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A False Dichotomy: Non-profit vs. For-profit Solutions

By Nell Edgington



In a recent blog post, Tony Wang, a brilliant researcher at Lucy Bernholz’s  Blueprint Research & Design, a strategy consulting firm for philanthropy in the Bay Area, makes a thought-provoking, yet ultimately flawed argument about the social impact of nonprofits (which he calls charities) versus social businesses. Tony and I have sparred before on PRIs and mission-related investing, and I had to take up the cause again with his argument that poses a false dichotomy.

Tony’s underlying argument is that a for-profit business model is better able to deliver social impact per dollar than a nonprofit one.  He gives many reasons for this:

  1. Dollars for charity are limited. True the nonprofit sector is undercapitalized, but that is changing, and will continue to change as the public, private and nonprofit sectors continue to converge and the social capital market, for both for-profit and nonprofit social impact organizations, grows.  The mere fact that nonprofits are undercapitalized is not a reason to dismiss nonprofit solutions out of hand.
  2. Charity is often inefficient because of its lack of accountability to the people who are the primary beneficiaries of aid.”  This has been true in the past, but I think it is changing.  An increasing focus on metrics, brought on by the venture philanthropy movement and others, has encouraged nonprofits to track and demonstrate outcomes.  These aren’t perfect by any means and there is much work still to be done, but why not work to encourage better accountability rather than simply say nonprofits are inefficient?
  3. Charity is often harmful and insulting to its recipients.  I agree that Western solutions to third world problems can sometimes be full of hubris, but this is no less true in social businesses than it is in nonprofits.  Read my post on the “missionary” nature of some social business solutions.
  4. Business has a much easier time scaling: “it will be difficult for domestic nonprofits to scale when the federal government is the only viable answer and that international nonprofits will still struggle mightily with the issue.”  Government isn’t the only viable answer.  Some great organizations have been able to scale without government assistance (Teach for America, KIPP, Citizen Schools). And the beauty of nonprofit organizations is that scale doesn’t have to mean just the expansion of a single organization.  Rather, scale can mean the dissemination of a solution that works.  Because nonprofits worry less about competition, they are more likely to want to share best practices, models that work, and allow local adaptations of a solution from another area.

Because of all of this, Tony believes that “a lot of young social entrepreneurs…are starting to realize that business solutions and not charity solutions can be more ideal when it comes to maximizing impact (and philanthropy’s impact would be multiplied if it leveraged its capital to fund social impact businesses with true potential).”

I’m sorry, Tony, but I really disagree with this.  Why does it have to be either, or?  Why is one model inherently better able to create value than another? Rather, I would say that it depends on the problem and what the best solution is.  Yes, there are problems and inefficiencies within the nonprofit sector, but there are also some pretty major problems, and inefficiencies in the for-profit sector (dot-com bust, financial crisis, anyone?).

Rather, we need to take a holistic approach to social impact.  There need to be multiple tools available to social entrepreneurs, whether they be for-profit or nonprofit  (different business models, various financing, etc).  And let’s remember that there are some inherent problems with for-profit social impact models as well.  When a solution requires the appearance of impartiality, a nonprofit model might be more effective.

I think the whole point of the convergence and “resetting,” to quote Lucy Bernholz, that is going on is that the old dichotomies and definitions don’t work anymore.  We have to break out of the notion that the way we used to categorize things doesn’t apply anymore.  Structures are changing, new models are emerging.  We need to be flexible and analyze the best solution to each problem that faces us.  “One or the other” thinking just won’t cut it anymore.


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About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.


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7 Comments to A False Dichotomy: Non-profit vs. For-profit Solutions

Tony Wang
May 14, 2009

Thanks Nell for the very thoughtful and intelligent response! I ultimately agree with most of your points – and to respond to your question of “Why does it have to be either, or?” – the answer is that it doesn’t!

What the sector really needs to understand is the comparative advantage of the business and nonprofit forms. You’re absolutely right that the optimal form depends on the problem, but we need to know when the optimal form is business and when the optimal form is charity. This post is a very small step in the dark towards identifying the comparative advantage of business, but we’ll need more conversations like these and more research on the topic before we can truly understand when to apply a nonprofit solution and when to apply a business solution.

Nell Edgington
May 14, 2009

I agree. We definitely need to understand better the various models and the benefits of each. And I’m not giving up on the hybrids (like the LC3s) just yet. Let’s do a little more research and see some more in action before we dismiss them.

[…] response to my post on Charity vs. Business: The Business Case, I just wanted to thank everyone who commented in the blogosphere and everyone who propelled the conversation into the twittersphere […]

Dr. Robert M. Penna
June 2, 2009

You make the point, regarding the question of whether nonprofits are, as Tony Wang contends, ineffecient, that nonprofits are being “encouraged” to track and demonstrate outcomes. You add that there is still much work to be done. I agree; but at the same time note that Ken Berger recently wrote of finding that fewer than 10% of nonprofits are working with outcomes. The problem is not, as might be taken from your comment, that the “metrics” are imperfect; but rather it is that too few nonprofits have any real notion of what good outcomes are or how to manage toward them. Worse still, many believe that they lack the resources to learn what they need to know. This situation is not llikely to change until funders stop simply asking for outcomes, and start providing nonprofits with the resources needed to understand and actually use outcomes.

Nell Edgington
June 2, 2009

Robert,

I agree with you, much more needs to be done in helping
nonprofits understand and use outcomes and this is all part of a larger need for capacity and infrastructure in the nonprofit sector. I think funders can definitely help to finance that infrastructure, but I also think that nonprofits themselves have to work towards understanding how their work in the community is actually having an impact. Their business models have to include a measurable
social impact piece. So I think we are in agreement.

Tooth Doc
November 24, 2009

I am an executive with a socially responsible, for-profit enterprise focused in the healthcare space. Our mission is to create access to healthcare for under-served populations. We looked at both models and decided that sustainability was a critical factor in delivering healthcare services and that we didn’t need a 501-c-3 designation to force us to adhere to our socially responsible mission. Because we get nothing for free we are very prudent with how we spend our money. Because we can freely employ an HR strategy of hiring the best people without regard to public scrutiny over compensation they may command, we operate with greater efficiency and effectiveness than many non-profits with whom I’ve worked which have nice people, albeit not necessarily the most qualified. They also must dedicate an inordinate amount of time to grant writing, accountability reports, etc. whereas we focus on delivering healthcare.

I’ve also seen non-profits become their own cause, rather than the people they are supposed to help. For example, our organization delivers a broader scale and scope of healthcare services than any non-profit in our space. One of our segments is a school-based dental program that provides comprehensive dental care to low-income children, including procedures like fillings and extractions right at the school. We partner with thousands of schools. Believe it or not, there are non-profits who do far less, like only dental education, dental sealants or fluoride (which we do as well) who fight to keep us out of schools so they can preserve their lesser programs. In other words, they’d rather these kids live with their existing tooth decay than have us come in and fix the problems. Why would a supposedly socially responsible (non-profit) organization want to prevent poor children from getting healthcare? To exist, that’s why. They will hang their hat on the fact that they are non-profit as opposed to what they actually are able to accomplish.

The key advantage I see for non-profits is the perception that they are more socially responsible and therefore more worthy of support than for-profits. For this reason, more agencies may wish to align with them to further the social cause and/or business purpose. They also can qualify for certain grants that a for-profit cannot.

In healthcare, I’ve seen a lot of non-profits come and go. They are there one year after they get a grant and then hire a bunch of people and after a year or two they are gone or significantly reduced in scale and/or scope. While they exist, they spend their money on capital equipment that ends up under-utilized because there is not enough money left to operate it full-time. When the grant runs out they must liquidate these assets at rock-bottom prices (which our company then buys and employs in our sustainable, for-profit model for the identical socially responsible purpose except we do it better).

Whenever a for-profit model can get the job done in a sustainable and responsible manner, the for-profit model should be used. In cases where a donation/grant-funded model is the only way, then and only then should a sole non-profit model be used (i.e., providing healthcare services to those with no ability to pay). There also needs to be broader recognition by society that a for-profit entity can be just as socially responsible as a non-profit so that more entrepreneurs will consider the for-profit model. In the long-run we’ll all be better off for this.

Nell Edgington
December 1, 2009

Thanks for writing. You make a reasoned argument. However, I sense an underlying assumption that nonprofits are inherently inefficient, and thus your assumption that a for profit model is always preferable. I don’t think it is that simple. I will easily admit there are problems with the nonprofit sector, but I strongly disagree with any notion of dismissing the sector overall because of some serious dysfunction within it. I disagree that a for profit model is always preferable. The nonprofit sector exists to deliver public goods and as such there will always be a need for their service which cannot be delivered via a for profit model. Instead of dismissing the nonprofit sector overall, we must work to strengthen the sector, make it more functional, more effective, more efficient and more solutions and results-based. Then a budding entrepreneur can make a reasoned decision about which model to go with, instead of opting for the for profit whenever possible simply because the alternative is so poor. Let’s create more options, not limit the options.

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