Opinion
October 23, 2015

What Nonprofits Need to Learn From Business

For years I’ve straddled the worlds of business and philanthropy, first as a corporate executive, then as a foundation head, and now as a consultant helping companies use social impact to drive their businesses. So I’ve seen both sides. Contrary to what I expected, this has made me an even more ardent believer that business-oriented, market-based approaches are the key to finally solving social problems in ways that are sustainable, scalable, and replicable.

Why do I think this? Because despite all the things that businesses have gotten wrong in the past 25 years, they have still been the most efficient and effective allocators of time, money, and natural resources, as well as the most powerful force in pulling people out of poverty. According to The Economist, the number of people living in extreme poverty around the world was cut nearly in half from 1990 to 2010 — “a reduction of almost 1 billion people.”  And “most of the credit [for that reduction] must go to capitalism and free trade.”

In his book Poverty in America — and What to Do About It, Arthur Brooks, president of the American Enterprise Institute agrees, saying that “it was the worldwide spread of American-style free enterprise that saved billions from poverty.”

That got me wondering: Why has business been so successful compared to the other sectors, including nonprofits? It isn’t because nonprofits attract incompetent people. Quite the opposite. Some of the smartest, most dedicated people I’ve met work in the social sector. So what is it? I would argue the problem is waste — both time and money. Combined, the U.S. government and private foundations spend enormous sums — enough to do what needs to be done. But instead many major indicators are moving in the wrong direction. Why? Because, like retail pioneer John Wanamaker is said to have remarked:  “I know 50 percent of my advertising is wasted. I just don’t know which 50 percent.”

While few want to admit it, we all recognize there is waste. We just don’t know what to cut and what to invest more in. That’s because nonprofits are missing three features that make business so successful:

Transparency. Some people think that business is highly opaque, but I would posit that there is more information available about U.S. public companies than about institutions in any other sector. Doubt this? Just ask yourself: Which is more forthcoming, IBM or the Catholic Church (at least prior to the current pope)? And if you have a question or concern for leadership, is it easier to raise it during an annual general meeting or during a State of the Union? Business may not be an open book, but it’s far ahead on transparency.

Comparability. Not only is there more easily accessible information about companies but the type of information that’s available can be readily compared on an apples-to-apples basis, thanks in large part to common accounting standards. That makes it relatively easy to tell who is “winning” and who is “losing” — not by some largely meaningless internal standard like spending 10 percent or less of funds on overhead but where it actually counts — in the market they are serving.

Accountability. In business, you get paid for outcomes, not activities (for profitably selling a product, not just for getting it onto the grocery-store shelf). That accountability for your performance against stated outcomes is swift and clear: Investors can move money out of your stock in an instant if they no longer believe your company is the best bet to achieve their investment aims. We need a way to help social investors make the same types of assessments.

I understand this might be scary to many. After all, these three features also made the rise of activist investors and agitators of all types not only possible but indeed likely. Since outsiders can pretty clearly see what’s working and what’s not, they can often persuasively push for change.

Now I’m not saying the short-term mentality of activist investors would benefit the nonprofit world, but I am all for intense external scrutiny of nonprofit programming.  After all, there must be some duplication and waste in a system in which roughly 1,400 501(c)(3) organizations in the United States alone are trying to fight the same disease, namely breast cancer. Yes, that’s a big and critically important job. And there are many needs: finding a cure, caring for those who already have cancer, and so forth.  But, wouldn’t, say, 10 or even 100 larger, better-resourced organizations stand a greater chance of tackling the problem?

I’m also not saying there hasn’t been a lot of great work done (there has!), but if ever there was a sector that could benefit from some smart merger-and-acquisition activity, it’s nonprofits.

In fact, I’d say the writing is on the wall. My prediction is that as impact measurement gets better, faster, and cheaper, donors will more often demand proof of outcomes. In turn, nonprofits that aren’t the very best because they try to be all things to all people will suffer.

Why wait for that to happen to your organization? It’s time nonprofit leaders had the tough conversations to determine where they have true competitive advantage and then focus on that and leave the rest to others.

I know it’s hard to say no to supporters, but in some instances, that is the right thing to do. We need to bring more “market-like” pressures to nonprofits both to jump-start innovation and to root out waste.

Won’t this create winners and losers? Won’t many nonprofits go out of business or be taken over or merged with others? Probably, yes. But I see this as largely positive. As a business person, my belief is that the winners — big or small, new or old — should be those organizations that are truly delivering and able to prove that they do so better than the rest. If this happens, we’ll greatly reduce waste and increase efficiency, making us all winners because we’ll finally achieve real progress on these intractable issues and maybe, just maybe, actually solve some of them in our lifetime. Isn’t that what we’re all fighting for, after all, and wouldn’t that be worth whatever disruption is required?

Perry Yeatman is a principal at Mission Measurement, which measures social outcomes, and the author of "Get Ahead by Going Abroad."