The Thin Mint Paradox

The more money brought in by a non-profit's side business, the smaller the share devoted to the organization's actual mission, suggests a new Pace University study.

Girl Scout cookies

Does it help a nonprofit to have a profitable side business? Apparently not. A new study presented by a Pace University researcher yesterday at the Satter Conference on Social Entrepreneurs at New York University examined 700 tax returns from New York non-profits, finding that the more money brought in by side-businesses, the smaller the proportion of total expenses spent on the organization's actual mission. The organizations examined included well-known examples like the American Foundation for the Blind, God's Love We Deliver, and Boy Scouts of America.

The study, by Pace's Rebecca Tekula, follows a hunch articulated in a 1988 book by the economist Burton Weisbrod called "The Nonprofit Economy," a book which noted an increasing trend toward profit-making arms of non-profits. By 1982, for instance, the Girl Scouts were selling 124 million boxes and grossing $200 million annually. Though Weisbrod had hypothesized that the trend was not good for the non-profits, the hypothesis had not been tested till Tekula's study, whose look at 700 organizations that provide human services concludes that, in the words of a press release, "the more they brought in from their businesses, the smaller were their proportion of total expenses spent on programs."

Tekula speculates that many organizations actually don't invest their profits in the actual services of the organization, but simply reinvest them in the side-businesses. "Running a gift shop or anything that isn’t an integrated part of your program may be bringing in money—gross revenues—but if it’s not making a profit, you’re keeping it going with funds that you could have spent on counseling and food for your clients," she said.

It's a problem that could benefit from further study. Even if it were true that the rise of the Thin Mint has resulted in a smaller fraction of Girls Scouts of America's organizational dedication to services, one could argue that so long as the pool has grown substantially, services still benefit. Quick thought experiment: 10% of 200 million dollars is far more than 100% of 200 thousand dollars, after all.

Still, the notion that the increasing trend of for-profit arms of businesses might be leading to a sort of "mission distraction," in Tekula's words, is troubling. For groups that may be taking the enterprise component of social enterprise too seriously, she counsels an old-fashioned strategy: asking for charitable donations.

[Image: Flickr user antigone78]

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4 Comments

  • L Jason

    Tekula's study is fundamentally flawed in that she equates ALL revenue earned by social enterprises as unrelated, which hopelessly skews her results. In the case of The Doe Fund, she didn't bother to look more closely at the organization's mission, which is one rooted in workforce development. Her examination improperly considered income earned by the organization's work ventures -- which are training programs at the core of the mission -- as unrelated business income. In addition, her examination didn't even look at the organization as a whole. Rather, she looked only at a single corporate entity, and as a result, grossly misstated the programmatic expenditures of the organization.

  • Rebecca Tekula

    L. Jason,

    As I am sure you know from reading my study, it does not cite or name any of the organizations in the sample. Therefore, your reference to The Doe Fund must be regarding the graphic created by the Wall Street Journal, for which I gather that the journalist consulted the Doe Fund’s 2006 IRS Form 990, which is publicly available from various sources including Guidestar.org.

    Finally, your comment refers to a "fundamental flaw" in my measure of revenue. In fact, I only considered unrelated business income in my analysis, not, as you suggest, “ALL revenue earned”. Virtually all academic consideration of social enterprise includes the unrelated business income model I studied in my paper.

    My research deals with important questions about the vital nonprofit sector of our economy. Those who disagree with my conclusions should respond with the relevant facts and analysis to support their disagreement. This process is the core function of academic research.

    Regards,
    Rebecca Tekula, PhD

  • Ann Marie van den Hurk, APR

    Not being able to get full access to the research and perhaps I'm not interpreting the information given in the article correctly, I'm hesitate to make comment. That said, I think on the surface the assumptions could be valid for most nonprofit organizations if it doesn't fit with their mission; however, in regards to the Girl Scout Cookie program more depth is needed. The Girl Scout Cookie Program is a program that girls can chose to participate in and is designed to give girls real life business skills. Girl Scouts of the USA is the mother organization, mentioned in the article, for lack of a better word franchises the Girl Scout name, programs, and provides support to local Girl Scout Councils. The actual direct service to girls comes at the local Girl Scout Council level. When people support the Girl Scout Cookie Program, they are supporting girls in their community. A good percentage of the funds raised through the program goes directly to services to girls.

    I must disclose that I was a local Girl Scout professional staff member for many years and I am currently Girl Scout volunteer.

  • Elizabeth

    I don't know about the other organizations, but Girl Scout Cookies, besides bringing in revenue, are a huge promotional tool for them. Having the girls show up at your door, or having your coworkers bringing in order forms and cookies, are often the only reminders that Girl Scouts exist.