Sustainable Public Financial Management

Corporate Social Responsibility: It’s a Real Trend

Milton Friedman suggested in 1970 that “the social responsibility of business is to increase its profits.” Mr. Friedman believed that this idea had a “lack of rigor”.  And businesses “cannot be said to have responsibilities, even in this vague sense.”

It’s 40 years later and it’s taken hold. This is no longer a fad.

It’s true that many look at CSR as outside the ethical dimension of business. Business are falling behind in CSR programs.

Globe Scan found that CSR will become increasing adopted in the next 5 years, according to 62% of survey respondents. The Economist Intelligence Unit also found increasing priorities for CSR programs in business. Your business should not fall behind!

Don’t be fooled – Web 2.0 will go deep into financial software

by Doug Hadden VP Products

Social networking is revolutionizing transactional systems like Government Resource Planning (GRP). Many observers recognize that Web 2.0 will affect the content and collaboration product space in business and government. Some see applicability within the Customer Relationship Management (CRM) and Human Resource Management (HRM) product spaces. But not transactional systems. Surely not financial management!

I’m not talking about a superficial use of Web 2.0 user interface concepts. Or widgets. I’m talking about fundamental deep integration between transactional and social networking software. At the core. Not an interface or a portal. Core. From the basic design.

We looked at public financial management trends in 2005. We found an increased interest in integrating financial and records management systems. We analyzed our feature requests. Over half of these requests covered content or collaboration. The ability to attach documents at points in a transaction cycle. The ability to narrate decisions made in the budget cycle. We realized that an effective 21st Century GRP system required integrating transactional, collaboration and content systems. To improve government results. We built some use cases as part of the design for the FreeBalance Accountability Platform.

2005 Diagram: A Government Story

Tim O’Rielly had just defined Web 2.0. We realized that traditional financial applications did not integrate well with content and collaboration. It was, and remains, difficult for someone to decypher a government story. Yet, it was easy to follow the history of discussions in a blog.

This realization – that Web 2.0 was going to fundamentally change our business – enabled us to design a Government 2.0 / Government Resource Planning platform. It’s true that the first software applications delivered on this platform focus on functional transactional completeness. Stay tuned. We plan to leverage this fundamental architecture more and more.

I still encounter financial and technical experts who question how Web 2.0 can apply to GRP. Or why GRP needs Web 2.0. With all the excitement about collaboration in government through social networking, it is possible to lose sight of the end game.

We’re providing some “food for thought” ahead of the ICGFM panel discussion about Government 2.0 on November 4th. in Washington.

We’re providing a quick overview of Web 2.0 in anticipation of the upcoming ICGFM DC Forum about Government 2.0 on November 4th. The term “Web.2.0″ was coined by Tim O’Reilly of O’Reilly media.

Mark Drapeau has had, to say the least, a varied and interesting career. A biological scientist by training, Dr. Drapeau has brought his knowledge of the social behavior of fruit flies and bees to the potentials of social networking within government agencies. Formerly an Associate Research Fellow at the Center for Technology and National Security Policy at the National Defense University, Dr. Drapeau is now an adjunct faculty member at George Washington University’s School of Media and Public Affairs and a recognized thought leader in innovation and technology in government.

In anticipation of an upcoming panel discussion on Government 2.0 hosted by the International Consortium on Government Financial Management, we asked Dr. Drapeau ten questions:

Do academics approach social networking in a different way than typical users?
That could be answered a number of ways. Academics often only like to socially network with other academics, so their average social networks are probably more narrowly focused than a typical person’s. They also probably approach the study of social networks in a more abstract manner than a typical person, who probably wants practical uses out of their network – how do I use my network to get stuff done that’s important to me?

How can social networking improve social capital?
Social networking is to some degree linked to “new marketing” in which proactively putting out positive content like helpful blog posts helps drive eyeballs and customers and fans to brands, businesses, and so forth. Contributing to a community of interest and being generous with your ideas grows your social capital within social networks. This has always been true but social networking tools help you spread your word much further than ever before.

Was musician Joe Walsh right: “What were vices are now habits”?

Sure, it used to be that only the hard-core addicts used things like WordPress and Twitter. Now everybody wants some – everyone has the vice. And people who had the vice a year or two ago have now made blogging and tweeting and other things habits. And we are searching for new vices. Mine is Posterous.com.

What from insect social networks applies to human social networks?
Virtually everything.

How do these virtual social networks merge into the physical world?
It’s easy to forget that social networking is not only about a digital existence. We all exist in real life and like to interact with people in real life to some degree or another. Few people can completely exist online – maybe game designers, freelance writers, a few other things. Most people need to get business or other work or play done in real life. So, virtual social networks help you accentuate your real life networks. For example, you meet someone at a conference and you don’t see them for 9 months – things like Twitter help you ephemerally stay in touch with them just enough such that when you see them again, it’s like it’s only been 9 days, not 9 months. I’ve experienced this a lot.

What lessons can we learn from terrorism networks?
Terrorists and similar groups are agile, and seem pretty good at taking advantage of new technologies to spread information internally and externally for PR. This is a boon to small companies, small groups like NGOs, and to government units that need to be more agile or need better “marketing” to the people about what they’re up to.

Do we need to inject a “social gene” into government?
Government employees could be more social. Even if they really don’t have time (which I often find to be an excuse) social tools are increasingly mobile and people can “socialize” and let people in on their lives from their cars (safely!), homes, vacations and so forth. Just a little sharing means a lot!

Governments strive for standardization – doesn’t social networking provide better service to a select group of citizens?
The digital divide is a complex topic but generally the Web is becoming more accessible to more people every day. True that not everyone has an iPhone or a MacBook, but lots of people have cell phones and access to a computer at least some of the day.

What is the implication of mobile technology on Government 2.0?
Potentially huge and definitely to be determined.

Do different generations interact differently in the Web 2.0 world?
Every generation is capable of using Web 2.0 technologies, but different backgrounds yield different expectations and applications. Lots of people are looking at this issue right now, because it has all kinds of implications; for example, government workforce retention.

There are excellent sources for reading material on PFM and GRP coming from donor organizations.  We’d like to highlight some of the best material from DFID, USAID, the World Bank and the International Monetary Fund.

Integrated Financial Management Information Systems A Practical Guide http://pdf.usaid.gov/pdf_docs/PNADK595.pdf

Review of Public Financial Management http://www.dfid.gov.uk/Documents/publications/evaluation/review-pub-finan-mgmt-reform-lit.pdf

World Bank Public Sector and Accountability Series:

• Local Public Financial Management http://siteresources.worldbank.org/PSGLP/Resources/LocalPublicFinancialManagement.pdf 
• Budgeting and Budgetary Institutions http://siteresources.worldbank.org/PSGLP/Resources/BudgetingandBudgetaryInstitutions.pdf
• Performance Accountability and Combating Corruption http://siteresources.worldbank.org/PSGLP/Resources/PerformanceAccountabilityandCombatingCorruption.pdf
• Macro Federalism and Local Finance http://siteresources.worldbank.org/PSGLP/Resources/MacroFederalismandLocalFinance.pdf
• Local Budgeting http://siteresources.worldbank.org/PSGLP/Resources/LocalBudgeting.pdf
• Participatory Budgeting http://siteresources.worldbank.org/PSGLP/Resources/ParticipatoryBudgeting.pdf
• Intergovernmental Fiscal Transfers: Principles and Practice http://siteresources.worldbank.org/PSGLP/Resources/IntergovernmentalFiscalTransfers.pdf
• Public Expenditure Analysis http://siteresources.worldbank.org/PSGLP/Resources/PublicExpenditureAnalysis.pdf
• Local Governance in Industrial Countries http://siteresources.worldbank.org/PSGLP/Resources/LocalGovernanceinIndustrial.pdf
• Local Governance in Developing Countries http://siteresources.worldbank.org/PSGLP/Resources/LocalGovernanceinDeveloping.pdf
• Fiscal Management http://siteresources.worldbank.org/PSGLP/Resources/FiscalManagement.pdf
• Public Services Delivery http://siteresources.worldbank.org/PSGLP/Resources/PublicServiceDelivery.pdf

IMF Fiscal Affairs Department Technical Notes

• Modernizing Cash Management https://imf.org:443/external/pubs/ft/tnm/2009/tnm0903.pdf
• Commitment Controls https://imf.org:443/external/pubs/ft/tnm/2009/tnm0904.pdf
• A Basic Model of Performance-Based Budgeting https://imf.org:443/external/pubs/ft/tnm/2009/tnm0901.pdf
• Transition to Accrual Accounting https://imf.org:443/external/pubs/ft/tnm/2009/tnm0902.pdf

The Ethical Dimension

We wondered why social responsibility in business needs to be justified.  New ideas from the telephone through to Web 2.0 meets resistance. So it is with CSR.

There is a notion in corporations that “this is business, not personal.” (To quote the movie, “The Godfather”. )

But, business is personal. It’s very personal.  A business can impact thousands of people.  Businesses affect employees.

That’s why so many billionaries turn to philantropy.

CSR helps business leaders to provide social good on the road to billionaire status.

Many observers believe that the focus on financial capital is insufficient to value a company. Companies have social capital – how the business impacts society. And businesses have natural capital – how the business impacts the environment.

This ethical approach helps companies to determine value through triple bottom line reporting: profit, people and planet. This approach helps business leaders to recognize any negative impact. According to the Conference Board of Canada, CSR is “a vital part of a long-term, comprehensive approach to business success”

More entrepreneurs should consider the For Profit Social Enterprise route. More companies doing “good” should consider this approach. FreeBalance is a For Profit Social Enterprise software company that helps governments around the world to leverage robust Government Resource Planning (GRP) technology to accelerate country growth.

FOPSE is much more than Corporate Social Responsibility (CSR). In fact, it’s more than CSR on steroids. FOPSE is a commitment where CSR is core. We had some difficulty in expressing how this core commitment differs from traditional for profit company CSR programs until we read a landmark study by Harvard professor Daniel J. Isenberg. We knew that we had found our definition. We’re sharing what we have learned.

1. FOPSE requires addressing a social issue as core to the company mission

In many ways, FOPSE companies differ from Non-Profits in only one respect: profit. There must be a social linkage for FOPSE products and services. FOPSE is not marketing – it requires a real commitment.

FreeBalance GRP products and focused methodology support financial reform and modernization to improve governance, transparency and accountability. Good governance is required to improve development results – across all sectors: education, health, economics, etc.

2. FOPSE requires leveraging the for-profit model to improve efficiency and effectiveness

The for-profit model drives company effectiveness because of the competitive environment. Competition means gives customers choice. It improves products and services. It validates that products and services have value.

FreeBalance operates in a highly competitive field of Government Resource Planning. There are numerous IT alternatives for governments. This environment has driven product features and technology choices.

3. FOPSE is global in nature

Professor Isenberg suggests that FOPSE companies must have a global footprint. It may be unrealistic to create a global company immediately. But, FOPSE companies focus on global growth. And, there are many tools available to assist organizations to enter global markets.

FreeBalance has customers in 15 countries around the world. We have at least one Ministry of Finance-level implementation at the national level in every World Bank region.

3. FOPSE requires local delivery

FOPSE companies do not just extend products and services to address social needs. It is more than changing product labels. FOPSE companies deliver products and services directly to the local customer. They do not place a set of intermediaries between the company and the customer.

We’re involved in every FreeBalance GRP solution. We deliver it to governments around the world. We hire local staff to provide on-going support. And, we have set up regional development and support centres around the world.

4. FOPSE requires a customer-innovation approach

Companies traditionally expand globally with existing products and services. These products and services are reluctantly adapted to meet the local context. FOPSE companies question traditional business models and conventional thinking. They do not think about extending markets. They look at the customer context and innovate from there. They must find more ways to engage with customers.

We changed our business model in 2006 to become customer-centric and drive innovation by direct contact with governments. We enabled customers to drive our product roadmap. Our organizational structure was changed. We continue to innovate this ISO-9001/2000 certified process to more effectively meet customer needs.

5. FOPSE means sustainability

FOPSE companies examine the consequences of their actions. FOPSE companies are environmentally conscious. They do not upset the local business ecosystem by putting local entrepreneurs out of business. Their solutions are financially sustainable by customers.

Sustainability is a key theme in Government Resource Planning. That’s why we started this Blog last year. Many of our customers implement GRP using donor funds. But, as World Bank statistics show,  many governments are unable to sustain these solutions when the funding ends. We have been able to improve sustainability through product design and capacity building.

Cognitive dissonance this morning: it seems that the Wall Street Journal has fallen behind Business World Philippines in understanding Corporate Social Responsibility (CSR).  The Wall Street Journal Monday editoin provided a thought piece on “selling to poor consumers“. Dr. Erik Simanis, a senior researcher at the Center for Sustainable Global Enterprise at Cornell University Johnson School of Management, began his article with:

Around the world, four billion people live in poverty. And Western companies are struggling to turn them into customers.

Meanwhile, one of the CSR RSS feeds we use at FreeBalance for Google News included articles from these so-called emerging nations.  It seems like companies in the West are trying to create markets rather than address social problems.  Examples from Google News included:

• CSR needs to be part of company business models from the Philippines
• A critical review of social responsibility in State-owned enterprises in China
• CSR efforts by a Bank in Nigeria

To be fair to Dr. Simanis, his case studies are for products that are socially responsible.  Perhaps the article was designed to appeal to CSR skeptics. As we suggested in our previous blog post, it seems odd that social responsibility needs to be justified in so many businesses.

Nevertheless, it should be crystal clear. One should not create markets in order to separate poor people from their money.  If there is a need, then there should be a business model that enables overcoming this social problem at the lowest net cost to poor people. As Dr. Simanis points out, companies should modify products to best meet customer needs.

On the other hand, “to change people’s mind set and behavior”, can be ethically problematic. For example, replacing locally grown food or manufactured products can have dire economic consequences.

We’ve found that there is a need to adapt to the local environment. Our products have changed to meet the needs of emerging economies. The business model has changed to support more local employment and improved civil service capacity.  We partner with local companies and encourage these organizations to take a larger services footprint in order to make our Government Resource Planning (GRP) solutions sustainable.

Business Dangers of No CSR Programs

Many companies are reluctant to spend on Corporate Social Responsibility (CSR) programs. The return on investment for CSR programs has not yet been fully proven. Athough one wonders why being socially responsible needs to be proven. Perhaps this is the situation whenever business models begin to change.

If you are looking to encourage your company to adopt CSR, start by looking at figures from AMR Research.

AMR has been reporting on sustainability strategies and Corporate Social Reponsibility. AMR has made some of their older analysis available at no charge – an excellent step to showing CSR.

AMR has shown how “corporate social irresponsbility can hurt the bottom line”. Social responsibility is becoming an expectation for doing business. Customers are expecting more than a marketing campaign; they want to see depth in social responsibility.

AMR provides an interesting historical perspective on CSR from John Elkington who co-founded SustainAbility that describes the four waves of societal pressure. This fourth wave “focuses on creativity, innovation, scalable entrepreneurial solutions, and the role of emerging economies.”

It’s clearly not your grandfather’s social responsibility! This trend affects all companies. The impression is that only large companies can afford CSR.  These larger firms are publicizing social responsibility – making CSR an important consideration for companies of all sizes.

The first message for those advocating CSR programs is about how the bottom line will shrink if your business does not keep up with the trends.