January 12, 2010 Are NonProfits the Next in Line for Extinction? pt1
There’s a lot of talk about the end being near. The Mayans predicted some kind of end to mankind around this time next year. Christians have been predicting the end of days for God knows how long. Between predicted droughts and melting ice caps in the environmentalist doomsday dialogue, there are a whole bunch of things that aren’t expected to survive this generation. Perhaps one of them are non-profit organizations.
There’s a lot of talk about the end being near. The Mayans predicted some kind of end to mankind around this time next year. Christians have been predicting the end of days for God knows how long. Between predicted droughts and melting ice caps in the environmentalist doomsday dialogue, there are a whole bunch of things that aren’t expected to survive this generation. Perhaps one of them are non-profit organizations. Anyone with an interest in improving their community or society at large, did so through the formation of a nonprofit organization.
This, however is changing rapidly. The prevalence of Social Entrepreneurs, individuals who are approaching societal problems with for-profit businesses, is spreading like wildfire and shows no signs of slowing. Prominent organizations like the Clinton’s Global Initiative are making business a new priority in how they approach social change. Economists like Muhammad Yunus have won Nobel Prizes for applying business principles to social good and with values of entrepreneurship and social responsibility being so popular among GenY, it is surely expected to grow more. As all these changes in contemporary society that are encouraging people to turn towards a more conscious capitalism, I find myself wondering what’s the upshot for comparatively inefficient nonprofits?
Many nonprofits, while well intentioned, have some poorly placed incentives for performance. Since a majority of an organization’s funding comes from grants and donations, their financial sustenance is not necessarily linked to how well they service their populations or how innovative their approach is. Their budgets more accurately reflect of how efficient their grant-making team is, making the industry as a whole pretty static. Not only that but in tough economic times, when the altruistic giving of major donors starts to slow, it is difficult for the organization’s leadership to respond quickly with creative solutions because of the consensus that must be reached by the various stakeholders on the Board of Directors. There’s also the issue of employee compensation. While nonprofits can offer work environments that are creative and fulfilling as a result of the meaningful work their employees are doing, the relatively low compensation for such jobs make it difficult for organizations to attract and retain talent. Perhaps the biggest drawback of nonprofits as compared to social businesses, is the speed and efficiency of scaling an opportunity. Now scaling an idea may not be an important priority to an organization, but if they did have a model for change that was creating measurable impact for their constituents and wanted to expand, the inconsistency or unpredictable nature of that organization’s income through grants, loans, and donations certainly stems the organizations’ growth.
Enter the world of social enterprise where a company like Tom’s Shoes emerges. For every pair of eco friendly stylish shoes Tom’s sells to one of their customers, a pair of shoes goes to a poor child in Ethiopia, enabling the child to go to school, preventing disease and literally making their walk through life a little easier. In the video below, Tom’s Shoes CEO Blake Mycoskie explains why he chose to make this a profitable venture. Doing so enabled his idea to grow sustainably without being dependent on fickle donors whose choices could impact the organization’s capacity to carry out its mission from year to year.
Can nonprofits as we know them today compete with business models like Tom’s Shoes? Or are they heading towards an inevitable extinction? What do non-profit organizations do better than for-profit companies? What do you think justifies this model’s future existence in the market?