The Profit in Not-for-Profits
The Profit in Not-for-Profit
By Tammy Hobbs Miracky and Amy Lieb
What do First Book and RARE -- two of this year's Social Capitalists -- have in common? At first glance, you might notice more differences than similarities: One focuses on childhood literacy while the other addresses environmental concerns; one operates in the United States, while the other is almost exclusively international; one relies on a national supply chain while the other employs a variety of customized, local approaches like radio soap operas.
As we reviewed the accomplishments and aspirations of the 118 organizations that applied for this year's Social Capitalist awards, our task was to find a basis for comparing such seemingly distinct organizations. Of the five categories we assessed -- social impact, aspiration, entrepreneurship, innovation, and sustainability -- social impact proved the most challenging in this regard. What we have discovered, though, is that the organizations that rise to the top -- those being recognized as this year's Social Capitalists -- have a lot more in common that one might think.
The Difficulty of Defining and Measuring Success
Social sector organizations must take a much more sophisticated and complex approach to measuring their success than their corporate counterparts. The social impact created by a non-profit organization can be completely unrelated to the financial health of the organization, the one area where standardized metrics are common across all types of organizations. Annual income describes only an organization's ability to raise funding; it cannot tell us how efficiently the money is translated into improved outcomes. Similarly, operational expenditures describe the cost of specific activities but cannot reflect whether those activities create the desired social results. For example, knowing that an organization spent $100,000 last year to run a job-skills training workshop tells you nothing about the degree to which students' abilities improved as a result, or if those improved skills led to higher employment rates or wages.
In fact, there is no widely accepted approach to measuring success across the diverse set of non-profit organizations; there is no equivalent to profit. How, then, can one compare the performance of organizations that address a wide range of social needs and that use an almost infinite number of approaches? As we reviewed this year's nominees, a common pattern became apparent: Top performers consistently incorporate four elements into the measurement of social impact:
Social Change Model. High-performing organizations demonstrate a deep understanding of the social need they address and the ways in which their particular approach addresses that need. For these organizations, their "social change model" is consistently understood and pursued throughout the organization. Consider ApproTEC, an organization that addresses the extreme poverty affecting so much of Africa's rural population. Their approach to addressing this need includes recognizing the entrepreneurial drive and work ethic that characterizes much of this population; identifying opportunities for these individuals to use their existing asset -- land -- to improve their plight; and designing, manufacturing, and marketing technologically-appropriate equipment (e.g., seed presses and water pumps that are powered by manual labor instead of electricity or generators) that enables them to increase their farm income tenfold. Ultimately, ApproTEC aspires to reach enough farm entrepreneurs that a rural middle-class will begin to emerge in the countries where they operate.
Measurement. A supporting system of metrics -- as well as a disciplined program of data collection -- must be in place to help an organization know whether it is realizing its desired effect. Given the time, effort and resources required to invent a means of measuring impact, many organizations yield to the temptation to simply describe their effort or activities -- meals provided, ad campaigns run, jobs created. Leading organizations strive to do more. ApproTEC locates every individual who purchases a product via their lifetime guarantee registration process. It then conducts multiple site visits over time with a substantial percentage of those customers. As a result, ApproTEC can validate its stated impact to date: 36,000 products placed and $37 million in annual profits and wages added to the economies of the countries in which they operate.
While a strong emphasis on measurement is important, these organizations do not limit their aspirations to what can be counted. ApproTEC's ultimate goal is the emergence of a rural middle class that is more civilly-active, pressuring national governments to introduce more effective developmental policies for all. But they recognize that not everything is directly measurable.
Direct Impact. Top organizations emphasize the maximization of direct impact. In measuring their direct impact, they describe not only how many individuals are served by their efforts (e.g., 300 students per year), but also the depth of the change that was created (e.g., an increase of three reading levels). They also focus on the duration of impact -- what is the benefit created now, and what impact will persist five years from now?
Systemic Impact. In addition to their direct impact, these organizations have set their sights on something bigger. They understand how their activities can, over time, add up to a lasting, systemic change that will benefit many more people than they are able to affect directly. Consider ACCION International. In addition to distributing micro-loans to seed businesses among some of the world's poorest people, ACCION's experience has demonstrated the commercial viability of serving the poor, prompting the establishment of independent banks that focus on this segment of the population. Since 1990, ACCION and its banking partners have issued $5.8 billion in loans to 3.2 million people. This impact was realized not through ACCION's direct activities alone, but through the systemic change those activities brought about.
Why does this matter to business?
Clearly, the for-profit and social sectors measure success in profoundly different ways -- but this may be changing. The pressure for corporations to focus on their social impact is growing, coming from external actors such as shareholders and customers as well as from concerned employees within.
Given the growing attention paid to the corporations' social impact -- both positive and negative -- the private sector is beginning to wrestle with these challenges. Corporations must be clearer about the sort of impact they desire to have, and they have to be inventive about how to measure this impact. Just as non-profit organizations must achieve social impact while sustaining ongoing operations, corporations will be asked to have a positive impact on society and the environment while satisfying shareholders.
Increasingly, private sector leaders will need to learn from non-profit organizations such as those featured as this year's Social Capitalists. Those lessons may well revolutionize the traditional for-profit focus on "the bottom line."
Tammy Hobbs Miracky and Amy Lieb are account manager and consultant, respectively, at the Monitor Group.