Twenty years ago, it would have been shocking for a children's choir to sell singing telegrams or for an organization serving the homeless to dabble in property management. Today, it seems routine. Nonprofits increasingly feel compelled to launch earned income ventures--not only to appear more disciplined and businesslike to stakeholders but also to reduce their reliance on fundraising. There's plenty of hype about the value of earned income ventures in the nonprofit world, but such projects account for only a small share of funding in most nonprofit domains, and few of the ventures make money. Moreover, when the authors examined how nonprofits evaluate potential enterprises, they discovered a pattern of unwarranted optimism. The potential financial returns are often exaggerated, and the challenges of running a successful business are routinely discounted. But the biggest downside of such ventures is that they can distract nonprofits' managers from their core social missions and, in some cases, even subvert those missions. There are several reasons for the gap between the hype and the reality. One is that an organization's nonfinancial concerns--such as a desire to hire the disadvantaged--can hamper it in the commercial marketplace. Another is that nonprofits' executives tend to overlook the distinction between revenue and profit. For example, a youth services organization that had received funding to launch a food products enterprise hired young people and began making salad dressing. The nonprofit believed it spent $3.15 to produce each bottle of dressing that was sold for $3.50. But when expenses such as unused ingredients and managers' salaries were factored in, the cost per bottle reached a staggering $90. Earned income ventures do have a role in the nonprofit sector, the authors say, but unrealistic expectations are distorting managers' decisions, wasting precious resources, and leaving important social needs unmet.
February 1, 2005
Should Nonprofits Seek Profits?
Nonprofits increasingly feel compelled to launch earned income ventures--not only to appear more disciplined and businesslike to stakeholders but also to reduce their reliance on fundraising. While there's plenty of hype about the value of earned income ventures, the authors of this Harvard Business Review article warn of the potential hazards nonprofits can face when undertaking them.
William Foster is a partner in Bridgespan’s Boston office and the firm’s managing partner. He is an active thought leader on issues of philanthropy and social change.
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