A Corporate Challenge for Charities

Businesses expand their reach into non-profit service areas

Competition from for-profit businesses is leading to major challenges for the non-profit world, as more and more companies offer services previously provided primarily by charities and government agencies.

Businesses, often with the encouragement of government officials, are staking out territory in health care, education, social services, and many other areas.

As a result, many kinds of charities are beginning to feel the same kind of competitive pressures that non-profit hospitals have experienced for nearly a decade. Many non-profit hospitals have been taken over by for-profit chains, while others have been forced to merge or restructure their operations to stay afloat.

One of the newest and most intense battlegrounds is in the field of job training, where companies are vying with charities for billions of dollars in federal and state contracts made available as part of the overhaul of the welfare system. Goodwill Industries, United Ways, Urban Leagues, and other charities now find themselves regularly competing for contracts against businesses like Maximus, a McLean, Va., company that last year earned $127.9-million in revenue.

Women in Community Service, a national antipoverty charity based in Alexandria, Va., recently had to lay off 35 California employees after it lost two federal Job Corps contracts to companies that submitted lower bids. Ruth Herman, the organization’s executive director, says she worries that many non-profit groups have not done enough to prepare themselves for aggressive competition from businesses.

“Awareness needs to be heightened before all not-for-profits are out of the running,” she says. “People don’t realize how the big picture is changing.”

Not only are a growing number of charities at risk of losing money and clients to businesses, but some fear that charities of many kinds could lose their favored tax status if policy makers decide that programs run by tax-exempt groups are little different from those run by companies.

Some non-profit leaders have also questioned whether organizations concerned about making profits and pleasing shareholders provide quality services to the neediest people.

“When you’re dealing with people who are among the most vulnerable in our society, longevity, continuity, and quality of service are extremely important values,” says Peter Berns, executive director of the Maryland Association of Nonprofit Organizations. “And in some areas it simply may not be appropriate to have companies enter and exit fields solely on the basis of whether you can turn a profit in a given year.”

Still, some observers say increased competition from businesses will give a much-needed jolt to the non-profit world. Well-financed companies, they say, can rapidly expand the availability of services, and ultimately will stimulate improved care for all.

“Competition is healthy,” says David Braddock, head of the Department of Disability and Human Development at the University of Illinois at Chicago. “Non-profit doesn’t mean non-competitive.”

One big reason for the competition is a gradual shift in federal policy that has prompted many corporations to see possibilities for new or expanded lines of business.

Lawmakers have been opening doors in recent years to allow businesses to compete for a growing number of government contracts for social-service programs, arguing that corporations might be able to provide viable solutions for intractable social problems.

What’s more, lawmakers hope that increased competition will cause federal contractors and grantees to become more cost-efficient.

The 1996 welfare law not only put billions of dollars worth of job-training contracts up for grabs, but also allowed companies to vie against non-profit groups and state and local government agencies for approximately $3-billion annually to run foster-care programs.

Now Congress is considering the same approach for Head Start programs, which last year spent $4.4-billion to help charities and government agencies provide education, day care, and other services to poor children. The Senate last month approved legislation that would allow companies to apply for Head Start dollars.

Sen. James M. Jeffords, Republican of Vermont, said he hoped the legislation would “open up the competitive process to another segment of child-care and human-service providers.”

He added: “I do not believe that, by virtue of an organization’s tax status, it is either more or less capable of providing the high quality of services which we require of all Head Start grantees.”

While Senators made clear that they wanted to introduce new players into the Head Start program, they were not unaware of or unconcerned by the potential problems that competition could cause for non-profit groups. Included in the Head Start measure is a provision that allows charities to be given priority if their bids are equal in quality with those offered by businesses.

Sen. Christopher J. Dodd, a Connecticut Democrat, pushed for the change, citing his concerns about “the potential conflict between the mission of Head Start to serve the most vulnerable children and the mission of for-profit entities to show a financial gain.”

Beyond encouragement from government, businesses have also been closely eyeing the money that charities have been bringing in by charging fees for their services. Many corporations have been eager to find ways to emulate those successes.

“Ironically, the non-profit sector’s very success in tapping the paying market has made it vulnerable,” says Lester M. Salamon, director of the Center for Civil Society Studies at the Johns Hopkins University.

More than half of the growth in revenue for non-profit groups from 1977 to 1996 was in the form of fees and other earned income, according to Mr. Salamon. Private donations increased just 7 per cent during that time.

Wall Street has been supportive of the companies that seek to compete in areas that were once strongholds for non-profit groups.

Many such companies have been able to use the stock market to help finance their plans for aggressive growth. In child-care, eight of the top 20 for-profit day-care companies are now publicly traded, compared with just one in 1995, according to the Child Care Infor mation Exchange. The largest, KinderCare Learning Centers, reported revenue of $597.1-million for its fiscal year that ended in May.

In higher education, the Apollo Group, which is traded on the Nasdaq Stock Market, posted 1997 revenue of $283.5-million for its University of Phoenix and other subsidiaries, which offer college degrees to working adults.

In mental-health care, Res-Care, in Louisville, Ky., has seen its revenue in each of the past six years rise by 25 per cent or more — to $306.1-million last year. Stock sales, plus loans, have helped it expand to provide services in 24 states and Puerto Rico. (See story on facing page.)

While the intensified competition from businesses has caused difficult decisions and lost income for some charities, it has also provided new opportunities for others.

Baltimore’s Urban League says it has reaped significant benefits from teaming up with Lockheed Martin Information Management Services, a subsidiary of the defense contractor, to provide job-training and placement services for unemployed parents who owe child support. Lockheed Martin IMS approached the Urban League to be a sub-contractor as part of the $570,000, three-year contract the company held with the State of Maryland.

Roger I. Lyons, president of the Urban League, says the partnership was “a perfect match.’’ He says that by working with Lockheed Martin, which is one of Maryland’s largest employers, his organization was able to expand its services and operate in a “tighter, more cost-effective” manner than in the past.

Lockheed Martin IMS got the benefit of the Urban League’s almost 75 years experience in job training, as well as greater credibility to serve blacks and other minorities, says Audrey Rowe, a senior vice-president at the company. “If you look at Lockheed, we don’t have a lot of diversity in the company,” she says. “So our partnerships have to be with those individuals and entities that are already delivering services in a community and that can help develop the right kind of staffing.”

Ms. Rowe says that as her company has joined forces with charities in Maryland and elsewhere, she has found that both partners end up saving money because they are able to work more efficiently than either could on their own.

“In some cases, some of the charities have been able to do very well,” she says. “They’ve been able to do more than what they’ve contracted for.”

At the Goodwill Industries of Pittsburgh, President Robert S. Foltz says that increased competition from for-profit companies prompted him to take steps that have ultimately improved his organization’s services.

He says he conducted a top-to-bottom review of the charity’s work to see how it could better set itself apart from the for-profit counterparts who seek government job-training aid.

He realized that it was hard for some people to make it to Goodwill facilities, so he added four region al “employment help centers” throughout the city that Pittsburgh residents could use to take advantage of the charity’s services.

Mr. Foltz says he is confident that charities will weather the competition, as they have endured other challenges: “It’s just the entrance of a different kind of competition than we’ve been accustomed to on the non-profit side.”

Perhaps the toughest problem charities face in going head-to-head with companies is how to charge a price that covers the cost of their services — and is still low enough to win a bidding war.

Lucy Cabrera, president of Food for Survival, in Brooklyn, N.Y., says her group faced competition for the first time this year when a contract it held with the City of New York to store emergency food for the needy came up for renewal. The charity knew that Irving Liebertoff Inc., a Brooklyn food-distribution company, planned to submit a competing bid for the warehouse contract, which was worth roughly $800,000.

“We had to ask ourselves, How badly did we want this contract?” recalls Ms. Cabrera, who says some employees felt that the charity should find foundation grants or other sources of income to help pay its operating costs so that it would be in a position to submit the lowest bid.

“But we knew we would be obligated for three years, so we decided that we were just going to put in for reimbursement of almost 100 per cent of our costs,” Ms. Cabrera says. The decision to submit a bid similar to ones in the past worked. Food for Survival’s bid still came in the lowest, and the charity retained the contract.

When Women in Community Service lost its most recent bid for a federal Job Corps contract, it was to Dynamic Educational Systems, a Phoenix company that the charity says underbid it by about 9 per cent.

Ms. Herman, the charity’s executive director, concedes that it is “hard to be objective” under such circumstances. But she says she worries that the company will not be able to provide quality services for the lower amount.

“We’re a very frugal organization,” she says. “I just have to think that they’re taking a loss in this for a longer-term objective of securing bigger contracts in the future.”

David L. Stout, president of Dynamic Educational Systems, says that is not true, and that the company’s bid covers “every nickel” of the program.

He argues that companies like his will benefit as government agencies increasingly base contract awards on results that can be measured. “As a for-profit company, we tend to realize how extremely important customer satisfaction is,” he says.

Some charities fear that he is right. They say their success rates may not look as good as those of businesses, because most charities serve anybody who needs help. Even the best-intentioned businesses, say some non-profit groups, face pressure from shareholders to maximize profits, which is easier to do by focusing on people who do not need intensive, long-term aid.

“Because for-profits tend to go after the easier-to-serve popu lations, when they do get some one who requires more services, they’re at a real loss for how to do it because it doesn’t make economic sense,” says David Barringer, a spokesman for Goodwill Industries International.

Even charities that don’t compete for government aid or provide social services stand to be affected by the prominent role businesses are taking in traditionally non-profit fields.

Judith E. Bell, director of Consumers Union’s West Coast office, in San Francisco, says she worries that as the two types of organization become harder and harder to distinguish, government leaders will begin to chip away at tax exemptions that are provided to all charities.

“On a very basic level, you have to be able to look at a non-profit group and see why it’s different,” she says. “Otherwise the public really will turn around and ask, ‘Now why shouldn’t you be paying taxes? Why should you be getting these benefits? Why shouldn’t you be in the same pot of fish as businesses?’ ”

Ms. Bell says she believes that most non-profit groups have good answers to those questions but that they have failed to explain to the public what benefits they provide in exchange for their tax exemptions.

To avoid falling into that trap, Consumers Union, which competes with businesses as the non-profit publisher of Consumer Reports, emphasizes to its employees and the public that it has “a mission other than just increasing subscriptions and the revenue base,” says Ms. Bell.

The magazine makes a point of accepting no paid advertising, a decision tied to its mission of running objective tests of products. The organization also does advocacy work to make sure protections for consumers are put in place and enforced.

Many non-profit and business leaders believe that there is room in most fields for both types of institution. But they also believe that there should be clear differences between the way each is structured.

Some observers suggest that Congress should get involved in helping to sort out those delineations.

“This talk about blurring the lines between the sectors makes me very nervous,” says Rachel Newton Bellow, executive director of Project 180, a New York charity that arranges creative links between non-profit and for-profit organizations. “There should be strict differences between the arts and entertainment, between education and vocational training.”

Ms. Bellow says it might be a good idea for Congress to hold hearings to look at how best to “redraw the lines,” while still maintaining a diverse range of non-profit groups.

James J. McGovern, a senior partner at KPMG Peat Marwick and a former chief regulator of charities at the Internal Revenue Service, agrees, but he says that the issue may be too explosive for Congress to handle.

“Academically, theoretically, should it be revisited to see whether a million organizations should remain tax-exempt? Yes,” he says. “Politically, will it happen? I doubt it.”

Even without legislative changes, the challenges from businesses will lead to a major shake-up in the non-profit world, predicts Ed Skloot, executive director of the Surdna Foundation, in New York.

Charities will be forced to undergo “both internal scanning to know what they’re really good or best at,” he says, “and external scanning to see what the marketplace has to offer” that they can then incorporate into their operations.

“It’s a very dynamic, exciting, important time,” says Mr. Skloot. “These factors are forcing us to review what non-profit status means, and what it means to be a non-profit.” Kenneth Hayden/Black Star, for The Chronicle Ronald G. Geary, president of Res-Care, a company that competes against mental-health charities: “Our game plan is to become an even more dominant player.”