October 2009
Has Small Business Gotten a Bad Rap in the Nonprofit World? part 2
Last time, we looked at some of the assumptions and beliefs common among nonprofits and corporations about the other. This month, we’ll take a look at some ways that nonprofit organizations and small businesses have incorporated some of the best parts of the other side to the benefit of their clients, employees, and investors.
To help us explore the best practices among nonprofits and corporations, I’ve asked Linda Ketchum for her perspective. Linda is the Coordinator of the Entrepreneurship Training Center at the University of Alaska’s Center for Economic Development. She develops and delivers training, organizes education events, and promotes coordination and collaboration of statewide efforts. Linda has also taught Social Entrepreneurship in UAA’s MPA program. Over the years, she has worked and volunteered in a variety of leadership roles in Alaska’s nonprofit sector.
FEI: Linda, thank you for helping us take a broader look at how corporations and nonprofits can learn and benefit from each other. Could you help us set the stage for this discussion by providing us with your thoughts on current trends affecting the nonprofit sector?
LK: For some time now, the nonprofit world has been changing. These changes pose challenges but also present new opportunities. One significant trend has been the reduction in funding from traditional sources, such as government grants and now, according to a recent survey, corporate donations, with half of large companies reportedly planning to decrease their giving this year as a result of the economic downturn. Across the country, many nonprofits have also seen their investments shrink as a result of the financial crisis or financial fraud. These developments serve to underline the urgency of thinking differently about the business of running a nonprofit.
FEI: What are some of the advantages of nonprofits adapting business principles into their organization? Are you saying that all principles that are good for business are also good for nonprofits?
LK: I think the fundamental question nonprofits should be asking is “How can we fulfill our mission most effectively?” And then “What resources do we need to accomplish this?” Two schools of thought have emerged in the field of social entrepreneurship – the school of innovation and the school of enterprise. The school of innovation, as exemplified by Ashoka and others, seeks to address urgent social problems by approaching the issues in new ways and instituting systemic change. Nobel Peace Prize winner Muhammad Yunus, who pioneered microcredit in Bangladesh and founded Grameen Bank, is one individual taking the social innovation approach.
On the other hand, the school of enterprise includes those nonprofits that choose to start a business to generate earned income, thereby diversifying their revenue streams while generating social value. Many such business ventures focus on addressing the social objectives of the organization’s mission, such as employment training for clients that develops their self-sufficiency, and often leverage the core competencies or assets of the nonprofit. Social enterprises pursue a so-called double bottom-line – doing good and doing well.
Virtue Ventures defines social enterprise as “any business venture created for a social purpose – mitigating/reducing a social problem or market failure – and to generate social value while operating with the financial discipline, innovation and determination of a private sector business.” I take this to mean that nonprofits should consider new strategies for fulfilling their mission and implement them efficiently and effectively.
FEI: Do you have a favorite ‘short list’ of business principles that nonprofit organizations could start with?
LK: With regard to business principles, I like Greg Fisher’s Top 10 Basic Business Principles from his blog:
- Decide what you do (and what you don’t do)
- Decide who you serve (and focus on them intensely)
- Decide what makes you different (and do it)
- Manage cash flow (very closely)
- Manage employees (incentivize them for success)
- Manage customer expectations (under-promise and over-deliver)
- Set goals (and go after them)
- Expose yourself (tell the market what you do)
- Persevere (through the tough times)
10. Always maintain your integrity (in everything you do)
Reading this list, there is nothing there that would not apply to a high performing nonprofit.
FEI: Can you provide some specific suggestions that will help nonprofits adopt business principles?
LK: In “Forces for Good: The Six Practices of High-Impact Nonprofits” authors Heather McLeod Grant and Leslie Crutchfield examine the conventional wisdom about promoting real social change, exploding a series of nonprofit “myths” in the process. One high-impact practice they identify is “making markets work.” Instead of appealing to altruism, find appropriate ways to work with the business world. Twelve high-impact nonprofits they identify have achieved social change on a larger scale by influencing business practices, building private sector partnerships, and developing earned-income ventures.
James Austin has written several articles and a book, “The Collaboration Challenge: How Nonprofits and Businesses Succeed through Strategic Alliances” which is a great resource for any nonprofit wanting to learn more about this approach.
FEI: What are some of the best examples of nonprofits adapting business principles to the benefit of their organization?
LK: Some of the better known success stories are organizations that have been employing an entrepreneurial approach over a long period of time – it has been integrated into the way they do business either from the start or from an early stage. These include: City Year in Boston, which formed a powerful partnership with Timberland; Pioneer Human Services in Seattle, which earns 99 percent of its income through the sale of its products or services; and Delancey Street Foundation in San Francisco, which is run by the residents themselves and has a portfolio of successful businesses furthering its mission to help people with nowhere to turn to turn their lives around.
There are many examples out there including organizations that have adopted an enterprising approach more recently, but these three websites are a good place to start. You can join the dialogue about social enterprise by becoming a member of the Social Enterprise Alliance. Their 2010 Social Enterprise Summit in San Francisco in April will be combined with the next Social Enterprise World Forum, to be held in the United States for the first time, and offers the opportunity to engage with social entrepreneurs from around the world and learn what they are doing.
FEI: Are there nonprofits that have successfully adopted/adapted to the world of business, truly incorporating business practices into their day to day work?
LK: Some nonprofits leverage their knowledge and expertise to provide consulting services to nonprofits and even for-profits. Share Our Strength, which acts to end childhood hunger, created a successful for-profit subsidiary called Community Wealth Ventures (CWV), a social enterprise consulting firm that works with both the nonprofit and the private sectors. According to its website, CWV helps nonprofits become more self-sustaining by generating revenue through business ventures and corporate partnerships, and helps corporations improve their bottom line through the design and implementation of community investment strategies.
Community Wealth Ventures brings in revenue for its parent nonprofit. Although it is a social purpose business, it must stay in business to benefit Share Our Strength. Likewise, a nonprofit should end the year with revenue over expenses and, ideally, a healthy reserve fund or endowment in order to stay in business and continue pursuing its mission. Nonprofit doesn’t mean you shouldn’t make a profit – that is, retain earned income. When it comes down to it, what counts in a social enterprise as well as a nonprofit is how you use the earned income.
FEI: Can you tell us a little more about social entrepreneurism and what implications it has for nonprofits and for corporations? How are things changing in this field?
LK: As social entrepreneurship evolves as a field, it has become clear that the existing legal structures are inadequate. At present in most states a social enterprise may be either a for-profit or nonprofit, the legal structure becoming a leadership decision that is influenced by factors such as the nature of the business (central to the mission or unrelated to the mission) and access to capital.
In Britain, the government has created a new legal structure call the Community Interest Company to facilitate the growth of social enterprises. A CIC can be established for any lawful purpose, as long as its activities are carried on for the benefit of the community. In the United States, a new legal form has been created called the L3C or low-profit limited liability company to provide an option that allows for investments in social purpose for-profit ventures while simplifying compliance with IRS rules for Program-Related Investments or PRIs. This legislation was pioneered in Vermont last year, and similar initiatives have been signed into law in Michigan, Utah, Wyoming, and Illinois.
In both countries this hybrid form has been designed to promote social enterprise activity. Many social enterprises – Pioneer Human Services and Delancey Street being only two examples – focus on bringing hard-to-employ individuals into the workforce and leading them to self-sufficiency, and job creation is only one way in which social enterprise can benefit a community.
FEI: What recommendations can you offer to nonprofit organizations in this tough economic climate?
LK: Have a clear vision of the social change you want to effect. Think differently about how to get there. Be adaptable. Finally, determine what you need to do to become a high-impact nonprofit.
FEI: Thanks Linda, for providing us with some new ideas and alternatives to consider for our organizations. We appreciate it!
(end of interview)
In challenging economic times, it can be tempting for both nonprofit organizations and corporations to ‘hunker down’ and take a defensive approach to weathering the storm. As we have seen from the examples above, those who alternatively choose to explore creative, ‘outside the box’ solutions are often rewarded for their innovative and entrepreneurial thinking. They serve as examples for all of us in the business and nonprofit worlds alike.
