Nonprofit orgs turning to a for-profit model

Check out this article on the trend of nonprofit orgs turning to a for-profit model. I would be interested to know your thoughts on this. Is it a necessary evil or is it just good business sense?
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July 28, 2005, 1:33 PM EDT
By MILLIE MUNSHI

NEW YORK -- Dan Cardinali is running his nonprofit organization like a business.


Communities In Schools, a national dropout prevent program, went through a painful process last year similar to a cooperate reorganization that included program cuts and layoffs. Working with a consulting firm, Cardinali's organization spent seven months redefining the roles of its local, state, and national offices, changing its management team and tightening its business model.

"We were intent on becoming a really well-run nonprofit organization, balancing an efficiency of resources with high, substantial impact,"
Cardinali said.

The same type of transformation at the Crohn's & Colitis Foundation of America led to new executive positions including chief technology officer and director of pharmaceutical relations.

"We changed the dynamics of the organization," said Rodger DeRose, president and CEO of the New York-based foundation. "In general, there's a shift in the culture of nonprofits that's much more focused on the fundamentals of business."

Motivated in part by an uncertain economy, nonprofit organizations have become more results-driven by developing new ways of creating revenue, increasing employee specialization, and enhancing marketing techniques.

Changing the way an organization is run to increase efficiency and impact, a process known as capacity building, is one of the biggest trends in nonprofits, said Margaret O'Donnell, director of the American Humanics Nonprofit Certification Program.

"Organizations are interested in beefing up," O'Donnell said. "They've been looking at capacity building for two or three years, but it's really coming to a head now."

Read the entire story here: Nonprofits Adopting a For-Profit Model

Hi Susan,

Interestingly this is a model and evolutionary path many NPO's running community Telecentres have been following for nearly two decades.

Commencing life as an NPO and usually establishing a Telecentre with seed (grant) funding, it's very common for Telecentre's to evolve into commercial entities selling everything from training and computer access, to advanced web hosting and (in some cases) a full range of ISP services. The business model commonly evolves along with the business itself from charitable NPO to a fully commercial operation.

The basis for this turn-around in methodology is simple sustainability - most Telecentre's cannot sustain themselves beyond the funding period unless they adopt a commercial mode of operations.

Rgds, Don

When you refer to a telecentre, I am assuming you are referring to what we call a CTC or Community Technology Center? I am not aware of nonprofit CTCs charging heavy fees and turning a profit in California, but I will defer to someone who knows more about the field, to see if I am incorrect in my assumption.

Hi Susan,

One and the same - I managed a Telecentre back in the mid '90's and was contracted to support a few others. One was renamed to a 'CTC' back in '96 and I think was the first (or one of) of its type. The name certainly took off!

Most of the Telecentre's (or CTC's) I've worked with that evolved to a fully commercial model did so after 5 or 6 years of operation when sustainability became a major issue... mostly because by this time a number of other competitors had entered the local market (Internet Cafe's, ISP's and other comemrcial offerings) as well as other Govt providers (Libraries started offering free computer access etc.) - This was mostly to the credit of the local Telecentre which through market creation and capacity building were able to generate a competitive environment.

I think it's an evolutionary process. How old are the CTC's in California? - It might still be early days for them yet...

Rgds, Don

PS - Just to add my experience is with Telecentre's (CTC's) in remote and rural towns. These are small population centres where massive competition isn't an issue... conversely, a single additional competitor can make a world of difference to sustainability, business types and models.

I'm sure urban CTC's have different factors impacting on them.

Rgds, Don

Susan,

For a number of years, I have taught a course in Business Planning for Nonprofits, developed by the Ewing Marion Kauffman Foundation. The Center for Social Entrepreneurship also has a model for nonprofits establishing business practices and methodologies.

While the for-profit model must be adapted to the peculiar circumstances and environments in which nonprofits operate, applying basic business principles may be the best way to help nonprofits succeed, not merely survive.

I have worked with dozens of organizations and assisted them in developing and implementing business plans for their organizations. It's not about "turning a profit", it's about operating efficiently and effectively.

As to profit, there is certainly no doubt that a well-run organization can generate profit (or revenue over expenses), as long as those proceeds are generated through activities directly related to the organization's mission and are distributed back into program-related activites.

Otherwise, the organization may be liable for Unrelated Business Income Tax. If those "profits" become a disproportionate share of total income, the organizations is at risk of losing its 501c3, tax exempt status.

Regards,

Brian Smith

Wow - as an MBA and former dot-com'er now working happily in an NPO [TechSoup, in fact], this topic immediately grabbed my interest. Here's my initial and most heartfelt response:

NPO's are usually founded for reasons that have nothing to do with generating revenue. They are guided by a mission to deliver services and/or products that, to put it simply, are good for people, good for communities, good for the environment, etc. The "success" of an NPO is measured by how well it lives up to its mission -- how many meals delivered, how many people served, etc -- not by its sales revenue or its operating margins.

Once revenue-generating activities and expectations are introduced, it's very hard not to shift the internal focus to conventional, for-profit measures of success: how much revenue came in at what margins. It's easy to track that, often much easier than it is to track the more qualitative and long-term impact of conventional NPO service and product delivery.

But following the money may pull an NPO's attention (and resources) away from its all-important mission. And an NPO exists to fulfill its mission -- generating revenue is just one operating means toward that end.

So, my plea: when and if your NPO starts to look at revenue-generating activities, don't hesitate to be the one to remind everyone to keep their eyes and minds on the stated mission of the organization and the people it exists to serve. That won't necessarily put you in opposition to revenue-generating activities; it will help the NPO stay true to what their work is about.

And don't for a moment believe that in order to be a "well-run nonprofit organization" you have to make a profit. You just have to run your organization well.

Thought you might find this article interesting. It's from the Straits Times (Singapore).

Aug 5, 2005
Advice to charities: Start a business
by Theresa Tan

CHARITIES and non-governmental organisations (NGOs) have been urged to start businesses to fund their work, as donations are unlikely to sustain them in the long run.

'Instead of depending on donors, who come and go like the wind, why not find your own batteries?' suggests Dr Mechai Viravaidya, a social activist and founder of one of Thailand's largest NGOs, the Population and Community Development Association (PDA).

He says such non-profit organisations could ensure their financial security by ploughing the profits into their charitable work.

Dr Mechai, who is also a Thai senator, shared his ideas on funding NGOs in the 21st century as part of the Fortis Community Lecture Series on Wednesday. The free public lectures, sponsored by European bank Fortis, are aimed at building up local expertise in the non-profit sector. It kicked off in February.

The PDA is a shining example of a charity that funds itself through its profitable businesses. The organisation began by promoting family planning in Thailand and launched its first business venture a year after it was founded in 1974.

Its first donor said it could fund the organisation for only five years, said Dr Mechai. He and his colleagues knew they would have to rely on their own resources sooner or later.

'Even your parents don't help you forever,' he quipped. 'You have to think outside the box.'

The PDA borrowed US$65,000 (S$107,000) and started a clinic. Today, it runs 16 companies, including the famous Cabbages & Condoms chain of restaurants and resorts.

Last year, profits from the businesses provided the PDA with US$6 million to run its activities, said Dr Mechai, better known as Thailand's Mr Condom.

A 1999 survey showed that 14,000 NGOs in the United States made US$63 billion through business ventures.

Singapore charities have come under intense scrutiny following the recent National Kidney Foundation (NKF) controversy over the salary and bonuses paid to its former head, Mr T.T. Durai.

Many outraged donors halted their contributions to the NKF and other unrelated charities have also been affected.

When asked what lessons could be learnt from the NKF experience, Dr Mechai said the reality of depending on donations is that donors have certain perceptions and conditions on how their money should be used.

This is one reason why wages in the non-profit sector don't match those in the business world, he said. Staff working for the PDA's business arm earn less than similar employees employed in the private sector, said Dr Mechai. But staff at both the PDA's business and non-profit operations are paid the same.

'Both are doing good work. Our business people know what we are doing and where the money goes.'
IP Address:210.24.114.155

Just another thought...

Commercialism (or for-profit) is not necessarily the antipathy of an NPO mission.

Many NPO’s are fortunate that economic circumstances and the availability of donors can sustain them. Conversely, many are not (NPO’s operating in poor countries or within an otherwise disadvantaged economy). It would be truly sad for an NPO to fail simply because staff and directors refused to acknowledge that life-saving missions are often sustained by profit.

... and of course, just where do those donations come from? (profit making enterprise) - Absolving oneself of being part of the 'profit machine' can hardly be justified when donations are accepted from other for-profit entities.

The money must come from somewhere...

Rgds, Don

During the dotcom boom, nonprofit reps, including myself, were subjected to endless lectures by tech corporate reps about how nonprofits "need to operate more like our companies!" Thank goodness most nonprofits didn't listen and go the way of the dotcom bust...

There's this disturbing trend in rhetoric that equates a mission-based organization being well run, "balancing an efficiency of resources with high, substantial impact," being "more results-driven" and "increasing employee specialization and enhancing marketing techniques" all with for-profit management practices. In fact, mission-based organizations that are embracing these qualities are embracing the qualities of established, well-run non-profit organizations all over the USA (and then some).

Yes, we can all name poorly-run nonprofits. I could name just as many poorly-run for-profits.

The most effective practices I have learned in project management, marketing, resource mobilization, human resources management and financial management have come, overwhelmingly, from the mission-based sector. In fact, I think the mission-based sector has MUCH to offer the for-profit sector in this regard. Yet, so many of these outstanding practices are not documented and not shared with others. Why? Primarily because it's not part of an organization's mission to do so, and funders (the for-profit folks) are seldom keen to fund such endeavors. Remember when there were so many complaints about nonprofit use of technology by the for-profit sector -- who, at the same time, didn't want to fund capacity-building among nonprofits regarding tech?

If there is a trend among mission-based organizations that is leading them to embrace better management practices that help them to better serve the people and issues that drove the creation of the organization in the first place, whoopie -- but for better management to be automatically branded as a "for profit" best practice really gets my hackles up.

>> but for better management to be automatically branded as a "for profit" best practice really gets my hackles up (snip).

I don't think anyone here has really made that claim; conversely I don't think anyone has effectively argued against the concept of profit (as a component of management), as being something NPO's should ignore for the sake of parochialism or a philosophical stance.

If the Red Cross were to waive their NPO status they would be regarded by Fortune 500 as number 98 on this list... ahead of General electric, Mobil Oil and Chrysler. The profit generated by the for-profit arms of the Red Cross (mostly the Blood Bank and blood testing Laboratories) generates enormous profit... profit donated back to other sections of the Red Cross to provide humanitarian aid. Similar profits are generated by the Salvation Army through the provision of aged care (profits again donated back for other activities).

For many larger NPO's this is just standard practice in a world where money is one of the resources required to provide life saving humanitarian work. Nothing out of the ordinary; standard business practice.

Rgds, Don

>In fact, I think the mission-based sector has MUCH to offer the for-profit sector in this regard. Yet, so many of these outstanding practices are not documented and not shared with others.

I agree and that's one of the reasons I've started publishing the Social Enterprise Reporter at SEReporter.com--to document and share these mission-critical business innovations that are coming out of the third sector. And while I don't recommend the latest for-profit management trends for social entrepreneurs, it's been fascinating and instructive to see how nonprofits adapt traditional business tools to further their social change agenda. Compumentor is a good case in point--so thanks to CM and TechSoup for making this possible!

Tom White, Editor and Publisher
Social Enterprise Reporter