Critical Issues at Origin | Organizational Capacity Building: Key to Long-term Sustainability

By Warren E. Armstrong

The SCAA Sustainability Council serves as a “think tank” for sustainability–related ideas and as a liaison to other industry, professional and NGO organizations. As part of its work, the Council has defined several critical issues at origin to promote the long-term livelihood interests for a quality coffee value chain.

A quality coffee must not be defined by a cupping score, but rather must include social, economic and environmental concerns to become a “quality” coffee. Such issues include climate change, sustainable agriculture production, water security, human rights, gender, health care, food security, and organizational capacity building. This article focuses on the often overlooked importance of the organizational capacity of the co-operatives supplying high-quality certified coffees. This article provides insights and ideas to help our industry strengthen the coffee value chain from origin to cup into the future.

Critical Non-Coffee Suggestions to Ask at Origin

In order to be successful, coffee cooperatives must employ a variety of managerial techniques no less effectively than a successful importer, roaster, or coffee shop owner. When roasters and importers visit origin, their concern usually centers on a co-operative’s quality of coffee and its social programs. Only when there are defaults, late shipments, unexpected changes in leadership, certification suspension, or a bankruptcy, do they then ask: what happened at the co-op?

Well-written reports follow the same sentence and paragraph construction rules no matter in what language it was written; likewise, sound management techniques build successful businesses no matter what language is spoken. Some techniques are simple while others are more complex. Simple ones are implementing a good hiring and employee evaluation process or documenting key institutional processes identifying critical limits. On the other hand implementing micro-credit indicators (Pearl or Microcamel) or using the Balance Score Card (BSC) to facilitate organizational strategic planning requires a deeper understanding and commitment to successful management techniques.

When a roaster or importer asks co-ops what their needs are, the common responses are more credit, working capital or investments to improve their members’ production, farm infrastructure, or the co-ops’ infrastructures to expand services. How many co-ops have expressed their need to improve strategic and financial planning, enhance their software, improve their employee evaluation techniques, and receive consultancies in risk management and micro-credit lending?

This begs the questions: Could on-farm productivity, credit availability, and investments be increased through institutional capacity building? And could creating a sustainable organization resolve both immediate, as well as future, needs?

Here are some of the questions that might indicate that a co-op is in need of some institutional capacity building:

  • Do their members receive loans in a timely manner?
  • Is the price the members receive competitive in the local market year after year?
  • Does the cooperative have an independent audit every year?
  • Has its equity grown at least 10 percent every year?
  • What is its debt-to-asset ratio?
  • How much of the social premiums get consumed in the cooperative’s operational costs?

In the case of a second or third tier co-op, these questions need to be asked at the community-based co-op level to understand the strength of the pillars upon which the second or third tier co-op is resting.

If the co-op is not providing quality services or improving its services to its members, then the co-op should explore its managerial policies:

  • Employee hiring, training, development and evaluation methods
  • Salaries
  • Risk management strategies for coffee
  • Software capabilities in accounting, credit and coffee
  • Credit policies and indicators
  • Financial and strategic planning
  • Internal controls
  • Management versus Board of Director roles
  • Quality management systems

The lack of these sound practices creates operational inefficiencies, resulting in higher operational costs, thus lowering prices paid to co-op members—despite the importer/roaster paying the co-op an attractive quality and social premium above the NY “C” market.

Business-to-Business Solutions

Relationships are often formed between green buyers, their star cuppers, and the co-op’s counterparts. Why not also develop creative relationships between one’s accountant, finance or human resource manager and their counterparts on the co-op’s side? Are their creative ways to connect them with university MBA students or retirees with experience in these areas willing to travel? A small annual investment to strengthen organizational capacity building at origin creates growth opportunities. Looking at creative ways to develop a solid organization is mutually beneficial in the long-term.

Everything Starts at Day One: Hiring your Employees. The true competitive advantage of any business starts with a quality employee selection process. Getting the right mix of abilities and personalities is hard. Next is creating a positive/constructive work environment by creating processes, manuals and clearly defined employee functions. Without defining and revising these functions, how can you evaluate and create a training/development program for the employees to improve the co-op’s capabilities?

Without a strong finance manager or consultant on the team, it is hard to envision a co-op growing in the long term. It’s beneficial to have someone who works hard to keep significant operational costs down, manage cash to generate additional income and determine strategies to maximize profits while managing changing government tax codes. Key in all aspects of a co-op’s business, there should be clearly defined risk management strategies. The goal for co-ops is to provide services to their members for years to come, rather than speculating on the futures market to hit the lottery. Of course, it never works.

As the organization grows, the Board of Directors’ role changes. At the beginning the Board is involved in just about every aspect, but as the organization matures and grows the Board must learn to step back and focus more on strategic planning, leadership and growth, financial supervision, community and government relations, as well as quality management systems. Clear separation is required between Board and management team roles to prevent organizational friction. Also there are significant challenges for these co-ops’ Board of Directors, who are often small farmers, when they are placed in a position to manage their organization. Traditionally they come from small five to ten acre farms, managing small personal loans with limited business education, to now leading a co-op which might have $5,000,000 in sales and $4,000,000 in international and local credit lines. How do you transition from managing a small farm to leading an organization managing millions? The challenge is just as great to send someone with an MBA to grow and manage a small coffee farm.

In all leadership positions, it is key for these leaders to know what they don’t know in order to grow their business. How can you request help, if you don’t know what’s possible?

Some Organizational Capacity Resources 

Share your successful experiences in any one of these managerial topics with co-ops at origin. Talk about these issues, about what has and has not worked in your business. What tool did you find helpful to resolve different situations that you faced? We should invite businesses to send to the Sustainability Council different resources that have worked under these managerial topics. For example, in Jinotega, Nicaragua we use the North American Lakota Indian personality test to determine if a job applicant is a Bear, Bull, Rabbit or Eagle. You should think twice about putting a Bear and a Rabbit to work together….

On the other side, we hired an industrial engineer as our human resource person to help develop operational manuals and procedures to eliminate internal friction as well as improve quality and service to all our clients. Ildi Revi, Leopard Forest Coffee, provides a great employee evaluation method called Human Performance Technology (HPT) from her talk at the SCAA 2010 on Forming Great Employees. Although her talk was aimed at roasters, it was 100 percent applicable to co-ops.

Risk management, financial management, sales strategies, and other organizational training models can be found at Cla@se, www.claase.org, to strengthen cooperative skills.

As with good writing, good accounting is the same regardless of language. Numbers are numbers. When is the last time someone sent an accountant to origin? The small co-ops that are the pillars for the second and third tier co-ops often value a good agronomist over a good accountant to attend to their numbers. It is not surprising when the Board of Directors in small co-ops are not familiar with how to use internal controls, audits, acid tests and debt ratios, etc. to determine their co-ops financial health. Often the focus is on crop needs and how well did they sell their coffee. A co-op can’t be successful without a robust accounting system and a capable accountant to provide up-to-date financial information so the general manager and Board can make sound decisions.

Another Achilles heel for co-ops at the community level is micro-credit management—small loans to their members. Too often these loans are oversimplified within the co-op and money is lent without a thorough analysis of members’ payment capabilities. Managing credit is as specialized a field as agronomy, but not taught at the local colleges at origin. Several resources including MICROCAMEL (http://www.gdrc.org/icm/micro-camel.html) and PEARLS (http://www.gdrc.org/icm/rating/rate-1.html) provide key tools to analyze a co-op’s microcredit portfolio.

The next time you are at origin, or meeting co-ops at your place or the SCAA, after discussing how the new harvest looks, cup profiles and orders, don’t forget to find some common ground on organizational issues that challenge us all and limit our success.

Warren E. Armstrong has worked in coffee for 31 years, including 24 years as a coffee farmer in Nicaragua. Since 2000, Warren has worked as the general manager for Asociación “Aldea Global” Jinotega, a small farmer association in Northern Nicaragua, producing exporting Fair Trade, Organic and Rainforest coffees, as well as promoting gender equality via economic alternatives and education for 1,505 members. E-mail: warren@aglobal.org.ni 

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