A Voice for Convergence

There is a great new voice in the growing movement towards the convergence of the public, private and nonprofit sectors.  Dan Pallotta, author of Uncharitable: How Restraints on Nonprofits Undermine Their Potential, has launched a blog on the Harvard Business site.  His first two posts expose the irrational dichotomy under which the American business and nonprofit sectors operate.  The private sector enjoys various financial tools, incentives and behaviors that are forbidden to the nonprofit sector.  Why do we offer those trying to make a profit every advantage, but make those trying to create a social good suffer hurdle after hurdle?

His first post takes on what he calls the “two rulebooks — one for charity, one for the rest of the economic world.” And he gives various examples of a double standard for charities:

• We let the for-profit sector pay competitive wages based on value, but have a visceral reaction to anyone making a great deal of money in charity.
• We let Coca-Cola pummel us with advertising, but donors don’t want important causes “wasting” money on paid advertising. So the voices of our great causes are muted.
• 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. All results must be measured against expenditures in twelve-month windows, and a 65% return is required.
• We aren’t upset when Paramount makes a $200 million movie that flops, but if a charity experiments with a $5 million fundraising event that fails, we call in the attorneys.

Yes!  Nonprofits exist within a system that in effect penalizes them for trying to do good.  The result is a sorely undercapitalized sector held together by bandaids, desperate for more talent and resources, bracing themselves against the increasing number of problems they are being called on to solve.  It is a horribly broken system, which requires a complete resetting.

In his second post, Pallotta takes on the nonprofit executive salaries debate, again with a view towards the double standard nonprofits face: “We give young people horrible mutually exclusive choices. We tell them that they can pursue their dreams of helping the world’s neediest citizens or they can pursue their dreams for their own economic futures, but they cannot pursue both.”  The end result is a nonprofit sector that struggles to attract enough of the top talent our country has to offer.

The problems we are facing are too complex and too deep to allow this continued lack of resources for a sector that is trying to find solutions while the for-profit sector pays enormous salaries to those  just trying to make a profit:

We must reject the dysfunction that calls a billionaire who spends all his time building his wealth a “philanthropist” but the three-hundred thousandaire who spends 100% of her time trying to end hunger a parasite for her six-figure salary. The notion that people should be compensated on the basis of the value they produce can no longer be denied to those who save lives while it is given freely to those who sell sodas and bounce basketballs.

Some might argue that despite lower salaries Generation Y is entering the nonprofit sector in higher numbers than previous generations, which is great, but that’s not sustainable.  If the system doesn’t change, as they get older, buy houses, raise families, many of the best and the brightest of that generation, too, will be lured away by big paychecks and greater resources with which to do their work.

Dan Pallotta provocatively demonstrates the tremendous inconsistencies that exist in a system that unnecessarily drives a wedge between the nonprofit and private sectors.  I look forward to more of his posts.

Tags: Convergence, Dan Pallotta, nonprofit, resetting, Uncharitable

Change is Here

One of the criticisms of an otherwise very well received speech last night by President Obama was that it was “too ambitious.”  Last night he vowed to take on healthcare and education reform, the recession, global warming, 2 wars, among other things.  That is ambitious, but does he have a choice?  Do we have a choice?  You could actually argue that it wasn’t ambitious enough.

Our world is changing so quickly and the problems are becoming larger and more complex.  This complexity requires, and indeed demands, a completely different, and by previous standards “ambitious,” approach.  The very ways in which we live, work, play, communicate are all changing, and exponentially.  Take social media and the flood of information it provides; we’re all trying to figure out how to keep up.

Lucy Bernholz, president of Blueprint Research & Design (a philanthropy consulting firm) and a philanthropic thought leader, argued recently that what we are experiencing is not a recession, but a complete restructuring of our world.  Our institutions are crumbling, our environmental resources diminishing, our economy melting down.  We are charting completely new territory:

It doesn’t make sense to think of this as a dip in an otherwise upward trend. It is more like a turn off onto a different path. People born since 1990, all over the globe, have fundamentally different assumptions than those born before that year about where information lives, who controls it, where and how work gets done, what the “proper” role of government might be, where their friends live, how much personal privacy they have, want or value, what kind of resources will be needed to fuel their futures, what kind of innovation might fuel the economies in which they will live, and what their individual relationships to others – proximal and far away – are, could be, or might be.

And she suggests many ways in which this restructuring could take place.  Several on her list point to a growing convergence among public, private and nonprofit approaches (which I’ve talked about before):

Social enterprise begins to morph the philanthropic giving that exists to its left and the commercial enterprise that exists to its right (on a spectrum from giving to investing

Individuals’ daily contributions and activities are a deliberate and recognized mix of paid and unpaid – and successful enterprises build themselves to catalyze those inside/outside, professional/volunteer, expert/amateur, user/producer contributions

Philanthropic giving is really asked (read: required by regulators or purchased: in a marketplace) to prove its value in the funding food chain of producing social good. So are social investing, social enterprise, and socially responsible investing.

Enterprises and activities that generate economic, social and environmental benefits move from marginal to the middle – and innovation shifts elsewhere

We will no longer assume that nonprofit = social good, commercial enterprise = profit, rather we will think about what we need as a society (investigative reporters, an independent media, universal literacy, human rights) and figure out new forms of delivering those things

So financing, once separated into private and nonprofit buckets, merges into a results bucket that combines social impact and financial profit.  Problems are no longer addressed from a profit or nonprofit position, but rather from a solution position, which draws on both.  Activity that provides a blending of profit and social good is no longer marginalized, but is actually revered and becomes the norm.

What we are already seeing, and will continue to see more and more, is a convergence of private, public and nonprofit money; private and nonprofit operating principles; private, public and nonprofit goals and reasons for being; private, nonprofit and government approaches to problems.  We no longer exist in neat categories that inform our activity, funding, thought, approach, world-view.

The social entrepreneurship movement has taken off so dramatically in recent years in large part because of this growing convergence.  People are recognizing that the old separations no longer make sense or work.

Convergence is real and is happening everywhere.  Those who are not “ambitious” enough and continue to view the world in stale and unbending categories will be left behind.

Tags: Convergence, Lucy Bernholz, nonprofit, Obama, Philanthropy, Social Enterprise, Social Entrepreneurship

The Power of an Accounting Convergence

One of the most exciting things happening in recent years is a “convergence” of the three sectors:  government, business and nonprofit.  Some private businesses now include a social mission in their business model (a solar energy company); nonprofits are using business models to create sustainable organizations; the federal government is thinking about an office of social innovation.  The old, separate sectors are being swept aside by a new idea that each sector has something to offer and by combining the social focus of the nonprofit sector; the business acumen, wealth, and innovation of the private sector; and the tremendous resources of the public sector you have a palpable ability to solve the challenges we face.

One area where I think convergence could be particularly powerful is in accounting practices.  I’ve talked before about the ideas of adding equity to the nonprofit balance sheet, nonprofits raising growth capital like businesses can, and moving nonprofits towards the for-profit understanding of necessary and justified costs.

All of these ideas demonstrate how currently the nonprofit sector is put at a disadvantage by not having access to powerful financial tools that the for-profit sector is well versed in:  growth capital, justified costs, equity.  On the flip side, nonprofits are also hindered by strings and restrictions on the money they do receive.  Take government grants for example.  There was a fascinating New York Times Op-Ed this week by two University of Texas at Austin accounting professors arguing that banks receiving TARP money should be held to the same requirements that nonprofits are when they receive federal aid.  They argue that TARP banks should be required to practice “fund accounting,” where a separate set of books is kept for funds given to a specific project or activity, just as nonprofits are.

Any nonprofit accountant, executive director or development director will tell you that fund accounting can be a nightmare.  Indeed as the professors point out:

Executives of banks that have received TARP cash have said that it is too hard to account separately for how they spend their federal dollars. Money is fungible, they argue, and therefore they cannot readily distinguish between outlays of their own resources and those provided by the government. But that’s the type of doublespeak that would get the head of a town’s homeless shelter thrown in jail. If bankers are unable to segregate cash by source and specifically account for expenditures, why are they in charge of banks in the first place?

The underlying assumption of nonprofit fund accounting is that nonprofits can’t be trusted to effectively and honestly use the money they have been given.  The banks that have received TARP money have already demonstrated their inability to use the money as it was intended, so fund accounting going forward might be the answer.

But what the op-ed unintentionally demonstrates is how crazy the strictures we put on nonprofits are.  Why is the assumption that for-profit businesses can be trusted to spend government money correctly, but nonprofits cannot?  Does it stem from an assumption that nonprofits tend not to know what they are doing when it comes to the business side of things?  Or is it an assumption that nonprofit work must have more safeguards in place?

What ends up happening is that we are weakening the financial position, and thus the productivity, of a key sector.  We are limiting the tools at their disposal and making those resources we do give them cumbersome and costly to use.

What underlies this mistrust of the nonprofit sector?  And how do we change these rules and structures so that nonprofits are given the capital, without the strings, that will allow them to successfully address issues?  We need to move towards a convergence of accounting practices whereby nonprofits are given more of the tools the for-profit sector enjoys and the for-profit sector is called to account in a more meaningful way for the resources they receive.

Tags: accounting, Convergence, fund accounting, Nonprofits, TARP

Thoughts on Social Innovation

The United Way Capital Area recently asked to interview me about social innovation for their blog.  It was a lot of fun, and they asked great questions.  You can check out the interview here.  Or read the text of it below.

Q: Your bio says you’ve been in the social sector for over 13 years. Tell us what things were like for you when you first got involved with the non-profit world. How were they different from today’s imperative to develop entrepreneurial models in the non-profit sector?

A: I don’t know that things were fundamentally all that different when I got started.  Nonprofits have always been entrepreneurial, if you think about it.  They are created because someone sees a disequilibrium, or “market opportunity” (inadequate schools, poor housing, lack of cultural arts) so they create an organization, with great risk and few resources, to fix that disequilibrium.  This is not so different from a business entrepreneur, aside from the social motive versus profit motive.

I think what has changed over the past decade or so is a convergence among the public, private and nonprofit sectors.  A decade or so ago the three sectors remained relatively separate.  A nonprofit might receive corporate philanthropic dollars or federal dollars, or government might contract with a nonprofit to provide public services, but the three sectors stayed separate and had their own unique characteristics.  Now you see a merging of the three sectors into what some call a “fourth sector.”  Some private businesses now include a social mission in their business model (a solar energy company), nonprofits are using business models to create sustainable organizations, the federal government is thinking about an office of social innovation.  The old, separate sectors are being swept aside by a new idea that each sector has something to offer and by borrowing the best from each we can move towards solving the mounting problems we face.
Q: What is an example of a fundraising lesson you’ve learned during your career that helped you make KLRU’s transformation so successful–either a mistake made, or a surprising success you were able to apply again?

A: When I started at KLRU in 2005 there was a tremendous lack of fundraising infrastructure (technology, staffing, planning), and we needed a significant financial investment to build that infrastructure.  But my experience had been that funders weren’t interested in supporting infrastructure.  However, my boss several years earlier at the Oregon Children’s Foundation, who was an expert fundraiser, always said that if you can clearly articulate the impact that an investment can make you can convince someone to invest.

Armed with that idea, I created a compelling case for investing in a complete transformation of KLRU’s fundraising function, along with a demonstration of the return on investment an investor would get.  This plan to revamp KLRU’s fundraising function (everything from new database software, website, staff, messaging, collateral) was ambitious and expensive for donors who were not used to supporting infrastructure. But because the case was so compelling (their investment would allow KLRU to become more self-sustaining, generate more revenue, spend more time on programming, and spend less money over the long term) we easily secured the money needed.  People always talk about the importance of relationships in fundraising.  Relationships are definitely important, however, I would say that even more important is a compelling, articulate ask that demonstrates impact and social return on investment.  Donors want to make a difference.  If you can clearly demonstrate how they will make a significant difference, not in your organization, but in the broader community through your organization, you will gain their investment.

Q: In your recent article, “Social Innovation Provides Hope in the Uncertainty”, you mention an approach that entails “uncovering the root causes of the social problem and addressing those head on with new ideas and models, instead of attempting to ameliorate the symptoms of a social problem”–tell us why such an approach is so important, especially right here and now in Central Texas?

A: Because the problems that we as a city, region and nation face are so large and so complex and the resources available to address them are becoming scarcer.  We have to be smarter about how we solve problems; we no longer have the luxury of just addressing the symptoms.  That’s not to say that every nonprofit organization must solve problems.  There are some problems that unfortunately will probably never be solved completely, for example hunger and homelessness.  But, there are many problems where the conversation can change from “How do we serve more people in need?” to “How do we change the system so the need no longer exists?”  I don’t suppose to have the answers to the problems facing our region, but what I am arguing is that we examine the issues we are working on and ask hard questions about the root cause of the problems and how we could creatively find solutions.  Again, not every problem has a solution, but every problem deserves a critical analysis of the systems and structures feeding it and whether those could be changed.  It is sometimes a difficult conversation to have because root cause work involves changing long-held beliefs or entrenched systems, but the end result could be more lives saved in the long run.  And I would argue that in some cases investing in solutions, or changed systems, is a far better long-term investment than simply continuing to provide services.

Q: How do you see the non-profit landscape in Central Texas changing or evolving in 2009?

A: The economy will most certainly play a role. It will be harder to find resources, and so organizations will have to get smarter, more efficient and more strategic about fundraising, and that means making an investment up front in planning, messaging, strategy, technology.  These don’t have to be large investments, but it can’t just be business as usual.  Difficult times call for better strategy.  I think nonprofits will have to become more social media and Internet savvy.  There are cheaper, better ways to raise money, but you’ve got to be willing to take a risk and make an initial investment.  It takes money to make money in the nonprofit world just as in the business world.

I also think there will be larger conversations among the nonprofit and philanthropic communities about our level of investment in the nonprofit sector.  Clara Miller, CEO of the Nonprofit Finance Fund, wrote an interesting piece recently about how the nonprofit sector has been sorely undercapitalized for years and is near the breaking point.  She argues that we can no longer allow this critical sector to scrape by with band-aid infrastructure.  I think there will be a growing realization that we have to invest in the infrastructure and capacity of this sector. We can’t just buy programs, we have to build the organizations that we are relying on to provide our social safety net and solve the many problems facing us.  And that means nonprofits have to ask for and funders have to invest in technology, top talent, strategic planning.  We can’t bootstrap our critical services any more.  If we want our nonprofit sector to survive and thrive and continue to solve problems, we have to make adequate investment there.

Q: What is your take on the importance of collaboration, between government, private and social sector organizations to provide socially innovative solutions?

A: Absolutely critical, and I would go even further to say that the three sectors are not just collaborating, but actually converging, which, as I mentioned earlier, is a really exciting and powerful development.  The three sectors have been collaborating for years.  What is happening, and where I think the tremendous opportunity lies, is in the convergence of the sectors.  By combining the social focus of the nonprofit sector; the business acumen, wealth, and innovation of the private sector; and the tremendous resources of the public sector you have a palpable ability to solve the challenges we face.  Take the idea of a federal social innovation fund that is being discussed among the Obama administration and social entrepreneurs.  The idea is that the federal government and private investors would pool a significant amount of money that would be invested in social entrepreneurs, along with management assistance similar to what a venture capital fund provides its investments.  This social innovation fund would combine the wealth and resources of the government and private sectors to provide adequate growth capital to nonprofits and social businesses.  That’s a pretty exciting idea.

We all know that Austin has such an entrepreneurial, innovative private sector, a committed nonprofit sector and a strong government sector.  We are ripe for social innovation and for a convergence of the sectors.  Other cities similar to Austin, such as Portland, Denver, San Francisco, Seattle, Boston, are heavily involved in social innovation, with venture philanthropy funds, blooming social enterprises, and investors in social businesses.  Although Austin has some activity, it is nothing like these other cities.  Our city has a tremendous opportunity to benefit from this convergence and face the future with a new economy that combines social and financial profit.  I’d love to see that happen here.

Q: Thank you for your time, is there anything else you would like to add?

A: Although I know people are wary and uncertain in this economic climate, I would argue that this is also a time of tremendous opportunity. We all know that the nonprofit sector has been sorely undercapitalized for years, if not decades.  We can’t go on like that.  We also know that our problems (poverty, inadequate schools, depleted natural resources) are getting worse, not better.  Because of this mounting pressure I see lawmakers, philanthropists, nonprofit leaders, CEOs and others standing up and saying enough is enough.  We can’t go on like this.  Something has got to change.  The entire financial system of the nonprofit sector has got to change.  We need to invest in infrastructure, we need to create strong, sustainable nonprofit organizations, we need all three sectors to work together, we need to address root causes, and we need to look to others for innovative models.  I am very confident that out of this pain and uncertainty our social sector will emerge stronger, better resourced and better equipped to solve the problems we face.  Because, in essence, there isn’t another option.

Tags: Central Texas, Convergence, Nonprofits, root causes, Social Entrepreneurship, social innovation, United Way Capital Area