Over the last few years, there has been an increasing amount of overlap in how for-profits and nonprofits operate. For the most part this is a good thing — the best aspects of each model are cross-pollinating and creating many new forms and ways to both do business and do good.
The invisible hand of free-market capitalism is one of the keystones of business, for-profit or otherwise. The rise and fall of businesses to market forces, investment and competition is a wonderful thing, but for too long it has overly influenced how nonprofits work. That needs to change.
A recent study from the William Penn Foundation concluded that there were too many arts and cultural organizations in Philadelphia and not enough money to support them. This is an example of framing nonprofit work though a for-profit lense: supply outweighs demand and therefore the invisible hand will push supply down.
But is there another, less Darwinian way to approach the nonprofit sector?
I’m starting to believe that the sector has an inherent design problem that inevitably leads to poor outcomes. Think about how a for-profit business and a non-profit business are founded:
A for-profit business is founded on the principle that an investment of X will become X+1 by doing Y. That is the basic business plan, and that is what you take to the bank to get a small business loan: You show that by performing some type of service or selling some type of product you can borrow money and turn it into more money.
A nonprofit organization is founded on the principle that people are suffering in some way. You think you can help by doing X and you need someone who is willing to give the money to support that. Sometimes the funder benefits in a tangential, spiritual or indirect way, but a funder is not an investor.
This means that every time someone starts a nonprofit, they are further diluting the relatively fixed amount of donor money available to the sector, which is essentially William Penn’s case about their being too many arts and cultural organizations — there is only so much money to go around and it’s being stretched thin.
The answer, however, is not to stop starting new nonprofits or letting old ones fail. The answer is to develop a new paradigm for organizing the sector.
The current ecosystem of the nonprofit sector goes something like this:
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- Someone with the passion to change the world starts a nonprofit
- They start trying to change the world, often before they have a business model, before they have funding in place, and many times before they have a legally constructed and fully insured nonprofit corporation to operate within.
- If they are lucky, they begin to attract donors and even grants to cover the costs of the organization.
- As their funding grows, managing the funds and staff that comes with it takes over more and more of their time, from reporting requirements to renewing annual appeals year over year.
- As the organization matures, the founder, who started the organization, is now in charge of a staff, a complicated multi-funder budget and the same issues any business owner has. But most people who start nonprofits are not business professionals who have never managed a team or run a operation with a budget of this magnitude.
- After a few years the organization plateaus, then after three or five years many funders pick new people to fund. They “reprioritize” and your funding goes away and you have to find new sources of funding.
- If you are lucky, you do. If not, you close.
How the nonprofit sector grows could be redesigned to become more effective and efficient. If outcomes are what the funders want, then the funders need to make a stronger commitment to the business operations and programmatic design of how they get the outcomes they desire.
I propose a model of outcome-driven franchise model that looks like this:
- The funder desires outcome X
- The funder pays for a business model, operation guide and budget created by the best business minds to achieve outcome X at Y rate per year over 10 years until X is achieve
- The funder then releases the business model, operation guide and budget to the public for free, so best-in-class plans can be used by anyone who also wants outcome X
- The funder then releases an RFP around the plan to achieve X with a commitment to fund all 10 years of the plan.
- Professional contractors that specialize in outcome X get the best plan with the right amount of funding
- The funder gets outcome X
This is like an open franchise model — there’s a reason that the franchise model is the main model of American retail — it works. You don’t sell 1 billion burgers without being outcome driven.
Back to the problem of arts and cultural organizations in Philadelphia, here is another way of looking at it: Artists are not always the best at business operations and may not be making the best financial decisions for long-term sustainability. The open franchise model would help this.
Think about aerodynamic cars. The goal is to create a design that most efficiently cuts through the air, but cars start looking the same because physics doesn’t account for aesthetics. For nonprofits to become efficient, they will have to start to look more alike and be built alike. They’ll also have to be built by the best engineers who can hand the easy-to-follow plans to anyone that really wants to change the world.
Image via Steve Jurvetson
Tivoni Devor, MBA, has spent his entire career in the nonprofit sector. While working for diverse institutions in many roles, Tivoni has often found himself developing earned revenue models and designing strategic partnerships. Tivoni currently works as the Manager of Partnerships and Outreach at the Urban Affairs Coalition, where he helps social entrepreneurs leverage fiscal sponsorship to jumpstart their nonprofit endeavors. Tivoni Devor lives in Point Breeze with his wife Jennifer and daughter Ava. The thoughts and content of his columns are his and his alone. You can follow him on Twitter: @tivonidevor.-30-
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