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Pride & Prejudice: (What) Can Nonprofits Learn From the For-Profit World?

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No one, least of all I, would argue nonprofits do anything less than important work.

In addition to providing vital art, theater and music experiences, as Senator Bradley once noted, nonprofits have done everything from create the polio vaccine to build the Sesame Workshop to invent the nationwide 911 system we all benefit from. They've protected endangered species, played a crucial role in bringing down apartheid, helped rebuild civil society in Eastern Europe, demined war zones, cared for aged patients, fed and sheltered the homeless and continue to provide help for schools nearly every day of the year. About half our nation's hospitals, colleges and universities are nonprofits. And yes, nonprofits even play music.

For the purpose of this discussion, let's stipulate nonprofits do some pretty amazing things and we'd all like to do them properly, without compromising our integrity one iota. We can talk about what the good things are and why they matter later, perhaps, in a future article.

But for now, because we identified a structural fissure in the underlying nonprofit business model the last time we spoke, let's focus on some fundamental steps nonprofits might take if they are to follow their financially more perspicacious siblings in the for-profit sector toward a brighter financial future.

And lest we forget the reality of our situation, consider the 2012 State of the Nonprofit Sector Survey released by the Nonprofit Finance Fund only last month. That report surveyed 4,500 U.S. nonprofits including arts organizations, human services organizations and educational organizations, among others. Taken as a whole, the survey found 85% of all nonprofits experienced an increase in demand for their services in 2011 (and 88% are expected to experience an increase in demand again in 2012) but a scandalous 57% of all nonprofits have barely enough cash on hand to last them three months or less. No business in the for-profit sector would tolerate this state of affairs on an ongoing basis. It is certainly more than a bit precarious if sustainability is really one of our goals.

Like everyone else in the business world, we nonprofits need money to operate, folks, and lots of it.

But suggesting to the nonprofit sector they might learn something by studying the habits of their for-profit brethren is a bit like suggesting a priest might want to learn something from a rock and roll promoter. It upsets people. But who knows? Maybe the priest should take a gander at the fellow in the next auditorium. I'm not suggesting nonprofits give up pursuing donations. There's a value to the giver too. But it's clear we need to supplement our old strategies with newer ones if we're going to accomplish the goals society needs us to because the numbers show us the old methods are not working adequately anymore. So to prime the public conversation, here are a few introductory ideas, set within three broad strategic categories.

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Strategy One: Side-Ventures

The most obvious way nonprofits already make unrestricted revenue is through operating side businesses -- gift shops, cafeterias, renting out performance spaces, parking garages and the like. For the most part, this is pretty mundane stuff, not worth rehashing here, but a category nonetheless.

For a somewhat more sophisticated example of a successful side-venture consider the 56-storey condominium Museum Tower atop the Museum of Modern Art in New York City which was conceived as a revenue-producing line of business meant to support the Museum's operating expenses. The details are a bit much to go into in a short discussion like this, but the innovative bond the city developed to finance the effort and the tax structure it operates under both seem like wins to me.

To provide a significantly simpler, street-level example, consider this idea from the for-profit world. A close friend of mine in San Francisco bought a restaurant after selling his prior company. He thought it would be a good retirement project, but in retrospect it was a vanity purchase, and one he soon regretted, because the venue made only about $300,000 a year in revenues but cost more than that to operate. By the end of the first year, he was at his wit's end.

I noticed one day when I met him at his place to console him that his restaurant was situated on a corner next to a small fairly quaint alley. I asked him why he didn't try closing off the alley and having some sort of block party there. "What would it hurt?" he must have thought. "I'm almost broke as it is." So on the weekend nearest Valentine's Day the intrepid restaurateur roped off the adjacent alley and advertised a party online for sweethearts -- mostly booze, not much food.

He sold $80,000 worth of drinks that Saturday. Then another $80,000 the next day. ("All cash," he informed me later with a rather disturbing nudge and wink.)

Now he throws five two-day festivals in his alley each year: Valentine's Day, Saint Patrick's Day, Cinco de Mayo, Independence Day and Columbus Day. He makes about $800,000 from those outdoor parties (in addition to the $300,000 his restaurant makes on its own).

Okay, so this isn't a nonprofit, I'll grant you. But there may be something to learn here about being flexible in what we do in the nonprofit world. My friend wanted to sell food and drink, and now he does. He wanted a restaurant, and now he can afford to operate one. How can we do the same in the nonprofit world?

I well understand, by the way, consultants generally advise nonprofits not to become distracted by side-ventures for fear they'll stray from their core missions. My own view, however, is that losing focus is more a function of weak leadership than of structure.

Strategy Two: Grown-up Partnerships

Jason Saul tells an interesting story about a nonprofit food bank that struggled to make ends meet doing things the old fashioned way: begging for money from government agencies, foundations and individual donors. They would then spend the money they received on food and give it away to the hungry; not a bad plan, so long as you don't need to scale in any meaningful way.

But the problem was (similar to most nonprofits) an increasing need for their services meant they were never able to truly fulfill their mission of feeding everyone who was hungry because the population that needed their services kept growing faster than they could keep up -- and the relentless increase in demand for their services meant they nearly went broke every month. Clearly they needed a better business plan.

Their goal was, of course, to feed people. Under their current model they were only able to feed some of their constituents one meal a day, although most folks like three meals a day. How could they get to three squares a day and still have enough money to survive?

Suddenly a new idea appeared: one method of paying for the remaining needed meals was to use food stamps. And the largest percentage of food stamps in America is spent at Wal-Mart. So they approached their local Wal-Mart store.

If they took every person they fed a meal to and also registered them for food stamp eligibility (which would solve the problem of finding the extra two meals a day) they could also give each registrant a discount coupon and letter inviting them to shop at the nearby Wal-Mart to establish a new habit. Assuming they had about 100,000 recipients of meals per year and could sign them all up, and assuming the average food stamp benefit to be about $133 a month, the new sales at Wal-Mart would amount to about $13 million a year. Now that's real money.

So the food bank asked Wal-Mart if they would contribute a margin of roughly 7% from their marketing budget (as opposed to drawing from the company's much smaller philanthropic budget) which would give the food bank an extra $1 million to grow and expand their business. Now, says Saul, they're doing fine.

Of course, I have no idea whether this story is accurate or apocryphal, but that's not the point.

Setting aside your personal feelings about food stamps or chain stores, there seems to be something fundamental for us to learn from this story no matter what the specific details actually were because the nonprofit here changed its business model from simply asking for money to help people with, to selling its impact in a very commercially viable way that did not compromise its core mission (to feed the hungry), but indeed improved its ability to achieve its core mission (feed even more people) while acting in a balanced commercial way with a for-profit partner.

It makes me wonder what orchestras (or any nonprofit, for that matter) could learn from this story. We plead for money then ladle out music and education, much like the soup kitchen in the story ladled out soup. Once we serve our art up, it's gone and we know people will be hungry for another serving again very shortly thereafter. So how could we apply what the soup kitchen experienced to our own pursuits to achieve a similarly effective and uncompromising result? This is a question we're asking ourselves now.

There are a wide and creative variety of these sorts of partnerships with both commercial companies and government agencies -- strategies that produce value for both sides, rather than for only one. I'm reminded of TerraCycle, for example, an impressive company that tries to outsmart waste by paying schools who teach kids to recycle things like Capri Sun drink pouches. The kids learn to recycle waste, the school makes a little extra spending money, and TerraCycle uses waste items to make nifty handbags, purses and other consumer items to sell. Sounds like the beginnings of a virtuous cycle, to me.

On the government side, New Yorkers, of course, are quite fortunate to have the Department of Cultural Affairs which is positively brilliant at helping arts organizations figure out effective partnerships with government agencies, for-profit companies, and other nonprofits in order to stimulate a robust arts ecosystem that feeds the city, the nonprofits within it and many visitors who come to experience the arts. Agencies like these are well worth talking with to try to brainstorm advances such as these because they're thinking deeply about these issues every day.

Can you think of ways the food bank to chain store sort of partnership might work for your organization? We're working on that question ourselves now too.

Strategy Three: New Money from Your Core Business

A few years ago, I owned a clothing business in Asia and the experience makes me wonder whether there might not be some gem hidden in its story for nonprofits too. The basic gist was as follows:

It was a very large company that sold casual clothing with the names and logos of various rock and roll, hip-hop and pop bands printed on each garment. The company made a lot of money because people liked the clothes. So that was nice and as much of the business story as most people knew -- clothing from every new up-and-coming band at which you could shake a stick, so to speak. Selling clothing was the core business of this particular company in much the same way developing donors is currently the main source of revenue for many nonprofits.

But actually, there was a hidden part to the clothing company story most people overlooked, and it accounted for an awful lot of additional revenue at the end of the day, which allowed us to do more of what we really wanted to do: make stores cooler, invent new things, connect with new audiences (things, it seems, many arts organizations want to do too). And what was this hidden feature of the business plan?

Well it had to do with the way the company picked what clothing to sell. There was a big open stage in the middle of the company's headquarters. And every week the company invited new indie or rock or hip-hop bands to perform during their lunch hour. This process gave the people who worked at the company a pretty good chance to see what was being created along the avant-garde edges of popular music.

Then each quarter, the company would pick some of the bands it had listened to and offer to hook them up with concert gigs, place their songs on iTunes and so forth. Because of this, the bands got exposure and built new audiences for their art. The company, in return, got the rights to make and sell all the collateral materials like t-shirts and pins and such, as well received a portion of the ownership of the songs they were sponsoring.

When a band eventually sold a million of any one song, the company then sold its share of the mechanical and recording rights of the now platinum-selling artist's work to a major record label, and simultaneously sold its share of distribution rights to a large retailer or distributor like Wal-Mart or Target. By that point, the artist had built a huge following and went on to do his or her own thing without us. The clothing company made a ton of money selling the rights (always with the artist's permission, by the way) that supplemented the revenue they earned from selling clothing. Hardly anyone knew about the plan, or even more impressively that that the parent clothing company had actually generated more platinum singles than any record studio in America. Wild, right?

The artist got what he or she wanted: the chance to make art and let people listen to it (not to mention the opportunity to make lots of money). The public got what they wanted: the discovery and cultivation of new artists. And the company got what it wanted too: the chance to sell clothing, support new artists, and make enough money to keep doing this sustainably.

The for-profit business world is full of complex strategies like this, which is part of the reason so many for-profit companies can sustain stormy economic downturns better than their nonprofit peers.

Somewhere in this little tale may be the most useful bones of a new business model yet for nonprofits if we can deconstruct it and apply the good parts to what we're doing to serve society.

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Making these Ideas Useful

Some readers, of course, will disagree with the three categories I've described. They're only a starting point for serious discussion, not a how-to manual. So play with them. Adapt them. See which ones might fit with your nonprofit activities large or small. Improvise and experiment with your business model just as you do with your art.

When I say the current nonprofit business model is not working adequately anymore, I'm not doing what publishers like by coming up with a provocative subject. I rather mean to say the relentless begging for funds infects our pursuits. At the most basic point of integrity it dictates we can't simply do what we believe is right unless someone unrelated to the transaction gives us money to do it first, because our work is not really worth anything in a tangible way like everyone else's is. It says we can't grow as fast as the for-profit sector because we are forever relegated to survive only in their beneficent shadow. So we must be afraid of those outside ourselves because we depend on them whether we want to or not. We must be forced to oblige the person who funds us rather than trading value equally with those we are really trying to reach with our work. It is a path that ultimately dead-ends in a master-servant relationship. And it is wrong. And its effectiveness is waning. And we should begin changing it now.

I am confident we can resolve this fundamental structural problem, but only if we get over the sanctimonious conceit that the mathematical laws of economics do not apply to nonprofits because our work is so terribly meaningful; and instead face the reality of our business situation with the same innovative vision and gusto we deploy toward our core missions. The art, music and many other activities nonprofits undertake are well worth making this shift.

Can we nonprofit leaders begin to make this change? Or will our historical pride and prejudice dictate we are to become zombies in the years ahead?