A growing number of nonprofits are starting businesses with the goal of solving social problems or producing revenue for charitable programs—or both.
While every entity is different, certain characteristics distinguish those that achieve their goals from those that either limp along or outright fail. Successful enterprises I’ve seen typically incorporate the following principles into their planning, while those that ignore or play down these essential ingredients do so at their peril.
Hiring experts. Well-run health clinics, schools, theaters, and other nonprofits are usually led by teams with years of relevant experience; social enterprises require the same depth of management expertise. But many nonprofits are reluctant to spend the money that an experienced management team costs, especially because such business veterans sometimes expect salaries similar to what the private sector offers.
In the long run, however, spending more money on talent will save money. Hands-on expertise with the business dynamics, supply chain, industry trends, competitors, and revenue cycles involved in a nonprofit’s business are critical. It is more cost-efficient to pay more for managers who have already learned from their mistakes than to pay less for someone who will use your business (and resources) to learn on the job.
Raising adequate and appropriate capital. Many social enterprises are started with too little capital, in part because organizations underestimate the enterprise’s capital needs or can’t figure out how to find the required resources.
Nonprofits are so accustomed to providing services on a shoestring and operating without adequate infrastructure that when they plan for a social enterprise, they often consider marketing, sales teams, or finance and accounting resources as luxuries they can’t afford. Ultimately they underestimate the cost of running the social enterprise and do not include these expenses when they seek money to start an enterprise.
Nonprofits also overlook the need to raise enough money to provide a cushion to experiment and to make mistakes. Sometimes the organization will need that extra money if early sales are slow, if an advertising campaign doesn’t yield results, or if the cost of materials increases.
Other nonprofits might have a good sense of what it will take to finance a social enterprise; however, they are unable to raise the capital. Many proceed anyway, ultimately finding themselves short of capital and unable to reach their potential. In some cases, organizations in these situations fill the capital need with too much debt (which can be quicker to raise than seeking grants) and are not able to keep up with debt payments. When properly deployed, debt is an effective tool, but too much debt can sink the whole enterprise. Without the right kind of capital, organizations will face limits on their ability to maneuver and respond nimbly—and that can cause an enterprise to fail.
Collecting benchmarking data. Very few businesses unfold as originally planned; nevertheless, devising business plans with benchmarks (production or service levels, revenue dollars, sales targets, etc.) makes it easier to see when and where things may be going off course. Without data, organizations often can’t respond in a timely way or don’t have good information about what they need to fix. Organizations that can make quick course corrections save time and money.
In your experience with a social enterprise, are these the most essential ingredients of success? Have you encountered other stumbling blocks your peers can learn from? We’d like to hear about your experiences, so please click on the comments box below.
3 Responses to How Nonprofits Build Successful Businesses
jerrboschee - January 27, 2011 at 1:41 pm
FIRST WRITTEN IN 2006, THE FOLLOWING STILL APPLIES:
“The single greatest challenge: Existing organizational culture is frequently the biggest obstacle for social entrepreneurs”
BY JERR BOSCHEE
Social innovators around the world have begun to reach a disquieting conclusion: Inspired vision, impassioned leadership, enthusiastic volunteers, government subsidies and a phalanx of donors are not always enough.
They serve admirably while innovators transform their dreams into fledgling programs and steer their organizations through early growing pains. But there comes a time, albeit reluctantly, when most founders and their followers begin to understand that living from year to year does not ensure the future – and that is the moment when they begin migrating from innovation to entrepreneurship. It is one thing to design, develop and carry out a new program, quite another to sustain it. So they begin turning toward commercial markets, gradually exploring the possibilities of earned income, many for the first time, and often with reluctance given their uneasiness about the profit motive.
The moment of realization is dawning today for some of the most successful social innovators in the world, and they are slowly moving away from a dependency model of financing that relies almost entirely on charitable contributions and public sector subsidies. The movement takes two forms:
• Some are working toward sustainability, which can be attained through a combination of philanthropy, subsidies and earned revenue
• Others are seeking self-sufficiency, which can only be achieved through earned revenue alone
However, entering commercial markets poses significant challenges for nonprofits, none greater than their own embedded culture.
The culture of a traditional nonprofit, no matter how innovative, is vastly different from the culture of an entrepreneurial nonprofit. Entrepreneurs have a higher tolerance for risk, a greater appreciation of margins, an eagerness to compete. Traditional nonprofits distrust the capital markets, prefer collaboration to competition, and underestimate the productive capabilities of their disadvantaged employees. They watch other nonprofits become increasingly sustainable or self-sufficient, but are unwilling to emulate their practices.
Instead, they criticize. “My god, the resistance,” says Rick Walker, who runs seven small businesses in Marshfield, Massachusetts, that employ people with developmental disabilities. “To a great extent, nonprofit people are not risk-takers, and their unwillingness to think outside very standard parameters constantly amazes me. Quite frankly, we’ve had a lot better luck getting people outside the nonprofit world to understand what we’re doing and feel comfortable with it.”
Tony Wagner concurs. He has been astonished by the resistance he has encountered from both the business community and the nonprofit sector as his nonprofit in Minneapolis, Minnesota, tries to simultaneously create a business and carry out a social mission by employing people who are economically disadvantaged. “I’ve been blown away by the level of misunderstanding and mistrust,” he says. “For all the writing and talking that’s being done about the subject, out there in the world people either don’t get it or don’t want to get it. They say you have to be one or the other.”
Why does this happen? Why is the embedded culture of an organization so often the single greatest obstacle for Board members and senior executives trying to launch earned income strategies or social sector businesses?
Because too many suffer from what Joel Arthur Barker calls “paradigm paralysis.” As Barker pointed out in his seminal 1992 book, Paradigms: The Business of Discovering the Future, paradigms can be extraordinarily useful. They help us make sense of the world by organizing incoming data streams and sorting them into categories, helping us decide what to think and do. But paradigms can be a double-edged sword. Blinders are slapped into place and we begin to interpret new information according to our pre-conceptions. We become frozen. Change becomes our enemy. Individuals and organizations begin to believe the categories they are using are the only ones available, and they slowly become paralyzed.
Institutional paralysis can be overcome, with a sufficient dose of courage. But occasionally it takes something dramatic. In the mid-1980s, when the Board of Directors of a nonprofit in Louisville, Kentucky, offered Bob Russell the job as CEO, he realized the existing make-up of the Board worked against entrepreneurship and agreed to accept the position only if every member of the board resigned. They agreed.
Still another CEO, who ran a sheltered workshop for people who were developmentally disabled, decided to change the basic values of his organization – and in the process invented an entirely new type of business, known today as an “affirmative business.” On a pleasant summer evening in 1973, John DuRand invited his 11 senior managers to a downtown hotel in St. Paul, Minnesota, where he wined and dined them, asked them to sit down – and then fired them all. Five minutes later he passed out application forms. “Starting tomorrow,” he said, “we are no longer a rehab agency, we’re a business. Starting tomorrow, we no longer have clients, we have employees. And, starting tomorrow, you are no longer social workers, you are business managers. If you can get your minds and hearts and souls around that concept, I want you back. If you can’t, I’ll help you find a job somewhere else.” Nine of the 11 returned to their jobs. Two could not accept the philosophic shift. But, from that day, the culture of the organization changed and the primary goal became the operation of a viable business.
However, regardless of dramatics, cultural change must be systemic.
The first step usually has to be taken at the Board level. When Charley Graham arrived at his new post in Oregon in the early 1980s, he immediately began promoting the idea of a double bottom line. According to his second-in-command, Roy Soards, “he told the Board we were never going to be able to employ more people with psychiatric disabilities if we continued operating a sheltered workshop and depending primarily on social service subsidies and charitable giving. He convinced the Board that if we provided quality goods and services, people would buy them and we’d therefore be able to employ even more people with disabilities and help them become self-sufficient.”
Kevin McDonald, founder of a moving company in North Carolina that employs former convicts, drug addicts and prostitutes, discovered that customers appreciated the change. He built his company primarily through personal selling and word of mouth. “We didn’t have a very big staff,” he says, “just me and two others, and we didn’t have much money for advertising. We were just trying to survive as a program. So, I decided to start hitting the pavement and gave a lot of speeches. Went out to the Junior League, the Kiwanis Club, that sort of thing…and I found out they were tired of people asking for a handout. So I told them, ‘I don’t want your money…I want your business…call us up, let me give you an estimate…use our services.’”
Once they begin paying for actual products or services, customers become increasingly demanding, which puts a further strain on an organization’s traditional culture. “When we started working with Ben & Jerry’s,” recalls Julius Walls, CEO of Greyston Bakery, which employs former convicts and others with barriers to employment, “they made it very clear that our product (providing brownies and blondies for five Ben & Jerry ice cream flavors) had to always be up to snuff or they wouldn’t produce their ice cream with us. They held us accountable as a business and not as their young child. They provided a lot of assistance, but they told us from the beginning that we needed to stand up and be a business, not a sheltered workshop.”
When Walls took over the Yonkers, New York, company as CEO, he discovered that the biggest obstacle he faced was helping his employees “understand what we needed to do to be a sustainable model. We had to understand we were a business with a dual bottom line. Most businesses have one bottom line – economic dividends. (At the time) Greyston also had a single bottom line, but it wasn’t the economic one. There was a mentality on the part of the employees that came here that if you’re really nice we’ll figure something out to keep you and it doesn’t matter if you’re producing or if the business is doing well. But there came a time when the employees and the business needed to understand that that’s not a sustainable model.”
The cultural transformation can turn into a war. “By the time I got here,” remembers Soards, who eventually succeeded Graham as CEO in Oregon, “there was a demilitarized zone between the production people who ran the factory and the rehab people who provided social services. We had two very strong-willed managers and each of them had their own lieutenants and armies.” The opposing forces fought over resources and, more fundamentally, they fought for the soul of the organization.
It took years for the culture wars to subside, and “it was pretty ugly at times,” says Soards. “The rehab people would sabotage the production people, who often had to rely on the rehab folks for employees. If the production people had a job that had to get done, they were under a lot of pressure, because the rehab people were more concerned about, ‘Well, is this the proper training for this individual, they’re not ready for work that’s too demanding, and why don’t you guys find the types of jobs that fit their needs, and no, they can’t work after three o’clock because they have to go see their case workers.’ We finally had to part ways with the head of the rehab division.”
Hiring people from the for-profit world can be another wake-up call. “Everything changed,” says Dave McDonough, who ran a social enterprise in Los Angeles that employed people who were homeless. “Right off the top, it was just the way the new people walked and talked and dressed and approached their day. It was a big shock to the rest of us.”
Making the transition from innovation to entrepreneurship is fraught with dangers. Years ago, Pablo Eisenberg, Founder and Chairman Emeritus of the National Committee for Responsive Philanthropy, wrote that “far too many charities have…forgotten the distinction between for-profit and non-profit activities, between fulfilling a mission and survival at any cost….The appeal of non-profit organizations is their commitment to public service…it is not as a shadow private sector.”
But, according to Kenneth Mason, the former Chairman of Quaker Oats, “making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life. Life’s purpose, one would hope, is something broader and more challenging. Likewise with business and profit.”
And nonprofit executive Robert Harrington may have put it most succinctly, and in terms social entrepreneurs would resoundingly endorse: “If you want to help the poor people of the world,” he said, “step one is to make sure you’re not one of them!”
zceline - January 27, 2011 at 3:42 pm
Thanks for an excellent post!
Really appreciate Jerr’s response as well. “Paradigm paralysis” is precisely what I’ve encountered speaking with NPOs + social enterprises on identifying “business” models:
- High-level acceptance of earned income concept, but deep-seated belief that running a commercial business dilutes the purity of the mission
- General discomfort with benchmarking data of any kind, e.g. measurement is viewed as questioning social impact
Would love to hear how others have addressed this :)
bdholtzman - February 6, 2011 at 11:06 pm
I have found that small businesses make the transition to social enterprises far better than organizations do. Companies who adopt a social aspect to their mission, often along with an enhanced sense of environmental awareness, are often those who have succeeded in some way and want to go the next level by giving back and being more aware. Small organizations, which is what we’re talking about, because pretty much all of the larger ones have had a capitalist component for quite some time, usually engage in what might be considered “quick, we need some money!” endeavors. As Jerr writes in his book, “Migrating from Innovation to Entrepreneurship, and referenced here http://www.nptimes.com/howtos/fundraising.html, there are risks associated with making the transition, and when an organization jumps to profit-making endeavor, they take those risks often without consideration.
When you consider that far too many smaller organizations start with a mushy mission and fuzzy goals, goals that couldn’t be measured even if the Board wanted to and they often don’t, they really need some kind of consultant or coach to get them through it – or at least properly started. So many don’t even have a strategic plan of any kind, or they use a boilerplate one that makes no real sense for them. At the very least, they need a mini-strategic plan to cover this one endeavor.
I haven’t found too many “purity of mission” issues with making money, more the Boards are confused as to how to accomplish such a thing within their tax status as a non-profit. That’s not as difficult to get past as the measurement issue; even benchmarking is considered anathema! Any kind of assessment or metric causes concern that someone might be measured and found less than adequate. If it’s a program you want to assess, it’s thought to reflect on the individuals involved. As someone who came from science and transitioned through social science to social enterprise administration, the myths and myopia over measurement amaze and confound me! Few have metrics and even those who have them aren’t sure why, or what they’re good for. To me, the second most important task in working with a non-profit that is considering enterprise efforts (after the aforementioned clarification of mission and goals) is devising metrics that make everyone happy AND get the job done.