012 – Fundamentally Profitable

The IDEMS Podcast
The IDEMS Podcast
012 – Fundamentally Profitable
/

Description

Santiago Borio interviews David Stern on the concept of being “fundamentally profitable” and how and why IDEMS prioritises this over maximising profit. They explain how this idea evolved through the years in its implementations and present some challenges IDEMS faced recently to remain fundamentally profitable.

[00:00:00] Santiago: Hi and welcome to the IDEMS podcast. I am Santiago Borio, an Impact Activation Fellow, and I’m here with David Stern, a founding director of IDEMS. Hi David.

[00:00:16] David: Hi Santiago. What are we discussing today?

[00:00:19] Santiago: Well, today I want to as always question you on something that I found when I joined IDEMS, scrolling through the website. If you go to the website, you go to how we work and you see community interest company, we are a community interest company, we covered that in a previous podcast, we’re not for profit, we covered that, I think, in the same…

[00:00:45] David: Yep.

[00:00:45] Santiago: …episode, we are part of Social Enterprise UK, and we’ll likely do an episode about that, but essentially…

[00:00:52] David: Let’s talk about that.

[00:00:54] Santiago: …we are a social enterprise, and we talked about that as well in a previous episode. The next bit is fundamentally profitable.

[00:01:05] David: Yes.

[00:01:06] Santiago: And we talked about this a few times before, but my first reaction was, hang on a second, there’s a contradiction in here. And that contradiction is probably due to lack of understanding I had. Not for profit, fundamentally profitable.

[00:01:24] David: Not a contradiction. They’re not a contradiction at all because not for profit is a statement about our legal status. There is no owners who make a profit, we don’t have shareholders who get dividends who take the profit out of the company. Everything that the company makes gets fed back in to growth of the company, or to our social impact mission. That’s the not for profit status. But fundamentally profit, we don’t have any core funding. We don’t have donors who are ensuring our survival. We only ensure our survival by being, as an organisation, fundamentally profitable. And this is really central to who we are and who we want to be as an organisation.

[00:02:10] Santiago: And of course, we’re a business. We have to be profitable. And I think that…

[00:02:14] David: We have to be profitable, but we don’t have to maximise profits. This is another element of being fundamentally profitable.

[00:02:20] Santiago: Go on.

[00:02:21] David: Well, if you were a normal business, under US legislation, and your shareholders felt that the decisions you were making did not maximise their returns, You could be taken to court as the director of the business for not maximising profit. We do not have to maximise profit.

We have to be profitable, otherwise we don’t exist. We have to be fundamentally profitable, but we don’t have to maximise profit. That’s a really important point.

[00:02:59] Santiago: And we don’t want to maximise profit?

[00:03:02] David: No, it’s not that we don’t want to, it’s that we don’t have to. There’s a difference.

[00:03:07] Santiago: We don’t necessarily maximise profit. What does that allow us to do?

[00:03:13] David: It allows us to prioritise impact, for example. It allows us to prioritise other things. Environment, society, community. Those things can be prioritised. As long as we’re profitable. They cannot be prioritised over being profitable. But once we’re profitable, we get freedom.

[00:03:34] Santiago: Ah, that brings me back to when I joined IDEMS.

[00:03:39] David: Yes, as employee number one.

[00:03:41] Santiago: 2020, joined IDEMS full time, the very first full time employee, I’m going to keep saying it. And I was trying to understand my position, and you and Danny explained to me, well, essentially, we need 100, 110 days at commercial rate, and that’s it, we’re done, the rest of the time we can work on things that we care about. And that’s your objective, and in fact you put me in a project that would give me those hundred or so days that I needed to become profitable for the company.

[00:04:24] David: Yes, and this has been the same for most of the people we’ve taken on. We’ve only been able to take people on if we can line them up with projects where they’re able to slot in and become fundamentally profitable quite quickly. We haven’t done that with everyone, and in fact, where we haven’t done that, we’ve run into trouble on occasion.

But most of the time we have work for a certain amount of time, we slot people in, and then we give them great freedom beyond that. Roughly speaking, having 60 percent of your time on a project which makes you fundamentally profitable to the organisation means that the rest of your time you can have great freedom. And if you happen to work on things which are more profitable to the organisation our belief is you should have a say in the direction we as an organisation take be and how that extra fund is spent.

[00:05:15] Santiago: And we’ll discuss a lot about our staffing models in future episodes and we’ll get into that in a lot more detail. But I think the interesting aspect related to what you were saying is we are currently going through a tough financial patch. We have two new team members that we managed to get in specifically because they could automatically be fundamentally profitable because some…

[00:05:44] David: Absolutely, and this is…

[00:05:45] Santiago: …work needed to be done.

[00:05:47] David: The last few months have been some of the toughest time of my life in many different ways. I’ve had to let people go for the first time, but at the same time as I was letting people go I’ve been recruiting people. I mean it’s felt so strange. But it’s exactly that element that the people that I’m letting go, there’s no work I can offer them, which is fundamentally profitable to the organisation, while the people I’m taking on are slotting into projects, and they’re doing work, which is fundamentally profitable for the organisation.

And this is just… this is business, I’m afraid. I don’t consider myself originally as a businessman, but I’m having to be a businessman in this context and be very cut and dry. We have to prioritise the things which are fundamentally profitable and they are what are keeping us afloat. The fact that we’ve got elements in what we do which are not fundamentally profitable, that is a problem and we cannot continue to have those as an organisation.

[00:06:42] Santiago: And that brings me to my role because you mentioned that you had to let someone go but both myself and one of our colleagues had to come to a compromise. One was more a mutual agreement the other one was more necessity in…

[00:06:59] David: Negotiation.

[00:07:00] Santiago: Negotiation, and I had to take a big, pay cut with a change of role, but that I’m perfectly happy with because I love IDEMS, I want to stay in IDEMS, and I want to show the world that things can be done differently, and that is my, let’s say, it’s my personal belief and my…

[00:07:17] David: Well.

[00:07:18] Santiago: But the thing is fundamentally profitable. All of us were working on an area that wasn’t being fundamentally profitable, which is education. And IDEMS had, for the last two, three years, invested considerably…

[00:07:36] David: We’ve been investing in education. We believe in our education component of our work. But what we did about a year ago, just over a year ago, a year and a bit ago, is that we decided now was the time when we could actually take our education work and take it to fruition so that it would bring in a new revenue stream. And we, no, I can’t say we, I have to say I. I need to take responsibility. I misjudged. I didn’t get that judgment right because we weren’t able to get the funding in to support the level of effort we had in that area quickly enough.

[00:08:12] Santiago: Well I want to raise my hand as well because I was Education Lead and one of my items in my to do list was to work with you on developing the education strategy and we didn’t get…

[00:08:28] David: We prioritised other things. And so this is, I think, a good representation of what IDEMS is. It is about us taking collective responsibility. It’s one of our staffing principles, I believe. So that element that, you know, I, I’m taking responsibility of it, but you’re also taking responsibility, is exactly correct, and this is part of what makes IDEMS strong as an organisation.

This is why we were able to save some of the jobs. Because people were able to take responsibility for what needed to be done to be able to make sure that their roles in IDEMS became secure. And the people who weren’t able to do that, I’m afraid we had to let go. Man, that was tough for me because it wasn’t that their work wasn’t good or wasn’t valuable. On the contrary, I have so much value for their work. We just could not afford it. And they couldn’t reimagine themselves into a new role, and so we had to let them go. And that’s a reality of what we have to do as a organisation, we have to be fundamentally profitable.

[00:09:26] Santiago: I think it’s very important to state in this context that it was a discussion.

[00:09:33] David: It was a discussion.

[00:09:35] Santiago: And it was a tough process in all three cases everyone had to make compromises, but in the case of the person who was let go, they were very thankful of the opportunity that IDEMS had given them and the learning…

[00:09:49] David: Yes.

[00:09:49] Santiago: …and growth that they had achieved.

[00:09:52] David: And they were moving on to other things, so they managed to create themselves a situation where they’d used us as a platform and they were now moving on into other things.

[00:10:00] Santiago: And it was done quite responsibly.

[00:10:03] David: Done as responsibly as we were able and we tried our best, as we’ve mentioned in other cases, we’ve done what we could do. Am I happy with it? No, I wish, I wish we’d been able to be in a position to be able to do that differently. But the reality was, we had a number of contracts we didn’t get in education over the last, it’s been a year and a bit now, where we had hoped that work would take off, would become fundamentally profitable in its own right and we believe it will. I certainly believe it will in the future. It’s just taking longer to come to fruition than we anticipated.

[00:10:42] Santiago: And we were very successful in terms of building a network, in terms of impact, in terms of gaining experience, in terms of developing a quality of work. And we are in a great position thanks that impact investments that we made in order to transform it into revenue generating activities. It is just about timing.

[00:11:03] David: Let me be clear because this is part of my own failings and misjudgments in some sense. We have been in an incredible position. I mean, the work, the education work, which has happened over the last 18 months, I’m so proud of that work because the impact it’s having and it’s transformative to society.

And this is work, which I believe is something which is needed. Is it something which we can convert into IDEMS being fundamentally profitable on it or not? I don’t know. If we can’t, we have to hand it over. That’s the problem. We have to hand it over to a charity, to a university, to someone else, because we cannot afford to work on things which aren’t fundamentally profitable, however impactful they may be. This is our reality.

[00:11:59] Santiago: But what we are doing is we are re-imagining our education work, and we’re looking at ways of transforming education into being fundamentally profitable by, for example, offering services directly to consumers.

[00:12:13] David: Absolutely. And I believe there’s lots of different opportunities for us around education. It’s a strength we have, and I have no doubt that we can have a fundamentally profitable education stream of work. What I don’t know is whether the route we were really investing in before can become fundamentally profitable, and even whether it should become fundamentally profitable. It is certainly impactful. If we have really powerful impactful work we want to support, great, we support it through charities. We cannot do it ourselves. We cannot carry that burden because we as an organisation need to have things which are fundamentally profitable. I believed that it could become fundamentally profitable.

I’m now on the fence. I certainly don’t believe it strongly enough that I can put in jeopardy the other elements of our work, which are fundamentally profitable, by continuing to invest as we had before. However, I certainly believe enough not to cut that investment down to zero, because I want to keep an opportunity going that If we are able to make it happen, we can.

But it’s a really difficult decision point. That specific initiative, I’m particularly looking at supporting the African universities, developing STACK resources, which enable them to have automated assessment, which is transformative. And it’s our first real instance of viral scaling going from one university to the next. It’s fantastic, the work that’s happened there, and you’ve been central to this. So, you know, this is…

[00:13:56] Santiago: It’s been my baby in many ways.

[00:13:58] David: Well, let’s put this in perspective. Before you joined IDEMS full time, we recruited you part time, just as a subcontractor, to be able to support a university in Kenya for this work. That was what, five years ago? 2018? 2019?

[00:14:18] Santiago: December 2018.

[00:14:21] David: Yes, so it’s almost exactly five years ago. This is the thing, and that work is one which has taken five years to come to fruition. The social impact of it now is incredible, it’s beautiful. What’s happening. I mean, I don’t need to tell you about this, but the audience might want to know if there’s anyone listening. And that work, I love. We can’t afford it, and we over invested in it recently. The investment we made before, I’m happy with. The investment over the last 15 months or so, we over invested in it. We over extended ourselves at a time where it wasn’t clear how to make that fundamentally profitable. Now, maybe that investment will pay off. Maybe that work will get the recognition that it deserves, I believe, and we’ll be able to really build from it.

[00:15:12] Santiago: And we are waiting for a response from two quotes that we send to an organisation for work, so it could very well become fundamentally profitable.

[00:15:21] David: Well, no, so wait a second. Those quotes for that little bit of work, that would be great. But that won’t make it fundamentally profitable. I do believe it could be, but it might be that or it might be something else.

And this is the sort of thing where I think we need to recognise and we need to step back. As an organisation, we are not a charity, we cannot be a charity and we cannot act like a charity. Just because this work is socially impactful, if it isn’t something which is sustainably, fundamentally profitable, we have to hand it over. And there are plenty of universities that could step in to where we’ve taken it and take it over…

If it is not something where we have a business model around it which comes out, which emerges, which can then justify it… We have ideas for that business model but we’ve not managed to execute them yet. And so I think that’s a really good way of highlighting what fundamentally profitable really means to us.

[00:16:23] Santiago: Well, I want to bring you back to the basic concept of fundamentally profitable, because when we’ve been talking about the education situation and we can spend hours on it. I mentioned how when I joined it was a hundred, a hundred and ten days now IDEMS grew quite a bit since then with the growth came additional overheads. Some people are now doing work which is very difficult to quantify.

[00:16:55] David: It’s added value for their fellows rather than being fundamentally profitable in their own work. And that’s a really important distinction and it’s one we’ve struggled with. If you think about universities as a whole, they have this problem all the time, that they have their academics who are core and then they have their admin staff who support the structures, provide those support structures.

It’s a very common problem and I would argue that many academic institutions actually need really large amounts of overhead because of the administrative structures. And that balance between administration and the academics in that context is a really tricky one. And I think more generally, this is one of the reasons that self employment is so attractive for individuals is that their admin load goes right the way down.

And so as bigger organisations, you need good administrative structures to support the work that you do. We recognise that as we grow, that administrative burden is going to have to be borne by the work that we do. How we do that, how we balance that in, is something we’re still struggling with. But what is really key is the concept of added value.

And this is central. And I think so far we’ve been really good with this. That when we think about people, and there’s some people who are really, even within our organisation I consider, in some sense, workhorses. The work they’re doing is in demand, they’re able to bring in extra work, and there’s always paid work flowing through them in a way which is, of course, so important for the organisation.

And not everybody can do that, not everyone will do that, but what’s so important is that the people who are not doing that, that they are valued by the people who are bringing in that balance, because that mutual respect, that mutual valuing of the other is what means that everybody can be considered fundamentally profitable.

Because if you have that individual who is bringing in more work and able to do and deliver more work, if they value the other people in the team who are not bringing in that work directly, but are making their life better, then the whole system works. And that’s part of our fundamentally profitable in terms of individuals.

[00:19:27] Santiago: And there’s a shift from the initial highly quantitative system to a more mixture of quantitative and qualitative way of seeing what fundamentally profitable means for each individual.

[00:19:41] David: And an understanding also this element of, in terms of fundamental profitability, should it be measured at an individual level? At a community level? At an organisational level? At a team level?

[00:19:54] Santiago: At a branch level, with education.

[00:19:58] David: Exactly. So there’s so much complexity there. And of course, as an organisation, we like living in this complexity, but there’s no easy answers. So we don’t have answers to this. We just try and build structures which recognise that complexity and therefore are not prioritising one over the other.

In particular, we are not prioritising the profitability of the organisation being maximised at the expense of the elements. All we require as an organisation is this element of fundamental profitability, which is so much more. It’s not easy, this year for the first year, it’s really in danger. We may have a year where we are not profitable. But as an organisation, the restructuring it took to get back to a point where we are fundamentally profitable as an organisation was relatively straightforward.

It meant tough decisions, meant elements of leadership. I think you were the one who actually pointed out that there was suddenly an element of them and us that had never been before between the directors and, and everyone else because we had to make some really tough decisions. And those decisions had to be in the interest of the organisation because this was an organisational level issue.

[00:21:25] Santiago: And there was a big shift in priorities as well. So we were looking at prioritising growth a year ago, while now our real priority is consolidating profitability.

[00:21:39] David: Yes, I think that, yes, that is true. Sorry, that is true, but both were always important. It’s just a year ago, we were fundamentally profitable, and so therefore we had the luxury of choosing what to prioritise, and we were able to prioritise growth, because we were in the fundamentally profitable space. Now, we don’t have that luxury. As an organisation, we don’t exist unless we are fundamentally profitable.

And so we don’t have the luxury of trying to prioritise something else. We have to prioritise that first and foremost, because that’s central to who we are and to what we are. And that’s part of where this is an interesting dynamic, but it doesn’t seem that unusual, it’s just, I don’t think many would articulate it as we do. And I don’t know that we’re articulating it that well. But I think thinking about this way of fundamental profitability versus maximizing profitability versus thinking about charitable status where you’re not trying to be profitable, you’re just trying to exist. We have to be fundamentally profitable. Otherwise, we are not succeeding as a social enterprise. That’s our view.

[00:22:56] Santiago: And we’re doing our best.

[00:22:58] David: What do you mean by that?

[00:23:01] Santiago: In terms of regulating, or not regulating, but changing our perspectives towards highly impactful work that we’ve been doing. We’re doing our best. We’re trying to maintain and support that work rather than leave it.

[00:23:20] David: Well, and we’re trying to minimise the negative impact from pulling back on some of these things, because this is supporting the communities we’re trying to serve. So yes, this is, you’re absolutely right, we’re doing our absolute best to maintain the importance of our social impact work while at the same time refocusing as we’re having to do now on this core tenant of fundamentally profit.

[00:23:50] Santiago: Well, I think that’s a very good place to stop.

[00:23:53] David: Thank you.

[00:23:55] Santiago: Thank you, David.