Friday, 31 December 2010

The Promise of UID - What to do, to get it right?

As part of the annual ISIS Conference on 18th Dec 2010 at ISB Hyderabad, there was a Panel Discussion on UID. Besides myself, Dr KC Chakrabarty of RBI, Mr Sanjay Swamy of UIDAI and Mr Abhishek Sinha of Eko Financial were the other Panelists. The Panel was moderated by Prof Arun Sundara Rajan.

Before the Panel Discussion, a specially recorded video (will be linked once the Conference Organisers upload the video) of Mr Nandan Nilekani, Chairman of UIDAI was played.

As you would see in the video, Nandan outlined SA, PA & DA of the SA-PA-DA-PPA template, I used my time on the Panel to do a PPA of three of those areas. This is what I said:

Acknowledged existence: Many Indians, especially the poor, cannot prove their identity with legally valid documents. Out of a billion Indians, only 60 million hold passports; there are just about 70 million IT PAN Card holders. It is not difficult for fraudulent third persons to misrepresent the poor in certain transactions. As a result, for example, many of the poor people cannot access social support programmes of the Central and State Governments. Substantial part of the social subsidies meant for the poor get diverted and misappropriated. The proposed UID number helps in accurately establishing the identity of a person and in authenticating any transaction. This will help in reducing misappropriation and lowering leakage from subsidy funds.

But, vested interests won't be happy with lower corruption in the subsidy system. Powerful among those interests won't let UID scale! Besides the technological challenges in scaling (mind you, the enrolment system must be fool-proof to eliminate any fake identities, must be robust enough to eliminate duplicates and must be easy & cost effective to verify & authenticate; all these for some 600 million people) that UIDAI is well geared to take on, the execution plan must cognise for the potential challenges arising out of the hurdles created by these vested interests.

I see these hurdles as marketing and social sciences challenges. Instead of clinically enrolling the citizens, the benefits of UID must be widely communicated to the citizens so that they get "enrolled" into seeing UID as a practical solution for their real problems. The people will then collectively find a way to deal with the hurdles created by the vested interests, as they did when ITC eChoupal faced similar resistance years ago. Similarly, it will help if the relevant agencies (eg District Administration) can co-opt the poor in design and execution of the social subsidy schemes. For example, the poor themselves know exactly how they get excluded from many schemes, and what process changes can help include them.

Business Opportunities: To start with, there is a mega business opportunity in the very process of enrolment of citizens into the UID system. Appropriate hardware is required at some 100,000 enrolment centres, along with necessary software to capture the finger prints, iris shots and demographic data. Someone aptly said that India can become the Bio-metric Capital of the world. There will also be similar opportunities in building transaction authentication hardware for different types of establishments using one or more of the UID features.

In the long term, the real value business application of UID is actually in improving effectiveness of financial transactions, consumer loyalty programmes, personalised crop management advisory, health cards for citizens etc. through shared transaction data of every UID across organisations. But, public access to such data raises serious concerns on privacy of individuals and competitive intelligence for businesses.

One way this conflict could be resolved is by limiting the seam-less sharing of such transaction data among a syndicate of organisations or certain type of businesses approved by the individuals for an appropriate value-exchange.

Innovation Ecosystem: Once the data sharing conflict is resolved, a powerful innovation ecosystem will be catalysed by the UID platform. Pretty much like a Development Apps Store! Some of the potential innovations would obviously be yet un-visualised. But, I can surely see ideas that make up for the missing institutions such as credit rating system and dispute resolution mechanisms. Many by many experience rating using the same identity can lead to interesting B2C and C2C applications.

The yet unvisualised innovations could also be mega threats to society. Dutch Census anecdote I recently heard is an example of such a threat. In an early 20th Century Census, Dutch collected the religious affiliation data of their citizens (for building places of worship in their neighbourhoods). A few years later, that data was very handy to Germans in exterminating some 75% of all the Jews listed.

On balance, I say, we must push forward with the UID.

But, raising public awareness of pros & cons of any new system with potential transformational impact, such as UID, is key, rather than selling it as a panacea to all problems...

Friday, 17 December 2010

Role of Corporate Sector in Inclusive Growth: Importance of Business Model Innovation

Earlier today, I spoke at the SMF-IIMA Conference on "Challenges to Inclusive Growth in the Emerging Economies".

My talk posed and answered four questions.

Q1: Who is "excluded" from the current growth process, that we now want to include?

Two sets of people are excluded, may be are even short changed, from the exciting growth story of the emerging economies in general, and India in particular, in recent times.

  1. Some sections of our population, because they suffer from certain inherent disadvantages, are excluded from the new economic opportunities and growth (e.g. farmers, rural crafts persons, people with physical disabilities etc)
  2. Some other people are excluded from the economic equations, because they don't have a say today! I am talking about our grand children and their grand children. The decisions taken by our generation have a bearing on the availability of natural resources (e.g. water) and the quality of ecology (green house gases) when they are around on this planet.

Q2: What can Corporate Sector do in this context?

Traditionally inclusive growth has been the domain of Government, Civil Society Organisations, Multilateral Institutions. Although there has been some progress over all these decades, none of us can feel satisfied with today's position of either of these excluded segments. For example, per capita GDP of an Indian farmer is just about 1/4th of that of rest of Indians. And, the concerns on climate change are at a level we have never seen before.

Programmes of these agencies miss out on one or the other aspects of three crucial areas.
  1. Sustainability - where the programmes are subsidy based, their long term sustainability is suspect
  2. Outcome effectiveness - for the target segment of people is weak, as the programme focus is typically on outlays
  3. Scalability - is often the most challenging aspect of a successful programme
Call these SOS, if you will, by the first letters of the three areas. That's the message to the world.

On the other hand, by the very nature of enterprises, Corporates survive & thrive by doing these three things right...
  1. Profit, the key metric of financial sustainability is the core objective of any commercial enterprise
  2. Value Proposition to the target group of customers is the essence of market and competitive strategy, and guarantees outcome effectiveness.
  3. Growth, the other metric by which Corporates swear, is what goes into determining market capitalisation of an enterprise
In other words, Corporates have the specific wherewithal to engage in inclusive growth agenda by applying these capabilities and deal with the SOS challenge.

Q3: Why is Business Model Innovation important?

Despite such a case for Corporate involvement in inclusive growth, there is widespread skepticism too!

Many in Government and Civil Society are skeptical about the intentions of Corporates. They simply see such engagement as a lip service, since they believe that 'profit' and 'inclusive growth' are at cross-purposes

Even the Financial Investors see a conflict between a company's profit objective and its social or environmental engagements.

On the other hand, if Corporates stay out, the SOS challenge unlikely to vanish. If the income divides expand and the ecological insensitivity continues we will have a serious problem. No business can succeed in a failed society, or in a world where natural resources are exhausted.

Then, there is also a huge business opportunity in selling products & services to the poor, and in selling eco-friendly products.

How do we reconcile these conflicting realities? The only answer is Business Model Innovation.

If we are able to innovate business models in a way that the profit objective of Corporates is enmeshed with the social or ecological benefits to the community at large, the new goal will be well aligned.

While many Corporates create shareholder value indifferent to society, and some even do at the cost of society, the conflict can be resolved if shareholder value is created "through" serving society. That's where business model innovation comes in!

By calling it business model innovation, I am distinguishing it from product or service innovation that can help inclusive growth. Renewable energy, micro finance, mobile phones, and road infrastructure are some examples of such product & service innovations.

Q4: Is there a special tool kit for business model innovation for inclusive growth?

Based on my experience in building the many phases of ITC eChoupal, and having observed several other inclusive growth initiatives of ITC from ring side, I see three important tools in a kit that will help innovate business models and deliver inclusive growth.
  1. Co-creation together with the Communities: Both design and execution. This makes up for the missing infrastructure (eg individual credit rating, dispute resolution) through infusion of social capital. This also cuts costs. More importantly this co-opts lead consumers and helps accelerate product & service innovation. Two of the new institutions innovated under ITC eChoupal system viz. Sanchalak and Samyojak are vital components of a co-creation platform.
  2. Leveraging Technology: Technology helps in remote delivery of services (eg eLearning, Telemedicine) and overcomes the physical access barriers as well as the knowledge concentration barrier. Technology can multiply productivity. Technology can also personalise solutions to individuals, so important given the heterogeneity of the target segment we are talking about. Technology helps in precision, leading to better resource usage and improve quality of the output.
  3. New Revenue Models: Integrating the micro producers into value chains that connect them to the markets, is one way in which their share of a consumer price can be taken up. The principle of "Third Party Pays", as in Media business, is an important way in which the burden on the low-income producers or consumers can be reduced. This leads to rapid market expansion. Platforms that can carry products & services of several other organisations can create "increasing returns ecosystems" and deliver exponential growth, once the network effect sets in.
Wish you good luck, in co-creating a new world order :)

Sunday, 5 December 2010


Earlier this week, when President of MFIN Vijay Mahajan tipped off that "some MFIs may have to shut shop as early as 1st Jan 2011, as Banks refuse to lend", of all things, Karna from Mahabharata came to my mind...

Bankers may only be proving the stereotypical notion that they are, after all, fair weather friends; or may be right in their judgment in not putting any more good money behind bad. But, much like the Karna's story, many factors beyond the new loans from Banks may have contributed to the death of such MFIs.

Here is my take on what some of those factors are:

1. While the interest rates of MFIs are lower than what a local money lender charges, the fact that the rates hardly came down in so many years of MFI existence implies that the sector hasn't innovated enough. Whoever survived without innovation for long?

2. Actually, at the heart of MFI value proposition are two other complementary services viz. (a) improving income generating capability of the borrowers - beyond their cost of borrowing - through several Business Development Services, including collectives for scales of economy and (b) social mobilisation for improving credit repayment culture and taking up activities that benefit the community as a whole, eg anti-liquor campaigns. Along the way, as MFIs proliferated many of them focused on transaction efficiency, and lost sight of these two pillars that defined the original business logic.

3. That politicians cutting across party lines are egging the borrowers not to repay their loans, likening the MFIs to Loan Sharks, suggests that the industry hasn't built any political capital either, in all these years! A wide range of motivations were attributed though, such as opportunistic political gains and selfish interest of some politicians who are money lenders themselves hence anti-MFI.

4. What's even more surprising is the lack of overt support (in this hour of crisis) from the very beneficiaries themselves - the borrowers - even after knowing fully well that the MFIs would close and they may have to resort to higher cost borrowings again. The absence of social capital in the operations of many MFIs (described in 2 above) meant that the borrowers didn't see the long term benefits of continued engagement with those MFIs, instead were happy extracting the short term transactional benefits (escape from repaying their loans). In contrast, when the middlemen struck work at mandis in 2004 to stop ITC eChoupal from making the agri markets transparent, thousands of farmers came on to the streets spontaneously to support eChoupal.

5. Appropriate regulations did not evolve along with the growth of the MF sector.

6. The MF market got distorted, with Government also acting as a lender through SHGs in many States. In fact, competition with Government (who is also a regulator) in a distorted market, is a big threat for the sustainability of many social enterprises. People at BoP are the common target, by definition.

7. Wrong choices of scaling models by many MFIs is another factor. Any organisation can choose from four scaling models - scaling up, scaling deep, scaling out or scaling through. Up requires standardisation of processes for efficient replication of a demonstrated unit. Prerequisite of deep is a capability to orchestrate an ecosystem to deliver multiple products & services to the same customer group. Out is replication of the same model in a different domain. And, through is a typical franchising approach with the attendant conditions. Some MFIs attempted crossing from one model to the other or even blending different models without building the requisite capabilities, obviously leading to trouble.

8. Large sums of money was pumped in through Private Equity, IPO etc. before the sector geared itself for scaling. These sources of money demanded rapid growth, which in turn meant diluted quality of execution (multiple loans to the same borrower, coercion in recovery etc). Coupled with 7 above, this is a recipe for disaster.

9. Not enough manpower was trained in conjunction with the growth of the sector, unlike what was done in other manpower intensive large scale businesses, such as Software, Green Revolution and Operation Flood. It is estimated that some 100,000 people are employed in MFIs. Again, whoever succeeded without quality manpower.

10. In many places, the group leaders (of borrower groups) started their own bridge loan businesses, thus "ever-greening" the loans, making the ground reality opaque to MFI staff.

11. Many people question the ethics of some MFI promoters for using the growth & profits from the highly leveraged soft loans (originally given for a social cause) for private gain. In businesses at BoP, it is important for the lead players not to lose the strength of morality to be able to push Government towards reform.

What Next?

Notwithstanding all the above factors, the business case for MFIs still exists. By virtue of the crisis wrought by the Ordinance in Andhra Pradesh, good MFIs are suffering as badly as the bad.

Instead of trying in vain to revive the sector after it is dead, all the stakeholders need to kick-off a consultation process to determine the right way forward in each of these and such other factors, with the future of the borrower in mind. Karna did die due to many curses, but mythology tells us that every curse can be lifted too!