Blending Business With Charity Can Be ‘Head-Busting’ Work

To solve the social problems facing the United States, nonprofit organizations need to forge new kinds of relationships with the corporate world, Jeffrey B. Swartz, chief executive officer of the Timberland shoe and apparel company told more than 550 nonprofit and business leaders gathered here. The meeting, organized by the Social Enterprise Alliance, focused on ways in which charities can advance their missions and diversify their sources of revenue by charging fees for the services they provide and starting business ventures.

Mr. Swartz said that building those connections would be “head-busting, gut-wrenching, frustrating” work, but well worth the effort.

“We can do more than address social challenge,” he said. “We can resolve social challenge if we have the strength to hack the path and create true collaborative partnerships.”

Over the last 17 years, Timberland, in Stratham, N.H., has contributed $18-million to City Year, a youth service corps in Boston that served as a model for the AmeriCorps national-service program. The company’s involvement with the organization began as what Mr. Swartz calls a typical “transactional” relationship. First the company supplied boots for City Year corps members, then it sponsored a team of corps members who wore T-shirts that included the company’s logo.

But it wasn’t until Timberland and City Year had been working together for two years that they began to build a deeper bond. “We spent an enormous amount of time to negotiate a vision that we could both buy into,” said Mr. Swartz.

Putting in that time to discuss what each party would gain from the partnership is key to a healthy collaboration with business, said Mr. Swartz.

“You need more than, ‘Here’s my proposal for what I need from you to accomplish my goal,’” said Mr. Swartz. “We started that way with City Year, and if we had ended that way with City Year, we would in fact have ended [our support]. Many companies have invested in City Year, and they’re gone because they didn’t have this conversation. They didn’t create a vision.”

Timberland has integrated service into its corporate culture in other ways, such as offering employees 40 hours of paid leave for volunteer work each year and sabbaticals to work full time with a charity. As Timberland’s community involvement has grown, so have its profits, which Mr. Swartz said is not a coincidence.

“It is not a factor of my brilliant, strategic leadership,” said Mr. Swartz. “It directly correlates to the fact that people at Timberland are mission-centered, passionate people. What we do is make boots and shoes, who we are is people who believe in the intersection of commerce and justice.”

In May, Timberland, along with Dell, Green Mountain Coffee, and Starbuck’s, will be organizing a conference of “corporate social investors” to share the message that social responsibility is good for the bottom line.

At the gathering, nonprofit leaders, grant makers, and businesspeople from across the United States and several other countries shared ideas and discussed the challenges that charities running business ventures face.

Community Catalyst, a health-care advocacy organization in Boston, has spent $5-million over the last five years to develop RealBenefits, Web-based software that allows health-care providers and community groups to screen clients for a wide variety of government benefit programs, including Medicaid, and then help them apply for those benefits.

The software’s development was largely supported by foundation grants, but the organization knew that wasn’t sustainable over the long term, Enrique Balaguer, Community Catalyst’s director of Internet opportunities, told conference participants.

“We simply couldn’t go back to the MacArthurs of the world, to the Caseys of the world, and ask them for $2-million a pop,” said Mr. Balaguer.

When the organization began to look at ways to make RealBenefits self-sustaining, the organization quickly realized the market for its product was made up of two types of organizations that benefited from using it in very different ways.

Hospitals and large community health centers that provide care to uninsured patients derived significant financial benefits from using the tool because they receive Medicaid compensation for services they provide to people they help enroll in the program.

Community organizations, on the other hand, were using RealBenefits to help their clients apply for benefit programs, but they were not themselves receiving financial gains from the use of the product.

Community Catalyst’s dilemma: How could it develop a pricing structure that would make RealBenefits self-sustaining without pricing out the local community groups that are important to its mission?

Eventually the organization decided on a tiered pricing structure based on ability to pay and the financial benefits for the user. Hospitals that provide millions of dollars of charity care each year pay an annual fee of $30,000, plus a very small percentage of the Medicaid payments they receive for patients they helped enroll using RealBenefits. The fee might total $105,000 for a hospital that provides $50-million of care to uninsured patients, Mr. Balaguer said.

The fees that hospitals and large health-care centers pay helps subsidize the cost of the tool for community organizations. But the product is no longer free for those groups. They pay an annual fee of $1,500, plus $800 for every five employees who use the system.

While community groups have resisted the change, “it’s important to have a price signal for the product,” said Mr. Balaguer. “Giving the product away for free made it very difficult for these organizations to value it relative to other things they’re spending money on.”

One of the problems that many nonprofit business ventures face — particularly as they get started or expand — is a lack of working capital. Debt financing offers one potential solution to that problem, Sarah M. Eisinger, a senior program associate at Seedco, told conference participants. Seedco is a New York nonprofit organization that helps strengthen local development groups, in part as a nonprofit lender that operates a $75-million loan fund.

“Debt is a tool that is really going to help grow your business,” said Ms. Eisinger. “It’ll be that shot in the arm that can really help provide the seed capital that your business needs to take off.”

But while many small businesses in the for-profit arena take on debt, nonprofit organizations are much more reluctant to consider loans as a source of start-up funds, said Ms. Eisinger. She believes that starting a business venture is already a big shift in thinking for charities that have traditionally relied on grants and government, which makes the added risk of debt particularly scary.

Seedco makes loans of $50,000 to $500,000 for businesses through its Nonprofit Venture Network, an intensive program to help nonprofit organizations develop commercial enterprises. Earlier this year, the organization released two publications: a report that discusses the lessons that have come out of the Nonprofit Venture Network and a collection of case studies that profile eight businesses run by organizations in the network.

Chief among the report’s findings: Business ventures run by nonprofit groups work best when the mission of the organization and the business are closely aligned with each other.

“Operating a bakery simply as a fund raiser that doesn’t have anything to do with the nature of the work of the organization is probably not the wisest course,” said Diane L. Baillargeon, president of Seedco, in an interview. But, she said, if the charity’s goal is to provide young adults with job training in the food-services industry, then a bakery might be a good fit.

Ms. Baillargeon also pointed to sound business planning, committed leadership by the board of directors and the organization’s senior management, and a realistic understanding of the business’s capital needs as important factors for a successful social enterprise.

While the publications draw largely from the experiences of the charities with which Seedco has worked, they also include lessons from Seedco’s own experience in social enterprise. In 2001, the organization started EarnFair, an employment company that fills job openings with workers who companies might not take a chance on without the probationary period EarnFair offers. Seedco continues to run the service, which recently broke even and has started to generate profits for the organization.

The second business that Seedco started, also in 2001, has not fared as well. Community Childcare Assistance, an emergency child-care service that companies could offer as a benefit to their low-income workers, shut down in May 2004 after it failed to find enough customers to become profitable.

In retrospect, said Ms. Baillargeon, she wished that Seedco had dug deeper when it was researching how big a market there would be for the service. When the organization interviewed business owners about the proposed service, it was too quick to assume that positive feedback it received also meant that they would be willing to purchase the service.

Said Ms. Baillargeon: “We were too easily persuaded.”

Both reports, “The Double Bottom Line” and “Profiting From Purpose,” are available on Seedco’s Web site at http://www.seedco.org/publications.

In the conference’s closing speech, Steve Case, co-founder of America Online, called for a new middle ground between the traditional nonprofit and for-profit arenas.

“Too many people still act as if the private sector and the social sector should operate on different levels, where one is all about making money and the other about serving society,” said Mr. Case, who chairs a foundation that bears his name. “We can and should integrate these concepts and these missions. Instead of all the organizations tending toward the extremes, the most dynamic, innovative zone would be somewhere in the middle, with businesses that are not-only-for-profit and social-service groups with their own earned income all contributing to positive, durable, meaningful social change.”

Mr. Case said he has been taking that approach in his work in his home state of Hawaii. On the business side, he bought a 40-percent stake in Maui Land & Pineapple, a company committed to community development, environmental responsibility, and nurturing local agriculture entrepreneurs. At the same time, the Case Foundation has been working with the Hawaii Community Foundation and the University of Hawaii to help nonprofit leaders develop business skills.

Fifteen years ago, Mr. Case recalled, he made a speech in which he said that the Internet will have arrived when people no longer talked about e-mail, but just called it mail. The Internet isn’t there yet, but it is much closer than it was 15 years ago. And Mr. Case said he had a similar dream for earned income and nonprofit business ventures.

“With social enterprise, my hope is that 20 years from now there won’t be conferences like this, because there’s nothing to talk about,” said Mr. Case. “It’s just the way the world will be working.”