Social Enterprise and Its Discontents

A new study—poignantly titled “Social Enterprise: Innovation or Mission Distraction?”—reports that nonprofit agencies which choose to support themselves with for-profit businesses end up serving their clients less and worse.  Moreover, when the businesses thrive the profits go back into the business, while when the businesses falter the losses are taken out of the hide of the agencies.  (So glad to see nonprofits acting like businesses!  This “heads I win, tails you lose” approach is just what the investment bankers did—en route to destroying the economy.)

Gloating is unattractive, and unwarranted.  After all, any friend of the nonprofit sector would be delighted to learn there was a way to strengthen it without having to stretch every penny into a copper wire, or grovel to wealthy people who understand the situation less well than the people they may or may not deign to help.  But a bit of schadenfreude directed at the prophets of social enterprise really can’t be avoided.

It’s always seemed obvious to the Nonprofiteer that if there were money to be made in ending poverty, poverty would long since have been ended.  The challenge is to provide services and alleviate suffering when it isn’t profitable.  It seems equally obvious that any system which must allow for a private person to make money before the clients get served is one that reduces the resources available for those clients.

Now, lots of things that are obvious also happen to be false.  And certainly there’s a reasonable discussion to be had about whether, once you factor in all the costs of raising donations, it would be cheaper or more efficient—even with a profit margin—to organize charities as business enterprises.  But a decade’s worth of experimentation suggests that the answer is “No.”

Are services provided by social entrepreneurs better than no services at all?  Sure, but it demonstrates the poverty of our current mindless anti-tax political discourse that those seem like the only two choices.  The real alternative to entrusting the provision of public services to for-profit groups is having them supplied by the public.  Anyone familiar with the history of the private subway franchises and private lending libraries and private schools of the 19th Century will be grateful that our predecessors decided to eliminate the middleman markup and run subways and libraries and schools as the public goods they are.

Have social enterprises ever succeeded?  Certainly, and more power to them.  But anyone who claims they will supplant philanthropy, charity or social change movements is selling snake-oil.

The most thoroughgoing enthusiasts of the market seem to forget that Adam Smith himself recognized areas in which it would, and did, fail.  Those of us caring for people who can’t make profits for other people are dealing with the consequences of those failures.  So let’s face it: we’re outside the market economy.  Let’s stop contorting ourselves to fit into it, and concentrate on figuring out how to make our own systems function more fairly, transparently and effectively.

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10 Responses to “Social Enterprise and Its Discontents”

  1. Vicki Says:

    Well said. Hip, hip, hooray for taxes!

  2. Whitney Brooks Says:

    Yes, it’s quite a dilemma. On the other hand, grant funding comes with its own ethical considerations. Ashoka is doing some interesting work with a Hybrid Value Chain model (a nonprofit + for profit structure) for poverty reduction. Let us know what you think of our recent article in the Harvard Business Review http://hbr.org/2010/09/a-new-alliance-for-global-change/ar/1.

    • Nonprofiteer Says:

      Thanks for the link, and for the comment. Ashoka’s recognition that a nonprofit structure can’t accommodate a for-profit subsidiary, and its efforts to create partnerships instead, are the kind of thinking that gives social enterprise a deserved good name. I’m just eager to separate the wheat from the chaff, and to make sure that people recognize the difference between needs that are susceptible to the Hybrid Value Chain approach and those that aren’t. As your HBR article notes, without a significant profit opportunity (meaning a huge market) these enterprises can’t thrive–and many American nonprofits are too fragmented to deliver the kind of huge market businesses want. While we’re figuring out how to solve that problem, we still need to deliver services, and that’s what taxes and charity are for.

  3. Tom Cannon Says:

    A really good one today; nonprofits serving the impoverished are more important than ever, especially in our Social Darwinist age. But the problem of “every man for himself,” is that we need each other if we’re going to survive beyond the next quarterly reports.

  4. Jeff Raderstrong Says:

    I’m a little concerned you might be arguing against a straw-man here. I’m not sure that anyone argues that social entrepreneurs will ever supplant philanthropy. Additionally, saying that Adam Smith recognized that markets sometimes fail does not mean that markets don’t always work–it just means that sometimes they don’t. Which doesn’t means that we [non-profits] operate outside of them, it just means that we sometimes do, just like sometimes the business sector operates outside of markets as well (evidence: TARP).

    The way I envision social entrepreneurship is not necessarily for profit or nonprofit, it’s just people taking a different approach to change. Social entrepreneurship and philanthropy are completely compatible–in fact, I see philanthropy as a necessary component of social entrepreneurship.

    Sometimes, we want to do things to create social change that doesn’t make money. For that, we need philanthropy. Sometimes, we want to do things that creates social change that makes a lot of money (like AIDS medication). For those things, we don’t need the philanthropic dollars. For other things, we need both, which is where the notion of nonprofits operating for-profits. It’s possible that these particular business models are not successful, but that doesn’t mean the idea of making money off of social change solutions can’t happen. (The newest development in this area, the L3C model, is particularly exciting to me. But that could also fail.)

    I’m not saying that you are arguing against this in your post, but I think it comes across as a little philanthropy vs. social entrepreneurship, which isn’t really the dichotomy I see happening.

    But thanks for the thought-provoking post.

    (Also, on your post of this on the SSIR blog, your link on “study” links to a YouTube video of an otter playing with a ball. It was very cute, but I don’t think what you were going for.)

    • Nonprofiteer Says:

      Thanks for your thoughtful comment. I agree that social entrepreneurship and philanthropy can co-exist, but I’m not persuaded they can co-exist within a single enterprise, and the study (must fix that link) focuses on precisely that circumstance. The rhetoric around L3Cs and other profit-making enterprises that also serve a social good–particularly charter schools operated by for-profit agencies–seems to suggest that theirs is the new paradigm and the rest of us had better get with the program, and stop asking for philanthropic (and, especially, government) support. I just have to raise a flag of skepticism whenever I hear that someone has figured out how to end poverty with no sacrifice to anyone who’s currently comfortable and no shift in the current allocation of ownership. Along with Adam Smith, I admire capitalism but am aware of its defects.

      • Jeff Raderstrong Says:

        Thank you for your thoughtful response.

        I agree that I am also concerned whenever anyone tells me to “get with the program” or they have found a silver bullet, because they are clearly missing out on something. I would write a similar response to the comment I left on this blog to anyone claiming that for-profit social enterprises were the only answer.

        But I do think that the creative tension between these social enterprises and philanthropic efforts are a good thing, even if they fail sometimes. Someone pointed out to me that this study is about nonprofits that partake in business activities unrelated to mission, which I missed, and I think it probably makes sense that this model wasn’t a good fit. But its good to keep trying these things out to see what works, even if we fail. I am just hasty to draw too many conclusions from one success or one failure, on either side of this argument. Because, really, this argument does have two sides, but rather a spectrum of options for people interested in social change to try.

  5. Must Read: For-Profit Arm No Panacea For Non-Profit Funding Woes | The Content Beast Says:

    […] your non-profit to help support the latter’s mission, you must read The Nonprofiteer’s post on the subject. I have been hearing it suggested that non-profits embrace these types of arrangements as grants and […]

  6. Anita Bernstein Says:

    I don’t know much about what external funders like foundations look form, but I wonder whether faddish concerns about novelty or thinking outside the box (nice loathsome phrase, that) are part of the problem. Do organizations that raise money from donors and spend it on their mission and raise more money and spend more money look dull or hidebound from the outside?

    Every nonprofit has to walk the line between preservation and innovation. I worry that demands for something new make entrepreneurship look like a silver bullet AND consistent with any mission. Even though chasing UBI will almost certainly prove to be a distraction.

    • Nonprofiteer Says:

      You’re right: the demand for innovation for its own sake is one of the primary ways in which the institutional funders damage the operating nonprofits they exist to support.

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