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Capitalism in crisis: Lessons for the nonprofit sector

Bob Ottenhoff interviews for Money for Good II Bob Ottenhoff interviews for Money for Good II

I love the debate the Republican presidential candidates are having about how capitalism should work and in particular the role that Bain Capital has played in Romney’s campaign. It’s been fascinating and has caught the nation’s attention – even the hyper-hyperbolic cable stations are talking about it. It’s about time. The debate is getting to some fundamental issues that ought to be discussed in a national campaign: what role do we want the government to play in our society, does growing economic inequality matter and is it a threat to democracy, and what do we need to do to assure economic opportunity for all?

The debate also has me thinking about lessons for the nonprofit sector.

Running Nonprofits Like a Business. I always shudder when I hear someone say we should run a nonprofit – or a government – like a business. This is a boast usually made by a crusading politician, who claims with his business know-how he can cut waste and make the tough decisions elected officials have been avoiding. But they really don’t get it. It sounds easy in a soundbite. It’s also a mistake that business professionals serving on nonprofit boards frequently make as well, causing them to focus on the wrong metrics or the wrong measures of success. As Paul Krugman put it the other day in his New York Times column “America is not a corporation.”

Nonprofit organizations are created to provide a service or address a social problem. Of course, revenue is important – without it the organization can’t operate and the mission can’t be met. And profit is necessary as well if the organization hopes to be sustainable. But at the end of the day, the measure of a nonprofit’s success is not money in the bank, but the impact of its work. Operating like a business also has a “command and control” sound to it that I think doesn’t work very well in the nonprofit sector and government. One of the reasons that decision-making can be more difficult in the public sector is that decision-making isn’t made by a handful of people; it is the result of a complex process of checks and balances between the board of directors, senior management, program officers and others—it is a give and take between varying points of view. Nonprofit leaders tend to look to the long-term, building institutions and tackling big problems. A school or a community center isn’t easily replaced. Steel mills and neighborhood restaurants come and go. For-profit managers are pulled in the direction of quarterly profits. And shorter term decisions.

Driving Money to High Performing Organizations. How many times have you heard someone say we have too many nonprofit organizations and we need to take a lesson from the business world and force more organizations to go out of business? Creative destruction, it’s called. Some of Mitt Romney’s critics charge that this is what Bain Capital has done, sucking all the value out of certain companies, including jobs and facilities–basically dismantling the company and walking away with the profits. Often this is done through leveraged buy-outs, where investors take on debt in order to take control of a company and then either dismantle it or make it better before selling it. Neither of these models holds much promise for the nonprofit sector.

Rarely is there a lot of underutilized or surplus value in a nonprofit organization waiting to be exploited for a profit. In my experience, nonprofits either lack the resources to scale up or don’t have a revenue model that offers a path for growth. They slide into mediocrity or get disinter mediated. Our Money for Good II research with Hope Consulting, underscores the critical need to drive more money to high-performing organizations, which could ultimately end up causing a few organizations to merge or become acquisition candidates. But this isn’t without some complications. As Greg Ulrich of Hope Consulting wrote to me recently, “Some nonprofits should be shut down – or merged. But, there are some important caveats. Just as in business, there are times when it is best for organizations to fold when they are not able to provide – and generate – sufficient value. And, just as in business, there are times when this can go too far. In the nonprofit sector we have to recognize that there is not an efficient marketplace driving things. Nonprofits are treating market failures. That can be difficult, and sometimes, they provide the only solution.”

I’d personally like to see funders take on more of the role of venture capitalists. At their best, venture capitalists try to build things. If they’re lucky, they’ll generate many times their investment when the company is sold. But in the process, seed money and expertise is made available, and a company is built that creates jobs and develops a product or service. That’s the model I would like to see emulated more often in the nonprofit sector. We still lack the kind of venture capital that is necessary to build an organization and grow it to scale and sustainability. It might also be a way to explore how to promote more mergers and acquisitions in order to encourage more consolidation.

Topics: Nonprofit Leadership and Practice