In today’s Social Velocity interview I’m talking with Pat Lawler. Pat is the CEO of Youth Villages, a national nonprofit dedicated to helping emotionally and behaviorally troubled children and their families live successfully. Youth Villages is often heralded as a model for high performing nonprofit organizations. In 2006, Lawler was recognized as one of “America’s Best Leaders” by U.S. News & World Report.
You can read past interviews in the Social Innovation Interview Series here.
Nell: In 34 years of your tenure at Youth Villages you’ve grown the organization from serving 25 youth to now serving 22,000 families. Very few nonprofits are able to grow to that level, let alone sustain it. What are the factors that make nonprofit growth attainable and what holds more nonprofits back from achieving it?
Pat: First, an organization must have a clear mission and defined values. When we started Youth Villages, we knew who we were. We didn’t just want to respond to RFPs; we wanted to do what was best for kids. No more of the status quo, instead we used our expertise and created best practices. We built our leadership team and our culture around a clear mission and set of values. Our culture is a big part of who we are and what we’ve done over the years. We’ve also been willing to change directions. We’re willing to do different things based on the needs of kids and families. At one time, we only provided residential treatment services, but now residential services comprise only about 35 percent of our work. Don’t anticipate the future, create it.
As an organization, we were also careful not to grow too fast. We were constantly assessing what was best and reevaluating. We also implemented a feedback system to learn what was working and what was not so we could improve our outcomes.
It’s easy for nonprofits, especially those focused on social services, to make decisions with our hearts instead of our heads, but we must still maintain a strong focus on the business aspect of our work. After we got through our first 12-13 years, when we were just trying to survive as an organization, we began thinking about strengthening our financial reserves because we were responsible for more children and families, as well as our staff and their families. So we really started trying to build a stronger financial foundation that would help us successfully transition through turbulent times.
Nell: Often when a nonprofit becomes very large finding on-going sustainable funding sources can be difficult. The majority of your funding comes from state contracts. Is government the ultimate answer to long-term funding for large nonprofits? Or are there other ways?
Pat: It depends, but in general, I think it’s important for organizations to have a diverse set of funders to achieve maximum stability. Having at least three or four funding sources and a relative balance among those sources is a good way to go. If government is a major funding source, you want to make sure that’s diversified among different programs, geographies, etc. and not all one contract.
Nell: Youth Villages is also unusual in that you have a robust performance management system and are considered one of the leading nonprofits in the country in that arena. Why did you make the decision many years back to invest in performance management and what do you think the return on that investment has been?
Pat: Youth Villages’ goal has always been to provide the best services for children and families. That’s one of the reasons why we started collecting data, using measurement, benchmarking and total quality improvement. It was all about getting better outcomes for kids. We didn’t realize how valuable our data could be until the mid-‘90s when some of our state funding was at risk. Using our data, we were able to convince the state to spend money for in-home services and develop a continuum of care — because we had really good data to show them what worked and how much more cost-effective it was. Throughout the years, we started trying to convince other states and funders. A few were pretty enthusiastic about our data and outcomes. When the Edna McConnell Clark Foundation met with us nine years ago, they were very interested in our data and outcomes, and that was the first indication that the private sector was becoming interested in doing what works.
Even today, we’re asking ourselves where is the best place to put our resources, and more often, we’re finding it’s better to serve a larger number of children through community-based services rather than in a residential setting. You can make such a greater impact in the community serving a large number of youth, rather than serving a small number with the greatest needs. We’re trying to do both. But we’re asking ourselves what’s the biggest return on our investment so we can have the greatest impact on our community?
Nell: Funders and nonprofits themselves are often reluctant to invest in nonprofit leadership development. How do we solve this need and how did you grow your leadership skills over the course of your career? What role do you think funders should or could play in leadership development for the sector?
Pat: I read a lot, and I’ve been very fortunate throughout my career to have worked with great boards of directors and mentors to shape my leadership skills. At Youth Villages, we have an outstanding leadership team filled with better leaders than I am. Together, we make a strong team. Any of us independently might not be as good. I know I wouldn’t be at all. At all levels of this organization, we have very bright people and that is what makes the difference here.
If I had to start over at the beginning, rather than asking foundations for money for programs and services, I would have asked for funds to put toward business planning, professional coaches, leadership development and communications to help with the things I didn’t know about. I’d have asked for money to help build a stronger organization, while at the same time maybe a little money for programs and services. I believe it’s a waste of money for governments, foundations or anyone to spend money on an organization that doesn’t have the necessary skills, organizational structure, leadership and business planning to achieve the goals of their program. It just makes no sense.
From the time an organization is created, I think they have to ask the questions: Do we have the right people in place? Do we have the right business plan and strategy to execute? Do we have the support of the community and board of directors? I firmly believe every foundation should put a significant portion of their funding toward strengthening the organization versus funding some programs and services. If you don’t have the right people in place to execute the strategy then it’s not going to happen. It’s also important for foundations to give organizations time. It takes time for leaders to develop, they get better as they encounter and overcome problems, and it’s important to stick with those organizations for extended periods of time.
Photo Credit: Youth Villages
The financial market collapse of the last year has given the emerging social capital markets, where social impact and money converge, a voice and credibility. Indeed some social investments, like those in the microfinance arena, have actually far outperformed the financial returns of the traditional capital markets in the past year.
Will it last? And will money begin to flow more readily to organizations and projects that promise a social return? Will, as some at SoCap forecasted (or perhaps hoped), impact investing become a significant part of a normal investor portfolio in the next five years? Will social impact become a necessary and prevalent part of the traditional capital marketplace? Who knows. This whole space is evolving, and it is much too soon to understand how it will all play out.
One thing, however, that was lacking in last week’s conversations, and is worth a larger discussion, is how nonprofits, those organizations that have been creating “social impact” since before it was cool, fit into this emerging market. As I mentioned in earlier post, attendees to the session I moderated, “Growth Capital for Nonprofit Social Entrepreneurs,” appeared hungry for information, tools, advice, insight about how their organizations could play in this emerging space.
If you think of the overall market as a continuum with traditional charities on one end and traditional businesses on the other, the social capital marketplace, then, is everything in between. It most certainly includes social businesses–businesses that not only make a profit, but also contribute some sort of social impact (like wind farms or organic groceries). And there are emerging investment vehicles that can provide investors a financial return (sometimes equivalent to a traditional market rate return) in addition to a social impact return.
But the social capital market must also include new financial vehicles for nonprofit organizations. In order to effectively provide the public goods that for profit businesses (both traditional and social businesses) can’t or won’t provide, nonprofit organizations require seed funding, growth capital, capacity capital, loans, equity, grants, operating revenue and so on.
Although there was some discussion of these financial needs, the nonprofit side of the social capital market discussion was not as prevalent last week. And indeed some at the conference, including conference co-f0under, Kevin Jones, refer to nonprofits as “our cousins” in this space. Indeed, the keynoter at the first SoCap conference last year encouraged the audience to “set aside” nonprofit organizations because they were not what that conference was about. And I have had a few conversations with leaders in the social business space who have told me: “Innovation will never come from the nonprofit side. It must come from the social business side.”
But nonprofit organizations are very much part of this conversation and this emerging market. Social impact is not a new thing. As much as those of us assembled at SoCap last week would like to believe that we are pioneers in all things, we are not. Many of the financial vehicles emerging in this new space are exciting and new. But creating social impact through entrepreneurial efforts is not new.
Nonprofit organizations have been around for a long time. And their reason for being has always been to create some sort of public good that was not addressed by the market. That is not to say that it has been done right. Many would agree that the nonprofit sector and the philanthropy that funds it are dysfunctional, even broken. And I think most of us would agree the government sector is fairly broken as well.
But we cannot discount and dismiss either sector. In the true spirit of the social innovation space, we must recycle and reuse the nonprofit and government sectors, just as we are refashioning the private sector. We must reconfigure the assets of all three sectors to turn them into more effective, more productive, higher functioning sectors that can work with, not separate from, each other to create solutions.
What does that look like? It means that venture philanthropy funds are sharing investor prospects with social venture funds and vice versa. It means that investors interested in a social return have portfolios that include not only social businesses, but also nonprofit deals. It means that foundations are investing in both for profit and nonprofit social impact organizations. It means that the SoCap conference list of attendees and speakers come equally from all three sectors (public, private, nonprofit). It means that the majority of nonprofit organizations that have an interest in and capacity for growth have access to growth capital and management expertise to scale. It means that a nonprofit that is solving social problems is just as sexy and gets just as many resources, respect and mind-share as a social business that is doing the same. It means that those working on changing laws to help social entrepreneurs look at both for profit and nonprofit structures, incentives and restrictions.
The creation of the social capital market is a bold, chaotic, possibly insane, but potentially game-changing endeavor that has the power to completely rework how money flows through the market to shape society. Let’s not get bogged down in dichotomies and factions, rather let’s take a bigger picture view of the essence of what we are attempting to do. And that is to completely reconfigure, and create a productive convergence among, the three sectors. Now that would be innovative.
In the last couple of years there have been discussions about the convergence of the public, private and nonprofit sectors, some call this The Fourth Sector. Up until now, there have been, for the most part, 3 separate sectors. The government sector was separate and distinct from the private (or for-profit) sector which was separate and distinct from the nonprofit sector. That’s not to say that there weren’t crossovers and partnerships and joint ventures. There absolutely were. Government has always been a huge funder of the nonprofit sector. The business sector has always helped fund and lead (via board seats, etc.) the nonprofit sector. The government provided incentives to the growth and development of the business sector, and so.
But the concept of the Fourth Sector is that the three sectors can no longer be separate entities. In the Fourth Sector you have concepts like social capital markets where the nonprofit and for-profit sectors find and channel their capital in almost the same way. Just as we invest in and grow successful businesses to scale, we will invest in and grow successful nonprofits to scale, often with the same sources of capital. Good Capital and Investors Circle are just a couple of examples of this. Also in the Fourth Sector, government becomes a venture capital fund for social innovation. Government, along with business partners, provides growth capital to nonprofit organizations just as a for-profit venture capital fund would provide growth capital to a business. I discussed Obama’s platform on a Social Innovation Fund like this in an earlier post.
In the Fourth Sector, the old rules don’t apply. Government can act like a venture capitalist. Nonprofits can scale their solutions like an entrepreneur scales her business. Wealthy individuals can invest for financial return or social return or both. Nonprofit fundraisers are no longer looking purely at philanthropic revenue; they are also exploring business revenue, investment revenue, growth capital, and other vehicles that in the past were only available to their for-profit counterparts. The lines are blurred. The idea is that each of the three sectors can build on the assets of the other two. Businesses can and should start taking the social and community effects of their business into consideration as they grow. Nonprofits should start thinking about exponential, not just incremental, growth and strategy, as successful businesses do. Government should use their tremendous resources in more effective and efficient ways to achieve greater impact.-
The idea behind the Fourth Sector is a simple, yet profound, one. By merging the three sectors we can, perhaps, have the best of three worlds. At the very least, we can learn a lot from each other and move solutions to the many problems that plague us forward.
These past months have been frightening, with new banks crumbling every week and the government weighing the merits of a $700 billion bailout. The economy is reeling with tremendous uncertainty. I can see the nonprofit sector, which is often hit hardest and longest by any economic downturn, holding its collective breath, unsure what all of this will mean to the critical services they provide. And, if the government does end up providing a tremendous influx of cash to the overall economy, it must mean that less will be left over for nonprofit programs.
All of this seems incredibly bleak. Indeed, the times we live in are rather bleak. But they are also incredibly historic. And what if, instead of battening down the hatches, we viewed these times as an opportunity? Perhaps times like these are exactly when system-changing ideas can take hold. Take New Orleans for instance. Despite the incredible destruction of Katrina which threatened to wipe that city off the map, New Orleans is starting to come back. And social entrepreneurship is driving that come back. New Orleans’ school system was in disarray before Katrina. It was one of the worst in the country. However, Katrina has given them a clean slate. And social entrepreneurs, with great new ideas for education, have taken the city by storm, using it as a test case for some pretty exciting and powerful models for changing the end game: improving future outcomes for at-risk kids. It’s a pretty inspirational story.
So, maybe, amid all of the bleak news of recent days there is a ray of hope. When nothing is sure, anything is possible.