Leap of Reason

Leap of Reason: Managing to Outcomes in an Era of Scarcity, co-authored by an SVP Seattle Partner, was reviewed in The Economist. Click here to read the book review. Leap of Reason provides candid, practical insights about the ways that we can help our nonprofit Investees, through our grants and our strategic advice, improve their performance and sustainability. It will help spark important conversations that every nonprofit board and leadership team should have at a time of dramatic budget cuts at the local, state, and federal level.

Why Can’t a Nonprofit Be More Like a Business?

Business people and funders often say they want nonprofits to act more like a business but then criticize them and withhold funding when they do. At First Friday on January 7, 2011, SDSVP Partners JoAnne Berg and Duane Tromblywere joined by Laurin Pause, Executive Director of Community Resource Center, to discuss this sometimes provocative subject. All three speakers serve on the SDSVP Board of Directors and have extensive experience in both the nonprofit and for-profit worlds.

by Mandy Sherlock

Nonprofit and for-profit businesses are different.

Anyone who has worked in the for-profit world understands that revenues are the measure of success. It’s all about the bottom line. In the nonprofit world, success is measured differently because there’s a disconnect between revenues and service delivery. The service recipient (“client”) is divorced from the revenue source. The funder or donor is not the person getting benefit from the service delivery - it’s the client. For-profits are very customer-centric, focusing on the needs of the customer. So who’s the customer in the nonprofit world? The “customers” are the funders. Nonprofits are serving their clients but at the same time, they must keep the funders happy. Because of this split, there are many unique challenges to running a nonprofit organization.

So how does a nonprofit determine if they are successful? Ultimately it comes down to outcomes. During a recent strategic planning session as an Investee of San Diego Social Venture Partners (SDSVP), Community Resource Center (CRC) asked themselves, “how are we successful based on the different categories of people we serve?” They determined that feeding a chronic homeless person in the breadline would be considered successful. But there are other levels of success too. After a three year process, CRC was able to put three homeless people, who had been on the streets for over 10 years, into safe housing which also provided a huge cost saving to the county. For a victim of domestic violence, CRC provides safe shelter which is the first step of success. The next steps include the woman staying away from the abusive situation, finding a job, getting a home and staying off welfare. This process of service delivery resulting in outcomes takes 2-3 years, where as in the for-profit company, a product can be developed and taken to market within a year. Instead of counting how many clients they serve as an indicator of success (outputs), CRC measures whether their clients move forward and become self-sufficient (outcomes). Success doesn’t have to do with money; it’s all about the client’s end result which is a major difference separating the nonprofit from the for-profit world.

Another difference: A nonprofit could have $750,000 in the bank and be broke. Why? A donor could write a big check, but restrict the funds. So just because there’s money in the bank doesn’t mean they can spend it. Typically donors don’t want to fund general operating support like lights and staff and printing. They want to give toward the program or directly to the people whom the nonprofit is serving. Often, funders have the unrealistic expectation that nonprofits can run their organization on 10 percent overhead. This is not possible because nonprofits are businesses too. Part of acting like a business is investing in infrastructure and staff and program capacity. For example, Community Resource Center needs real estate – buildings – in order to serve their clients and this involves marketing, sales and administration expenses. If a nonprofit organization doesn’t make these kinds of investments, they can’t implement their mission and ultimately they will fail. For this reason, SDSVP funds general operations and doesn’t restrict funds to its Investees.

In 2004, Community Resource Center’s technology system was failing them. Their computers crashed every week. Data was lost and they couldn’t access reports on time. A few years later when CRC became an Investee of SDSVP, their IT insufficiencies were diagnosed and they put together a plan of attack. In the first year, they spend $20,000 on upgrading CRC’s hardware, let go of their IT staff, substituted a service company and started a computer replacement plan…and ultimately saved $25,000! Now, employees are working efficiently, management information is available, and reports are on time. Because of SDSVP, Community Resource Center was able to invest in its internal infrastructure and come up with an innovative solution to produce an effective outcome.

Before joining San Diego Social Venture Partners, many members donated to charities. However, SDSVP transforms people from check writers to effective donors who build capacity and infrastructure in nonprofits. Money donated to nonprofits who work to prevent violence, feed the homeless, transition foster youth is wonderful but effective giving is about investing in organizations that can be a sustainable business and work to fix social problems for good.

Magnifying SDSVP’s Impact

This past year, SDSVP has created 5 best practices capacity assessment checklists which have proven quite useful for our Investees and other nonprofits in San Diego. As other SVPI affiliates have asked for copies, we have been looking for an efficient way to extend the scope of our impact to help the broader nonprofit community.

A newly launched San Diego social venture provided the solution. IdeaEncore Network is peer-to-peer, on-line learning marketplace (like Amazon or eBay) for nonprofits and those who support them to share, sell, and buy all types and forms of practical knowledge and information assets. Almost anything nonprofits might need can be shared and found - including ready-to-use tools, templates, grant proposals, grant tracking tools, training content, policies, procedures and plans. Started by Scott Bechtler-Levin (co-founder of Pacific Ridge School and technology entrepreneur) and Flo Green (recently retired ED for the California Association of Nonprofits), the website launched in February and has quickly attracted quality content and the attention of nonprofit executives around the country.

Checkout SDSVP’s “Best Practices Checklists.” Just a week since we posted these checklists, 180 nonprofits from across the country have already viewed them and 2 organizations have bought the “bundle” for $45 each. So, with very little effort, SDSVP has created our own social enterprise while helping spread our mission to other nonprofit communities. Sharing documented knowledge is another great way SDSVP is increasing the return on our philanthropic investments. Everyone wins!