DC summer heat and humidity arrived in force this week and I think melted a few brain cells...or at least has turned me into a lazy blogster. So this post is basically linking to other people's posts, but in these two cases I honestly think they said things more eloquently than I could, on two topics that I care passionately about: non-profits (social sector? independent sector? for-benefits?) and UNC basketball.
First up is the non-profit vs. for-profit debate over at Tactical Philanthropy. While I will be the first to admit that non-profits could learn a thing or two from for-profits, I get steaming mad when people make sweeping judgements implying that businesses are superior to nonprofits in everything-- efficient, analytical, streamlined profit making machines that should really come in and whip these nonprofits into shape. There are great nonprofits that could teach businesses a thing or two, and there are mediocre entities on both sides that no one should strive to emulate (hellooooo, Enron). Check out the great post here.
Second, UNC basketball...ok, this post is really about hating Coach K and Dook but that goes hand in hand with cheering on the Tar Heels, and it's written by a super funny UNC alum whose blog I have been stalking since I read about it in the Carolina Alumni magazine. I love his comparison of the two coaches (K and Roy Williams) and their respective TV commercials:
"In fact, he's (K's) pissed off about the crap he got for the Amex commercial that ran ad nauseum during the 2006 tournament, because Roy Williams didn't get any shit for his Coke commercials this year. Well, Koach K, actually you were in a frickin' Pontiac commercial too, but moreover, your Amex ads were sanctimonious, self-aggrandizing muses on sportsmanship and relationships that, frankly, rang immeasurably hollow to anyone who has seen you in action. Roy Williams held a Coke and told a true story about his mom. What did you expect?"
Definitely check out this post and some great comments that follow.
Happy weekending everyone!
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2 comments:
I've been thinking about for-profit vs. non-profit a lot in the past couple days too, and here's where my thinking is at on it:
If the business model is totally self-contained and operates like a normal business and produces a normal profit, then chances are somebody is already doing it. Grocery stores make the world a better place, and make a profit at it.
So I set that category aside as "normal businesses" and instead focus on non-profits and "for-profits". Where "for-profits" have the same non-market goals as non-profits but must achieve them in ways that also provide a return for investors.
To me, the only distinction between the two is how you raise capital. The commentary you linked brings in other issues like employee pay, but that is obviously irrelevant because both non-profits and for-profits can pay both high and low wages. The decision about where to raise capital should be (theoretically) independent from other decisions like how much to pay your employees.
So what is the real difference between the two? I split this into two conceptual groups: donor motivation and mission efficacy. Donors to non-profits don't get a return, but they might think that more of their investment is going to the mission. Donors to "for-profits" are also losing money to some degree (if the venture returns a profit high enough to compensate for its riskiness, then it's just a normal business, see above). They get some return back, but not as much as if the venture was completely focused on returns. Their money also partly goes to furthering the mission.
So what does it come down to? The result is shocking: Non-profits and For-profits are the *same*! In the end, all that matters is how efficiently investor/donor money is translated into mission results.
Think of it this way: both types are machines that convert dollars to mission results. Except for-profits just have an additional loop that converts dollars into, well, dollars back to donors.
What do you call a non-profit that gives back half of all its donations? A "for-profit"!
What do you call a for-profit that makes profits at a rate above market returns? A "normal business"!
Does this resolve the issue? Not entirely. The biggest problem is that you have normal businesses (as defined above) that also take in donations (e.g. Better World Books). Many of their donors do not realize that part of their donation is generating profits for investors. To me that is profoundly dishonest, like a beggar who makes enough money from begging to own a mansion and a BMW.
I hope this provides some new perspectives. I am interested to hear what somebody who deals with "social entrepreneurship" on a regular basis thinks of this theory as I am still in the process of developing it.
Great comment Adam and impressive attention span on a Friday afternoon! You must have one of them "real" economics degrees...sorry it's taken my lazy ass like 5 days to respond.
I think at a high level I agree with your argument. In both types of organizations resources go in, and value (whether in the form of widgets, return to investors, or feeding starving babies) comes out the other end. There are a few wrinkles I want to throw back out there from my few years on the more non-profit side that might make the comparison a little more complicated (some of these are also mentioned in the TP post).
1. Unlike businesses, in nonprofits the "purchaser" (donor) is different than the consumer (recipient of goods or services) so there's a broken feedback loop. If I buy an iPhone and love it, I can buy more, tell my friends, buy apple stock, etc. If I donate money to feed said starving babies, I may get a picture of a baby being fed or an appeal hitting me up for more money-- but I personally do not know if the organization delivered a great product (good, nutritious food provided in culturally sensitive manner, perhaps combined with vaccinations, etc etc).
2. Unlike profit or stock price in the for-profit world, there's no universal measure of success for nonprofits which (I think) has led to a hyper-fixation with organization overhead rates (overhead is any money spent on "non-program costs" like staff, fundraising, computers...). Nonprofits boast on their websites and annual reports how low their overhead percentage is, but no one would expect a business to produce their value without staff or lights or offices. We need more meaningful measures of social impact, and more competition amongst nonprofits to deliver the most impact, to get away from the overhead rates obsession.
3. Lastly, (partly due to easier metrics, see #2) demonstration of success and capital for additional growth is more clear cut/easier in the for profit world. Fantastic nonprofits need patient capital for growth and scaling just like for profits do, but instead get strung along by annual grants or program donations rather than large investments in the organization as a whole. "Successful" nonprofits can even get punished for their success if donors stop funding them when they appear too well off...and struggling or small nonprofits fail to merge or close up shop as might happen (and probably should given the explosion of new orgs and duplication of efforts) in the sector.
I guess in the end I agree with TP that we need to be more creative in how organizations are structured and financed so that we can accommodate for profit, nonprofit, mission driven business, hybrid, social enterprise, social franchise, B corps...and also a broader definition of social value (there was an interesting WSJ editorial responding to Bill Gates' Harvard commencement speech pointing out that his creation of Microsoft has been more valuable to society and dwarfs the contributions his foundation is now making. Debatable, especially if the foundation finds a cure for AIDS, but an interesting perspective).
Finally, a few places to check out that might have more insight than I do: www.socialedge.org (check out top discussions on finance and social entrepreneurs) www.xigi.net (social capital markets) www.ssireview.org (stanford social innovation review). This reminds me I really should get my links section together...
Anyways, hope this is some help and let me know what you think! Maybe I'll try to recruit a brilliant colleague or two to weigh in/guest blog too ;)
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