Why Traditional Nonprofit Model is Doomed and Social-Profit Sector Must Emerge
Updated: Aug 30, 2019
The September 2019 issue of Stanford Social Innovation Review presented a fascinating study on why business should co-create solutions with the low-income communities (academically termed BoP which is the “Base of the Pyramid”) in developing countries rather than the traditional transfer approach that takes a patronizing white colonial guiding view on International Development (Cocreating with the Base of the Pyramid, London & Jäger 2019).
I found a striking parallel between the transfer approach towards BoP and the framework with which the traditional nonprofit model operates in North America. Social problems that often have a lot to do with the base of the pyramid (BoP) in a developed country are largely the responsibilities of the social sector currently consists largely of nonprofit organizations. These organizations were governed by volunteer boards from members of the business community to provide their “expertise” in the business world to nonprofit. In other words, it is a “transfer approach” as referred by London and Jäger. However, it’s common knowledge for those of us who actually work in nonprofit organizations that often time board governance is more distractive than effective. The only assets that the board could effectively offer is their networking power to fundraise. On the other hand, many nonprofits in North America heavily rely on government grants and private donations. These “free” money also come in with a price. That is, the nonprofit becomes limited to utilizing the fund raised to build its own capacity or seek innovation.
Dissecting these problems deeper with three lenses: Power Dynamic, Economic, and Innovation, we quickly can see how this model is becoming obsolete and need to make ways for the new social-profit sector to emerge.
Power Dynamic Lens
The relationship between nonprofit and government/businesses is that of charity and patron. Therefore, businesses and governments have way more say in setting agendas in the social sector. With a transfer approach from the private and government sector to the social sector, the solution is often symptom-focused and rather turning a blind eye to the root cause of a systematic problem that’s currently benefiting private sectors. Nonprofits are left powerless because they rely on their patrons for “free” money and advice. In a social-profit model, the government and businesses become customers instead of patrons. The shift of power dynamics will facilitate system change that the social sector wants to see.
The technological revolution in the past decades brought faster communication into the world and knowledge becomes less controlled and authorized by the elite. Generations of people from more diverse backgrounds and armed with these new mindsets are empowered to make changes faster in the world and they intend to do so. They want to be more engaged in decision making and using market power to benefit society. They soon realized that the BoP not only has economic power but also has assets that could turn the outcome into profit. As Shaun Loney rightfully pointed out, nonprofits are giving out lucrative outcomes while social enterprises evaluate and sell outcomes (Loney, The Problem Solver’s Companion, 2019). While the transfer approach does not recognize the value of the BoP market, a co-creation approach blends nonprofit with for-profit by leveraging network, leadership and knowledge assets of the nonprofits and sound business practices to grow sustainable businesses, create markets and solve a social problem at the same time.
Today, innovation is essential to the survival of any organization. Innovation requires an environment that’s creative, collaborative, and risk-taking. The social sector should thrive on innovation to resolve social problems. Instead, the nonprofit model stifles innovation with a scarcity mindset as donors and funders are often too focused on efficiency not building capacity. The social-profit approach emphasizes business acumen, borrowing lean and agile management while creating human-centred innovative solutions for social problems.
Seeing what’s wrong with the traditional nonprofit model through the three lenses explain the two biggest trends we are experiencing in the philanthropic sector: Diversity and emergence of a blended solution. Diversity of not only the base of the pyramid but also the top of the pyramid puts the traditional concept of philanthropy in question. Changed mindset brought forward different ways of financing solutions to social problems. The emergence of impact investment and social impact bonds are two examples. The expectation for the nonprofit to become more sustainable and self-sufficient is also higher. Many nonprofits started to use a blended model but most are still resistant to the paradigm shift. There are still plenty of people in nonprofits who think profit is evil. However, these major trends are resulting in diminishing donors as well as calls from funders for financial diversification and collaboration. Although I don’t think it’s time to use the name Social-Profit Sector yet as the system still needs to change first, the shift from nonprofit to social profit is inevitable. It’s not a question of if but a question of when.