Profile - McKesson and Comparative Advantage

On Monday, I wrote about corporate philanthropy and comparative advantage. I argued that companies should focus their corporate philanthropy programs on contributing resources to which they uniquely have access, resources that they can provide at a cost that is lower than the beneficiary would pay on the open market. As such, I argued that most companies should donate primarily expertise and perhaps products, giving cash only to leverage such donations. Today, I want to illustrate that theory.

Last week, I had the chance to speak with Carrie Varoquiers, President of the McKesson Foundation and Vice President of Corporate Citizenship at the McKesson Corporation. Back in February, I wrote a post on the impact of the recession on CSR. Carrie commented on that post, saying, in part:

“I have also noticed a dearth of corporate operating foundations, which is actually quite surprising. Most corporations have institutional knowledge and in-house resources to create and manage social benefit programs, especially if their Foundation’s mission is well aligned with their business. It’s very curious. Perhaps we will see more of this model moving forward.

I’m not saying traditional grantmaking corporate foundations shouldn’t exist, I am simply saying that it’s not the only option for creating meaningful social change.”

This way of thinking is very much in line with how I think about corporate philanthropy and comparative advantage, so as I was writing Monday’s post, I reached out to Carrie to hear more about how she approaches this issue.

First, a bit of background: San Francisco-based McKesson describes itself as “a health care services company dedicated to helping its customers deliver high-quality health care by reducing costs, streamlining processes, and improving the quality of care and patient safety.” According to its profile on Hoovers.com, the company is a pharmaceuticals distributor (the biggest in North America) and a medical supplies wholesaler; it also provides software and technical services to insurers and health care providers. The publicly-traded company’s 32,000 employees generated 2008 sales of $101.7 billion.

Carrie joined the McKesson Foundation in 2003 and took on her current role last year. She told me that, historically, the company practiced more “traditional philanthropy”, giving small grants to a wide variety of nonprofits because it was the right thing to do. Recently, though, McKesson engaged in a strategic planning process for its community engagement function. As a result, it’s decided to focus its efforts on chronic disease management, beginning with diabetes.

McKesson’s approach to this issue goes beyond aligning the company’s cause with its business goals, which has been the extent of strategic philanthropy for most companies. McKesson is also aligning the types of resources it donates with its own comparative advantage. As Carrie points out, the company could have chosen simply to make a grant to a nonprofit that works on diabetes management. Indeed, cash is a resource of which McKesson has plenty – as of December 31, 2008, its financial statements indicated that it was carrying nearly $1.2 billion of cash and cash equivalents on its balance sheet and stockholders’ equity was close to $6.2 billion. However, as I discussed yesterday, McKesson does not have unique access to cash. Instead, it has unique access to its professional expertise – and Carrie told me that the company has professional experience in chronic disease management.

According to McKesson’s new strategy, while grantmaking will continue to be a component of its philanthropic strategy, the company will also operate its own social engagement programs – something along the lines of the corporate operating foundation Carrie mentioned in her comment. The company will be contributing its expertise in chronic disease management, which I believe will enable it to contribute resources of greater value than the cash it could contribute for the same cost to the company. Currently, the Foundation is investigating the feasibility of a diabetes cell phone project, whereby automated calls are made to diabetes patients, who respond with information about their blood sugar levels; the technology flags patients that require follow-up. The technology, which Carrie described as inexpensive, has demonstrated decreased ER visits in pilot programs.

I’m especially interested in the fact that the company is experimenting with an earned-income strategy for its foundation. The McKesson Foundation hopes that, by selling the program to insurance companies based on the expected cost savings, it will be able to subsidize the cost of providing it free to uninsured patients in community clinics. Through this earned-income approach, Carrie hopes not to get more money into the Foundation’s endowment, but instead to be able to expand this healthcare quality improvement to more patients.

I asked Carrie why, given the apparent market opportunity, McKesson is researching this project through the Foundation, instead of a business unit. She told me that, in such a large, geographically dispersed company that provides so many services, “This project is in its infancy, so little data is available to prove the viability of this disease management strategy yet”. She described the company as mission-driven - "everything that we're doing is improving patients’ lives" – so the business unit presidents see all of their possible business opportunities as beneficial to society and, within that, look for the largest profit margins and the largest markets. While the project has not yet met the investment criteria for McKesson’s business units, the corporate social engagement function has the flexibility to take it on if the feasibility study proves successful.

I also asked Carrie about some of the challenges she’s facing as she takes this relatively unorthodox approach to corporate philanthropy. She talked a lot about innovation, and the lack thereof in the very traditional field of philanthropy at Fortune 500 companies. She told me that change will have to be driven by the leadership of these companies, or by the analysts who evaluate their activities. She also acknowledges that this approach to social engagement is much easier for her to implement, given the industry in which McKesson operates – “I don't know how that would work if you were looking at a company like Gucci”. I was particularly intrigued by a comment she made earlier in our conversation, about the need to take care in carving out a philanthropic focus area when a company decides to donate the resources it uses to make money – she told me that, when the McKesson Foundation attempted a similar social engagement approach a few years ago, the project ended up in direct competition with one of McKesson’s business offerings. As such, it was important that she identify an area that the company is not in and doesn’t plan to expand into, at least in the near future.

I’m really excited by McKesson’s approach. As I said on Monday, I think companies can dramatically increase the impact of their community involvement, without changing its cost to the company in question, by leveraging the very resources that make them successful in business. McKesson has a comparative advantage in providing expertise about chronic disease management, and that’s relatively more valuable that its cash contributions. I look forward to following this story to see how it works out and what we can all learn from McKesson’s approach.

Comparative Advantage and Corporate Philanthropy

What's the most valuable thing Coca-Cola has to offer? Its brand, certainly, helps it outsell its competitors. I'm sure the company also places great value on its top-secret formula. I'm particularly impressed with the company's distribution network - my friend once saw a Coca-Cola billboard in a rural, rural part of East Africa, hours from the nearest city, and it certainly seems that you can buy a Coke anywhere in the world.

Other successful companies have their own unique, highly-valued assets. GE is famous for its leadership development expertise, and McDonald’s has real estate portfolio with an incredible footprint. Microsoft has an enviable amount of cash sitting on its balance sheet, but I'm sure the company is more concerned with hanging on to its talented developers, who create solutions to problems that stand in the way productivity.

When Google.org announced its reorganization last month, the company also stated, "…our greatest impact has come when we've attacked problems in ways that make the most of Google's strengths in technology and information". That is, Google.org feels it's had the biggest impact on the social problems it cares about when it has utilized its own most valuable asset - in my interpretation, that includes Google's employees and their unique expertise in using technology to solve problems that stem from a lack of organized, accessible information.

This makes a lot of sense to me. When companies put their unique assets to work on social problems, they offer a resource that almost no one else can offer. Furthermore, they can typically make an impact utilizing their existing skills and processes more cost-effectively than a nonprofit partner could buy those services on the open market. One very clear impact of that is in the pharmaceutical sector. Thanks to the economics of the pharmaceutical industry, while fixed costs are very high (drug discovery is ridiculously expensive, and I imagine that setting up manufacturing isn't cheap), marginal costs - the cost of making one extra dose - are fairly low. As such, a pharmaceutical company will have a much greater impact if it donates drugs that cost it a million dollars to make, rather than contributing a million dollars cash, as the recipient of the cash donation would be able to buy a far smaller quantity of drugs than the quantity the company can make for the same cost to the business.

Basically, I think it all comes down to comparative advantage. Companies might have a lot of cash - maybe even more cash than a lot of the other players in a community. They don't have UNIQUE access to cash, though, and cash isn't the most valuable thing they can offer. So if you have a foundation that could offer a $100,000 grant, and a company that could offer a $100,000 grant OR a service (that the grantee needs) that would cost the company $100,000 to offer but would cost the grantee $200,000 to purchase, wouldn't you want the company to specialize its philanthropy in donating that services? Of course, nonprofits have a need for cash as well, but better for the foundation to specialize in that offering, while the company specializes in something that no other donor can offer as cost effectively.

Of course, sometimes a company needs to donate some cash to unlock the value of the donated product or expertise. I recently read a case about Merck's corporate social engagement activities (Rangan, V. Kasturi, and Katharine Lee. "Merck: Global Health and Access to Medicines." Harvard Business School Case 509-048), for a class I'm taking called Business at the Base of the Pyramid. One part of the case described the company's philanthropic activities in Botswana around 2000, where Merck donated both cash ($56.5 million) and antiretroviral drugs. According to Raymond V. Gilmartin, then Merck's CEO (and now a professor at HBS):

"It was very clear to many of us that just giving free drugs would not do it. We needed to engineer an entire supply chain, train health professionals, build infrastructure for testing and treatment. All this and more would be crucial to the success of the program."

If Merck had just donated drugs - the resource in which it had a comparative advantage, relative to the other players in the public health space - the drugs might not have ultimately been deployed effectively. However, note that, in this particular initiative, Merck partnered with the Gates Foundation, which also put in $56.5 million in cash - this allowed Merck to redirect its significant but ultimately limited corporate resources to that which it uniquely could offer. Overall, according to the same case, in 2007, Merck donated $828 million, including $62 million in cash (7% of total giving), $161 million through the U.S. Patient Assistance Program (19%), and $605 million via the Merck Medical Outreach Program (73%); the latter two programs, accounting for nearly 93% of total giving, are both product donation programs.

Overall, corporate giving in the US, when broken down by cash and non-cash giving, doesn't look like Merck's program. In its "The 2008 Corporate Contributions Report", The Conference Board surveyed 197 "major" companies regarding their 2007 giving. The survey found that, among the U.S. respondents, 45.77% of giving was cash, while 54.23% was non-cash; interestingly, among non-U.S. companies, 66.20% was non-cash. The Committee Encouraging Corporate Philanthropy (CECP), in its 2008 "Giving in Numbers" report, had somewhat different findings - it surveyed 155 companies, including 69 of the largest 100 public companies in the U.S., and found that 20% of total giving was non-cash. (I'm not sure why this discrepancy exists - my best guess is that the Conference Board survey happened to include a few more of the big pharma companies, which tend both to give more and to give a higher percentage of contributions in the form of non-cash giving - for instance, in the CECP report, which categorized the respondents into eight industries, "health care" was the only one that gave more than half of its contributions in this form.)

Either way, though, it's clear that most companies are not focusing primarily on contributing their core competencies, and cash is used as more than a way to leverage non-cash contributions. Based on the logic I've laid out thus far, I don't think that's a good thing. I think it's inefficient for companies to give so much cash when they have more valuable resources available, that the total value of corporate contributions would go up if companies were to focus more on contributing the non-cash resources that make them successful in their core businesses.

That said, I have to admit that I'm a bit uncomfortable with the logical conclusion of my argument, that cash contributions by companies would fall significantly. Cash, after all, is much easier to use, and it's much more flexible - it can be deployed to address any number of needs. Companies play an important role in funding the small nonprofits that make up the fabric of a community. Those relatively small grants might not play a big role in the companies' philanthropic strategies, but they might be awfully important to the recipients. As companies become more and more strategic in their community involvement - and I think this is a very, very good thing - what happens to these small organizations, which have for so long received grants just for being local? Big organizations may have well-developed systems for receiving and utilizing product donations; they may have entire departments that can coordinate the use of highly-skilled volunteers, but can your local homeless shelter extract value from a non-cash gift as effectively as it can spend the cash?

I think small nonprofits can indeed utilize these resources, but it will take a constellation of intermediary organizations to make this happen. The United Way and community foundations have, for generations, created economies of scale for their local nonprofits by raising money, pooling it, and distributing it in relatively small quantities, to organizations that, individually, might not have been able to afford to build extensive fundraising departments. Today, Taproot Foundation is playing a similar role with skills-based volunteerism. By coordinating teams for professionals in areas like marketing and strategy management and "granting" the teams to nonprofits that might not be able to solicit and manage such pro bono services on their own, Taproot helps bridge the divide described above. Similarly, Gifts In Kind International was able to accept $750 million in product donations last year, from thousands of companies, and distribute them to 150,000 organizations.

I also think it's critical to recognize a key area in which most companies do NOT have a core competency - identifying social problems and figuring out how to address them. There are exceptions to this rule - health care companies, for instance, probably have quite a bit of relevant knowledge in-house. In most cases, though, it's important for the corporate partner to acknowledge that it doesn't have a comparative advantage in this piece of the puzzle, while its prospective nonprofit partners do. I think that building strong, thoughtful partnerships is an important way to ensure that each player can individually contribute its own comparative advantage, and that together, the suite of offerings meets the social needs in question.

So could Coca-Cola use its amazing distribution expertise to help development organizations solve the "last mile" problem in international development? Could GE invite nonprofit leaders to its leadership courses at Crotonville? Could Microsoft put its developers to work solving the computing needs of the worlds' poor? Could McDonald's engage in a social marketing campaign with incredible reach, given the fact that, every day, millions of people all over the world spend several minutes within an environment that the company controls?

Certainly, these companies, and many others, are creating innovative solutions utilizing their comparative advantages - Coca-Cola, for instance, donates its distribution expertise and capacity for the purpose of disaster relief, while Microsoft, through its Unlimited Potential program, uses the company's skills and knowledge to create technology products that foster economic and social development at the middle and base of the economic pyramid. If you have other examples, PLEASE post them in the comments section.

I think there's a lot of potential for companies to increase their impact without increasing the cost to the company of community involvement. This makes me really optimistic about the future of such social engagement, despite the tough economy. While companies seem to be taking corporate citizenship seriously, I think that we have yet to hit the inflection point, in terms of the impact they can have on the community. I think that focusing on comparative advantage - and recognizing that, in many cases, this means shifting from donating cash to donating expertise or products - will be a major factor in getting there.

News Update

Lots of interesting news in CSRWire recently! A few of the stories in Wednesday's Weekly Alert that I found intriguing:

The Company You Keep: IBM Sustainable Procurement Consulting Service Helps Clients Reduce Costs, Ensure Suppliers Are "Green," Ethical, Safe - IBM has developed a consulting offering through which it will help its clients "establish sustainability standards… throughout their global supplier networks".

UN Global Compact Annual Review Highlights Progress Made, Identifies Gaps in Corporate Responsibility Practice - Covers results from the "United Nations’ largest-ever corporate responsibility survey" . The short story: "...corporations around the world are making progress in adopting responsible business practices. Yet, serious implementation gaps remain, particularly in supply chain management and subsidiary engagement." (Looks like supply chains are a theme!)

Despite Economic Pressures, Majority of Companies Plan to Increase Emphasis on Sustainability - Reports the findings of a survey by of corporate communications professionals. Favorite quote: "'At a time when the economy requires everyone to stay focused on the essentials, it's noteworthy that businesses are putting sustainability programs into that must-do column,' said Nancy Costopulos, chief marketing officer of the American Marketing Association."

Then, from the New York Times:

Getaways That Are ‘Guilt Free’ - The story is about vacations that won't make you feel guilty about spending a lot of money on a luxury during a recession. It talks fairly extensively about programs that incorporate philanthropy and service into the trip. Will this be a long-term trend in the travel industry? Is it moving beyond the tour operators covered in this story to incorporate hotels and other players in this industry?

Have you seen any interesting news lately? Please post a link!

Cause Marketing Motivations

Why do people buy products that are part of cause marketing campaigns? I've always assumed the obvious, that it was mostly because they care about the cause being promoted. Or maybe they don't care about the specific cause, but they feel good about doing something that makes the world a little better, irrespective of how it does so. I also suspect that sometimes, it's just because the cause promotion helps the product break through the clutter - when you're looking at a wall of nearly identical post-it notes, all at nearly identical prices, the ones with the pink ribbons on the packaging stand out. Similarly, I suspect that, when a company creates a product with a cause marketing component, it gives them a hook when negotiating with retailers for the best possible shelf space, which in turn leads to increased sales.

I came across another reason, though, that I think has interesting implications for cause marketers. I'm currently reading Creative Capitalism, the compilation of essays on the title topic, edited by Michael Kinsley. Early in the book, Kinsley has included Bill Gates' 2008 speech at Davos that launched that term into the mainstream (that introduced the term, perhaps?). In the speech, Gates has this to say about (RED): "If you give people a chance to associate themselves with a cause they care about, they will pay more, and that premium can make an impact."

Notice what Gates does NOT say: "If you give people a chance to" impact, or to contribute to "a cause they care about." He says "to associate themselves with", and that's a fundamentally different concept. Association is not about action, it's about identity. I associate myself with a cause when I wear a particular t-shirt (like Gap's RED shirts), when I join a particular group on Facebook, when I slap a sticker on the back of my car. When I take those actions, I may be raising awareness, I may be winning hearts and minds, but let's focus on association - I'm telling people who I am, what I stand for, and what kind of person I want to be.

The fact that (RED) and its ilk seem particularly popular among teens and young adults makes more sense in light of this framework. That population is still in the midst of exploring and trying on identities, so anything that helps someone in this demographic to project his or her identity to peers is attractive.

If Gates is right, this is a really powerful concept. If a marketer can get prospective customers to make a product part of the identity they display to the world, that sounds like a gold mine to me - and the money goes to both the Gap and the Global Fund.

This also suggests that marketers should think about cause marketing in a really different way than I suspect many currently do. Right now, I imagine that decision-making around cause marketing typically goes in one of two ways. Either the company decides to create a product that raises money for a cause with which the company is already affiliated, as an extension of existing philanthropy, or the company decides to run a cause marketing campaign and searches for a cause with which to affiliate. In the latter case, marketers try to identify a cause that it's customers care about - they may use market research to identify this cause, or they may look for causes with the same target demographic as the company (which is why women's clothing stores seem to turn into a uniform array of pink ribbons every October, in honor of breast cancer awareness).

If we take the latter case, the "competition" for the cause-related products (it's awkward to think of it that way, but I think we have to) includes other cause marketing campaigns benefiting the same cause, along with direct donations to the organization in question. It also includes volunteerism or activism that support the cause.

On the other hand, if we buy cause marketing products in order to broadcast our identities, the marketer's job is not so simple. While women, as a monolithic group, might have a common reason to be concerned about breast cancer, they are interested in projecting a wide array of different identities. Women who shop at Coldwater Creek and women who shop at New Balance - both companies are members of the Komen Million Dollar Council Elite - might want to impact the same causes, but they likely want to project very different identities. That said, these two companies aren't trying to attract "women" as a monolithic group, either. They each have very specific target audiences, which can be delineated in part, I imagine, by exactly this issue of identity.

In this case, the competition isn't writing a check - most of us don't write checks big enough to name a building or otherwise make our philanthropy part of our public image. Instead, the competition could be logo t-shirts, or fashion in general, or our Facebook profiles, or the music we play when the car window is down, or any other tool we use to tell the world who we are.

This makes the cause marketer's job much more complicated, and probably more difficult. On the other hand, it gives marketers the opportunity to build a deep and unique relationship with the customer, just the type of relationship that goes beyond a transaction to a partnership.