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Mar 21, 2012

March Business First: Defining the New Nonprofit

My March column in Business First starts a conversation on what the future nonprofit business model needs to look like. In last month’s post, I discussed why I think the current model is obsolete. Government contracts take too great of a financial toll on nonprofits, and philanthropy is unable to replace the government as a major source of funds. So what are nonprofits to do?

First, we need to remember that our society cannot function well without nonprofits. They are a necessity, not a luxury. We forget that nonprofits fulfill community needs that for-profit companies are unable to provide. The market system fails when for-profits cannot make a profit while still meeting the community’s need for quality, volume or breadth of service. Economists refer to these shortcomings as public goods, externalities and market failure. Nonprofits step in to make sure the community gets what it needs.  

Therefore, every responsible nonprofit has a key mission that loses money if done well.  Basic research; emergency rooms; public access to education, art, music and theater;  care/feeding of the unfortunate and disabled; community development and neighborhood rehabilitation are a few examples. If we did not have nonprofits, we simply would not have these services.

We also want these services to be available regardless of the strength of the economy. In particular we don’t want our nonprofits to use the option of service cutbacks and layoffs that help for-profits survive recessions. We want reliability and sustainability for these key services. We can’t say the same for a for-profit business.

The following are attributes that I believe we will have to look for in a sustainable nonprofit:

  • Clear identification of key mission activities and of the upper bound of financial losses they will tolerate for these activities
  • Increasing reluctance to accept government/foundation grants and contracts that do not cover at least the fully-loaded costs of the activities they fund
    • This ideally will come from education of government/foundations that will induce these funders to pay all costs of a program. More likely, nonprofits will gain the courage to reject money-losing “gifts.”
  • Maintaining the share of charitable contributions in the revenue mix
    • This share peaked nationally at 24 percent in 2001 and recovered to near that level in the latest data. Maintaining current shares by all nonprofits will require continued effort, particularly in light of trends in corporate philanthropy, away from broad-based cash giving. The 2011 survey of the Committee Encouraging Corporate Philanthropy noted that one-third of their sample provided more than half of their philanthropy to just one program. Moreover, they found that cash giving has been flat with most growth in-kind, particularly pharmaceutical donations of medicine.  
  • Entrepreneurial development of profitable activities that are lower in mission, but based on the expertise and business infrastructure of the nonprofits’ core activities.
  • Paring of marginally profitable and unprofitable activities that are not central to the nonprofit’s key mission

Some of this is exactly the same as we would expect from a for-profit business. So, yes, sustainability requires a nonprofit to live simultaneously in the high-mission, financial-loss space and for-profit arena.  

Having been given the honor of being the keynote speaker at Business First’s annual Corporate Caring event, I will use the opportunity to talk about some ways for nonprofits to move in this direction.  As well, I will moderate a panel of nonprofit leaders who have already done so.  Be at the Hyatt Regency Columbus on Thursday, April 19 at 11 a.m. to learn more and engage in the discussion.