Trend Report: Sector-Switching

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Until recently, the boundary between for-profit and nonprofit, at least in theory and public perception, was clear. There was a distinction, codified by legal status and crystalized in a collective understanding of disparate motivations and bottom lines. The for-profit world made a profit, and the nonprofit world made a difference.

Today, that boundary has become increasingly blurred, at least in terms of discourse. The term social enterprise is bandied about with very little exactitude. It is linked to the development of so-called hybrid forms like B corporations and L3Cs, neither of which have been proven to be monuments to effectiveness so far. Perhaps that is not where the real action is; perhaps it’s in hybridity—that is, borrowing from and linking to the work of the other sector while retaining a clear sense of integrity. (Nonprofit Quarterly will have much more about this last topic in the next edition of the print journal.)

 

We know, for example, that for-profit companies can make a social difference in many ways, not the least of which include minimizing externalities, providing both productive and rewarding work environments, and adopting socially conscious missions. NPQ recently ran an article urging businesses to become more nonprofit-like, while at the same time nonprofits have been increasingly encouraged to become more “business-like”—whatever that means. As the boundary between for-profit and nonprofit becomes increasingly obscured, some organizations are switching incorporation status from one sector to another, some are using practices clearly identified with another sector, and some have wandered into the muddy area of hybrids.

In recent years, NPQ has reported on many examples of organizations adopting practices from other sectors. For example, we have reported on crowdfunding by independent bookstores. We have reported on efforts that blend sectors, like nonprofit and for-profit theater collaborations, and we have discussed the emergence of players from one sector in a field originally dominated by another, as in for-profit breast-milk collectors. We have also documented fields where it appears that one sector performs better than another based on outcomes, as in for-profit disability service providers and college and professional sports. All of these examples illustrate a bidirectional trend toward sector switching. At times, for-profits are becoming nonprofit—in mission, if not in tax status—and nonprofits are becoming for-profitsin operation, if not on the balance sheet.

These newswires have also raised important questions:

We don’t pretend to know the answers or to know what the future holds. We do believe there are some deep and fundamental concerns that get lost in the hype and blur.

We encourage leaders of all sectors to consider the following: What is it that distinguishes this sector from others? What about those distinctions gives us an edge in some fields? How might we better honor and build on those strengths?

  • Keenan Wellar

    At this point “social enterprise” is clearly in the running for the most confusing and possibly the most abused/abusive terminology of 2014. Consistent with things that go wrong in the nonprofit sector, whether or not a given organization is branding itself as “social enterprise” is already having implications with respect to funding, public perception, etc. when in the end it doesn’t matter what it is called, it is the results that matter.

    Some of the negative ways this is playing out will be familiar to anyone who has worked in the nonprofit community:

    1) Organizations operating programs that have been going on for decades (and may or may not be delivering results that actually benefit the community) are re-branding as “social enterprise” so they can appear more relevant (and potentially access new funding opportunities) without really changing anything or assessing whether or not the program is beneficial.

    2) Organizations are creating new programs or projects branded as “social enterprise” because it is indeed a trend that various funders are chasing, and so agencies are now chasing it too.

    3) There is already confusion that social enterprise means charitable organizations can now operate a business and thus no taxes or donations are required to support their work; it will take time, but of course the stories will pile up about how charities started business, not only to experience that the business failed, but that it took down the rest of the organization with it.

    There is little agreement as to what constitutes a “social enterprise” and when I hear it now it already means as much (little) to me as the sticking the word “innovative” in front of a program or project.

    I will continue to evaluate the work of organizations in any sector based on what they deliver.

  • SoozInCA

    You say “whatever that means” next to the statement that non-profits are being asked to become more business-like, well I think I can explain, as Controller for a non-profit organization which has figured it out. I have seen too many times when non-profits become dependent on non-sustainable sources of income, or those which will not bring in enough to cover their expenses. They determine what they want to spend and then hope they can fundraise or grant-raise enough to cover that. However most grants are intended to have a zero bottom line impact, meaning they don’t allow for growth of the mission, or for adequate coverage of the administrative costs required to successfully run a non-profit corporation. As less government funding is available, or budgets get stalled in their approval, non-profits continue to spend money on payroll and program costs only to have the revenue stream held up, sometimes for months. There was a time when banks easily offered lines of credit to cover those gaps, but not now. That is why too many non-profits, even some that have been around for over 100 years, have gone bankrupt in the past few years. Being asked to be more business-like means they are asked to determine what level of revenue they can count on, what sources of revenue might they have that can be fee-based instead of relying so much on grants, especially government grants, and then to trim expenses to fit that revenue stream. Before a non-profit can truly achieve its mission it must first figure out how to operate in a sustainable manner.

  • Jennifer A. Jones

    SoozInCA – I like the way you’ve captured the idea of becoming more “business-like.” That may be the best definition I’ve seen yet. I also appreciate the comment about grants having a zero bottom line impact. This is one of the crippling effects of program-based funding.

    The phrase is “become more business-like” used frequently. In addition to your definition, I sense it may also be used to encourage nonprofits to operate more efficiently. This always makes me wonder, as not all nonprofits are created equal. Many nonprofits are run more efficiently than some businesses I have observed. The nonprofit sector is extraordinarily diverse.

  • Steve Boland

    These are good questions to ask. It’s only good that more businesses are doing social good, but how does that differentiate a charity? Next in Nonprofits counsels start-ups that if you don’t need donated revenue and tax-exemption – then incorporate as a for-profit (L3C, B Corp, whatever).

    There are still social goods in this world which will only function with donations, but even donated revenue isn’t the exclusive province of nonprofits anymore. What makes a charity a charity is a need for donated revenue *and* either a need for tax exemption or a business need for donors to claim tax exemption for the contribution. It’s a culture change for for-profits to blend the social good and for nonprofits to blend the earned revenue, but the distinction remains with tax exemption and tax deductible contributions. – Steve Boland, Next in Nonprofits

  • Gus Blessing

    This article was well written with the intent of invoking important questions just beneath the surface of our understanding of what is considered nonprofit or for-profit organizations. I enjoyed the questions proposed to the reader, which dovetail nicely with discussions in my nonprofit class. As we try to understand nonprofit organizations, we realized that in some regard, there is little difference between nonprofits and the for profit organizations they supposedly differ from.

    I don’t have time to discuss all the questions listed in the article, but I think each one is an important consideration for leaders of nonprofits and for profits alike. Some questions seem more concrete, such as tax considerations, while others hit at the heart of how we define a nonprofit organization and what it means to be one, such as shouldn’t every business be a social enterprise. In the end, the way we have structured the nonprofit and for profit sectors has led to this evaluation and questions of what it means to be one or the other.

    One line of blurring between nonprofits and for-profits not mentioned is that of the job descriptions and salaries of employees. I have noticed through my class and our readings that there isn’t a noticeable difference between employees of for profits and volunteers of nonprofits. Often, volunteers have job descriptions that they would be paid for otherwise in a for profit. These questions will not be answered quickly, and I look forward to the discussion that arise from them.