Calling all Nonprofit Organizations: It’s time to Wake Up or Become Obsolete!

By Marcus Coetzee, November 2007.

It is time for traditional nonprofit organizations to wake up and rethink their paradigm. Those that don’t are likely to become either obsolete or irrelevant. Those nonprofit organizations that are able to adapt accordingly are likely to remain or become successful.

There are seven main reasons why nonprofit organizations need to put some time aside to rethink their paradigm:

1. Nonprofit organizations may and should make a profit.

The term “nonprofit organization” is a misnomer. Nonprofit organizations may and should make a profit. They should do this in order to build reserves and to take control of their destiny. Furthermore, these organizations clearly should strive to make a social profit, which happens when they create improvements to the lives of individuals and society.

2. It’s becoming too risky for nonprofit organizations to rely on donations for all their revenue.

It is both difficult and risky for nonprofit organizations to rely on donations for the majority of their revenue. While this may be necessary for some, it limits their ability to increase their impact and size beyond a certain point, to invest in important overheads such as marketing and branding and to pursue their organizational purpose. Failure in this regard is one of the main reasons that so many nonprofit organizations keep their activities small and localized and lurch from one financial crisis to another.

There are, however, two alternative approaches that nonprofit organizations can use to break free of this limitation. The first is to generate their income through selling their services and building up a healthy customer base. The second is to acquire and develop investments that yield profits and to reinvest a fraction of the yield.

3. Waiting for charity encourages nonprofit organizations into passivity.

Many nonprofit organizations hold the belief that because they’re doing “good”, people and organizations should donate money to them. This belief tends to render nonprofit organizations to a state of passivity and reliance on charity. In contrast, these organizations should rather focus on proactively selling the value of their socio-economic outcomes to their customers and investors/donors. This approach requires a paradigm shift.

4. Nonprofit organizations are starting to be judged on their outcomes.

Many nonprofit organizations are preoccupied with measuring their activities and building their “organizational capacity”. Furthermore, many practitioners and academics who work with nonprofit organizations are strongly opposed to nonprofit organizations measuring and being judged by measurable outcomes. Some even considered it heretical to judge a nonprofit organization by its outcomes. Instead they prefer to judge the effectiveness of these organizations on their systems, capabilities or stakeholders’ perceptions.

However, although happy stakeholders, good systems and required capabilities are likely to contribute to an organization’s effectiveness, these are poor surrogates for measures of a nonprofit organization’s effectiveness. The traditional approach allows many nonprofit organizations to maintain the illusion of effectiveness, when in fact their socio-economic impact may be minimal or even damaging. Such organizations are likely to be rendered irrelevant by businesses and social enterprises (social purpose businesses) that do measure their outcomes and impact. Some of these “new style” organizations even go so far as to calculate the social return on investment (SROI) or, where the social impact can be measured in economic terms, the net present value (NPV) inherent in their outcomes.

5. “New philanthropy” is entering the scene and sets new standards

The entry of ‘new philanthropists’ or successful businessman such as Bill Gates into the philanthropic arena will also encourage nonprofit organizations to change their paradigm. These individuals bring different models for how organizations should operate and judge nonprofit organizations and are likely to hold nonprofit organizations to high performance and governance standards.

6. Nonprofit organizations are coming under fire from businesses and social enterprises.

Nonprofit organizations will experience increasing competition from businesses and social enterprises. This is because of the trend for businesses to become more socially and environmentally responsible, which, in turn, is driven by pressure from ethical investors, consumers legislation and codes of good corporate governance. It is also common nowadays to see businesses defining themselves in terms of both their economic and their social purpose. As businesses start to behave more responsibly and measure and report on their socio-economic and environmental outcomes, it will become evident that businesses can have a positive impact on society simply by being responsible corporate citizens. In other words, nonprofit organizations will no longer be unique in their pursuit of social impact.

7. “Proactive social investment” will challenge traditional ways on investing in causes.

The concept of ‘proactive social investment’ will be the final nail in the coffin of traditional nonprofit organizations. Proactive social investment has to do with investing in a business venture (using debt or equity finance) in order to have an ongoing social impact. The key advantage of proactive social investments over traditional donations is that social investors can recover and reuse their funds. This concept poses a threat to some nonprofit organizations since it means that social investors could potentially receive better social and financial returns from investing in businesses rather than in nonprofit organizations. South Africa’s recent broad-based B-BBEE legislation and its “enterprise development code” will also mean that more investors will be looking for good social investment opportunities.

A convergence between businesses and nonprofit organizations

Two trends are clearly evident. The first is that many nonprofit organizations and businesses no longer conform to their respective stereotypes. The second is a potential convergence of these stereotypes, as these organizations begin to step into each other’s traditional domains.

To illustrate this convergence consider these two organizations. The first, Pioneer Human Services, is a successful US-based nonprofit organization focused on rehabilitating former criminals and drug addicts. (South Africa’s NICRO has made some progress towards replicating this model.) This enterprise operates in the construction, manufacturing, housing and service industries, and generates an annual turnover of over R480million. It receives less than 1% of its revenues from charity. From the other perspective, consider a business such as The Body Shop. This business has had a positive socio-economic impact on society while making a healthy economic profit. It has proactively engaged in socio-economic issues such as domestic abuse and developed poor communities through its supply chain. These two organizations have left behind their respective stereotypes.

Progressive businesses are likely to become more socially responsible and able to demonstrate their socio-economic and environmental impact, while progressive nonprofit organizations are likely to let go of the traditional mindset that has bound them and become more business-like. Convergence is replacing divergence. We will also hopefully see more organizations (both businesses and nonprofits) embracing the paradigm of the social enterprise. As Pioneer Human Services says, “we’ve got two bottom lines, the money and the mission.

Marcus Coetzee is a business strategist who helps leaders to think clearly about the future.