Balancing the Right Act – Profit v/s Non Profit
Increasingly, entrepreneurially minded nonprofit leaders are bringing today the tactics of the private sector to the task of solving social problems. And with good cause: they need the cash.
Federal and state funding for nonprofits dropped considerably lately after the 2008 crisis and it continues to decline. Similarly, corporate and individual giving has decreased, while social needs are on the rise. The nonprofit sector is indeed under a lot of pressure. Costs are going up, resources are going down, and now we have people in need who weren’t around in the late decade.
Consequently, all nonprofits are faced with trying to cure greater ills with even less money–or to find new ways to generate revenue and become less dependent on foundation and government grants. Some nonprofits are even starting and running small, profit-seeking companies, channeling their earnings back into social-services programs. Many others are adopting private-sector management techniques in an attempt to get more mileage out of whatever resources they have. Either way, the new “social entrepreneurs” are creating hybrid businesses that blur traditional sector lines and uncover startling uses for marketplace power.
Already, several networks have sprung up to study and replicate this relatively new phenomenon. Adding velocity to all this change is another factor: more than ever, there seems to be little difference between the kind of new-generation founders of nonprofit organizations and the founders of ambitious growth companies. The same people who are fashioning the hybrid social enterprise might as likely have been for-profit entrepreneurs. Little wonder, then, that the once-impregnable barriers between businesses and charities are now a lot more porous.
At least half the nonprofit executives in this country now understand that they have to do something different. Probably the best 2% to 3% of them understand what needs to be done and have the guts to actually try it.
Exactly what are we at the Financial Policy Council trying to do? The managerial challenges posed by a traditional nonprofit are tough. How have we worked to overcome them? What changes have resulted?
New sources of revenue: For one thing, by seeking nontraditional ways of earning income–such as running a business or developing corporate partnerships—we are becoming less dependent on mercurial sources of funding, such as government grants or individual donations, and are replacing them with a stream of income that has at least a chance of achieving self-sustaining momentum. Borrowing a concept from the corporate sector, some nonprofit organizations out there are planning to issue “community stock” as a new way of raising money, capitalist-style. They will give people stock certificates, and their money will go into a pool that provides funding for a young entrepreneur. Shareholders will vote on how the money is spent, much as they would in a company. We at the Financial Policy Council believe this is extremely creative and are considering doing it as of the coming new year.
Changing attitude toward profits: At the heart of the funding shift is a change in the way nonprofits have traditionally viewed money and the way they’ve valued their own assets. Finally, people are realizing that we have to rethink not how to raise money but how to make use of the resources in our communities. People are talking not about charitable contributions but about how to bring added economic value to the interaction between nonprofits and the communities in which they work. But such a shift in perspective doesn’t come quickly or easily. Many nonprofit entrepreneurs speak of the culture clash between their own wish to make a profit (to provide more services) and the distrust of money typically felt at nonprofits. Some people just don’t understand how to run a business profitably and, in any case, think that in the business of helping people, you shouldn’t be influenced by the bottom line. I strongly believe we at the Financial Policy Council have found the right balance in this respect.
Greater accountability to clients: Nonprofits that do manage to generate earned income gain greater independence from the demands of funding sources, ultimately enabling them to be more accountable to the people they serve. Some nonprofits go so far as to gauge their services by actual market demand. For us at the Financial Policy Council, the only way we get money is if people are willing to pay for something. We’re not giving our services away for free. There has to be a need for them, a market. A lot of nonprofits–or foundations, or the government–decide internally that there’s a need, but that’s a different threshold than the market.
A focus on outcomes: For social entrepreneurs, market-based thinking has also created a greater focus on the organization’s results than on its processes. Before, we were like all the other social-service agencies; we looked less at outcomes and more at process. We’d ask, ‘How many people walked in the door?’ instead of ‘How many people are better off from having walked in the door? There are other benefits of focusing on outcomes: It helps depoliticize social-services organizations by substituting concrete measurements for subjective interpretations. It also provides clear goals against which employees can measure their progress and accomplishments.
Less fear of failure: I’m a big fan of failure and I usually approach funding nonprofits more like a venture capitalist than a typical foundation officer. People involved in funding start-ups will tell you that out of every 10 launches, they’ll get two really successful efforts, two that are complete failures, and the rest in the middle–the walking wounded. When a for-profit fails, it’s viewed as a learning experience, an investment in intellectual capital. But when a nonprofit manager fails, it scars the person for life. I try to help the Financial Policy Council adopt the private sector’s attitude.
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