Negotiating the social and commercial landscape: how to prioritize and which (if either) should come first?
Developing an inclusive business model that benefits multiple parties involves striking a balance between competing priorities. Indeed, what may seem like a logical or straightforward idea becomes incredibly complex when trying to negotiate both social and commercial objectives that although are not contradictory, do not necessarily run parallel to one another. Both of these must be prescribed a similar weighting for the model developed to remain both inclusive and sustainable; if not embedded from the start, there is a significant chance that in the long run the commercial agenda will begin take precedence resulting in a sustainable yet not necessarily ‘inclusive’ business model. But where does the compromise lie? How does one navigate between these sets of priorities so that all parties are to benefit?
These challenges are central to the Business Innovation Facility team that is working with ACI in Bangladesh to develop a sustainable contract farming busines... for landless farmers.
ACI is the largest Agribusiness in Bangladesh that produces all the required inputs to grow fresh produce - seed, fertiliser, pesticide, farming equipment– but that does not currently have access to the labour or the land that puts these inputs to work. ACI also owns a small retail chain, ‘Shwapno,’ that targets the middle-lower class buyer who does not want to pay a huge premium for his produce but does not necessarily want to buy it from the local market either. ACI operates a small contract farming model that grows strawberries and maize, but most of their inputs are supplied to independent farmers who work their own land or who have their own set-up. Sub-units primarily work independently of one another but they all share a desire to grow their area of the business and increase their own profit margins. How best to achieve this? Develop an overarching contract farming business model that incorporates each of these sub-units by utilising their inputs, whilst at the same time producing above-market quality products that will serve as a secured supply for Shwapno.
ACI has acknowledged that it too has a social responsibility; the Chairman recognises that he has social obligation to help those incredibly poor farmers who don’t have access to the market or required inputs by incorporating them into this model. It is these farmers that ACI will provide with the inputs, knowledge and training to grow fresh produce and then buy these back at an agreed price. Both parties benefit: ACI gains a secured supplier for ‘Shwapno’ and secured demand for their inputs, and the famers receive a guaranteed buyer of their produce at an agreed upon price - something that neither currently has.
However, as the team experienced, negotiating between these parties is particularly challenging when every discussion results in a debate over price. What price is high enough to benefit the famers and incentivise them to want to be a part of this model, and low enough to still be a profitable for ACI as a whole and each of the sub-business units? Here is where the additional social benefits come into play; by conducting interviews with local farmers, the team identified that while the farmers are desperate for an assured buyer of their produce, they too are interested in social benefits that can help their family and the local community. Farmers are willing to perhaps accept a lower price, if in return ACI provides funding for a local school, water well or internet café. These, although costly, have a far greater reaching social impact than the monetary cost associated with them. ACI has the access and ability to organise these sorts of actions that the farmers don’t– this is a priceless and intangible asset and this is where the development opportunities lie. Farmers are not simply benefitting from a higher wage and thus greater disposable income, but also from improved facilities that will have a positive multiplier effect for their community. It is these additional social benefits that act as a buffer to the rigid pricing structure or financial agreements laid down in the contract; it is possible to strike a balance between the two.
When attempting to negotiate the price, the biggest challenge is trying to get both company and farmer to take a longer-term view. ACI needs to accept that this model will not deliver returns instantly; profits require investment and this is subject to a time delay. The farmers too need to understand that although accepting a fixed price for their produce seems completely illogical against a volatile market, if taking a 5 year view, this will eventually balance out and leave them in a better position. This departure from the short-term mindset is unsettling and is enough to prompt either party to default but here the social benefits can help alleviate some of this concern. By delivering on the social benefits earlier on (a social investment), ACI will fulfil some of their social agenda and the farmers will begin to experience the benefits of this contracted model even if the daily market price is not in their favour.
So how can ACI ensure that the farmers will uphold their end of the agreement in return? In short, there is no easy way to achieve this but risk can be reduced by ensuring that the contract agreed between ACI and the farmers is thorough and comprehensive, the rest is down to trust. Trust that ACI will purchase the agreed produce and trust that the famers will follow the techniques and protocols laid down by ACI and not side-sell their produce to other buyers for a better price. It by delivering these social benefits upfront that ACI will be able to gain this trust; these are something that the local market cannot offer. Trust cannot be bought and takes years to develop but ACI needs to start somewhere as the commercial objectives of the model depend on it. As a result, ACI has partnered with a local NGO – Practical Action - to help them establish and build these trustworthy relationships. Large Agribusinesses in Bangladesh are often viewed with suspicion and thus there is a need for an intermediary who does have a connection with the farmers to provide the initial link between the two. This is not a permanent role, once ACI has secured its connection with the famers, Practical Action can be removed and ACI can work directly with those it employs and further build on these relationships.
As the team has discovered, it is impossible to completely isolate these two sets of objectives. While the main priority for both parties is to financially benefit from this agreement, and logically the social benefits would be derived from these higher profits and wages, the two are inextricably linked. Indeed, what might occur is the opposite; it is only by fulfilling their social agenda that ACI's commercial objectives can be then be achieved.