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Sunday, 07 December 2014 22:00

A Seat at the Table: How nonprofits and for-profits can learn from each other

Written by  Jill Hinton
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A Seat at the Table: How nonprofits and for-profits can learn from each other DATA SOURCE: NONPROFIT QUARTERLY

At countless family holiday gatherings, the classic family division takes shape. The adults sit at one table while the youngsters are relegated to their own setting.

Among nonprofits and for-profit companies, a similar division has emerged, one that’s resulted in many nonprofits being unable to get the recognition they deserve for being smart businesses.

“A nonprofit corporation is a corporation, just like a for-profit is a corporation,” said Diana Sieger, president of the Grand Rapids Community Foundation. “I have a sensitivity to the fact that the prevailing attitude among for-profit leaders is that nonprofits don’t know what the heck they’re doing. In many ways, nonprofit organizations are run much more effectively than for-profit businesses.”

While business leaders may commonly chide nonprofits to run more like for-profit businesses, it turns out that the two sectors actually have a lot to learn from each other.

Sieger suggests that there are more important questions than whether nonprofits need to run their organizations more like businesses.  

“Can they (run their organizations in a) fiscally smart fashion? Do they have their operations and their staff deployed in the right ways? Are they keeping costs at a reasonable level? Are they reporting and are they transparent to the community? Those are the kind of things that the nonprofits these days are really encouraged to keep an eye on,” Sieger said.

Donna Murray-Brown also takes issue with the idea that nonprofits and for-profits are at different ends of the spectrum. The president and CEO of the Michigan Nonprofit Association says that although the IRS may see major differences between the two types of companies, “in terms of acting like a business, we are a business.”

Both sectors are known to have their own strengths and weaknesses. For-profits have traditionally been better at innovation when it comes to supply chain management, manufacturing, marketing, technology and more. On the other hand, nonprofits have been seen as better at consensus building, mobilizing constituents and working on a shoestring budget.

But Sieger said the public shouldn’t look down on nonprofits for turning a profit.

“I like it when our organizations make money,” Sieger said. “It isn’t like that’s such a bad thing. It’s more about are we making an impact in the areas that we say we are really focusing.”

A SYMBIOTIC RELATIONSHIP

Murray-Brown said that as more and more executives leave the for-profit world to work in nonprofits, it’s inevitable that nonprofits will gain exposure to traditional business concepts, including lean manufacturing and human-centered design.

Matthew Downey, director of development and nonprofit services at Grand Valley State University’s Dorothy A. Johnson Center for Philanthropy, cites Kids’ Food Basket as an example of how traditional business thinking has benefited a local nonprofit.

A few years ago, the provider of sack lunches for hungry children decided it had outgrown its facility. It was facing a tough decision, one that every successful nonprofit faces at some point: Should it invest valuable donor dollars into infrastructure, or put that money back into helping those who depend on its services? Since each lunch costs the nonprofit about a dollar to make, every dollar that went into a new facility would mean a missed meal in the stomachs of hungry children.

An Amway executive who sat on the nonprofit’s board offered to bring in the company’s lean manufacturing team to analyze the nonprofit’s processes, as MiBiz previously reported. The team looked into how Kids’ Food Basket brought food into the building, how they were organized, their assembly lines and their distribution models. In the end, the two organizations worked together to increase Kids’ Food Basket’s output by 60 percent, all while remaining in the same facility they thought they’d outgrown.

Additionally, human-centered design concepts are also finding a place in nonprofit management, Downey said.

“Really, (it’s about) how corporations think about product development and starting with the end user, and what does the end user need in designing programs and services,” he said. “(It’s) really looking at what do our clients need from us, and then designing programs and services using the culture of design thinking.”

Sieger said she finds the human-centered design concept “fascinating” but is careful to point out that it’s not a panacea for nonprofits.

“There are certain organizations that are being told that they must apply human-centered design thinking in order to come up with a good program,” she said. “That may be, but human-centered design thinking, just like other group process techniques, is just one method to get to some ideas and some solutions. It’s not necessarily the whole answer.”

KEY DIFFERENCES

While nonprofits have and will continue to borrow business practices from their for-profit counterparts, there remain some major differences.

Most important is that for nonprofits, money is simply a means to an end. For businesses, money is the end. Perhaps the most striking difference between the two is that almost all nonprofits hope to eventually make themselves obsolete.

“The motivation for a business is to stay in business. The motivation for a nonprofit organization is to go out of business, and those things are the distinction between the two,” said Murray-Brown.

In fact, planning is almost easier for corporations, whose only real goal is to make money, Downey said.

“(In business, you’re) either profitable or you’re not, and all decisions are organized around that unified understanding of what success looks like,” he said. “In the nonprofit sector, we have to be careful if we become too obsessed with profit and profit motive.”

Sometimes, being values-focused can actually be inefficient or contrary to the goal of ultimately making a profit, he said.

“That’s OK,” Downey said. “What distinguishes that social sector from the business sector is that we are willing to put as much weight and priority and emphasis on values as we are on our ability to generate sustainable income.”

There are other examples of where the nonprofit and for-profit worlds diverge. Usually there isn’t an “end customer” to buy a product or service in nonprofits. Also, nonprofits don’t have the economies of scale that are usually present in the business world, and they don’t have the clear “market signals” (i.e., earnings per share) that typically guide businesses in making financial decisions.

EARNED INCOME MODEL

With the proliferation of web-based giving, a new generation of donors and a recovering economy, nonprofits are seriously re-examining their current business processes, including the belief that pure altruism is more effective than harnessing the power of self-interest and standard economics.

“You’re going to see in the coming years a lot more blending of the sectors,” Downey said. “Foundation grants are not a reliable or sustainable form of funding for nonprofit organizations.”

That’s why the earned income model is gaining popularity among nonprofits. When nonprofits can create and sell a product or service, they’re better able to fund the social aspect of their operations and have “by far a more sustainable and reliable form of income than foundation grants,” Downey said.

Another positive of the earned income model is that nonprofits can apply the standard business measurements and metrics (ROI, efficiencies, hurdle rates, etc.) that donors often love.   

Murray-Brown said that a balance between earned income and donations provides the most stability and flexibility for nonprofits.

“What (nonprofits) should think about is how can they exist in a way that has a really good mix of revenues coming in,” she said. “It’s not all earned revenue, but it’s a complement of both so they can really create an opportunity to meet the community’s needs.”

SALES VERSUS FUNDRAISING

Another area where businesses and nonprofits differ is in how they generate capital. There’s a stark contrast between fundraising and sales, Downey said.

“The relationship between a donor and a fundraiser is all based on trust,” he said.  

Downey recounts a story about his experience working as a hospital fundraiser. He was looking for a donor who was willing to fund the entire cost of building a playground. After securing a commitment from a donor, his staff realized there was a technical error in the proposal he presented. Downey was forced to go back to the donor and ask for an extra $10,000 — which he ended up getting.

“Now if I were being paid on a commission, it would immediately call into question everything,” he said. “That’s an important part of how we raise money: It’s based on values, it’s based on trust. It’s based on a partnership with a donor. We’re not selling the donor anything.

“To me, that’s a really interesting example of where there has to be a very important divergence from business practices. Nonprofits need to know those and be aware of those, because really, it’s the values that we bring to the table.”

SHARED LEARNING

The flow of ideas between businesses and nonprofits doesn’t just go in one direction, sources said.

“What I find the most interesting is actually the reverse,” Downey said. “You’re starting to see corporations borrowing terminology and practices from the nonprofit sector. People want their corporations to not just make and produce products, they want corporations that are community-minded, that are producing practices that are environmentally friendly, that are ethical.”

That movement has given rise to the creation of low-profit limited liability corporations (L3Cs) in states including Michigan, as well as the national push to create so-called “benefit corporations” that can legally weigh business decisions based on social good, not solely for shareholder returns.

Downey said consumers are making purchasing decisions based on more mission and value-related principles than in the past, and businesses need to be mindful of that.

“You’re seeing a lot of social thinking that’s being borrowed from nonprofit organizations over into the business sector,” Downey said. “I suspect that’s going to continue to increase.”

COLLABORATION IS KEY

Standard nonprofit management practices, such as focused fundraising, well-networked board members, and effective management are all important for the success and sustainability of the individual organizations.

But truly great nonprofits work both with and through other stakeholders to create more impact than they could by themselves, Sieger said. When it comes to healthy communities, the key is having everyone work together.

Sieger’s most satisfying moments are when everyone comes together toward a common cause.

“When I’m with a group of business leaders and nonprofit leaders, and public sector governmental leaders, and we come up and brainstorm different ways on how we can approach difficult community issues, it’s really more the meeting of the minds,” she said.

Murray-Brown agreed.

“(Nonprofits) have to not just look at their own capabilities, and not only look at the capabilities of the nonprofit sector, but they need to be able to learn how to collaborate with the public sector and with the private sector … because that’s the way you get business done,” she said.

The mix of successful for-profit and nonprofit organizations also contributes to a sense of place in every community, Downey said.

“Communities need healthy nonprofit organizations and corporations,” he said. “Nonprofit corporations help create healthy communities, and corporations need healthy communities in order to do business. We have shared interest.

“It’s important that we continue to find ways to partner, to work with each other, because the whole is what’s going to make communities economically viable and healthy and great places to live. We need each other.”

Read 5211 times Last modified on Sunday, 07 December 2014 23:05

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