Are NonProfits the Next in Line for Extinction? pt1
There’s a lot of talk about the end being near. The Mayans predicted some kind of end to mankind around this time next year. Christians have been predicting the end of days for God knows how long. Between predicted droughts and melting ice caps in the environmentalist doomsday dialogue, there are a whole bunch of things that aren’t expected to survive this generation. Perhaps one of them are non-profit organizations. Anyone with an interest in improving their community or society at large, did so through the formation of a nonprofit organization.
This, however is changing rapidly. The prevalence of Social Entrepreneurs, individuals who are approaching societal problems with for-profit businesses, is spreading like wildfire and shows no signs of slowing. Prominent organizations like the Clinton’s Global Initiative are making business a new priority in how they approach social change. Economists like Muhammad Yunus have won Nobel Prizes for applying business principles to social good and with values of entrepreneurship and social responsibility being so popular among GenY, it is surely expected to grow more. As all these changes in contemporary society that are encouraging people to turn towards a more conscious capitalism, I find myself wondering what’s the upshot for comparatively inefficient nonprofits?
Many nonprofits, while well intentioned, have some poorly placed incentives for performance. Since a majority of an organization’s funding comes from grants and donations, their financial sustenance is not necessarily linked to how well they service their populations or how innovative their approach is. Their budgets more accurately reflect of how efficient their grant-making team is, making the industry as a whole pretty static. Not only that but in tough economic times, when the altruistic giving of major donors starts to slow, it is difficult for the organization’s leadership to respond quickly with creative solutions because of the consensus that must be reached by the various stakeholders on the Board of Directors. There’s also the issue of employee compensation. While nonprofits can offer work environments that are creative and fulfilling as a result of the meaningful work their employees are doing, the relatively low compensation for such jobs make it difficult for organizations to attract and retain talent. Perhaps the biggest drawback of nonprofits as compared to social businesses, is the speed and efficiency of scaling an opportunity. Now scaling an idea may not be an important priority to an organization, but if they did have a model for change that was creating measurable impact for their constituents and wanted to expand, the inconsistency or unpredictable nature of that organization’s income through grants, loans, and donations certainly stems the organizations’ growth.
Enter the world of social enterprise where a company like Tom’s Shoes emerges. For every pair of eco friendly stylish shoes Tom’s sells to one of their customers, a pair of shoes goes to a poor child in Ethiopia, enabling the child to go to school, preventing disease and literally making their walk through life a little easier. In the video below, Tom’s Shoes CEO Blake Mycoskie explains why he chose to make this a profitable venture. Doing so enabled his idea to grow sustainably without being dependent on fickle donors whose choices could impact the organization’s capacity to carry out its mission from year to year.
Can nonprofits as we know them today compete with business models like Tom’s Shoes? Or are they heading towards an inevitable extinction? What do non-profit organizations do better than for-profit companies? What do you think justifies this model’s future existence in the market?
The NeoCapitalist 
I would love to spend hours responding to your very interesting question. But, I am a consultant for nonprofits, and don’t have much spare time. 🙂
Below are some questions/comments in lieu of my long response. Please know that while I disagree with your position, I love the question, and hope that my response is received as engaging, not hostile:
When you say “relatively inefficient nonprofits,” what data are you using to measure efficiency? What is being compared to what?
If nonprofits have little incentive for being efficient, then I assume the implication is that for-profit businesses have profit as the motivation for efficiency? If that’s the case, what incentive does Tom’s Shoes (or any other “social enterprise”) have for continuing to give away shoes when times are tough?
You claim that nonprofit funding measures the effectiveness of the development department rather than the innovation of their approach.
However, we all know that market share is only marginally influenced by product superiority. The marketing department in a for-profit company is the same thing as the development department in a nonprofit. And, just as consumers must wade through the marketing hype, so must the donor wade through the fundraising hype.
You claim that nonprofits offer work environments that are creative and fulfilling because of the meaningful work they are doing. I wish this were true, but, unfortunately, The Devil Wears Prada works at nonprofits, too. I don’t have hard data to back this up, but I think that salary levels are similar at nonprofits and for-profits for the same positions. For-profits just have more need for – or at least more money for – higher skilled positions.
Also, let’s be real – businesses (for profit) are notorious for underpaying and exploiting workers.
I realize your claim has to do with attracting and retaining talent. This question is valid, but if the goal is to “cure” social ills, you have to prove that a for-profit model will both cure the ills and be able to afford highly paid talented employees.
Another claim you make is that in nonprofits, “it is difficult for the organization’s leadership to respond quickly with creative solutions because of the consensus that must be reached by the various stakeholders on the Board of Directors.”
Boards of directors are not (usually) run by consensus any more than a for profit organization’s board is. So, are you claiming that Boards are the problem? The only structure that doesn’t require consulting more than one person is a sole proprietorship. For-profit and nonprofit corporations have a board that empowers the hired executive(s) to make decisions within certain parameters. Speed is not affected by this structure differently in nonprofits than for-profits.
You are correct that the funding cycle in nonprofits can be long, but so can the manufacturing cycle, especially if you include R&D. I don’t see a difference here, either.
The reality is that some problems lend themselves to a business solution and others don’t, AND, there are some real advantages to structuring some “problem-solving” ventures as a profit-earning business. However, to say that the for-profit model is superior to the nonprofit model is short-sighted.
I look forward to hearing others’ thoughts on this question.
Mary, Thank You so much for your insightful and thoughtful comment! My decision to start this blog was to have conversations like this with intelligent people in nonprofit/social enterprise sector so I appreciate the tough questions.
I’ve come across literature that measures efficiency among nonprofits based on the percentage of donations actually used towards accomplishing their mission as well as papers like this one that discusses how changes in management practices, namely how funds are raised, could cut fundraising costs and enable organizations to allocate their budgets in ways that better support their mission.
The personal incentive or motivation to do good is the same for social businesses and nonprofits. The reason I think incentives for for-profit businesses lend themselves especially well to the organization’s efficiency is because a (for profit) business is constantly held accountable for how well they’re using their money. Whether it’s performing within shoestring budgets as a bootstrapper to produce quality goods and services or proving to venture capitalists that they run their business well enough to earn a return on investment, the link between how well their revenue is utilized and their performance or survival in the market is very clear. This, of course, is not to ignore the nonprofits out there that are doing kickass jobs at carrying out their missions on fluctuating and tight budgets as well. But I do think that since nonprofit revenues are generated from an outside source, less efficient management won’t have as dire effect on the survival of the organization as it would for a for-profit and as a result it may persist longer without correction.
I think your point about for profits having to “prove that a for-profit model will both cure the ills and be able to afford highly paid talented employees.” is an excellent one. This is something I’d definitely like to research more, if there is a difference between salaries in for-profit businesses without social missions, social businesses, and nonprofits. I think that because this term “social business” has become so popular recently and is in many ways a bit ambiguous, the research about the sector is still emerging. Stanford Social Innovation Review is one of my favorite sources for academic research of this nature.
And while the board in and of itself is not a problem especially since there are several businesses with a board of directors, the status of sole propietorship or even partnerships can offer a greater degree of flexibility in the decision-making than a nonprofit with several stakeholders.
This case study of Kiva is a great example of the pros and cons of their decision to become nonprofits rather than for profit. And there are of course Incredibly powerful useful and important nonprofits in the world. It’s a much needed sector and one that I still look forward to being a part of. But they have some interesting competition with social business and I think it will be interesting for all of us to see how the two models influence each other.
🙂
thx again for stopping by Mary.
I think that despite the recent rise of social enterprise, many of these so-called “social enterprises” are actually non-profit organizations. If you look at the grantees of Ashoka, Echoing Green, etc, many of them are not a profit based model but are non-profits! I don’t think the non-profit model is going anywhere soon, and indeed social enterprises often suffer from the same problems. This is a false dichotomy.
However, if you are talking specifically about “social business” rather than social enterprise more broadly, even there I would say that non-profits are here to stay. Sure, many of them can be inefficient, but there are also many non-profits that are doing very well and genuinely making an impact.
There are certain things that people should not have to pay for: healthcare, education, clean water in their communities, and so on. Non-profits can step in and ensure basic human rights through providing a basic social safety-net. Certainly there is room for social businesses to step in and provide people ways to increase their income, but non-profits ultimately play in important role. There are many other types of non-profits as well –for instance those reforming criminal justice systems, monitoring human rights abuses, etc — that are invaluable, but which I have a hard time imagining as a “social business” model.
Hey Akhila!
You make a great observation that many of the grantees are indeed nonprofits. Hmmm…now what’s interesting (and something that will factor into my future blogs)is that the understanding of “social business” is so varied and flexible in what its understood to be, so I think it’s useful to be explicit about what I mean by social business or social enterprise in the future. While both social businesses and nonprofits work to fulfill positive social ends, the distinction I’m making between the two in this post deals very specifically with their legal designation. Nonprofits, the classic 501c3 that can accept tax deductible donations through grants and individuals, are typically what have been at the forefront of social change. However, we are seeing more businesses funded with venture capital and operating from the revenue they generate from their products or services, get into the business of good. And these businesses presumably do generate profit and can earn a financial return for their investors or owners. So I’m very curious about how this specific model of business will emerge and the impact it will have on nonprofits. As structures to support these businesses grow and public perception about business changes as well, I think nonprofits will be influenced in one way or another. After all Tom’s Shoes was able to provide children shoes for free even with a for-profit model.
You bring up a great point with nonprofits’ role in human rights. I think this is a strong example of a specific function that nonprofits would be better at serving than for-profits.
Thanks for stopping by 🙂
Just a note, since you guys are interested in social enterprises vs. non-profits… you might be interested in knowing Mohammad Yunus / Grameen Bank opened up a branch in NYC – I’m interested in seeing how it stacks up against non-profits serving the city’s poor. There’s actually a documentary premiering at Sundance this week; it tracks the branch’s first year offering microfinance to New York’s poor. Check it out: http://www.tocatchadollar.com.
Wow Thank you so much for sharing this Mallie!
I remember hearing about Grameen coming to NYC and I think their first branch was in my hometown Queens!!! I am totally going to check out this film when I get a chance because I’m a huge Yunus fan. 🙂