Rising to the Challenge of For-Profit Competition

From health care to job training and from prisons to public schools, the private sector is making significant advances into the non-profit world’s historic turf. Fueled by local governments’ willingness to privatize services in their continuing quest for lower costs and greater efficiency, more and bigger businesses now compete to offer services that traditionally have been provided by non-profit groups. Even without the push of privatization, businesses increasingly believe that there is money to be made in longstanding non-profit activities.

The force of that competition may finally shake out the lethargy of non-profit groups that have often avoided serious investigation of their costs and effectiveness. They are in danger of losing their franchise.

The most visible and unsettling arena of competition is in hospitals and other health services. Spurred by the health-care industry’s largest — and most embattled — for-profit player, Columbia/HCA, health-care providers, both non-profit and for-profit, are now enmeshed in multiple rounds of mergers, acquisitions, consolidations, buyouts, and strategic alliances. A significant number of non-profit hospitals are even converting to for-profit status, perceiving greater market advantages in doing so. For many communities, the results are destabilizing, while the quality and scope of care are often unchanged.

Competition stretches well beyond health care. In human services, the traditional preserve of non-profit groups, Lockheed Martin Corporation, a Fortune 500 company, now does big business in 38 states and localities. Its services range from arranging for and processing welfare recipients’ electronic payments to tracking down non-custodial parents and enforcing court-ordered child- support rulings. Last year, Congress amended the nation’s welfare law so that private groups, among other things, may now be reimbursed for services like foster care to group homes for the disabled.

In the field of corrections, private industry now owns or manages as much as 5 per cent of the total prison beds nationwide — and the number is growing. The same trend applies to job training and placement services.

And in education, corporations, after a rocky start, increasingly dot the landscape. More than a dozen companies are now actively competing in the educational marketplace. The once-stumbling Edison Project, for example, will run 25 schools this year in eight states. Of the nation’s 500 charter schools, 10 per cent are now run by private companies.

In short, head-to-head competition is now a fact of life. Furthermore, in virtually every case where competition is occurring, most customers don’t know — and don’t care — whether their provider is non-profit, so long as the services are well-rendered and reasonable in cost.

In the past, many non-profit organizations have fought against competition by resorting to a broad-brush articulation of values and principles. They have been partially justified in doing so.

Non-profit groups, after all, do not simply provide services. They are the repository of the civic values, virtues, and volunteer spirit that ground American democracy and give it meaning and strength. They devise and carry out solutions to difficult social and cultural problems. They uphold the common good. The business world does none of that.

Yet time is running out on the strategy of touting civic values. It makes little difference whether or not charities like the trend toward market-driven competition. It cannot be ignored and is certain to accelerate.

Non-profit groups are at a disadvantage in the competitive environment. They are often unfamiliar with modern marketing. They rarely use financial incentives to motivate employees. They pay poorly when compared with business. Many are too small to operate efficiently or to bid on sizable contracts. Most lack access to capital for operations or expansion.

To be sure, non-profit organizations have some significant strengths, in addition to their much-vaunted tax exemption. They are, or can be, highly responsive to local needs. They can sustain neighborhoods, as shown in the area of low- and middle-cost housing in older cities, and they can be an effective safety net for the increasing number of people who cannot pay market prices for services. Sadly, the market economy often views those strengths as weaknesses.

To be successful in the 21st century, non-profit groups will have to be both more competitive and more driven by their values. Relying only on the former will make them indistinguishable from their for-profit competi tors and, therefore, dispensable. Relying only on the moral high ground, however, will confine them to being a faint echo, recognized but often ignored by people in power.

The only way non-profit groups will survive for the long term as providers of services is to demonstrate that they are as cost-effective and efficient as their for-profit competition. To do so will involve a willingness to get larger in size, to raise risk capital, and even to enter into joint ventures with private businesses. It will involve paying more attention to results and measurably improving productivity, upgrading operating systems, and changing in-bred cultural styles that actively or passively resist competition.

Truly successful non-profit groups in the 21st century will have to do four things at once: learn and master the marketplace, build stronger community roots, promote values that resonate clearly in America, and advocate their cause throughout the political process.

The recent Congressional attempt to curtail the legitimate advocacy rights of non-profit groups prompted the philanthropic world to mount a vigorous, effective response. As a result, the non-profit world today is in a much better position to counter proposals that would curtail participation in the legislative and regulatory processes of democracy.

That same energy must now be applied to the growing reality of increased competition. The encroachment of the market economy must compel charities to evaluate, promote, and improve their efforts and, perhaps, even to strengthen their relationships with government and the corporate world. For non-profit groups, competition is an opportunity to better reflect, serve, and defend their historic contract with America.

Edward Skloot is executive director of the Surdna Foundation, a family foundation in New York. This article is adapted from the foundation’s most recent annual report.