Service Delivery Cost per Farmer vs Type of Service Provider
Key Messages
Our data shows remarkable results:
We believe the results are due to four main reasons:
Different context. Development and CSR legacy. Closer positioning to smallholder farmers. Smaller and less mature models.
Keep reading to find out more.
Understanding how different types of companies invest in smallholder farmers
Until recently, much of the focus in the sustainability world had been on the supply chains of large global corporates and global (often cash crop) value chains.
Going into this work, part of our team and some of the partners that we tested this with expected certain results when looking at the
The differences that we observe are substantial: the median service delivery cost per farmer for local off-takers is roughly double that of global off-takers. There is a broad spread of results; some global off-takers invest relatively much and some local off-takers invest relatively little. Nonetheless, there are strong patterns that suggest fundamental differences between global and local off-takers at an aggregate level.
From conversations with our partners we have identified a number of compelling reasons for these differences:
- Different contexts in which these models operate
- A stronger development-oriented or CSR legacy among global off-takers
- Closer positioning and stronger mutual dependence with farmers for local off-takers
- Different operating models
These results have been validated using machine learning methods.
Link to other outcomes
When looking at the relationship between type of company and the other two outcomes analyzed in this Insights Hub, we find that:
- For
Direct Cost Recovery , higher investment does not appear to necessarily mean lower (percentage) direct cost recovery: the much higher service delivery cost by local companies is mirrored by much higher cost recovery percentages for those same companies. For local off-takers versus global off-takers, the median direct cost recovery percentages are 40% and 0.5%, respectively. Click here for more details - For
Farmer Value Created , we find no appreciable differences when looking at different types of companies. Click here for more details
In the following sections, we dive deeper into the possible explanations and nuances behind these results, as well as their implications.
Diving deeper: what explains these results?
There are a number of compelling reasons for the results we see. The discussion below focuses on the difference between global off-takers and local off-takers.
Different context – While the context differs for each individual business model, we find that global off-takers are more often active in contexts that reduce the need for or inhibit high investments in smallholder farmersDevelopment and CSR legacy – The relatively lower service delivery cost by global off-takers reflects, in part, the legacy of development- and CSR-focused interventions compared to business-focused interventionsDistance to farmers – The closer positioning of local off-takers to farmers incentivizes them to invest more. This is also driven by the fact that global off-takers are overwhelmingly active in intercontinental value chains, meaning that they have a (much) higher diversity of sourcing optionsOrganizational and business model – Local off-takers often run smaller and more recent models, meaning they can build on a lower scale of efficiencies, and existing corporate infrastructure
Clicking on each of the preceding reasons provides a longer overview of our thinking, including more supporting qualitative and quantitative insights.
Implications – so what does this mean for you?
Based on our findings till date on this topic, we see the following implications for different audiences:
- 1. Benchmark your current service delivery cost per farmer against comparable peers (other local or global off-takers). Are you over- or under-investing? Do you recognize any of the reasons for this that we have analyzed and do you see opportunities for improvement?
2. For global off-takers, are your service delivery activities organized separately from your commercial activities, for instance in a dedicated sustainability team? Consider bringing these two teams closer together to explore the implications your service delivery (or sustainability) activities have on your commercial (sourcing) activities. You could consider looking beyond providing services to meet for example certification requirements and look into the potential value of higher investments in farmer to create sourcing efficiencies. Is there a case to be made for increasing investments in smallholder farmers to drive your sourcing value?
3. In case you are currently investing relatively little per farmer, consider whether you can increase this investment in a way that can demonstrably create value for farmers as well as for you.
4. For local off-takers, are there operational inefficiencies in your model? How can you scale your model? What kind of support could you use (from donors, support organizations, investors, governments) to help overcome scaling-related challenges?
- We and many of our peers expect significant growth in regional value chains. (Read more in our publication on Unlocking Regional Food Trade.) This means that we expect huge investment needs and opportunities for local off-takers. We strongly recommend investors to develop strategies to meet these needs and capitalize on these opportunities. Our experiences show that organizational capacity is often lower for such companies. Thus investors must be cognizant of such when assessing potential investees, while considering support such as business development services that can reinforce such business models.
- Given our insight that many local off-takers are at an earlier stage of maturity, consider providing longer-term patient capital to help them invest in and build more efficient and scalable models.
- The fact that these results contrast with some of our own and our peers’ initial expectations, has important implications: decision-making in our sector is informed by such expectations and we believe our insights can help to critically evaluate expectations and perceptions, and contribute to better informed decision-making. Are there more possibilities of investing in the models of local off-takers than you may have perceived? What can you do to change existing perceptions?
- Use the Data Explorer to benchmark the companies currently in your portfolio, and work with your investees in understanding (and potentially addressing) those differences for improved financial and impact performance. Reach out to us so that we can conduct a more detailed portfolio analysis of your investees and/or pipeline, and create comparable insights and identify relevant investment opportunities and risks. When investing in such models, recognize that it may take more time for them to reach the stage of more efficiency and higher returns.
- We and many of our peers expect significant growth in regional value chains. This has huge potential benefits for local economic development, job creation, food security and more. (Read more in our publication on Unlocking Regional Food Trade.) Local offtakers have a key role to play in these value chains. We strongly recommend support organizations and donors to continue to drive this process of growth in regional value chains by supporting local offtakers develop smallholder inclusive business models. For instance, investing in high quality business development services to SMEs is often needed to improve their organizational capacity to become effective businesses.
- The fact that these results are contrary to some of our own and our peers’ initial expectations has important implications: decision-making in our sector is informed by such expectation, and we believe our insights can help critically evaluate expectations and perceptions, and contribute to better informed decision-making. Are your expectations and perceptions in line with the results shared in our analyses? And if not, how does this influence how you engage with sector? What can you do to change your perceptions?
- Provide financial and technical support to local off-takers in earlier maturity models to help them reach scale and efficiency. We have observed that local off-takers often have relatively high costs because of the earlier stage of maturity of their models and less opportunities to leverage other assets of the company. For instance, senior company leadership is often directly or indirectly involved in designing, managing, overseeing and evaluating service delivery to smallholder farmers, rather than being able to fully delegate this to dedicated sustainability teams.
- Actively identify ways in which activities that you provide directly or indirectly with a development mindset can be gradually transitioned to the private sector. Are the subsidies you are providing to markets or companies in some cases distorting or hampering the ability of the private sector to take them on? How can you support the private sector in developing commercially viable, investable and scalable models to take over some of your activities?
- Work with companies to analyze how the inclusivity of their business models can be further increased. Subsidies might be required in the start-up phase or in particularly challenging contexts. This may be more often needed by local off-takers who have less mature business models and/or smaller corporate resources to build on.
- Consider whether your engagements in value chains dominated by global off-takers may have a distorting effect on the market. Are you subsidizing service delivery in these markets, making it harder for commercial models to emerge and compete? Are you creating the right enablers to encourage companies to invest more in farmers? Can you start a conversation with global off-takers with whom you work?
- The fact that these results are contrary to some of our own and our peers’ initial expectations has important implications: decision-making in our sector is informed by such expectations, and we believe our insights can help critically evaluate expectations and perceptions, and contribute to better informed decision-making. Are your expectations and perceptions in line with the results shared in our analyses?
- Smaller companies (often involved in food crops in looser value chains) that are based within their communities have the potential to create a lot of value for the farmers and form a foundation for more inclusive and empowered local economies, where there are local opportunities not only for farming, but also for the various goods and services surrounding farming.
- Organize learning exchanges between global and local off-takers, and across different kinds of value chains. There is a lot of unmet potential for learning as companies most frequently engage with peers that similar to them and often operating within their own value chains. We believe support organizations such as ourselves and our peers can play an active role in showcasing and operationalizing learnings across different types of companies and value chains, and bring companies into contact with others that they might not normally meet.
- We and many of our peers expect significant growth in regional value chains. This has huge potential benefits for local economic development, job creation, food security and more. (Read more in our publication on Unlocking Regional Food Trade.) Local off-takers have a key role to play in these value chains. We strongly recommend governments to continue to drive this process of growth in regional value chains by supporting local off-takers in developing smallholder inclusive business models.
- Provide financial, technical or other types of support to local off-takers in earlier maturity models to help them reach scale and efficiency. We have observed that local off-takers often have relatively high costs because of the earlier stage of maturity of their models. For instance, senior company leadership is often directly or indirectly involved in designing, managing, overseeing and evaluating service delivery to smallholder farmers, rather than being able to fully delegate this to dedicated teams.
Reflections on data limitations and further research
The Insights Hub is a living document that we are constantly updating with new data, new analysis, validation by our partners, etc. For the results on this page, we would like to emphasize the following:
Major caveats and limitations of our current approach
Limited visibility of the role of the enabling environment Limited visibility on the role of philanthropic funding
Next steps that we have planned to update these findings in the near future
We have no immediate next steps planned to update the analyses in this section. We are considering conducting additional analysis on the interchange between the enabling environment and the activities of different types of off-takers, as well as strengthening our understanding and insights on Specialized service providers.
Suggestions for additional research by our peers and partners
Shine a further light on the role of public and philanthropic funding Build on our approach and methodology to study Specialized service providers
Page content
Strength of Relationship 3/5
- Moderate relationship between driver and outcome variables
- Results are not fully consistent across analytical models used
- Few limitations regarding sample or indicator
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