For many years now, I have bellowed a mantra to anyone who will listen. In order to succeed, charities must operate with the head of a business and the heart of a nonprofit.
I can’t count how many times I’ve seen nonprofit professionals cringe at the thought of adopting a business mindset. Sometimes, it’s their own personal biases, and sometimes, they fear the repercussions of their supporters. But now, there’s Dan Pallotta who is singing a tune akin to my playbook in his Harvard Business blog.
During my marketing career in the nonprofit sector, I’ve seen some leaders adopt a social entrepreneurial attitude to revenue generation. Many organizations have diversified their revenue streams by adding businesses to their revenue mix. This has helped some move away from the high risk of dependency on government grants and other handouts that tend to disappear in tough times. Besides, so many grants come with strings attached that organizations have been unable to invest in their own growth.
Dan Pallotta says it beautifully:
The nonprofit sector remains tightly constrained by a set of irrational economic rules handed down to us from the Puritans that discourage profit, self-interest, serious marketing, and risk-taking and long-term investment for revenue development. They work against the sector on every level, and they have been elevated, of all things, to the status of “ethics.”
We have two rulebooks – one for charity, one for the rest of the economic world.
How contradictory is this?
For decades, nonprofits have been picking up the pieces that governments and the private sector let fall through the cracks. Especially now, in this recession, charities are struggling to keep up with demand while donations have been cut back. They are expected to do more with less, but frankly, so many have been coming at this from a position of weakness even before the economic downturn. How much more can they scrape off the bottom line? There’s not much gravy there.
Yet, fundraisers will tell you that supporters are frequently reluctant to fund operations. Donors are eager to have their dollars go to the mission, but not necessarily to the salaries, infrastructure, and costs associated with running the organization that makes the mission possible. If they won’t fund these essentials, where does that leave funding for innovation?
As Pollotta says, “We let for-profit companies invest in the long-term to identify new sources of revenue, but we want charitable donations spent immediately to help the needy…No wonder charities can’t scale to the size of the social problems they confront.”
So, even when nonprofits try to develop more of a business sense to sustain themselves and do more, they are butting heads with the public and supporters on whom they must rely.
How do we resolve this?
Tags: business, charity, Dan Pallotta, donors, mission, nonprofit, revenue
Elaine,
Excellent question and although I have worked for nonprofits, I don’t know how best to change them. In my experience, the leaders themselves rejected ideas that would require them to act more like a business. They seemed to believe that “doing good” would result in positive fundraising. It doesn’t always work that way.
One idea would be to recruit top leadership from the ranks of companies instead of promoting from within. However, if those recruited are like me, frustration with the nonprofit culture would soon drive us away.
Overcoming a cushy status quo has never been easy. It’ll take a lot of hard hard work and a lot of butting heads, indeed, to get rid of the irrational nonprofit ethic. But it’ll happen. We need success stories, models that set the tone and show the way, organizations that take a stand and stick with it.
Gandhi said, “First they ignore you, then they laugh at you, then they fight you, then you win.” It’s all about persistence. The butting-heads stage comes right before victory!
I don’t think hiring CEOs from a corporate environment does anything to change the broken system of donors not wanting to fund what nonprofits need to run like a business. I really hate that mantra, btw, because nonprofits fundamentally ARE businesses and all businesses run differently. Yes, our capital comes from a different source, but we also are held accountable, I would argue, to many more stakeholders and undergo more scrutiny than alot of for profit companies. In my organization we work hard to keep our revenue diversified, explain to the Board and funders the need to invest in staff, professional development and infrastructure. We are starting an income generating arm to even out our cash flow. These are all strategies that I see other successful nonprofits employing.
@Lewis: Thanks for weighing in, Lewis. I agree that doing good isn’t enough to bring in the bucks. However, I’m not sure that corporate leaders are the best fits for nonprofits unless they’ve had previous exposure to the culture. I’ve seen a few come in and leave pretty fast. There are always exceptions, of course.
@Peter: I agree that change takes time, but it’s been well over thirty years since Philip Kotler and Alan Andreasen first wrote their nonprofit marketing book that indicated the need to be customer focused.
Although I understand Dan Pallotta’s reference to nonprofit “ethics,” I personally wouldn’t call them irrational. I actually find the strong values of fundraisers and nonprofit professionals refreshing in a sea of greed and corruption. I do believe that there is room for a hybrid of strong ethics and entrepreneurial spirit.
@Sheri: I agree with you that nonprofits are held accountable. Prior to Sarbanes-Oxley, I think there was a lot more transparency in the nonprofit sector than there ever was in the private one. It appears that your organization is making the case for growth investment. I’m curious…what percentage of your operational budget goes to marketing expenses?
Elaine, I think many donors have been burned in the past with waste and greed and thus want to make sure the charities are run as efficiently (lean) as possible. That said, isn’t it funny how we forget that the people who work at charities also have to provide for their families?
Back in college, I spent a few summers going door to door for a couple organizations. I was the guy with the clip board that knocked on your door about 7:00 PM. Even at that young age, I had this feeling that we were raising money to raise money, and not as much of the money was going toward the core cause as was optimal
We canvassers sort of justified it to ourselves by saying we were raising awareness. We were truly idealistic and wanted to save the world.
Later, I worked for a consulting firm whose largest client was a non-profit. The non-profit seemed set in its ways. There seems to be a tremendous opportunity to improve the marketing in the non-profit sector. A vibrant non-profit sector is essential for a society to function well. I have absolutely no doubt about that.
That said, I have volunteered for some truly outstanding non-profit organizations and even the ones I mentioned above (though not by name) did some very good work.
As an aside, Seth Godin’s latest blog post is related to this topic and worth reading:
http://sethgodin.typepad.com/seths_blog/2009/06/thinking-about-the-compromise.html
@Paul: Thanks for commenting. I think the waste and greed perception has been blown out of proportion because of a handful of negative news stories. Example: We experienced a recent series on this subject in the Arizona Republic. It exposed a circle of affiliated nonprofits that the journalists described as unscrupulous. Yet, there are about 11,999 other Arizona-based nonprofits probably slugging away at their missions on poor salaries and long hours and they may be just getting by. And yes, these workers have to provide for their families, many without health care coverage. Plus, Baby Boomer leaders are retiring and there won’t be enough replacements. If we are to attract excellent leaders to this sector so we can solve our society’s problems, we need to hire talented leaders at decent salary levels. OK, maybe not the same as in business, but competitive.
@Neil: Thanks, Neil. I totally agree that we need a vibrant nonprofit sector, and yes, most need better marketing. According to Tim Delaney, CEO of the National Council of Nonprofit Associations (whom I heard today at a local chapter meeting of the Association of Fundraising Professionals), the majority of nonprofit organizations in the country are small or mid-sized. So many of them are struggling to stay afloat, so it’s going to be increasingly challenging to keep our society functioning well.
The nonprofit sector needs help – from government, business and citizens. I don’t think we’ll be happy campers with a country that is beginning to resemble a third-world nation. That means donors need to fund more than just programs and services. They need to fund infrastructure and marketing.
Yes, in my opinion a developed country has these things and more, of course:
1. A strong middle class.
2. A vibrant private sector
3. Government that gets the job done reasonably well. That is, the garbage gets picked up, the water system works, sewage treatment, police, fire, infrastructure, etc. That’s right, lucky people who have these things rarely think about them: when we turn on the water faucet we do not usually have to wonder if water will flow.
4. A strong non-profit sector. There are certain things that neither the private sector nor the government do very well and the non-profit sector does pretty well by comparison.
I agree, Neil. Now, if we could only have a decent health care system, we’d be truly developed! (Coming from a Canuck!)
Elaine,
Interesting you should mention health care.
There have been some studies that show we pay a hidden health tax because of the sheer number of people without insurance in the U.S. When people have to wait to get health care until it is so bad they go to the emergency room, etc., somebody has to pay and pay more:
http://online.wsj.com/article/SB124353194170163283.html?mod=googlenews_wsj
By the way, I have absolutely no idea how to solve the health insurance problem in the U.S. but I do know that whatever solutions end up on the table, the marketing has to be good. Studies like the one referenced in the article above are great evidence that the uninsured are now paying a huge amount for the uninsured.
It is too bad the cost is hidden. The light of day needs to be shined on the VERY high cost of having so many people without health insurance. It is staggering.
Interesting, Neil. Makes sense. You’re right – it IS staggering how many people in the U.S. go to bed each night praying that they don’t get sick. It probably contributes to stress and illness.
A Canadian doctor friend, who visited a couple of years ago, said that she had never seen so many advanced cases of disease before. In Canada, no one needs to delay care or make excuses why s/he shouldn’t seek medical attention, so patients get seen before things get out of control. Yes, one may have to wait to see a specialist, but severe cases go first and no one goes bankrupt.
I do agree about the marketing of any health care reform program. It’s all in the perception, and there are many Americans who will already have their defenses up.
By advanced cases of disease, I am sure your friend is referring to the fact that while a doctor or hospital may turn you away when you are not critical, when things advance to the critical stage, you end up in the emergency room. They take you and it costs a lot more than if you had gotten treatment at an earlier stage of the illness.
Many economists have shown that somebody has to pay for this. Well, it ends up being passed on through higher health care premiums for individuals and businesses.
What makes it slightly more palatable, I suppose, is that the cost is hidden. It is a sad in and of itself that there are people who have no health insurance.
But for those out there looking out for number #1, well, you are paying a lot more and your employer is paying a lot more because of all the uninsured. The cost is hidden from clear view but it does not make it any less expensive and any less of a drag on our economy.
Woah, Neil, did we ever steer away from charities and business!
I understand what you’re saying. Either way, the system sucks.
As an MBA student I worked with a non-profit organisation to design a marketing plan to help generate funds via the revenue-earning side of the organization. It is through that experience that I realized how important it was for non-profits to adopt a business mindset. The organization was faced with reduced funding and desperately needed a way to cover its operating costs. This is often the fate of many non-profits who look heavily to grants to sustain their organizations.
But how will they achieve their objectives if their organizations struggle? How will they help others if they can barely keep their head above water? We have to look at the big picture here. The question non-profits need to be asking themselves is what is the best way to generate the greatest good? If that means managing in a more strategic manner, then this is what they need to do. What’s the alternative? Allowing the organizations to die a slow death so that no one is helped?
For the past several years, non-profits have been under more scrutiny by the federal government. The feds want to promote public confidence in the non-profit sector. They have emphasized transparency, governance, and accountability to gain that confidence of the public. I think this scrutiny over the years has resulted in non-profits holding themselves to a higher standard in these areas, as the IRS, major foundations, etc. have published “best practices”. The newly revised non-profit tax return (Form 990) also emphasizes the importance of this business-type structure with effective governance practices. As the awareness of the importance of this continues to spread, I am hopeful that it will also spread to funders and donors so that it will eventually become common to provide funding for the time/policies/procedures necessary for effective governance, and thus effective business practies.