Since the microcredit crisis in Andhra Pradesh began, there has been intense debate about whether and how some of the more successful microfinance institutions (MCIs) lost their way as they grew. Some are drawing a harsh lesson: Commercialization of MCIs corrupted them; management became distanced from clients, governance turned sloppy, and shareholders got greedy. But while there might have been individual cases of this, we think there was a much more subtle process at work—one inherent in the management of organizational growth.

Microcredit is a labor-intensive business, so the key managerial challenge is monitoring employee performance. As long as MFIs remain small (and the vast majority still are, contentedly), everyone knows each other and performance measurement is informal.  Managers know who is working hard, who has the enterprise’s mission at heart, who treats customers with due care and respect. But as MFIs grow, managers need measureable, short-term key performance indicators (KPIs) that they can use as operational guideposts, to drive staff evaluations, and to set staff remuneration and incentives. SKS in India and Compartamos in Mexico are fundamentally human resource (HR) machines, and they demand data on their own internal operations to run smoothly.

The problem is: As KPIs are formalized, financial metrics are likely to dominate over social impact ones for the simple reason that they are easier to come up with and monitor on a monthly, weekly, or even daily basis. What percent of loan amounts outstanding did you recover, how many new customers did you sign up, and how many clients at the end of their credit cycle did not “drop out,” or take a break from living with debt? With these kinds of KPIs, you can benchmark the performance of your staff, branches, and regional offices, and they either cut it or they don’t. But are they acting on customers’ interests? Unlike KPIs, social impact measures, such as the Progress out of Poverty Index, are laborious to construct and quite context-specific.

All this goes right into the cultural fabric of organizations. Conversations between MFI staff and supervisors seldom relate to social mission; their conversation is likely to center around more readily observable financial KPIs—the mission stuff becomes senior management talk.

Moreover, growth actually creates its own logic for running your social enterprise on sharp financial terms. The best thing you can do to increase impact is to grow, and that requires financial resources, which you can fund internally if you are more profitable. And when growth and profitability come to be inextricably linked to social mission, it leads you to think that if you focus on financial KPIs, social impact will follow. (This was the essence of the justification by Compartamos’s founders for pursuing the richly priced IPO.)  Well, as it turns out, that’s not necessarily the case if you are, say, an MFI, and you stress your customers with over-indebtedness.

So it is the ambition of scale, rather than pure greed, that pushes most MFIs and their managers to be more financially driven, and social objectives take a back seat. And therein lies a paradox: Only organizations with an ambition to scale can have the kind of social impact that they seek, but the bigger you get, the more elusive the social impact can become.

Working with a double bottom line requires navigating trade-offs between social and financial objectives. But the problem is less one of weak governance structures (a catch-all complaint when anything goes wrong) than one of overly simplistic operational management tools. Governance is about longer-term assessments, but the problem is one of day-to-day decision-making.

Social enterprises need to aspire to grow, but as they do so, their managers need to be as explicit as possible about:

• Who are the key stakeholders (a disenfranchised population segment, actual customers, employees, shareholders, etc.)?
• What are the medium-term success factors for each stakeholder (uptake among relevant segment, usage per customer, job stability and satisfaction, capital appreciation)?
• What operational (measurable and short-term) metrics can be ascribed to each of these success factors?

Many social entrepreneurs can talk persuasively and even inspiringly about the first two, but few have taken to specifying the last. And that’s for a reason: It’s hard. But without it, managing growth is like a snake pit. Without it, the social enterprise sector will remain endearingly grassroots but not world-changing.

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