October 14, 2010

For-Profits Should Drop the 'We Know Better' Attitude

Over the past few years, we have seen a rapid acceleration of business strategies being applied to work traditionally done by nonprofits.  This is certainly nothing new—Muhammad Yunus, the Nobel Prize-winning founder of Grameen Bank, and others have been at this for decades. But we seem to have reached some type of inflection point.

A number of blogs and conferences are now devoted to social entrepreneurship. Foundations and philanthropists—not to mention whole consulting firms—are also rushing into this space. What’s going on?

One answer is that the nonprofit business model is broken. Social entrepreneurs have referred to nonprofits as “our cousins”—but we’re treated more like the stepchild.  Many say nonprofits and philanthropy are dysfunctional at best and totally broken at worse.  Nonprofits cannot innovate. They are inefficient and ineffective, and they lack the proper incentives.  Social entrepreneurs argue that we need to come up with new models, new ways of doing business—and these new models should be based on the private-sector, for-profit success story.

And herein is the dilemma.

Clara Miller, president of Nonprofit Finance Fund and the lead author of this blog ,often says, “Nonprofits exist for a reason—and it is a commercial reason.”

Nonprofits enter the market when for-profit companies can’t, won’t, or shouldn’t. This is generally due to a gap or failure in the market economy.

So can we use market solutions to solve market failures?  Can we use business strategies to meet needs that exist when there is no mechanism that allows for for-profit viability?

Certainly, nonprofits can show that there are actual markets and money to be made in areas that were previously thought to be unprofitable for private corporations.  From drug and alcohol treatment, to foster care, to banking for the poor, to education, nonprofits have been innovators in showing that you can run successful businesses and generate profits.  And the for-profit companies have been quick to move in when nonprofits prove financial success.

But can business strategies work where there are truly no viable profit mechanisms?

I do think there is a real and vital role social entrepreneurship can play in helping to solve social problems. But to have a lasting impact, the businesspeople who run social enterprises need to have a better understanding of how the social sector works.  And they need to drop the “we know better” mentality.

There is no shortage of successful entrepreneurs-turned-philanthropists who believe they now have the solution for the world’s social ills. This is true of the tech entrepreneurs who made millions (if not billions), the venture capitalists who made the right bet, and the financial advisers who were fattened from the real-estate bubble.

These entrepreneurs believe that they can use the same strategies they used to get rich to solve any problem.

Let’s set aside for a moment that the “strategies” used to create successful businesses may have been the result of luck, timing, or even questionable business tactics. The “we know better” mentality is wrong because the rules of the game vary drastically between the for-profit and the nonprofit sectors. The nonprofit business model isn't broken. It just runs under a different set of rules than those that govern success in the business world.

You cannot price services for the homeless the same way you do for a cup of coffee. Investment is prohibitively complex and exceptionally costly to the nonprofit.  In fact, if for-profits had to adhere to the same rules as nonprofits, I believe very few would survive.

What is amazing to me is that nonprofits not only have survived with this structure but also have managed to do some incredible things.  Every time a hungry child has a hot meal, every time a victim of domestic violence has somewhere to turn, every time someone without insurance receives health care, it is despite of, not because of, these onerous money rules.

Yes, effective and inefficient nonprofits do exist. Philanthropy does have more than its share of dysfunctions, but instead of trying to create new models based on the private sector or create for-profit social enterprises that use market mechanisms to address social ills, maybe we should ask, “How do we release the potential of the social sector?”