February 3, 2005 | Read Time: 6 minutes
The application of business concepts in nonprofit groups offers proof of the old adage that a good metaphor frees the mind, then imprisons it. Over the past decade, many principles borrowed from corporate management, venture capital, entrepreneurship, and investment-portfolio management have been grafted onto the work of foundations and nonprofit groups. Those new ideas have stimulated a considerable amount of innovation, such as venture-philanthropy funds, social entrepreneurs, grants aimed at building “nonprofit capacity,” and the increasingly common goal of taking small nonprofit organizations “to scale.”
It is true that certain basic principles of strategy, expertise, and efficiency apply to the nonprofit world, just as they do to every other kind of enterprise. But not all business approaches apply to nonprofit groups. In particular the metaphor breaks down when people try to apply the principles of expanding a business to the process of increasing a charity’s impact on society.
Looking through the lens of venture capitalism — still the dominant business metaphor in American philanthropy — the inability of nonprofit groups to grow rapidly seems like a glaring failure. Out of 183,000 nonprofit groups started in the last 30 years, less than three-quarters of 1 percent surpass $20-million in annual expenditures, a size that is still minuscule by corporate standards.
Business-like thinking suggests that this lack of growth stems from the absence of sophisticated management and adequate expansion capital. As a result, organizations like New Profit Inc., in Cambridge, Mass., and the Edna McConnell Clark Foundation, in New York, have adopted a fundamentally different approach to grant making, committing millions of dollars and professional consulting support over several years to a handful of nonprofit organizations to give them the “mezzanine capital” — as the venture-capital people call the money needed to expand a company after its start-up stage — and business guidance they need. This combination of rigorous planning, good management, and substantial capital infusions over many years has produced remarkable results. Nearly all of New Profit’s and the Clark Foundation’s grant recipients have grown far more rapidly — without sacrificing quality — than other nonprofit groups. So far, the metaphor appears to hold.
But then, trapped by the metaphor, nonprofit leaders stop thinking about any alternatives for increasing their impact except by making the organization grow. That is because the for-profit world faces a set of constraints that the nonprofit world does not.
If the goal is to make money, a business must retain direct legal control over anyone who uses its concept or brand. With no other way to make a profit, expanding a business requires building an organizational structure that preserves the originator’s control and right to the profits — whether through internal growth, mergers, franchising, licensing, or partnerships. Expanding any of these organizational structures requires a tremendous investment in overhead, management, and technology, but it is the only way to retain the control that is essential to collecting profits.
For nonprofit groups, however, the goal is to contribute to the common good — not to profit — and no one owns efforts that help society. If others use the nonprofit leader’s idea, then they are broadening the social impact, even if the nonprofit group itself has no control or legal relationship to them.
That means nonprofit groups have an advantage over businesses: They can expand their influence in more ways than just through organizational growth.
Take microfinance as an example. By the 1970s, international-development organizations had a decades-long record of failure attempting to assist poor people in developing countries through traditional loan techniques. Then two organizations, Acción International, which works in Latin America, and Grameen Bank, founded in Bangladesh, developed a radically different way of lending to the poor. Their approaches, now known as microfinance, enabled destitute families to earn a living, provided attractive financial returns to investors, and had a 97-percent repayment rate.
Both organizations have grown in their own right: Acción’s annual operating budget is $12-million, and Grameen’s is $30-million. But the scale of their idea has far eclipsed both of its originators, with several thousand microfinance lending institutions around the world serving 41.6 million households. Nearly all of these lending institutions are unrelated to the originators, but all employ the approach that they invented.
Making a difference by spreading good ideas has been the holy grail of philanthropy for decades. Foundations often support a small pilot project to demonstrate its efficacy so that others will adopt it. But few such projects ever sprout elsewhere. Ideas don’t spread themselves, and people often resist change even when it would be beneficial. Most foundations tend to move on to the next new project, leaving the idea to wither. Those few foundations that have successfully duplicated a program have often had to start a major campaign, dedicating large amounts of money, personal leadership, and years of effort to spreading its adoption.
Neither expanding an organization nor spreading an idea is easy. Both require a degree of financial, organizational, and managerial commitment that goes far beyond the usual resources of nonprofit groups, or the traditional approaches to foundation grant making.
The business metaphor has correctly identified that one-year grants of $50,000 to $100,000, strategic plans drafted in a weekend retreat, and a penurious approach to management do not adequately support growth. Indeed, the business metaphor has correctly shown that the opposite proves true: First-rate management, data-driven strategies, and multiple-year infusions of million-dollar grants can deliver dazzling rates of expansion, often with better results and lower costs per client.
The same lesson applies to other ways of magnifying a nonprofit group’s influence. Given regular and substantial infusions of money, well-researched strategies, and bold leadership toward clearly defined goals, it is possible to make a difference in many different ways. Communications campaigns focused on specific audiences, educational programs, conferences, advocacy, publications, Web sites, even advertising can amplify a nonprofit group’s impact without the organization itself expanding.
The California Wellness Foundation’s decade-long Violence Prevention Initiative combined research, public-policy advocacy, leadership development, and community mobilization to achieve significant progress in gun-control legislation and reductions in youth violence.
The Robert Wood Johnson Foundation mounted a campaign to increase state taxes on cigarettes, driven by research that demonstrated that a 10-percent increase in the price of cigarettes reduces teenage smoking by 7 percent — and 38 states have raised taxes since the campaign began.
The Pew Research Center for the People & the Press has conducted polls that are regularly cited by the news media and influence the national public debate — achieving significant social impact with only a dozen staff members.
Each of those foundation projects has made a big difference without taking on the challenge of expanding nonprofit organizations. Perhaps the lesson is not that the nonprofit world should imitate business, but that certain practices can lead to social change — and the principles they depend on have yet to be adequately understood and adopted by charities or foundations.
Studying how the nonprofit world really works is a much slower path than the quick fix of a new metaphor, but it may be far more powerful — and avoid some traps along the way.
Mark R. Kramer is a founder of the Center for Effective Philanthropy, a nonprofit research organization, and managing director of the Foundation Strategy Group, an international consulting firm. He is a regular contributor to these pages. His e-mail address is kramercap@aol.com.
