As nonprofit organizations earn more unrelated business income—through such activities as merchandise sales or renting their donor lists—the proportion of their budgets that they spend on programs goes down, according to a new report.
The study analyzed 700 informational tax returns filed by 150 social-service organizations in Manhattan for the years 2000 to 2005. It was conducted by Rebecca Tekula, executive director of the Helene and Grant Wilson Center for Social Entrepreneurship at Pace University, in New York.
Ms. Tekula says that research in corporate finance has found that diversification leads to a loss of value at for-profit companies and that high-performing divisions subsidize less successful lines of business. She speculates that the same thing is true for nonprofit organizations.
“Stakeholders of nonprofits really need to ask themselves the question, 'Should we really be in the business of business?’ and not blindly go towards it because a donor encourages them or they read a case study of another organization that does it successfully,” says Ms. Tekula.
Fine Distinctions
Not everyone in the nonprofit world agrees on the meaning of the study’s findings.
Steve Goldberg, author of Billions of Drops in Millions of Buckets, a book about philanthropy, takes issue with the study’s methodology. In the report, Ms. Tekula explains that she’s using the percentage of income spent on programs as a proxy for the group’s social benefit.
“That’s the equivalent to saying that overhead is an unproductive expenditure for a nonprofit organization,” Mr. Goldberg said. “We have learned in recent years that, although we all believed that forever, that is an unfounded and dangerous belief to hold.”
He also worries that people outside of academe who read about the paper will miss the distinction between unrelated business income, which is what the study analyzed, and business ventures that charities run that are related to their missions.
For her part, Ms. Tekula thinks that the study points to a need for more rigorous study of the field of social enterprise.
“We need to move beyond anecdotes that X organization does a really good job of earning money,” she says.
Comments
1. tcf_staff - November 09, 2010 at 03:02 pm
This study is misleading because of its focus on nonprofits that earn unrelated business income. Some organizations operate revenue generating businesses (social enterprises) that are directly related to their missions. They were not included in this study because the revenue they generate is related to their mission and is not considered unrelated business income.
While some organizations do consider starting businesses at the encouragement of a major donor or because they read a case study about another organization, some innovative nonprofits have operated businesses related to their missions for decades.
Here are some good examples from around the United States:
TROSA http://trosainc.org, North Carolina's largest long-term residential program for recovering substance abusers. TROSA operates a moving company, lawn services, frame shop, and other businesses to provide vocational training to its clients.
Women's Bean Project http://www.womensbeanproject.com
helps women break the cycle of poverty and unemployment by providing employment in its own gourmet food production business.
MDI http://www.mdi.org serves people with disabilities by offering employment opportunities in business enterprises.
2. goldbergs - November 10, 2010 at 11:28 am
In fairness to the researcher, the problem with this study is not the study itself, but overly broad characterizations of the study's conclusions. Dr. Tekula is candid and explicit in identifying the limitations of her research and the inevitably artificial assumptions upon which she relies. She concludes as follows: "The results of my analysis do not indicate a positive relationship between unrelated business income and programmatic expenditure." That's it. She's conducting very preliminary research with very limited data within the confined constraints of academic economic and statistical analysis. I think she needs to be careful about offering broad opinions based on the study about whether nonprofits should pursue unrelated business income, but so do reporters, bloggers and tweeters.
Steve Goldberg
3. arstrauss - November 16, 2010 at 12:53 pm
I can't speak to the strength or weaknesses of the study. However, with government and corporate support for non-profits in decline, and with individual households paring back contributions because of concern about their budgets, my hope is that non-profits that derive a part of their funds from non-mission related business activities will not be too hasty in rejecting or discontinuing endeavors that can add to their revenues.