Dear Nonprofiteer, Why don’t charities operate like businesses?

Dear Nonprofiteer,

Our nonprofit has a new Board member who’s energetic and smart but seems obsessed with the notion of making us operate like a business.  The only question he wants to ask about any program is, "What revenue does it generate?"  As an old charity hand, I think most of what we do can’t generate revenue–that’s why it’s being done by nonprofits.  Poor people are not profitable; that doesn’t mean they shouldn’t be served.  How can I stop talking at cross-purposes with this new director? 

Signed, What I Do For Love

Dear Love,

There’s a terrific Boardroom brawl going on over at Tactical Philanthropy about this very subject.  (Actually, a pair of them, one under the heading "Business vs. Nonprofit Models" and the other under the more provocative "Some Nonprofits Just Suck.")  The Nonprofiteer is particularly impressed with the contributions of Dave Chakrabarti from Grassroots.org, who stands strongly for the notion that business concepts must be applied sparingly to nonprofits because they are fundamentally different beasts.

What’s great about the brawl is that it reveals the different languages people are speaking–even within the nonprofit sector.  When some people say, "Nonprofits should operate like businesses, and the ones that don’t should be starved of resources," they mean, "Poverty is annoying.  If we deny it, it will go away."  But when other people say the exact same thing they mean, "Poverty is a serious problem, and if we’re serious about solving it we need to know whether Intervention X works better than Intervention Y.  And once we know that, we need to give resources to the intervention that works, and stop funding the one that doesn’t."

Needless to say, these are not the same.  If, as one of the Tactical Philanthropy debaters says, you’re interested in serving people who don’t have $100, you don’t charge $100 for your service–even if there’s a market for your service at that price.  On the other hand, if you’re interested in serving people who do have $100–and still can’t afford whatever it is–then you can charge $100. 

So you have to ask yourself–and your energetic new Board member–what are we about?  Are we providing something free to the poorest of the poor, or are we subsidizing purchases made by people who only need a little boost to participate in the free market?  Either of those is a worthy activity–but again, they’re not the same.

Likewise, the word "sustainable" gets used a lot, but it means different things to different people.  Some use it to mean "paid for by its users without requiring charitable subsidy," in which case whatever it is can be done by the for-profit sector; but others use it to mean, "paid for over time by a combination of inputs, some of which come from former users whose problems have now been solved."  This latter is the micro-credit phenomenon–lend money to people, let them profit, and then turn them into lenders. 

But not every activity is sustainable, even in this sense: if your agency is running food pantries, you want people to stop needing your help, but emergency food supplies won’t in and of themselves enable those people to overcome all the problems which produced the need for emergency aid in the first place.  That doesn’t mean there’s no need for emergency food supplies, or not role for institutions that provide them.

So find out whether your Board member thinks you’re doing the wrong things (this is often expressed as "addressing only the symptoms instead of the causes," though any doctor will tell you symptoms need to be treated if the patient’s going to stay alive long enough to be cured)–or whether he’s satisfied with your services but doesn’t understand how you measure their effectiveness.  If it’s the former, thank him for his time and shove him off the Board (or reformulate your mission); but if it’s the latter, set him to figuring out how business principles can be applied to determine if you’re serving as many people as you can as efficiently as you can.

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8 Responses to “Dear Nonprofiteer, Why don’t charities operate like businesses?”

  1. Maureen O'Connor Says:

    I just read your post today, and you may be interested in a new report on social enterprise (available at http://www.seedco.org/publications). It includes a field review, case study, and analysis which clearly explain some of the conflicts and contradictions inherent in social enterprise. I’m all for creative ideas for revenue generation, and some organizations have developed successful models. But mostly these models advance their mission in additional ways. Very few social enterprises are actually making money, despite the breathless hype.

    The notion that nonprofits could actually become “self-supporting,” as in not reliant on contributions, is surely seductive. So’s that spinning straw into gold thing, or waiting for the prince to come, or other fairytales. Perhaps the next big breakthrough in funding nonprofit missions will be some kind of organizational Law of Attraction, where the nonprofits visualize the resources they need and just really, really, really, truly believe those resources will appear. And if the resources don’t appear, well, they just didn’t believe and wish hard enough.

  2. Nonprofiteer Says:

    It’s such a blessing to have colleagues who can take my inchoate complaints, support them with data and express them with pith.

  3. Dave Chakrabarti Says:

    The debate still rages over at tactical phil. There is a strongly entrenched notion that a nonprofit that does not charge for services has “no sustainability model whatsoever”. I’m trying to figure out how to propagate the idea that a business-oriented, profit-based sustainability model is harmful to the nonprofit sector, but it’s difficult since no one’s figured out how to measure nonprofit sustainability with a different model, perhaps one focused on social impact.

    The good news is that *some* VCs, businesses, and foundations do understand this. Don’t give up hope!

    Thanks for highlighting the issue here.

    Dave.

  4. Paul Botts Says:

    Having lived through this debate myself as an executive director, and then had the experience of working closely with smart businesspeople, I’ve come around to the conclusion that when the latter say this about non-profits our sector tends not to hear them very well.

    What they primarily mean now is that this sector lags behind in applying the skill sets which actually sort the winners from the losers in the real world. (It’s important to remember that we should only consider imitating the _successful_ businesses, not all businesses generically. Most businesses, by definition, are less than stellar.)

    The skill sets I refer to are things like choosing from amongst competing priorities, staying focused on what is most important rather than trying to do everything that would be worth doing, basing conclusions on robust data rather than anecdote and conventional wisdom, and so forth. As a board member of my theater company once finally burst out with at a meeting, “I love you guys and what you do, that’s why I joined this board, but you have the attention span of a bunch of 5-year-olds!!” He was right, alas. And now as a funder I see far, far more of that level of intellectual discipline than a sector as large and deep as this one is today, should tolerate. Which that weren’t still true, but it is.

  5. Michael Maranda Says:

    A related challenge: developing the appropriate relationship between organizational management and the board of directors. Again, in an NPO it isn’t one size fits all. Many a guideline is misapplied with good intention.

    It takes quite a lot of work to establish a good board dynamic and a good leadership-partnership between board and executive staff.

    The organizations that are challenged with regard to specific skills, technology, focus issues/mission scope, money and other resources need the right leadership for their circumstances.

    NPO staff may function in a leadership and support vacuum, often feeling the urgency to take on more because they see the need.

  6. Nonprofiteer Says:

    I think nonprofits don’t engage in some business practices because they have too few resources rather than because they have the attention span of 5-year-olds (though such short attention spans are often characteristic of foundations!). Failure to secure good data may result from being faced with a choice between providing services and evaluating them. I’m not making excuses for inept nonprofits, and think they all should know what they’re trying to do, for whom and what’s in the way; but I do think we need to recognize the extent to which nonprofits make poor decisions because they’re starving, and stop suggesting starvation as a cure. “The floggings will continue until morale improves.”

    It’s also true, as Mr. Maranda says, that confused staff-Board relations contribute to inefficient operation at nonprofits. If we’re going to continue to have society’s most important work done by agencies governed by amateurs, we need to offer those amateurs better training. Again, the cure for what ails the sector is not fewer resources but more.

  7. M Says:

    Maybe foundations and other funders could try telling nonprofits why they “suck” (or are merely uncompetitive) when they decline their grant proposal. This knowledge could help them fix any organizational problems they may have or to choose where to spend their time developing future proposals.

    It’s like a guy who comes out of the bathroom with his zipper down. People can inwardly snicker and ignore it or go over to the dude and let him know, so he can zip up and not be snickered at around the next corner.

    I know when I was a fundraiser I wanted to know why a proposal got declined, as a grantmaker I can only assume other nonprofits would like the same.

  8. Nonprofiteer Says:

    M is correct: the worst thing about the relationship between operating nonprofits and foundations is the ball-hiding that goes on. When I was an admissions officer, I tried to make the process of gaining admission as transparent as possible, and I’d always meet with people who’d been turned down and say, “If you want to strengthen your application, you have to explain why your grades should get more weight than your LSAT scores, or how the steady increase in your grades is more significant than the cumulative average.” That way, any reapplication would be as strong as possible.

    There’s a wonderful collection of possible rejection letters from foundations to be found over on White Courtesy Telephone (as I recall), ranging from “We can’t fund everybody” to “Your mission to provide red pogo sticks has nothing to do with what the community needs.” For my money (or yours!), the more straightforward the rejection letter from a foundation, the better. Thanks for your willingness to be frank now that you’re on the other side of the table.

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