November 4, 2010; Source: Wall Street Journal | A new study by researchers at the Wilson Center for Social Entrepreneurship at Pace University, “Social Enterprise: Innovation or Mission Distraction?” has found that nonprofits who run income producing businesses tend to short change those they are meant to serve by “focusing on money making schemes.” Download the study here [PDF].

The study, done by Rebecca Tekula, analyzes tax forms from 700 social service organizations across New York County between 2000 and 2005. These nonprofits’ average budgets were $19 million and they each raised approximately $1 million in unrelated business income. The study found that nonprofits that engage in unrelated business activities often run less efficient organizations than their peers. “As income from peripheral businesses went up, the share of a contributed dollar that went to actual services went down,” according to the report.

Why might this be? Tekula, the Executive Director of the Helene and Grant Wilson Center for Social Entrepreneurship, observes, “Organizations with unrelated businesses were not investing profits in their mission-related services. Instead, profits were reinvested in the business, and losses were subsidized with funds that might have gone to clients.”

Tekula’s report concludes, “From a broad perspective, this work has an overarching motivation: myriad philanthropists, associations and now federal and local governments support with a growing fervor the social enterprise movement and the use of business practices and measures in the nonprofit sector, but without the benefit of much analysis on the appropriateness or the success of these practices and the programmatic output of these vital public service providers. Continuing exploration and critique of the applicability of business practices in the nonprofit sector is unarguably important not only for health of the nonprofit sector, but for the well-being of the general public which has come to rely so heavily on these organizations for human and social services.”

NPQ appreciates Tekula’s willingness to ask hard questions about this practice which is so widely promoted. And we absolutely agree that it needs further study.—Ruth McCambridge