Wednesday
August 25
2010

Josh Cleveland

The Future of Microfranchise: An Interview with Deborah Burand

This post is second to last in a series focused on microfranchising. It focuses on the recent insights from a study conducted for the Omidyar Network by Deborah Burand of the University of Michigan.

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To get to the core challenges facing microfranchise today, I recently spoke with some of the leading researchers in the field. For her latest project funded by the Omidyar Network, Deborah Burand brought over two decades of experience in microfinance, law, and international development to bear on the issues facing the microfranchise field by surveying 37 microfranchise networks.

At the time of this interview Deborah Burand was the Director of an International Transactions Clinic at the University of Michigan Law School, the first of its kind in the world. She since has joined the executive leadership team at the Overseas Private Investment Corporation (OPIC) where she now is the General Counsel. (The opinions expressed in this interview are her own personal views and should not be attributed to OPIC.)

Prior to her work at the University of Michigan, Deborah spent nearly a decade working in the microfinance sector – first at FINCA International where she launched the Capital Markets Group of that microfinance network and served on the boards of several of FINCA’s transforming microfinance institutions, then at Grameen Foundation where she served as the Executive Vice President of Strategic Services. She also has worked as a consultant for CGAP, co-founded Women Advancing Microfinance (WAM) International, chaired the Board of Microfinance Opportunities, and served as a member of the Investment Committee of the Global Commercial Microfinance Consortium and the Advisory Board of Microvest.

In this interview Deborah helps us better understand what microfinance could teach microfranchise networks, why sustainable microfranchise is so hard to find, and also provides a vision of where microfranchise might be a decade from now. If readers are interested, you can check out this past post by Deborah and also her bio info before reading on.

Without further ado, here’s what Deborah had to say about the future of microfranchise.

Josh Cleveland, NextBillion.net: Before we dive into your knowledge of the microfranchise sector, let’s start off with a question about you, Deborah. I’ve been putting together articles on BoP Career Paths as well so I have to ask, why did you get interested in learning about the microfranchise? And why is it so important today?

Deborah Burand: I have to admit that my interest in the microfranchise sector has been a long time coming… maybe too long.

Nearly ten years ago I was visiting with microentrepreneurs in Tanzania that were microfinance clients of a company where I then worked. One Tanzanian female client approached me to talk about the microcredits that she had received. According to a translator, this woman was thanking me for her “soft knees.” At first I thought I had not understood correctly. Then I learned that, thanks to these very small loans, she had used the profits from her business to pay for the school fees of her children so that she no longer needed to kneel before her husband to beg for money for their children’s education.

That was such a powerful story. that I left Tanzania feeling like a newly ordained, albeit secular, missionary for microfinance. But as I reflected on this experience, I realized that there was more to this Tanzanian woman’s story. She also was telling me, at least implicitly, about her dreams for her children – and, importantly, about the investment she was making in those dreams by paying for her children’s schooling.

Over the years I have wondered if that Tanzanian woman’s investment paid off as she hoped. I worry that it did not. I worry that her microenterprise is one of those many businesses that have remained micro, never growing into a small or medium-sized enterprise. And I worry that her now teenage children are counted among the approximately 85 million unemployed youth (aged 15-24) in the world.

If a study conducted by FINCA International in 2004 is correct, I have good cause to worry. In that study, FINCA surveyed 1500 microfinance clients in Mexico, Guatemala, Honduras, El Salvador and Haiti. Of the surveyed microfinance clients’ children that had completed all or part of their secondary education, only one in six was employed in the formal sector working for a salary. The other working age children of FINCA clients were unemployed or employed in the informal sector where they were earning less than US$3 a day.

Fast forward to 2007 … I was attending a conference in San Francisco, California where I met Chuck Slaughter and heard of his plans for a microfranchise network called Living Goods. That was the beginning of my “eureka” moment. Within a year I had left the microfinance sector to begin researching the microfranchise sector for it seemed to me that Chuck and the other microfranchise pioneers that I since have come to know hold an answer to the dreams of that woman in Tanzania. These leaders in the microfranchise sector are building businesses that can scale at the base of the pyramid, providing both employment and investment opportunities for those now living in poverty.

NextBillion.net: To get everyone on the same page, what do you mean when you say ’microfranchise’?

Deborah Burand: Good question as there are many competing definitions of this term. When I say “microfranchise” I am talking about a business models that employs many of the practices used in commercial franchising to create scalable business opportunities that are affordable enough to be owned and operated by people who live at the base of the economic pyramid. Yet even here there is much room for debate. What is, for example, “affordable enough”? That calculation is likely to vary from country to country, just as the size of a “microcredit” can vary significantly from country to country.

NextBillion.net: Now let’s dive into your work in the sector. Tell me about your most recent research initiatives in microfranchise.
Deborah Burand: This past spring, with support from the Omidyar Network, I led a team that surveyed 37 microfranchise networks on their business models, challenges, and opportunities. We also surveyed many of these networks’ funders (13) and partners (14) to hear their perspectives on the state of the microfranchise sector. Alex Nosnik and Lea Werbel very ably and insightfully conducted all 64 of these surveys.

NextBillion.net: What were some of the big “aha” moments of your recent research that the Omidyar Network funded? What are some of the main learnings that you can share with NextBillion readers?

Deborah Burand: I personally had four big “aha” moments. First, we saw a wide spectrum of evolving business models and the absence of an identifiable/self-identifying microfranchise sector. Yet, at some stage, what became clear from our research is that, no matter what you call these networks, there is much that they can learn from each other. All along the spectrum – from the most franchise-like networks to the most product/service distribution-oriented networks – these networks face many common challenges as they work to build inclusive business opportunities at the base of the economic pyramid.

The second, more personal, “aha” moment for me was that I realized how much more complex it is to build scalable and inclusive business networks at the base of the economic pyramid than it is to make loans to the poor. Building a viable microfinance provider is never easy; building a viable microfranchise network is harder still.

Third, I came to realize that the type of product or service being sold will influence the need for control over the point of sale (and delivery). Services and products that differentiate themselves based on quality often demand significant control over points of sale (and delivery). Now this may not seem like a particularly keen insight, but it helped me to understand why some of the microfranchise networks that we surveyed pay much more attention to branding and microfranchisee recruitment and training than do others. In short, in most cases, I could map the need for control (over brand and microfranchisee behavior) to the need for quality.

Finally, and related to all of the above, I saw how important, indeed crucial, it is to embed a microfranchisee-focus into the microfranchise network. This focus is at least three-dimensional. It is important from a financial viability sense (the microfranchise has to generate financial returns for the individual microfranchisees as well as the microfranchise network as a whole). It is important from a more general business sense (information gathered from and among microfranchisees needs to be incorporated into a business feedback loop so that the microfranchise network as a whole is learning and adapting to an often challenging and changing business environment). And it is important from a mission or development impact sense (the social as well as financial returns of microfranchise depend very much on how well microfranchisees are treated).

NextBillion.net: We’ve talked about what microfranchise is and some of the different models for microfranchise here on NextBillion, especially in some recent posts by the Ayllu team. Something that comes up in every conversation is “sustainability” and the apparent lack thereof in this sector. What makes building a sustainable microfranchise so hard?

Deborah Burand: There are at least two levels to that question. One is understanding what is needed at the microfranchise network level. Second is understanding what is needed at the microfranchisee level.

On the microfranchise “network” level there are issues surrounding the development of robust and efficient product/service distribution chains. These issues will vary, of course, depending on both the “what” and the “where” – eg, 1) the type of product or service being distributed through the microfranchise and 2) the places where these products and services are created and the places where they are sold.

Then there are issues that are likely to be common to any microfranchise network. These are the “how” issues. They generally include questions about how to find sustainable sources of patient funding, how to tap into and learn from the lessons of peers, and how to gain franchise know-how.

With respect to this latter point – that is developing franchise know-how, others who are more expert than I am in franchising tell me that all organizations that begin franchising face a steep learning curve. As they put it, franchising organizations are engaging in a whole new business because “the business of franchising is so different from the business being franchised.”

So let’s say you are really good at producing and selling valuable “widgets” to customers at the base of economic pyramid. Selling these same widgets through a network of microfranchisees requires another whole set of business skills. You must be able to market a microfranchise opportunity, recruit microfranchisee candidates, train successful microfranchisee candidates, and complete all of the other steps necessary to help these microfranchisees open for business. Then, once these microfranchisees are in business, you need to be able to meet their changing and growing needs (including, possibly, funding). That is hard work in any business environment. Then add the challenges of working at the base of the economic pyramid in emerging markets and this work becomes even harder.

NextBillion.net: To your research in the microfranchise sector, you bring nearly a decade working in microfinance. Tell us what microfranchise can learn from microfinance.

Deborah Burand: One of the significant accomplishments of the microfinance sector is that it has demonstrated that scale can be reached while serving people who live at the base of the pyramid without sacrificing quality. That should be a goal for the microfranchise sector too. Here are six important lessons that I think microfranchise can borrow from the microfinance sector:

1) Start building an investment-ready microfranchise sector long before available donor capital is exhausted. This means developing microfranchise networks that are capable of attracting and absorbing capital investments from a variety of investors (profit seeking as well as social/development impact seeking).

2) Advocate for friendly, enabling legal/regulatory regimes. As microfranchise reaches critical scale, host governments need to see the value of supporting (or at least not interfering with) a vibrant and growing microfranchise sector.

3) Measure the success of the microfranchise sector holistically – combining financial and social returns. Anecdotes are not enough to prove the development impact of microfranchise networks.

4) Frontload microfranchisee protections into the system. A focus on consumer protections was too long in coming to the microfinance sector. The microfranchise sector should think long and hard about how to ensure that transparency and integrity are hardwired into every microfranchise network before rogue actors or other troubling issues surface.

5) Invest strategically in technology solutions with a view to applying these solutions across the microfranchise ecosystem. There is no need to re-invent technology solutions, microfranchise by microfranchise.

6) Prize and invest in the human capital of the microfranchise sector. As microfranchise reaches scale, human capital becomes even more valuable than financial capital.

NextBillion.net: If everything goes right, where do you see microfranchise a decade from now?

Deborah Burand: I can imagine a world where, by 2020, the microfranchise sector will have as large and impactful a global footprint in the world as the microfinance sector enjoys today. Business and employment opportunities in the microfranchise sector will have reached over 100 million households, and investment opportunities in the microfranchise sector will have grown to over US$25 billion.

Harder to quantify, but just as exciting — valued and valuable products and services will be reaching poor communities around the world at unprecedented penetration rates, no matter how physically isolated or remote these communities are. New technology solutions will be linking microfranchise networks and their microfranchisees so that information is flowing in real time, thereby increasing both the efficiency and cost-effectiveness of microfranchises.

And, best of all, when women like that mother I met in Tanzania invest in their children’s schooling, they will do so confident that their children will be able to apply that education to find gainful employment in their very own backyard.

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