Run It Like a Business

Being like a business isn't always all it's cracked up to be. Photo by Flickr user watz.

Denver Mayor Hancock vows to “run government like a business.” Charles Bronfman and Jeffrey Solomon, in the Wall Street Journal, argue that “philanthropy must be conducted like business.”

It’s a persistent if tiresome meme.

We understand the idea, of course: a nonprofit is more likely to be high-impact if it’s focused, disciplined, and outcome-focused. And we agree. But these aren’t characteristics of “business,” and the prescription shouldn’t be “run your nonprofit or government agency like a business.” Rather, they are characteristics of effective organizations regardless of sector, and the prescription ought to be: “run your organization using best practices and learning from across sectors.”

We’ve argued in this blog and elsewhere (and it’s a key argument of our forthcoming book, The Nimble Nonprofit), that nonprofits are like businesses in fundamental ways and have a lot to learn from the best practices of other sectors. There are plenty of practices common in the private sector that nonprofits would do well to draw from. (And yes, of course, the private sector can learn from nonprofits, too, but at Bright+3 our focus is on helping nonprofits improve).

But that’s very different than arguing that governments or nonprofits should be run “like a business.” In fact, for every example of a well-run, successful business you can point to others – Lehman Brothers, Enron, Kodak, Saab, Borders, Hollywood Video, MySpace, and Washington Mutual just to name a few – that exemplify poorly run businesses.

And while governments aren’t really our focus, it’s worth noting that the metaphor breaks down pretty quickly. Although part of what government does involves providing services – providing value to stakeholders – many of its responsibilities simply don’t track to conventional notions of return-on-investment: protecting rights, navigating the balance between the interests of individuals and those of groups or neighborhoods, ensuring that everyone in the community has a meaningful opportunity to participate in community decisions (if you wanted to create a slow, inefficient decision-making process, ensuring that everyone gets to play a role is a great strategy), and the like.

When it comes to government officials proclaiming that government should be run like a business, I worry that they don’t really understand the unique, non-market role of government. When nonprofit folks and philanthropists make the same assertion about nonprofits, I think they are idealizing the private sector (which has many, many more examples of poor practice and failure than it does of success).

Nonprofits (and government) have a lot to learn from best practices in the business world, and – to further complicate matters – nonprofits really are businesses in many important respects. Pretending that the laws of business physics don’t apply to nonprofits is a conceit that often undermines our ability to solve problems and effect change. But the facile “being like a business” sound bite obscures and undermines those lessons rather than highlighting then.

Hopping the Fence: A Couple of Nonprofit Geeks Jump Into the World of Tech Startups

The Bright+3 crew has long been interested in how the nonprofit world can learn from the best practices or organizations in the private and public sectors.

And yes, of course, the private sector has a lot to learn from nonprofits, too, as we’ve argued elsewhere (such as our “Be More Like a Nonprofit” post), but we are a lot more interested in improving the capacity of the social sector to kick ass in its mission-based work.

Couple that with an entrepreneurial itch (to use Jon Stahl’s expression), add a healthy enthusiasm about technology, and throw in a heavy dose of fascination at the entrepreneurial world, and you get our new adventure: Trey & I applied for, were accepted in, and are now two weeks into a summer-long intensive incubator/accelerator for technology startups.

I can’t say that we picked Founder Institute based on a careful review of the options; really we stumbled into the application opportunity and did enough research to know it seemed solid and well-regarded. But it’s turned out to be a really strong fit. It caters to founders that have other jobs (rather than being fully immersive), the focus is more on producing skilled entrepreneurs rather than launching companies (e.g., acceptance into the program is based more on the strength of the applicants than on the strength of their business proposal), and the program takes a smaller cut of equity from new businesses than some other incubators (and creates a shared bonus pool for graduates to share in each other’s success).

Although the program started just a week ago it feels like it’s been a few months . . . intensive, demanding, and challenging. Fun, as well, especially now that we think we are starting to figure out a clear business idea (more on that later). And despite the emphasis on entrepreneurial skills over business-building, we are still expected to do the latter, and we are moving full steam ahead.

In the meantime, one early observation: it is extremely cool to watch some of the extremely skilled, serial entrepreneurs who mentor in the program think out loud when they are evaluating business ideas and when they are crafting their own ideas. On the former, it’s a sharp, incisive, and very quick ability to run every idea though a series of critical questions about the market size, getting to market, the competitiveness of the market, and a host of others. It’s impressive to watch (and it can be brutal to be on the receiving end of an analysis). The latter is even more impressive, seeing the world through a lens that identifies points of friction and pain and constantly asking “what if there was something that . . . ” or “wouldn’t it be cool if . . . ” A lot of those ideas might not, in the end, pass muster, but it’s a very cool way of thinking about the world that produces a constant stream of ideas for solving problems.

Mergers and Acquisitions in the Nonprofit World

I don’t know if the pace of nonprofit mergers and acquisitions across the sector is increasing, but I’ve been personally involved in more over the past few years (two) than in the previous fifteen (none). Mergers and acquisitions are still pretty uncommon, I think, and I’m not clear what relationship those trends have to comparable trends in the private sector. The market pressures of the nonprofit sector are notoriously bizarre, and traditional market dynamics like economies of scale and market share just don’t apply in any particularly rational way. For example, because income for many nonprofit comes from philanthropic foundations and from individual donors, revenue often has a tenuous-at-best relationship to the market value of their offering. The value proposition for funders is often divorced from the quality of the service the organization provides, or the efficiency of its work, or the success of its advocacy efforts (although not necessarily divorced from the funders’ perception of those things).

As a result, the market pressures that often lead to mergers and acquisitions in the private sector don’t necessarily play out very consistently in the nonprofit world. But given how hard foundations have been hit by the recession, and given the continuing growth in just sheer numbers of nonprofits (the number of U.S. nonprofit organizations increased by 60% in the decade between 2000 and 2009), we suspect we’ll see more M&A in the coming years.

The first merger I was involved in (as a board member of the nonprofit I ran until 2007) was a solid success. It was really more of an acquisition: we absorbed the strongest programs and the associated program staff but not the other organization’s name or the pieces that didn’t fit well. I think the alignment in mission and organizational culture, as well as the ways in which the programs were complementary, made a big difference. Everyone – the boards and staff – took their time, and everyone on both sides worked pretty hard at building a new sense of camaraderie and shared organizational identity, which also made a big difference.

The second (between Center for Native Ecosystems and Colorado Wild) – a more conventional merger, with a new name and a combined board – is a work-in-progress, but so far everything looks really good. I’m much more of an observer than participant on this one, but they are following a similar playbook: measured and thoughtful, a lot of effort on making the programs and all the systems fit, and a lot of attention on creating a supportive sense of shared organizational culture. It’ll be a while before we get a real verdict, but the indicators are good so far.

But this is anecdotal, and while there is some discussion and a modicum of research (for example, Chronicle of Philanthropy maintains a blog on layoffs and mergers), I think the social sector would do well to invest some energy in learning from our own M&A activities . . . when does it seem to work well, when does it not, what lessons can we draw, and the like. I suspect, as well, that the nonprofit sector could learn a lot from the private sector about thinking strategically about mergers & acquisitions, how to avoid common pitfalls, and about how to make them work.

Be More Like a Business!

Nonprofit or for-profit, this organization's revenue trend has a problem.

Nonprofits hear the “be more like a business” refrain a lot, despite plenty of evidence that being like a business isn’t all it’s cracked up to be.

I’m persuaded by Jim Collins’ analysis, which more or less argues that within the business community you’ll find the entire spectrum, from extremely effective organizations to highly dysfunctional ones, and the issue is ferreting out the practices that make the good ones good. He extends this to the social sector, and essentially makes the same argument: the challenge isn’t for social sector organizations to be like businesses but to adopt the practices of the really well run businesses, as well as the really well organizations from whatever sector. I don’t think he’s ever evaluated the public sector, but I suspect his argument would be the same . . . learn what we can from the practices of the organizations that really kick ass (and I’ll bet there’s more of this than you might think, but that’s a post for another day).

In other words, conversations that focus on how the nonprofit sector can be more like the business sector are asking the wrong question. A better question: how can nonprofits learn from the best practices of highly impactful organizations within their own sector and across the business and public sectors?

Our frequent insistence on asking the wrong question leads to two kinds of problems. On the other hand, the nonprofit sector is often so allergic to the very idea of the business sector that it runs away from it, and eschews anything that smells like it might have come from the business world (the “we don’t do things that way” reaction). The problem is that there are a bunch of practices you find among the best-run private sector organizations that nonprofits would benefit from using. It’s not “be like a business,” but “adopt the applicable practices of the best businesses.” The most successful of the private sector organizations are often strong at things nonprofits are often weak at: capacity investments, staff cultivation, and staff management among them.

And then there are nonprofits that run in the other direction, thinking that salvation lies in being like a business, and they adopt private sector practices in seemingly wholesale and indiscriminate fashion, which often produces some of the weirdest and worst dysfunctions, since it involves the hybridization of worst practices from both the nonprofit and private sectors.

Nonprofits really are, at root, businesses. They are different in some important ways from traditional profit-oriented businesses, but they are similar in many more ways. Nonprofits live and die on cash flow, for example, and they have to offer a sufficient and appropriate value proposition to their supporters. But the implication isn’t “do whatever private sector businesses do,” since that would be dumb, but rather that the laws of business physics really do apply even if you are serving a social good of some kind. The sense of nonprofit exceptionalism that pervades much of the nonprofit world, the notion that we are special and different because we are a nonprofit, is harmfully misguided. If you apply a discriminating eye toward the private sector, however strong your allergy may be, you’ll find a ton of practices and accumulated wisdom that will help your nonprofit do good, better.