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Tech for good: will Impact Sourcing be the new Fair Trade?

Tech for good: will Impact Sourcing be the new Fair Trade?

BY Ernesto Spruyt

End of the week the annual The Next Web Conference will take place in Amsterdam. This year’s edition features a special program for ‘impact startups’, aiming to “shine a spotlight on entrepreneurs and startups that are attacking the world’s most difficult challenges.” To feature tech companies that try to make a positive social or environmental impact attests to how popular this movement has become.

The practice of doing impact business as we know it today, probably took off with the launch of certification standards for Fair Trade and Organic Agriculture in the 1980s. But now it seems that technology can enable positive social impacts that far outreach the possibilities of the traditional Fair Trade system.

Improving the lives of economically disadvantaged workers

The concept of Fair Trade was probably born in the church communities of western countries in the 1940s and 1950s, but was popularized with the launch in 1988 of what later became the Fair Trade certification label. The idea was to improve the lives of small scale farmers and agricultural workers in developing countries, not by providing aid, but by allowing them to receive a ‘fair price’ for their produce.

Throughout the years Fair Trade has become a widely known brand and concept among Western consumers, working with 1.5 million farmers and workers in 1,226 producer organisations in 74 countries worldwide. The retail value of global Fair Trade certified sales was as high as €7.3 billion in 2015. A substantial amount by all means.

In addition, the Fair Trade system promotes the development of human capital in farming communities in the areas of health and education. Although this could also be achieved through traditional aid, Fair Trade aims to teach farmers to be self-sufficient and independent players in the international marketplace.

The limitations of Fair Trade

But in terms of impact, the Fair Trade concept has its limitations. Its ‘floor-price’ mechanism produces all kinds of unintended consequences that can undo many of the envisaged positive effects, through causing oversupply, an incentive to dump low quality beans and consequently the self-limitation of demand through adverse selection.

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In the 90s alternative labels were introduced

As a result, in the 90s alternative certifications standards were introduced, such as Rainforest Alliance and Utz. These standards were designed to mitigate the disadvantages of Fair Trade, by focusing more on management best practices next to social and environmental practices. The idea behind these standards is roughly that farmers can earn more not by getting a guaranteed floor price, but by producing more and at better quality.

They allow for large scale implementation of social and environmental improvements in agricultural systems. And as a result, they significantly contribute to the mainstreaming of these best practices as the scalability and quality make it attractive for large market players such as Mars and Unilever to adopt them.

But there is also a flip side here: the upscaling of agricultural production, means that there are less jobs in this area of the economy. And as it’s estimated that by 2050, on the African continent alone around 400 million people under the age of 25 will be in need of sustainable employment. There is no way they are all going to find this in the agricultural sector, so there is obviously an urgent need to go beyond the current scope of Fair Trade and related systems.

Added value products

Firstly, an obvious way forward would be to create added value products from the agricultural commodities produced in those countries. One of the major criticisms of Fair Trade is that the price of let’s say a cocoa bean, is still a fraction of the price the consumer pays for the chocolate in retail. Consequently, most of the money in the chocolate chain is still being made by multinational players from OECD countries.

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Source: Make Cholocate Fair, Image: confectionarynews.com

A company like Moyee Coffee is trying to address this issue by not only paying a premium for coffee beans, but also helping to set up production facilities in the country of origin, in this case Ethiopia. They produce coffee ‘from bean-to-bag’ there and then export it to Europe. According to Moyee this ‘FairChain’-approach creates 5 times more local jobs compared to traditional Fair Trade, with roughly 50% of the value added in the country of origin.

The reality, however, is that there are not many of this type of initiatives that have substantial scale. And probably for a reason, as many of these supply chains are already settled and investment in processing and packaging facilities of any scale are generally very high. Therefore the laws of economics work against the transformation of mainstream supply chains into ‘fair chains’.

Impact Sourcing: the lowest hanging fruit

Over the past years, technology has enabled another, possibly more scalable, area of potential: Impact Sourcing. This is the integration of disadvantaged workers from low-employment areas into the processes of businesses from more economically advanced countries either through outsourcing or by setting up remote or virtual teams using digital technology.

It goes beyond traditional outsourcing, aiming to provide higher-income employment and access to new income opportunities to workers that otherwise might not be employed in that particular sector. For example, people that live in rural areas of economically less developed countries or in slums, people without access to secondary or tertiary education or educated individuals in areas of high unemployment.

Although it was already happening in some form around the world, the Monitor Group and the Rockefeller Foundation formally coined the term “Impact Sourcing” in a 2011 report that focused on the beneficial job creation aspect of the Business Process Outsourcing (BPO) industry.

Impact Sourcing as a concept took a real flight after in 2013 the Rockefeller Foundation launched its Digital Jobs Africa (DJA) initiative to catalyze new, sustainable employment opportunities and skills training for African youth, with a focus on the ICT sector.

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The Monitor Group report estimated that Impact Sourcing would be a $20 billion market by 2015 out of which $10 billion would be the direct income for 780,000 people. By 2020, according to Avasant, the market will grow to employ 2.9 million people. The Monitor Group’s research suggests that Impact Sourcing employees’ incomes increase between 40% and 200%. Further advantages include the benefits of formal, stable employment and access to health care and education.

The potential of impact sourcing: from low-skilled to high-skilled work

So far the focus of so-called Impact Sourcing Service Providers (ISSPs) has been on low-skilled work. They typically hire and train physically or socially-disadvantaged people who generally lack advanced skills, including youth from slums, hearing-impaired, and women or ethnic minorities. They often work on ‘microtasks’, such as data entry and conversion, content management and transcription.

The microwork model was successfully introduced by US-based outsourcing firm Samasource. Its example was followed by others, such as Digital Data Divide (Kenya), TechnoBrain (Tanzania) and Rural Shores (India). These companies’ clients generally break down projects and processes into smaller, standardized parts and see this way of organizing as a more effective way to utilize staff and at lower costs.

The limitation of microwork is that although it improves the economic position of the worker through introducing job opportunities and significantly higher wages, it does not contribute to skills development and employability in other, more lucrative job positions. This is why it’s so important that job creation and skills development go hand in hand. And also that high-skilled jobs are on offer, creating a pull-effect, motivating people to learn those skills.

Software development: the perfect match for Impact Sourcing

Probably the most attractive area for creating high skilled jobs and skills development through Impact Sourcing is software development. As production methods from the open source community are increasingly being adopted in the industry, software is often already being produced in virtual teams. At the same time, there is a huge shortage of software developers around the world, resulting in sort of an infinite demand for software development skills.

The potential of Impact Sourcing software developers is huge. As an indication, McKinsey predicts that by 2025 online labor platforms will add 72 million full-time equivalents. Gartner estimates the current global IT outsourcing market at roughly $200 billion. And Upwork data suggests that the amount spent globally on online hiring for software development by 2020 will amount to $19 billion. Most of that money would go directly to the workers, and in the case of Impact Sourcing that would mean a major multiplication of their current income, if they had any.

Compare that to Fair Trade: in 2015 a relatively modest total of €138 million was received by producers in Fairtrade Premium. And whereas according to a Solidaridad report even the best performing smallholders only manage to earn an income of less than US$10 a day, it is at this moment certainly not uncommon for a software freelancer online to earn the same amount per hour instead of per day.

Tech giants turning to Africa

So the IT outsourcing market is already huge. And despite the fact that outsourcing projects are often associated with all kinds of difficulties, due the global shortage of software developers this market remains very promising, especially as technology increasingly allows for dealing with the traditional obstacles of remote working.

Moreover, whereas traditionally most outsourcing was done in India and Eastern-Europe, tech firms are continuously looking for untapped pockets of talent. For example, tech giants like Google and Microsoft have considerable interest in the African continent, where both have elaborate developer outreach programs.

Nigeria-based startup Andela has even managed to secure a $24 million investment from Mark Zuckerberg’s foundation. Andela runs a high-end IT staffing company, in which it builds and manages (remote) engineering teams with the most talented developers from tech hubs across Africa.

The Fair Trade Software Foundation

With all this interest to turn workers from low-wage countries into software developers, an important point of concern is to what extent this will be done in a way that truly pays fair wages and promotes the development of human capital. Andy Haxby of IT firm Competa foresaw these developments, as in 2010 he introduced the concept of Fair Trade Software (FTS). Haxby:

“Fair Trade Software is still a work-in-progress and we are continually refining the model, but essentially FTS is an economic model for the IT sector based on co-development partnerships and Fair Trade Principles. By creating virtual teams with members in both OECD and developing countries it is possible for software development services to meet Fair Trade criteria. Urban youth in developing countries are the largest marginalised group in the world, and FTS helps to not only provide employment but more importantly develop capability and grow the digital economies in developing countries.

Organisations that meet FTS criteria can use a FTS label. There are different labels depending on the type of involvement and degree or participation, but a key factor is demonstrable capacity-building. Simple outsourcing or impact-sourcing is not sufficient on it’s own, there must be a mechanism for skills transfer, for example by mentoring. The reason for the focus on skills transfer is that it is important for software developers in places like Africa to learn the skills needs to tackle complex projects in their own countries, without external help.”

Unlike outsourcing, in which tasks are assigned to partner companies in developing countries and delivered upon completion, the Fair Trade Software process right now is based on working in virtual teams. The Foundation is still exploring how to certify the different ways in which developers may be used. But that aside, Haxby sees little limitations:

“When we started working using the FTS model we thought that it would only be applicable to projects developed in-house with maybe one or two Scrum teams in the EU and one or two teams in a developing country. We did not think it would scale to much larger projects. However, we were recently involved in a project for the Kenyan government that involved 30 people in 5 Scrum teams split between Kenya, The Netherlands and the UK. It worked very well and I don’t see why you couldn’t scale further.

FTS is produced using international best management practices and to international quality standards. There should be no difference in quality to products produced entirely in the EU. Due to the coaching/mentoring aspects of FTS, and the need for constant quality review and code refactoring, FTS development can be rather slower than is normal for software developed conventionally but the final result is the same quality.”

Fair Trade Software is actually more competitive

Incentro is a high-end software agency that serves the top-100 Dutch corporations, which is certified by the Fairtrade Software Foundation. For Incentro’s Coert Prins, this approach cuts both ways:

“We started our Kenyan office because we wanted to make a change for the people in Africa. We have a strong believe that the only way to make something last it should have a sustainable business case. Like other Fair Trade products it takes a bit more effort and resources to give our staff fair working conditions (like proper wages, opportunities and investing in lots of training). To validate our way of working and share this value with our customers we decided to get certified and build Fair Trade Software.”

But there it also contributes to their own competitiveness:

In this way we can stay away from the race to the bottom but stay competitive by focusing on quality software by well trained, skilled and happy employees. For the customer Fair Trade software gives them a clear and validated way to contribute to sustainable development goals. More and more companies have a CSR policy and this really fits in well without having to put in the extra effort.”

Moreover, according to Prins this way of working allows Incentro to mitigate the risks and negatives of traditional outsourcing:

The quality of the software is key. Too many companies have been disappointed with the low quality software delivered by outsourcing to low labor countries. Although Fair Trade Software doesn’t compete with these very low prices it does provide a high value for money. We work with senior developers in the Netherlands who can interact face-to-face with the customer and co-create software with the team guarding the quality of the software. Combined with Dutch management in Kenya we deliver the same quality software as you can expect from our development in the Netherlands but at a more competitive price.”

Impact sourcing as a typical example of Shared Value

Incentro’s statements are supported by research. Impact workers tend to be more loyal and motivated than regular outsourcing workers or even inhouse staff. Research by the Everest Group shows that Impact Sourcing service providers (ISSPs) have a 15–40% lower attrition rate than traditional Business Process Outsourcing providers (BPOs).

Being able to retain staff and at affordable rates happens to be a major added value to companies in need of software developers. Especially since the quality of work goes up over the long term if a software team can stay together. At the same time, Impact Sourcing may lead to a better position of employers in their own domestic labor market as well: the values-driven, tech-savvy generation of millennials is known to favor employers with a clear and meaningful impact policy.

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From Forbes.com, The Future Of Work: Corporate Social Responsibility Attracts Top Talent

This is a typical example of Shared Value, a concept that was introduced by business strategy guru Michael Porter and is based on the premise that the long term health of a business is based upon the long term health of the community it is operating in and depending on. In other words, Shared Value is about creating societal value and creating business value simultaneously. As it improves the lives of disadvantaged people, while being more competitive than traditional, outsourcing and IT staffing, Impact Sourcing is in a good position to conquer the substantial corporate market segment that is interested in creating Shared Value.

Using tech to fuel impact sourcing

TMG, one of the largest Dutch media companies, is one of those organizations in search of Shared Value opportunities. They had similar considerations as Incentro, but chose a slightly different route, by working with an Impact Sourcing platform called Tunga, that links African software developers to international tech firms.

For several of TMG’s digital business units, the scarcity of software developers on the local market was a major obstacle for growth. Projects simply couldn’t be executed or were stalled because it would take too long to find suitable developers, or they were simply too expensive. At the same time these business units are managed by young, entrepreneurial people who have an above-average interest in creating impact and are supported in this by their corporate CSR manager.

Tunga allowed them to have flexible and affordable access to software developers, and to build and scale a software team according to their own demands. Tunga works with developers from Uganda, Kenya and Nigeria that are trained and/or recruited through the Bits Academy alumni network of students from disadvantaged backgrounds.

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The Bits Academy network consists of 10 schools in 9 countries with over 6.500 alumni

According to Tunga founder Ernesto Spruyt the bottleneck is not so much coding skills, but the so-called soft skills; the ability to manage tasks and projects, to be part of an agile software team, to communicate with the client and to manage the client’s expectations:

“At Tunga we bridge this gap partly by traditional methods such as mentoring, training-on-the-job, and masterclasses; but also by using technology. Our platform interface is set up in a way that make it very easy for developers to conform to international project management standards. For example, by using automated daily mini-surveys to let them think and report about their progress, and to quantify it. But also by using standardized formats for project planning, writing specs, etc.”

Tunga is not certified by the Fairtrade Software foundation. When asked whether this is a deliberate choice, Spruyt replies:

“We surely operate in the same spirit, but the way we work simply does not fit the current system of the FTSF. I know they are working on a more flexible setup. In the meanwhile, we work in the countries with the highest youth unemployment rates in Africa. According to the ADB this is 83% in Uganda. And at Tunga the average developer — who is already trained through for example Bits — earns 1,000% of what he makes on the local market and then still is competitively priced in the international marketplace.

We’re working with Sinzer on developing an impact measurement strategy. We want it ourselves, but it’s also appreciated by the organizations that currently support us, such as Dioraphte, Oxfam and the DOEN foundation. And we’re looking to raise money from impact investors, for them it’s important to be able to quantify impact.”

The momentum of impact investing

This brings us to one more reason why the tide is favorable for Impact Sourcing: the mainstreaming of impact investments. This is a relatively new class of investments that seeks to combine financial returns with positive contributions to society and/or the environment. Or as a recent task-force at the World Economic forum put it: “In the 19th century investors focused on returns, in the 20th century investors focused on risks and returns and, in the 21st century, the conversation has shifted to risk, return and impact.”

Large financial institutions like Abnamro and Robeco are actively promoting impact investments and for a reason. According to Morgan Stanley, $1 out of $9 in 2012 could be qualified as sustainable investments. In 2014, that ratio closed in to $1 out of $6, amounting to nearly $6.57 trillion in investments.

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From Robeco product page: “Choose your Impact”

Now, sustainable investments is a broader class than impact investments, but research by GIIN indicates that over the next decade, impact investing can grow into a $1 trillion global market, and with serious returns. One study found that a sample of 51 impact funds generated a return of 6.9 percent (compared to an 8.1 percent return for the sample of 705 non-impact funds). Another found that 70 percent of impact investments target a return of 11 percent or higher.

Aside from generating solid returns, one reason that impact investing is becoming so popular is the Mainstreaming Impact Investing Initiative that was launched in 2012 by the World Economic Forum. Another one is the fact that technology is increasingly allowing for impact to be measured and therefore managed more professionally.

Conclusion

In conclusion, the alignment of several developments indicates that Impact Sourcing could be a more than worthy addition to Fair Trade’s intention to improve the livelihoods of disadvantaged workers and communities:

  • the huge shortage of software developers around the world
  • the need for and availability of young and talented people
  • the fact that the fair practices of Impact Sourcing provide a competitive advantage over traditional outsourcing services in terms of quality and durability
  • the enormous arbitration between what disadvantaged workers earn and international market rates
  • the availability of impact investment capital to support Impact Sourcing initiatives

Impact Sourcing is certainly not the only way that tech can make a positive impact. But it’s software developers that make tech firms possible in the first place. And in a sense impact startups are the heirs of the Fair Trade spirit of the 80s. Keep that in mind when you visit this week’s TNW conference.

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