Implementing Effective Innovation Challenges: Three Lessons from the Last Mile Distribution Sector – NextBillion

Last mile distributors (LMDs) are key to serving traditionally overlooked communities across emerging markets. Whether they’re distributing improved cookstoves, off-grid solar products or water filters, these companies bring life-changing products directly to the world’s hardest-to-reach consumers.

We believe that LMDs are proven innovators, and we see lots of innovation happening across the sector. However, these innovations have not been systematically sourced, supported and replicated – which is one reason LMDs have often found themselves reinventing the wheel. The Global Distributors Collective (GDC)’s Innovation Challenge is an effort to address this. We have run two Innovation Challenges since 2018, which were open exclusively to last mile distributors and their third party partners. These challenges have supported nine innovations, providing them with technical assistance and an average of US $41,000 in funding over an average period of 13 months.

We took a unique approach to these Innovation Challenges, by basing the eligibility criteria on the replicability of the innovation(s), and the willingness of pilot teams to open-source the insights, learnings and resources they developed through the challenges. We hoped to go beyond the traditional goal of sourcing and supporting individual solutions, and instead leverage this approach to drive change across the sector as a whole. This article explores the successes and difficulties we experienced in working toward this goal, and highlights key lessons learned. We hope these insights are valuable to intermediaries seeking to run impactful innovation challenges – and to other organisations working to support LMDs and other businesses working at the last mile.

Lesson 1: Finding replicable innovations is hard – and replication does not happen organically

Innovation is widespread across the LMD sector, and it was accelerated in response to COVID-19, as we explored in a NextBillion article in late 2020. But companies are often unaware of, or lack insights into, the pilots and experiments led by others, so they tend to spend time and effort solving problems others have already addressed. In our first Innovation Challenge, we wanted to bridge this gap by helping distributors to test discrete, replicable ideas, and by open-sourcing the results for others to learn from.

For example, we funded GDC member Mwezi’s efforts to develop a toolkit for selling solar powered drip irrigation kits. LMDs are interested in selling these products, given that smallholder farmers are a key customer segment, and irrigation kits have the potential to significantly increase farmer yields. In fact, our LMD State of the Sector update 2022 found that 35% of GDC members (as of 2022) sell productive use technologies – up from just 6% in 2019 – and GDC members are more interested in selling this product category in the future than any other. But these products are highly technical, requiring extensive tailoring in their design, and they must be accompanied by long-term financing and strong after-sales service. Mwezi’s toolkit includes sample marketing collateral, staff training material and a drip system design tool to help distributors overcome some of these barriers.

Another innovation we funded, led by GDC member Bidhaa Sasa, is a how-to-guide for scaling. This guide aims to help LMDs scale their operations into new regions using lean principles, and includes useful tips from Bidhaa Sasa’s experience using the tool to scale into Uganda.

These resources have been downloaded hundreds of times from our website, and feedback from the companies that have used them has been positive. However, our Innovation Challenge criteria put LMDs in a difficult position. It’s hard for a company to design an innovation that adds concrete value to their business and therefore justifies their time investment, while also being generic enough to be replicable. Company-led innovations are often hard to replicate because they generally cut across many areas of a company’s operations, and most of them are customer, product and/or context-specific. And of course, even with successful pilots of discrete ideas, fostering replication is time and resource-intensive. To address these challenges, we developed short and practical knowledge outputs, and held Q&A webinars with the LMDs that led the pilots. But this was not enough: In the future we would like to test other approaches, such as peer-to-peer mentoring for distributors that are particularly interested in replicating the innovations, with compensation for the mentor’s time.

One strategy that can increase the replicability of innovations is giving innovators access to specialised technical expertise over the duration of the pilot. For example, we enlisted the Frankfurt School of Finance and Management to support two companies that were testing new consumer credit assessment tools. These innovators reported that the Frankfurt School’s support was “a game changer” in terms of providing “high-level guidance, background materials and a sounding board.” But more than that, the Frankfurt School was able to draw on its previous experience of supporting LMDs in credit management, to ensure that the solutions these companies were testing built on best practice and could be adopted by other distributors.

Lesson 2: Funding innovations in service provision can be particularly impactful – but partnerships are essential

In our second Innovation Challenge, rather than focusing on LMD-led innovations that companies can replicate, we focused on business services that distributors can affordably access. We supported five partnerships between service providers and LMDs, all aiming to develop digital solutions specifically for distributors: These solutions offered better ways of remotely managing a salesforce, selling online, assessing customer credit-worthiness and providing consumer finance.

Until recently, digital service providers have not catered to the needs of LMDs: When the sector was nascent, it did not make sense to tailor software solutions for such a small market. As a result, distributors have often been forced to build their own solutions. But as recent research from Solaris Offgrid and Enable Digital has found, most LMDs would prefer to buy off-the-shelf solutions, because of the complexity of functionalities that distributors require, and the difficulty in recruiting experienced IT staff to develop and manage tailor-made solutions.

More digital service providers are emerging to meet this gap, as reflected by the growing number of entries to our Digital Service Catalogue – which, at the time of writing, featured 77 solutions. Our second Innovation Challenge aimed to accelerate this trend, by helping service providers to more deeply understand LMDs’ needs and to develop bespoke solutions. While it is still early days, initial results are promising, as shown by the following two examples:

Both Sevi and Maad intend to commercialise these services for the broader LMD market, and there is strong interest from LMDs in adopting these and other digital services developed via the Innovation Challenge. For example, in a recent webinar showcasing two of the innovations we supported, 90% of LMDs stated that they were likely or very likely to apply the ideas or learnings in their business.

These learnings suggest that funding innovations in service provision may be more impactful than funding LMDs alone – but they also reveal that partnerships are the key to ensuring that these services are fit for distributors’ purposes. A strong partnership between the service provider and the LMD proved essential for the success of these innovation pilots. Once we recognised the fundamental importance of this sort of partnership, we saw that we could have done more to ensure this relationship was in place during the application stage, by doing due diligence on the quality of the partnerships, and by working to align expectations between LMDs and their partners.

Our process also would have benefited from an inception phase, including seed funding for both partners, to enable them to work through the idea in more detail and help the partners decide whether they wanted to commit to the innovation – and potentially even co-invest in taking it forward. For instance, in one of the partnerships we supported, it transpired that the software solution a service provider had offered was not able to fulfil all of the LMD’s needs, and the LMD’s existing data could not be transferred to the new platform. An inception phase would have brought these challenges to light earlier, and potentially provided time and space to develop an alternative model.

Lesson 3: Innovation Challenges can create a fairer system – particularly through the application and decision-making processes

There is increasing recognition in the development sector that the current system of funding innovations is biased against local and women founders. This bias is not intentional, but the way that investors perceive and measure risk and investability often results in de facto disadvantages for certain groups. For example, local company founders may be seen as a less attractive investment proposition than their international counterparts. But this is not necessarily due to their skills or business acumen (GDC research suggests that locally-led LMDs actually achieve more impact per dollar raised), but because they do not always speak the business lingo typically expected by (mostly Western) funders.

We have been vocal about the need for this to change in our sector, given that local, often women-led companies are at the forefront of product and service delivery to the last mile. Our Innovation Challenges represented an opportunity for us to put our money where our mouth is. And creating an innovation challenge that is accessible to and fair for all entrepreneurs is not only the right thing to do, it also increases the replicability of innovations: If a challenge favours a particular group of innovators, there is a risk that the innovations it generates will be optimised for that same group, limiting their replication potential.

To help avoid this, we used a range of techniques in our application process to support traditionally disadvantaged entrepreneurs. First, we supported the efforts of longlisted applicants to improve their ideas through a round of feedback. This meant that companies that might have normally been overlooked in favour of companies that “speak the right language” were supported in developing and finessing their ideas, helping to level the playing field. Second, with the support of our donor, UK Aid, we were able to significantly streamline contracting and due diligence, enabling us to award funding to enterprises that would traditionally be deemed too high-risk. Third, we specifically included gender considerations in our selection criteria, and evaluated the gender balance of the proposed delivery teams – i.e., the staff members who would be responsible for implementing the pilots – as part of our due diligence.

We also knew that our efforts to create a fairer system couldn’t end with the application process. So we reworked our decision-making process, recognising that making an innovation challenge more accessible does not overcome the problem of bias in funding allocation. For example, we reversed the traditional power dynamics by adopting a peer-selection method, meaning GDC members had the power to vote for which innovations they wanted to see brought to life. This is not a new concept: Village Capital has been using a peer-selected investment model for over a decade, and the results speak for themselves. In our Innovation Challenges, the GDC team (with support from our Advisory Council and independent experts) shortlisted those ideas that were technically feasible, met the challenge criteria and were value-adding. We then presented members with short idea pitches that included a clear value proposition and asked them to vote, keeping the company names anonymous. We believe this is a fairer process for the enterprises we seek to support: It had the added benefit of giving entrepreneurs visibility into the innovations underway in the sector, and meant that the ideas we ultimately supported were ones that LMDs had identified as potentially valuable to their own businesses.

Though these measures have been helpful, we’ve identified some areas of potential improvement. For instance, our efforts to foster collaboration between LMDs and potential partners at the launch of the Challenge could have been more proactive – and more focused on including a broad array of organisations. We knew that service providers would be looking for distributors that were operating at sufficient scale to be able to pay for the service. And though many local LMDs met this criteria, service providers were often unaware of these companies, and so were more likely to partner with Western-founded distributors with higher profiles and better connections. If we had done some light-touch matchmaking, working with service providers to identify LMDs that met their criteria, we could have helped level the playing field for lesser-known distributors. This would have had wider benefits, by helping LMDs understand the types of services available, and helping third parties, such as service providers, understand the diverse needs and expertise of LMDs.

The Future of Innovation Challenges

Taking time to reflect on lessons learned during our Innovation Challenges has been a valuable exercise, and we’ll be doubling down on these insights for our future challenges. We will better support partnerships between LMDs and third parties, with stronger due diligence upfront and an inception phase that includes a small design grant. While service providers are intrinsically incentivised to replicate/scale successful innovations emerging from a Challenge, we will seek to compensate distributors for delivering peer-to-peer mentoring to other companies interested in replication. And we will continue to improve the inclusivity of our challenges, particularly for local enterprises – including by supporting lesser-exposed LMDs’ efforts to connect with potential partners at the outset of our Challenges.

We’re excited about the next generation of innovations in the last mile distribution sector. And we stand by our belief that innovation challenges can and should aim to support not just individual companies, but the wider ecosystem – and that intermediaries can play a crucial role in diffusing knowledge and evidence about innovations in a given sector. We hope these insights will be useful to others across the sector who are working toward the same goals.

The Global Distributors Collective Innovation Challenges (2019-2021) were funded with UK aid from the UK government, via the Transforming Energy Access platform.

Emma Colenbrander is Head of the Global Distributors Collective; Gerwin Jansen is an Inclusive Innovation Programme Manager at Bopinc, and Charlotte Taylor is the Communications and Impact Manager at Global Distributors Collective.