April 08, 2015

It Wasn’t Hatred of Markets That Doomed the Council on Foundations Competition

Editor's note: The Chronicle asked Cynthia Gibson, a consultant to nonprofits and foundations, and Paul Light, a New York University professor to respond to a Chronicle piece about controversy over a Council on Foundations contest adapted from the Case Foundation website. Mr. Light’s appears  below; see Ms. Gibson’s piece.

Sheila Herrling and Allyson Burns of the Case Foundation asked the wrong question about nonprofit prize competitions in their essay about the Council on Foundations’ decision to cancel a session that invited nonprofits to pitch their ideas for fixing the economy in front of an audience at the organization’s annual meeting.

The question is not whether nonprofits are comfortable with market forces but whether entering a prize competition is any sign of that comfort.

After all, most private-sector prize competitions are designed to generate breakthrough ideas at the lowest possible price. "Why find a needle in the haystack," an X Prize executive told the House Science Committee last year, "when that needle can find you?"

The answer depends on both the prize and the competition. All prizes are not created equal, nor are all competitions. As a result, comfort rightly varies from prize to prize, competition to competition. A $40,000 prize might be huge to one competitor but produce a negative rate of return for another; a competition might be wide open in one setting but stacked against unknowns in another; competitors might lobby the jury in one contest but be completely unaware that a competition is going on in another.

Market rules obviously vary greatly across prizes and competitions. Alas, even large inventories of carefully collected case studies cannot prove cause and effect without measuring the effects. But no one appears ready to call strikes and balls on the outcomes. Better just to say, as one foundation-supported report did, that "prizes are a unique and powerful tool that should be in every tool kit."

For now, the prize industry can draw at least three findings from the small inventory of more rigorous peer-reviewed research. First, competitions can, and I emphasize "can," generate breakthroughs at a very low cost, but most competitions fail well before producing anything approaching a groundbreaking innovation

Second, competitions vary greatly in their impact depending on the task at hand. According to a recent study of big-money prizes, competitions are particularly effective when they draw on outsiders and relative unknowns to solve well-defined problems like leaky Ebola suits. Highly insulated from market pressure, outsiders are better at producing more ideas, good and awful, and less likely to winnow their lists based on longstanding theories. And even though these competitions almost always fail, it only takes one great idea to produce great profit and social impact.

Third, breakthroughs such as an Ebola vaccine are more likely to come from highly trained insiders than from outsiders. The reason is simple: Innovation requires time, obsession, and what one scholar calls the ongoing discourse among highly motivated individuals who know the importance of their work. Once again, market rules are far less important than the chance to change the world. The prize isn’t money or a medal but success itself.

Sooner or later, the empirical research will catch up with the growth in "contest philanthropy" and the surge in consulting advice. Until then, I’d ask the prize industry to abandon sweeping generalizations about the nonprofit sector and do our best to stick as close to the research base as possible.

In the meantime, the prize industry might also invest in impact studies of particularly innovative nonprofits to see how the market works.

I am currently studying 1,200 of these nonprofits and can already attest that they are all skilled market managers who know the difference between fashion and fad. Many have already won prizes for their work and know how to give a winning pitch, set a stretch goal, manage long, and ethical supply chains and are comfortable talking about all kinds of for-profit approaches.

These nonprofits will also support just about any philanthropic "reboot" that helps them curb the market failures that face the world.

At the same time, many are keeping track of the rule breakers who created so much economic inequality. They are especially wary of the investment banks that gamed the debt market, bet against the financial innovations that continued to sell, accepted the federal government’s market-distorting bailouts, and are now driving the social-impact bond market. The best way to kill the movement is to bond with the banks that nurtured the 2008 crisis.

Asked if they are comfortable with market rules, these nonprofits would almost certainly reply that the answer depends on which markets and which rules. And that is absolutely the right answer to me.

Paul Light is a professor of public service at New York University.