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Case Study

In the Black with BRAC Serving more than 110 million people per year, BRAC is the largest

nonprofit in the world. Yet it doesn’t receive the most charitable donations. Instead, BRAC’s social enterprises generate 80 percent of

the organization’s budget. These revenues have allowed the organization to develop, test, and replicate some of the world’s most

innovative antipoverty programs.

By Kim Jonker

Stanford Social Innovation Review Winter 2009

Copyright © 2009 by Leland Stanford Jr. University All Rights Reserved

Action Case Study

74 STANFORD SOCIAL INNOVATION REVIEW • Winter 2009

in 1972, bangladesh was in shambles. Two years ear- lier, a devastating tropical cyclone had ripped through the country, killing nearly half a million people and establishing itself as one of the deadliest natural disasters in modern times. A few months later, the Bangladesh Liberation War broke out. Fought to establish the inde- pendence of Bangladesh from Pakistan, the war claimed hundreds of thousands of lives and sent roughly 10 million people fl eeing to India. When Pakistan surrendered in December 1971, many of these refu- gees fl ooded back to Bangladesh, where they found their homes de- stroyed, their jobs gone, and their economy in ruins.

But Fazle Abed had an idea for how to help. Born and raised in what is now Bangladesh, Abed had spent most of the 1960s in the United Kingdom. There he studied accounting and business as an undergraduate and then worked as a corporate fi nancial offi cer for Shell Ltd. Abed was in Bangladesh during the cyclone but returned to London during the Liberation War to generate support for the inde- pendence of Bangladesh. When the war ended in 1971, he decided to come home. “Being confronted with the massive devastation of the cyclone was a life-changing experience, compounded by the Libera- tion War,” he says. “Ultimately, I decided that I wanted to devote my life to helping my people.” Abed left his comfortable life and returned to a remote area of northeastern Bangladesh. He used the proceeds from the sale of his fl at in London to establish the Bangladesh Rural Advancement Committee (now called BRAC).

BRAC’s fi rst mission was to meet the immediate needs of war ref- ugees. In some 200 remote villages, the organization built houses, es- tablished health clinics, distributed food, and gave boats to fi shermen who had lost theirs in the cyclone. Within a year, the organization had moved most of the refugees out of crisis. Yet the people remained impoverished, and vulnerable to becoming more so.

So BRAC set about building businesses that would not only help its clients become self-suffi cient, but also keep the organization and its numerous programs afl oat. BRAC’s fi rst social enterprise was a printing press that supplied books and other printed materi- als to the organization’s schools and education programs. Owning a press was a way to cut printing costs and to reclaim the profi ts that the private sector was previously getting. At the same time, the

business provided jobs and valuable job training for BRAC’s clients, serving the organization’s mission to alleviate poverty. In its fi rst year of operation, the press made $17,400 in profi ts. By 2007, it was generating $340,000 in profi ts.

Now BRAC is the largest nonprofi t in the world, reaching 110 million people annually through its health, education, and econom- ic development programs. The organization generates 80 percent of its $485 million budget from its social enterprises, which include

In the Black with BRAC Serving more than 110 million people per year, BRAC is the largest nonprofi t in the world. Yet it doesn’t receive the most charitable dona- tions. Instead, BRAC’s social enterprises generate 80 percent of the organization’s annual budget. These revenues have allowed the organi- zation to develop, test, and replicate some of the world’s most innova- tive antipoverty programs. B y K i m Jo n k e r

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microlending institutions, craft shops, printing presses, and dairy projects. BRAC’s successes resonate throughout the country and the world: Major international organizations such as the World Bank credit BRAC and other nongovern- mental organizations with turning Bangladesh around economically, in spite of the country’s weak governance (two former prime ministers, Sheikh Hasina and Khaleda Zia, are in jail on charges of corruption). Bangladesh is now en- joying such strong economic growth that it could join the ranks of middle-income countries by 2016, the World Bank projects.

Many in the United States are skeptical about social enterprises, pointing out that most are unprofi table and that few nonprofi ts can sustain themselves solely through income-generating activities. Yet BRAC has managed to buck the trends. Its social enterprises have reaped enormous profi ts while also benefi ting the organization and its clients. BRAC has succeeded by honing the fundamentals of so- cial enterprise: build a strong organization fi rst, choose businesses

wisely, know when to let go of struggling business- es, and listen closely to stakeholders.

w h y e n t e r p r i s e ? Social enterprises are trendy, and with good rea- son. They can give clients jobs, job training, and even markets for their products. In addition, so- cial enterprises can generate surplus cash and thereby secure a reliable funding stream for non- profi t programs. More money, in turn, means more fuel for growth.

Growth was particularly important to Abed be- cause the population of Bangladesh had tremen-

dous unmet needs. “The entire country was destroyed,” he explains. “How could I focus on only one region when all the others also had great needs? It became clear that we needed to scale BRAC’s pro- grams across the country.” Although BRAC was attracting dona- tions and foreign aid in its early years, Abed did not want to rely on these sources, because they can be unreliable and even fi ckle.

Moreover, charitable funding would not support the innovations and experiments that BRAC needed for growth. “Typically, donors only like to fund things that have already been tested and will work,” says Abed. “But pilots are critical for us so we can know what will work and what will not, so that we can grow responsibly and in the right ways.”

By generating its own income, BRAC could freely try out new ideas. For example, BRAC used the profi ts from its printing press business to pilot a novel oral rehydration program. The program was eff ectively a nonprofi t public health program to teach parents how to make an electrolyte-rich fl uid for children with diarrhea. The fl uid prevents dehydration, which proves deadly to many mil- lions of children in the developing world every year. BRAC initially trained 4,000 oral rehydration workers (ORWs) and then sent them out to educate some 30,000 families. Accurate and eff ective teach- ing was extremely important because if parents gave their children too much of the solution, the children could get even sicker. So BRAC rewarded the ORWs with a performance-based incentive sys- tem: The more each parent remembered, the higher the ORW’s sal- ary. Over the course of 10 years, BRAC’s oral rehydration program reached 14 million of Bangladesh’s 19 million households. The pro- gram is widely believed by the public health community to have played a major role in halving the country’s infant mortality rates, with government surveys showing that 70 percent of families in Bangladesh use BRAC’s oral rehydration solution to treat diarrhea.

Emboldened by the oral rehydration program, Abed realized that BRAC could use funds from social enterprises to pilot and spread other types of programs throughout Bangladesh. While the oral re- hydration campaign was in full force, BRAC launched its second so- cial enterprise, the Aarong Craft Shops. Aarong helps 65,000 rural artisans market and sell their handicrafts and has become the most popular handicraft marketing operation in Bangladesh. Using rev- enues from Aarong, BRAC began testing microfi nance and primary education initiatives. When the oral rehydration campaign conclud- ed in the 1990s, BRAC was ready to scale up its most successful mi- crofi nance and education programs.

Today, BRAC’s integrated health, fi nance, and education programs

In rural Bangladesh, a BRAC representative dis- cusses the organization’s social enterprises and nonprofi t programs with an entire village.

CASE STUDY QUESTIONS:

What are social enterprises good for?

What are the building blocks of successful social enterprises? How should non- profi ts choose which businesses to pursue?

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76 STANFORD SOCIAL INNOVATION REVIEW • Winter 2009

are active in 70,000 villages in all of the 64 dis- tricts of Bangladesh, reaching an estimated 75 percent of the entire population. Its health pro- grams serve more than 92 million people, its mi- crofi nance programs assist more than 7 million borrowers, and its education programs reach more than 1.5 million children.

b u i l d i n f r a s t r u c t u r e f i r s t Despite the later successes of BRAC’s social en- terprises, Abed knew better than to dive imme- diately into the business of business. Instead, BRAC spent most of its fi rst decade building its infrastructure, which now includes a training department, an evaluation department, an in- ternal audit department, and a logistics depart- ment. “My background in business and fi nance helped me understand the importance of having the right infrastructure and management sys- tems,” Abed explains. “For example, from my work with Shell, I came to appreciate the impor- tance of budgeting and monitoring, and I under- stood that BRAC needed to create a solid inter- nal audit department and lay the necessary groundwork for running businesses.”

Consequently, BRAC weaned itself from donations very slowly. Established in 1974, BRAC still received all of its funding from do- nors in 1980 (see “The Slow Growth of Income” on page 77). Even 11 years later, BRAC generated only 3 percent of its total budget through social enterprises. Only 25 years after its founding was BRAC earning most of its funding through its businesses. “Some- what ironically,” notes Abed, “as we become less needy of donor funding we become even more attractive to donors.”

As BRAC expands, it leans heavily on its organizational founda- tion. Take BRAC’s training department. BRAC established its train- ing division in 1978, when the organization had fewer than 300 staff members and revenues of less than $1 million. Over time, the train- ing division became responsible for the professional development of all BRAC staff , fostering an entrepreneurial, business-oriented culture. For example, BRAC developed a middle-manager training program that teaches analytical skills and includes a social venture plan competition. BRAC has pursued numerous social venture ideas that arose out of this competition, such as a model high school. The organization currently devotes roughly 10 percent of its personnel budget to training. It also continually updates its programs, with re- cent off erings such as Management Skills and Eff ective Meetings.

“Many other nonprofi ts get trapped doing short-term program work and use a lot of short-term contract workers,” says Abed. “These nonprofi ts don’t build their organizations to do bigger things. I decided early on that for BRAC to serve the nation and conduct successful social enterprise we needed to train people.”

BRAC’s internal audit and fi nancial monitoring department also smoothes the path for sustainable social enterprises. In 2007, for in- stance, the department conducted internal audits in 5,011 locations. When the department audited the microfi nance program, it found that some branch managers were giving a second loan to clients who could not pay back their fi rst loan. Because of this fi nding, BRAC computerized its entire microfi nance program so that it could more closely monitor all of its loans and curtail ineff ective practices.

In recent years, BRAC has expanded into Afghanistan, Sri Lan- ka, Sudan, Tanzania, and Uganda. As was the case in Bangladesh, the organization is fi rst building strong organizations and saving the launch of social enterprises for later. “BRAC needs time to connect with the needs of the people in these countries,” explains Abed. “It takes at least fi ve years of operating on the ground be- fore it is possible to discern the needs of the people and to assess social enterprise opportunities.”

c h o o s e b u s i n e s s e s w i s e ly Having built a strong organization, BRAC next considered which businesses to pursue. The nonprofi t was and remains very choosy about the types of businesses it launches, using three criteria to judge potential enterprises. First, the enterprise must align with the organization’s mission to help lift people out of poverty with job training, income, capital, and improved health. Second, it must

Kim Jonker is a consultant to nonprofi ts and foundations on issues of strategy, board governance, and organizational eff ectiveness. She also serves as director of the Henry R. Kravis Prize in Leadership. Jonker is the coauthor of “Curbing Mission Creep,” which appeared in the winter 2008 issue of the Stanford Social Innovation Review.

BRAC founder Fazle Abed does the numbers at a school his organization runs. Soon high-speed Internet will supplement existing technologies.

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complement BRAC’s existing programs. Finally, the business oppor- tunity must meet a market need.

In 1990, for instance, BRAC began making microloans to poor women who wanted to raise milk cattle. But when Abed met with one of the program’s borrowers, she revealed that she was having a hard time getting the milk to market, and that even when she could, she received only one-third of the price that milk sellers received in Dhaka, Bangladesh’s capital.

So in 1998 BRAC established the BRAC Dairy, which primarily purchases and markets the milk that its microlendees produce. To collect and process the milk for the dairy, BRAC has set up 80 milk- chilling centers across Bangladesh. The BRAC Dairy and milk col- lection centers employ more than 500 people. In 2007, the project generated $1.15 million in surplus cash, which was enough not only to support the workers and dairy farmers, but also to expand opera- tions. The BRAC Dairy is also becoming increasingly competitive with other Bangladeshi dairies: Its market share increased from 20 percent in 2006 to 35 percent in 2007.

Meanwhile, BRAC discovered that its borrowers were not prof- iting much from their cattle—in part because the breeds of cattle to which they had access did not reliably produce much milk. To improve the breeds of livestock throughout Bangladesh, BRAC created an artifi cial insemination (AI) program in 1998. BRAC op- erates one bull station and a network of 70 storage facilities across the country, training more than 1,000 AI workers. These workers not only deliver high-quality semen and inseminate cows, but also provide wrap-around services such as vaccination, pregnancy

diagnosis, and calf delivery. BRAC pays the workers a fi xed fee per insemination, which means that the more work the AI worker completes, the greater is his income. BRAC’s AI program gener- ated $60,000 in profi ts in 2007. At the same time, it not only granted job skills and income to people across Bangladesh, but also supported the microentrepreneurs, dairy and chilling-center employees, and consumers—many of whom are also poor—fur- ther down the value chain.

Similarly, as part of its mission, BRAC wanted to improve teacher training and curricula in its network of more than 50,000 one-room

note: Expenditures is the sum of overhead, program expenditures, enterprise expenditures, and capital expenditures. source: BRAC

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The Slow Growth of Income BRAC fi rst relied on donations, and then turned to EARNED INCOME income only after decades of building its enterprises. DONATIONS

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rural schools. The organization decided that high-speed Internet access was the best way to get information to teachers. Yet Bangla- desh did not have nationwide high-speed coverage. So BRAC partnered with San Fran- cisco-based gNet to create bracNet, which is building Bangladesh’s high-speed network from scratch. As with other BRAC-run social enterprises, bracNet is expected to become a sustainable enterprise.

“At the most fundamental level, all of our social enterprises arise from the needs of our programs and our clients, and they typically address market failures,” Abed says. “Thus it would be impossible for us to develop an en- terprise that did not align with our mission and program, because the starting point is al- ways the mission and program.”

k n o w w h e n t o l e t g o BRAC is picky not only about which enter- prises it starts, but also about which ones it keeps. In the late 1980s, the organization entered the motorized irrigation pump busi- ness. According to the business plan, groups of landless borrowers would take out BRAC microfi nance loans to buy and operate the pumps, which they would then sell to farm- ers. The farmers, in turn, could use the pumps to water their crops during Bangla- desh’s winter dry season, when there is too little rain for farming most crops. By the winter of 1992, more than 700 BRAC pumps covered an estimated 27,000 acres.

Yet trouble was brewing: Rice prices were falling, as were crop yields. Farmers couldn’t pay back the pump salespeople, who in turn could not pay back their microloans. In 1996, Abed decided to shut the operation down. “This was a project with far too many moving parts over which BRAC and the pump operators had insuffi cient con- trol,” writes Ian Smillie in a forthcoming book on BRAC. BRAC sold most of the pumps on the thriving private market. Then, using a cash reserve dedicated to the purpose, the organization refunded 100 per- cent of the payments that borrowers had made on their loans.

Although BRAC has shut down most of its money-losing social enterprises, it sometimes preserves those that make outsized con- tributions to poverty alleviation. For example, some of BRAC’s milk-chilling stations are not collecting enough milk to break even in the near term. Yet the organization keeps the stations open be- cause they are located in extremely poor areas that would suff er greatly from the removal of access to fair prices.

l i s t e n t o t h e p e o p l e Through its many programs, BRAC has established a nationwide network of workers and clients who can guide the creation and management of new enterprises. Its health service alone employs

70,000 community health volunteers across Bangladesh. BRAC constantly asks workers and clients to suggest ideas for new social enterprises, as well as to off er advice about how to improve estab- lished businesses and programs. Microfi nance borrowers, for exam- ple, must attend a group meeting every week. At these meetings, BRAC staff members record borrowers’ feedback and then deliver it to the larger organization.

Feedback from the fi eld is also a cornerstone of BRAC’s moni- toring and evaluation activities. For instance, BRAC regularly con- ducts focus groups as part of its program assessments. One such focus group led to the creation of BRAC’s new Program for the Ul- tra-Poor, which currently serves 132,000 women. The focus group revealed that some of the poorest families in Bangladesh could not participate in BRAC’s microfi nance program because they did not have the wherewithal to borrow and repay.

“They needed grants rather than loans,” says Abed. And so BRAC designed a program that would “hold the hands” of Bangla- desh’s poorest 10 percent by giving them grants and stipends for the fi rst two years of their participation, he says. Then, most of the clients “graduate,” becoming full-fl edged microfi nance borrowers.

MAYBE NO

You want to launch an enterprise because…

You’ve managed your nonprofi t programs so well that it’s time to expand them

You like to be on the cutting edge, and all the cool organizations are launching social enterprises

You understand the benefi ts and opportunity costs of social enterprise

A potential funder may give you a grant if you start a business

Your commitment to your mission…

Is laser-like and focused Is wavering and distractible

Your culture… Is entrepreneurial and gives staff freedom to solve problems

Is bureaucratic and discourages initiative and problem solving

Believes that social enterprise can address market failures

Distrusts business and market incentives

Your board and staff… Have business experience Lack business experience

Base their decisions on data and analysis

Base their decisions on instinct

Your operations… Tend to function smoothly Are often out of control

Refl ect a long-term strategy Leave management and staff too overwhelmed to plan ahead

Your monitoring and evaluation systems…

Generate timely, accurate, and thorough information

Generate information that tends to be too little, too late

Could expand to include new enterprises

Are already overtaxed

Your business ideas… Align with your mission Do not align with your mission

Complement your existing programs

Do not complement existing programs

Meet a market need Do not meet a market need

Are likely to generate surplus cash Are unlikely to generate surplus cash

Should You Start a Social Enterprise? The vast majority of nonprofi ts lack the infrastructure and expertise to launch successful businesses. Is your organization in the minority that’s ready for revenue? Here is a guide to help you decide. —K.J.

BRAC combines listening to the people with thoroughly analyz- ing programs from the top down. Indeed, many consider BRAC to have the best evaluation approach of any nonprofi t in the world. Its approach includes both internal program monitoring and external, independent auditing that reports to the audit department, rather than to program heads. This separation ensures that the external auditors’ fi ndings are independent of the programs’. In this way, conclusions about the various programs’ outcomes and results are more likely to be accurate and unbiased because they are informed

by separate, independent sources. This independence is critical in assessing performance, but most organizations do not enforce it.

i s b u s i n e s s y o u r b u s i n e s s ? Many Americans seem to think that social enterprise exists only in the United States. Yet for the past few decades one of the most suc- cessful nonprofi t social enterprise organizations has been operating in Bangladesh. That organization, BRAC, shows that nonprofi t orga- nizations can launch social enterprises that work on a large scale.

Much of BRAC’s success stems from the leadership and exper- tise of its founder. Recently, Abed has been recognized with several

awards, including the 2007 Henry R. Kravis Prize in Leadership. More than 30 years ago, Abed envisioned an organization that would reach the poorest people in the farthest reaches of Bangla- desh. His background in business helped him execute that vision. “Often people are very skeptical of nonprofi ts running social enter- prises, and with good reason: It requires two vastly diff erent cul- tures to coexist side by side,” says Abed. “Our social enterprises are successful because we run them like businesses while at the same time staying focused on our nonprofi t mission.”

Not all nonprofi ts are in a position to mix profi ts with programs, however. Organiza- tions that are considering a revenue-generat- ing business should take a hard look at their motivations, organizational cultures, and re- sources. (For a checklist, see “Should You Start a Social Enterprise?” on page 78.) Upon

refl ection, most will fi nd that they should stick to more traditional fundraising, rather than pursuing moneymaking ventures.

For the few organizations ready for business, however, social en- terprises can expand their reach, advance their missions, and deep- en their capacity to innovate. BRAC’s enterprises, for example, have allowed the organization to reach the poorest, most isolated villages in Bangladesh with novel, successful programs that address many diff erent needs at once. They also give BRAC independence from donor funding. This fi nancial independence is indeed very compel- ling, not only for organizations making their way in the nonprofi t world but especially for the clients they serve.

“It takes at least fi ve years of operating on the ground before it is possible to discern the needs of the people and to assess social enterprise opportunities,” says Abed.

Winter 2009 • STANFORD SOCIAL INNOVATION REVIEW 79