CHAPTER THREE – The Nature Of Sustainable Societal Hybrids

I’m assuming …

  • you’ve begun to see how items from the Hybrid Buffet can be combined to help you create a life that’s quite extraordinary, and
  • you were inspired by the hybrid lives that at least a few of the people I interviewed are leading

… so now it’s time to take look more closely at hybrid organizations.
They have some exceptional qualities, too, and can play a vital role in effectively and creatively addressing societal problems.

What are the characteristics of successful cross-sector hybrids? And how do we grow them?

Such an organization should, of course, help address societal problems. By combining the traits of different organizations, hybrid organizations can compensate for the flaws or deficits in each, and build on their strengths. In nature, such resulting improvements are sometimes described as exhibiting “hybrid vigor.” If this happens in nature, why not in organizations?

Such improvements are often robust and long lasting. Hybrid corn is more “vigorous” than non-hybrid corn by having superior yields and responding better to modern farming practices. Try to find nonhybrid corn or wheat in the United States or other countries with modern agriculture: they’re exceptionally rare.

Hybrids that address societal problems come in many forms. Some are for-profit organizations with certain traits that typically are found in nonprofits. Others are nonprofits that have adopted a for-profit orientation or other characteristics common in the business world. Nonprofits may resemble for-profits in their legal or organizational structure or by the processes they follow to get their work done, and vice versa. In addition, both for-profit and nonprofit organizations may develop hybrid products or services aimed at bettering the world that otherwise might not be brought to market.

Cross-sector hybrids typically focus on basic human needs such as adequate food, clean water, clean air, shelter, and sanitation. Other areas include livelihood, access to medical care, education, training, and a healthier environment.

Why do social hybrids emphasize these needs? For one, these needs are enduring, and a decent quality of life is impossible without meeting them. But, unfortunately, for large portions of the world these needs remain unmet. As a society, we’re stuck: these vast problems don’t have easy solutions, and the solutions that might be available often fall in the cracks between the for-profit and nonprofit worlds.

Consider the case of clean drinking water. In the Philippines (and elsewhere and in the underdeveloped world), the government has struggled to provide clean water to its people and handed off this responsibility to private businesses. Manila Water won the contract to provide water for a portion of the Filipino capital city. But it, too, faced a host of problems. Water supply lines were old and decrepit, with up to 50 percent or more of the water leaving the treatment plant leaking out of the system. And much of the water that didn’t leak was stolen by squatters and others whose residences supply lines did not reach. On top of these physical problems were business difficulties, including the high costs associated with billing, collecting payments, and monitoring water usage for the many residents of Manila living without legal title to their property but still needing access to clean water. Compounding these issues was the question of whether water was a right (poor citizens’ perspective) or a product that one should pay for like any other (the business perspective).

The hybrid solution that Manila Water hit upon had to work for both the “business” and “society” sides of the equation. The utility agreed to supply water to those who would otherwise pilfer it, buy canned water, or obtain it in some other (expensive and inconvenient) way. Citizens, in turn, took on responsibilities similar to agents of the company. By banding into clusters of forty to fifty households each, withshared plumbing infrastructure and a single meter, citizens made it that much easier for the utility to acquire new customers. But perhaps more important, each cluster is given a single bill that it is responsible for paying. If the bill isn’t paid, the entire cluster loses access, regardless of whether the problem originated with you or your neighbors, even though each of you is “sub-metered.” Such peer monitoring and peer accountability—an approach that bears remarkable similarity to peer lending common in microfinance—has led to a 100 percent collection rate.

As this example illustrates, when progress bogs down on societal problems that defy customary solutions, pairing elements of different approaches can get us moving again. Manila Water recognized the incomparable power and knowledge of the local community and used it to full effect in co-designing a new solution for water delivery. They also realized that the “water problem” involved educating citizens and providing the community with other services they needed. Residents had to be educated about the cost savings from piped water (something foreign to people accustomed only to paying for small amounts of water at a time, if at all). They also had to be convinced that it was in their interest not to pilfer water so as to avoid a loss of service. Manila Water complemented their water-to-the-home efforts with water delivery to highly visible locales such as schools, hospitals, and public markets. They clinched the deal by creating a livelihood program that created more than fifteen thousand jobs, including delivering water bills and laying water pipelines.

In short, the Manila Water example shows how we can address enduring social problems by acknowledging both the needs of businesses and the needs of a community and, once we understand those needs, how we can combine the skills and strengths of both sides to produce a creative solution with incentives that both sides find attractive.
Companies, nonprofits, and communities can benefit by following what I call the “Rule of Co-”—banding together rather than going it alone. Co-identifying problems, co-identifying community and organizational resources, co-designing appropriate solutions, and co-implementing them with suitable incentives create the prescription for generating impressive societal change. Co-everything almost always trumps “my way or the highway,” an imperialistic view that can be lethal for companies, nonprofits, or government organizations to hold.

But hybrid organizations do more than merely coming to the rescue when society is in the lurch. Hybrids embrace an efficient, robust, and sustainable design process by recognizing that the resources to develop novel solutions are everywhere. A certain product may not be quite right, a design may have a flaw, or a concept may fit only imperfectly, but this does not represent imperfection with no value. Quite the opposite. A hybrid approach to design recognizes that the seed of a great idea may be found among ideas that could easily be overlooked.

This is especially true when it comes to poor communities. For example, when conventional banks make loans, there are certain preconditions. They must know who you are, therefore requiring you to produce a driver’s license, a utility bill, payroll stubs, or other forms of documentation. And they have the right to repossess your car or your home in case you don’t make good on your payments.

So how can loans be made in the developing world where people live on a dollar a day? Answer: by looking at the resources already in the community. Women have long banded together to form informal ROtating Savings and Credit Associations (ROSCAs) that lend each other money when one member has an unusual financial need such as a wedding, funeral, or other expense. This legacy of women supporting each other has become the foundation of microlending.When lending institutions, both for-profits and nonprofits, began to make loans to groups of women, there was no longer a need to know what the loan was to be used for or the identity of the borrower. Lenders realized that though an individual could hide, a group couldn’t. And so the entire group could be made accountable for repaying the loan with the stipulation that future loans would be denied if the group defaulted. They came to understand that, in poor communities, social collateral was more effective than physical collateral.

This approach of capitalizing on already established behavior and translating it into a formalized means of lending shows the power of keeping your eyes open, looking for useful problem-solving “building blocks,” and combining them in unique ways. There is no need to reinvent the wheel, but the wheel can just as easily be used to push a cart, steer a car, or throw a pot. Context—combining the right elements for a specific situation—matters.

Tweaking and expanding building blocks, whether physical or conceptual, speeds up the search for better ideas, but there is more here than a simple search for best practices. A bank borrowing ideas from another bank, or a hospital borrowing ideas from a restaurant (both, these days, give you beepers that let you leave the premises until it is your turn) does so to improve its functioning. But thorny social problems—the kinds in which society really gets stuck—can demand more innovative, fundamental change. Fortunately, recombining existing elements, even if recombination simply means considering one element in a new context, can sometimes create a positive jolt—much more than could be expected if the elements were considered one at a time. These jolting “combination” effects have many names. In mathematics, they are called nonlinear; in statistics, they suggest statistical independence; and in genetics they are known as epistasis. We might call them pbj effects: peanut butter, okay; jelly, ditto; pb + j = delicious.

Let’s think about microfinance again. The same essential idea of giving tiny amounts to poor women, often well below $100, has been combined with many additional elements. In its initial context, women formed their own solidarity group, or self-help group. Later, nonprofit non-governmental organizations (NGOs) began to raise and distribute money to similar groups. Despite all the apparent drawbacks of microfinance—high overhead rates, small loans, and customers of dubious credit worthiness—microfinance has proven to be exceedingly profitable. We now see major financial institutions such as Deutsche Bank and Citigroup making small loans and providing other financial services to the poor. Each of these steps in the evolution of microfinance has dramatically increased the amount of capital available to help poor people lift themselves out of poverty by investing in small businesses, their children’s education, and so on.

But perhaps none can compare in terms of potential reach with organizations such as Kiva.org. Kiva created a new, web-based context for microfinance to flourish by allowing individuals to make loans to poor citizens around the world (and receive repayment) by connecting donors to trusted, on-the-ground microfinance institutions over the Internet.

The historical trajectory of microlending shows its rise from its informal, grassroots beginnings to its growing adoption by powerful banking institutions and now “virtual bankers” sitting at computers anywhere around the world. Despite its humble beginnings in which local women “rotated” their meager savings among themselves, large banks are now supporting microfinance to the tune of up to $1.4 billion. In each case, the core idea of making small loans to poor people has been combined with different supporting elements.As the circumstances around “lending to the poor” change, we see the increased opportunity in this apparent contradiction: a proven idea can have dramatically greater impact when combined with other building blocks and placed in a new context. Remember the pbj effect?

Sustainable Hybrids

To compete successfully, a hybrid organization must have the right combination of elements. Some combinations produce hybrids that are powerful successes, while others flame out in a blaze of glory. Biology confronts this uncertainty by letting things play out in nature: we all know the adage “survival of the fittest.” Businesses, too, can be more or less fit.

The trick for creating successful societal hybrids is to have a system that is both generative and evaluative. Generative, in the sense of continually exploring new combinations. Evaluative, by testing them to determine which are, indeed, best.
For now, let us consider the evaluative aspects of such a system. Economists may argue that profits or revenues are the appropriate means of evaluating businesses, but such scorekeeping provides incomplete and biased feedback. (Quick example: think of pollution-emitting companies that don’t pay financial penalties for their behavior, thereby receiving “scores” (financial results) that are much too high.)

Organizations that aim to address society’s ills require a more appropriate system of evaluation. To sort out winners from losers, it is imperative to consider a fuller, more complex account of the environment in which societal hybrids operate. (In our quick example, a finance-results-only environment is much less complete than one that also considers a business’s effects on air and water quality.)
Proper evaluation will identify winning societal hybrids: sustainable organizations that are robust in the face of various forces and varying conditions. Just as hybrid wheat and corn has so successfully caught on, so can these sustainable social hybrids. But what exactly does sustainability mean?

John Elkington first described the “triple bottom line” as an evaluation system that goes beyond sheer financial success to include social and environmental concerns as well. Some have characterized the triple bottom line as focusing on the three Ps: people, profit, and the planet. Others describe its focus as the three Es: equity, economics, and the environment. These criteria can be applied to any type of organization—for-profit or not.

Social sustainability
means that all stakeholders are treated equitably.

Everyone—employees, community members, suppliers, and customers, not just stockholders—must feel they’re getting a fair shake. This does not necessarily mean a perfectly even split. Employees, for instance, may be happy that their efforts are making money for their company hand over fist. After all, a financially sound company is one that will endure. Still, they must perceive that what they themselves are getting is fair, too.

Financial sustainability
means that an organization is economically viable. It can pay its bills, make appropriate investments, and otherwise keep its operations going. Typically, this means generating enough revenue to cover expenses, though a large endowment or a highly successful fund-raising campaign may keep an organization financially afloat, too.

Last but not least is environmental sustainability. This simply means that the earth’s land, water, and skies are left in a condition that can support our future needs. Ideally, they are left even better than before.

Earning high marks for triple bottom line sustainability is a relatively new concept for businesses. It can also be hard to achieve. For instance, corn ethanol was recently hailed as a non-petroleum-based fuel source, and thus a way to reduce carbon emissions. Though this sounds good at first, let’s take a closer look.

An estimated 30 percent of the corn crop in the United States is being diverted from food to ethanol. This situation could have dire consequences for people around the world already suffering food shortages (P = people). In addition, although large, industrial agro-fuel producers could stand to make a bundle from ethanol production, there are serious questions about its economic impact on others. Ethanol production relies on $.50 per gallon subsidies, an attractive situation for states such as Iowa and Nebraska, which produce several billion gallons of ethanol a year. But by artificially depressing prices, this makes other “green technologies” relatively more expensive, making them less able to compete on the market, no matter how effective they are in improving fuel efficiency or reducing carbon emissions are (P = profit). Finally, enormous tracts of rain forest, or carbon “sinks,” in the Amazon are being cut down to plant corn, thus destroying critical resources to fight global warming. Ethanol production and transport both require energy and release emissions into the atmosphere. Certain fertilizers damage the climate on top of environmental concerns about crop spraying. So overall the climate-friendly effects of ethanol may be vastly exaggerated (P = planet).

My intention is not to rail against ethanol. I simply want to point out that with so few P’s supporting its production, it does not appear to be a sustainable alternative for producing cleaner fuels. Sustainable solutions will result only when we get all of our P’s in order. (Ideally, we can take the right “cues.”) This requires a careful understanding of the situation, appropriate vigilance and communication by citizens, and the political will to do what is necessary.

Becoming Hybrid

“Becoming hybrid” means embracing imitnovationship. Or immitation + innovation + entrepreneurship.

Societally focused hybrid organizations look at other firms, other industries, and other sectors—and imitate them. For-profits seek the advantages of nonprofits, and nonprofits seek the advantages of for-profits. Societally focused hybrids parlay what they observe into new combinations of ideas that work. The world is their research and development department, and keeping their eyes open is paramount to fostering innovation. By their nature, hybrid organizations are entrepreneurial—scratching, clawing, and tinkering to become more powerful agents for societal change, reinventing themselves to become more effective.

Nonprofits Imitating Businesses

This is another term that is in keeping with our discussion. It connotes firms that combine societal- and revenue-producing ends. They can be for- or nonprofit.

In what ways might nonprofit “social enterprises” begin to resemble a typical for-profit? For one, they can complement what they do with revenue-generating activities. Both giant and small nonprofits have come to this same conclusion.

For instance, CARE International has typically relied on donations to support disaster relief. But as typhoons, tsunamis, earthquakes, and other tragic occurrences draw donors to help those whose lives are suddenly turned upside down, CARE’s other, more fundamental, mission may suffer: eliminating the underlying causes of poverty. In tough economic times, people may still open their wallets to respond to a disaster (though even these donations are vulnerable to individuals’ belt-tightening), but giving “extra” money so that CARE can undertake non-disaster-related activities such as supporting agriculture or education may be something they are reluctant to do, or do less generously than in better times.

Thus CARE has begun exploring revenue-generating enterprises as a means to support its services and to generate funds it can use at its discretion. For instance, CARE Bangladesh has partnered with large companies, including Unilever, BATA Shoe Company, and Grameen Phone, to create jobs for marginalized women by linking them to markets. These jobs create not only income but often a sense of empowerment by giving women a voice in how the businesses are run. This new direction does not come naturally for CARE, an organization whose charity-only work is well known throughout the world. At this stage, these efforts represent CARE’s foray into business-oriented approaches to expanding its influence.

Similar initiatives are taking place in many local nonprofits that are seeking to turn their knowledge and resources into an expanded funding base. For instance, a Detroit-based nonprofit that serves gang members has realized that its skills and knowledge in dealing with these groups has commercial value to other social service agencies, as well as those in the legal profession and law enforcement.

Nonprofit social enterprises also imitate for-profits by striving to increase their market share. Just as Kellogg profits from selling more cereal, hospitals that serve more patients may be able to afford more effective and expensive medical technology, since the cost can be spread more easily among an expanded patient population. This is precisely what happens at the Aravind Eye Hospital in India, the largest eye hospital in the world, which serves vast numbers of very poor patients.

Nonprofits may also borrow from business in quite sophisticated ways. For instance, mortgage companies create a pool of mortgages from the mortgages they’ve issued and then resell the rights to collect income from them to someone else. When done judiciously, such bundling protects the company from a few bad mortgages and allows them to offer mortgages to additional deserving customers. Similar things are done by insurance companies and in other industries. This sophisticated idea is being undertaken by microfinance institutions, as well, to help them raise more money from worldwide capital markets, lend it out, and operate with less risk.

 For-Profits Imitating Nonprofits

Just as nonprofit social enterprises adopt ideas from business, businesses can benefit from acting more like nonprofits. Consider Google.org. It describes itself as “a hybrid philanthropy that uses a range of approaches to help advance solutions within our . . . initiatives [including efforts to protect the environment, contain infectious diseases, provide needed public services, and develop small- and medium-scale local businesses].” Google.org provides grants to partner organizations as a traditional charity would, but it also invests in for-profits, especially those developing disruptive “green” technologies. Its for-profit status allows it to retain earnings, profit from its investments, and lobby lawmakers in support of its goals.

Another way that business can adopt ideas from nonprofits is by understanding and responding to people’s passions. At first, recycling involved only the most hard-core environmentalists who hauled their waste to nonprofit community recycling centers. The increase in popularity of recycling from curbside pickup changed the behaviors of many more people and spurred interest in the environment. Many companies have begun to ride the environmental wave. The for-profit company Zipcar provides car-sharing services to those who prefer to reduce the damage they cause to the environment by driving only occasionally while avoiding the hassle of renting and the expense of car ownership. Terracycle sees true value in waste. In fact, they will pay you for old containers, candy wrappers, and other commonly discarded items. They fill these discards with their products, which are often waste products. Their “worm poop” fertilizer fertilizes lawns with . . . you guessed it. Their “Drink Pouch” tote bags are made entirely from used drink pouches like those used by CapriSun.

An Idea That’s in the Air

Let’s do another thought experiment by trying to imagine what the future of social hybrids might look like. Do you envision hybrids becoming much more common? Do you see roles for many more people as hybrids evolve?

History shows that certain ideas, including many major ideas, were “waiting to happen.” Take the telephone. We all know that Alexander Graham Bell invented it, right? But how many of us know that Elisha Gray and Bell filed patents for the telephone on the very same day? Or consider Charles Darwin’s crowning scientific achievement explaining how evolution arises through natural selection. Alfred Russel Wallace made a simultaneous discovery. These are just a few examples.

If you remember anything about calculus (including the dread it may have caused you), you know it could not just have appeared out of thin air. (By the way, calculus was independently discovered by Sir Isaac Newton and Gottfried Wilhelm Leibniz.) It has a subtle and highly developed structure, borrowing ideas such as slopes of lines and rates of change that arise in relatively elementary mathematics courses. But calculus changed everything by dealing with the infinitesimally small as well as the infinitely large, not just ordinary numbers.

So how could calculus have been discovered—or invented—by two geniuses working separately? Because they had similar backgrounds, had similar training, and were working toward a common end.

I would argue that hybrid social enterprises are now “in the air” in the same way. Hybrids spawn other hybrids. But you don’t have to be a genius like Newton to identify them, understand them, or create them. In creating a “hybrid stew,” good ingredients can come from anywhere. And adding the right ingredient doesn’t just change the recipe slightly. It gives it a jolt to make it something truly special.

Once a social hybrid takes off, there may be no end to the satellite hybrids that revolve around it. Think of the iPod. Now think of all the ways to accessorize it: covers, socks, armbands, docks, athletic feedback sensors, and on and on—or using its design as the basis for the iPad. Why should social hybrids be any different?

Consider once again Muhammad Yunus, the man and now Nobel Prize winner who brought microfinance to center stage. Yunus’s experience with microfinance through Grameen Bank got him thinking that there must be other businesses, like his, that wanted to be financially sustainable but desired to do societal good even more. This idea has given rise to a whole new class of businesses called social business enterprises—which strive to maximize societal benefit, not profits—as well as social stock exchanges devoted to nonprofit businesses. The hybrid mind-set underlying social business enterprises has even given rise to laws that grant special rights to a brand new type of hybrid: low-profit limited liability companies (L3Cs), which offer certain advantages and protections of both the for-profit and nonprofit worlds. Jolting pbj effects.

Continuing our thought experiment: Can you imagine a world where social hybrids produce results that are ever improving and beneficial for society? And how might they involve ordinary people, not only as customers but even as creators of societal benefits?

You may know about Linux, a computer operating system with extraordinary power developed entirely through volunteer effort. Users spot bugs, fix them, and propose and add new features. Though a governing body recognizes the current version of Linux, no one owns it. You can take an older version, change it to your heart’s content, and run it on your own computer if you’d like. Though the governing body provides certain boundaries, there is incredible flexibility, too, for those who desire it.

But such ever-improving, open-source efforts don’t involve only software. The Massachusetts Institute of Technology and other universities around the world have begun an open courseware effort. Though the idea is implemented differently at different institutions, MIT’s version illustrates the power of the idea. All educational material is put online: professors’ PowerPoint presentations, videotaped lectures, study guides, quizzes, exams, answer sheets—everything. All this material is available not only to MIT students, but to students anywhere in the world with an Internet connection. And it’s entirely free.

Though MIT was the originator of OpenCourseWare, the idea has been picked up by universities throughout the world who allow sharing and, with permission, the changing of content to benefit students everywhere. The spirit of keeping content open to improvement is exemplified by efforts at the University of Michigan Medical School, which aims to provide an online curriculum for U.S. students and then help customize it for use in Africa, where diseases, technology, and customs may all be quite different. Though content will be made available for free, revenue from ancillary services will keep the effort afloat.

But we’re getting a little ahead of ourselves. In the next part of this book, we will look at how to approach creating hybrid organizations that address deeply entrenched societal problems. We’ll return to the idea of “open” approaches for addressing these same kinds of problems in the last part of the book.