Divided We Stand? Facing the challenges of Collective Impact, Corporate Philanthropy, Earned Income and more – A dialogue with Jan Masaoka, ED of CALNonprofits.

Jan Masaoka

Jan Masaoka is a leading writer and thinker on nonprofit organizations with particular emphasis on boards of directors, business planning, and the role of nonprofits in society. She has recently assumed the mantle of Executive Director of the California Association of Nonprofits. (CalNonprofits).

She is Editor-in-Chief of Blue Avocadothe essential online nonprofit magazine with an amazing 63,000 subscribers. For 14 years she was executive director of CompassPoint Non-profit Services (www.compasspoint.org), a consulting and training firm for nonprofits based in San Francisco and Silicon Valley.

She is an eight time designee as one of the “Fifty Most Influential People” in the nonprofit sector nationwide. Her recent book with Jeanne Bell and Steve Zimmerman, Nonprofit Sustainability: Making Strategic Decisions for Financial Viability, (Jossey-Bass, 2010) has quickly become a vital tool for nonprofits to truly assess the financial impact of their range of activities. (I will explore the teachings of the book in another post.) My conversation with her was an opportunity to revel in her rich experience and take-no-prisoners plain talking. This makes everything she says not so much a condemnation of how things are, but an invitation to question, question, question. And we can’t have enough of that.

Jan, you are new in your position at CalNonprofits, yet already you are involving the organization in a major initiative to get nonprofit staff, volunteers and clients signed up to vote (for the recent California elections). I have noticed that some nonprofits shy away from such activities in their direct service programs because they are fearful that some donors might say they are ‘becoming political.’ How can you deal with that?

First of all, this is non-partisan voter registration to get out the vote. We’re not telling people how to vote. We are saying that whatever the ideals and values that brought you into contact with the non-profit sector, vote with those values.

Nonprofits are not outside of communities, they are the ways that a community organizes to take care of itself. But I also think that we don’t just serve people, we represent them. Anybody that’s serving children with disabilities, for instance, is also representing them. There is a lot of heavily lawyer-scrutinized information in the Legal FAQ’s section of CalNonprofit’s website which indicates what nonprofits can and can’t do in this area.

LOOKING UP AND DOWNSTREAM

In my discussion with Jan Poppendieck, she touched on the need for food banks and similar organizations to put more emphasis on looking up and downstream from what their own particular level of involvement was with clients.

This is vital. I can think of an example of a shelter program for runaway kids that used to be funded by the government. They received a fee for service based on a performance outcome basis. The designated outcome was reuniting kids with their families, and they would receive a certain amount of money for every kid they reunified with his or her family. But if you look downstream and think about it for 10 seconds you realize that with some kids, reunification is a good outcome but for many others, it is no. There were a lot of kids being returned to abusive homes or to a home where drugs were being used all the time. The nonprofit realized they needed another goal, of more long-term shelter for those kids who didn’t have good homes to go back to. They received no government money for this, so they had to raise it. And then looking upstream, they realized they had to advocate to get the policy changed that specified unification as the only goal. If they had only thought of themselves as a little factory of unduplicated units of service they might have remained focused on the unification numbers. But because they are representing this part of our community, they had to find the best outcome for them even if it didn’t mean they got any money for it. Standing on the sidelines is easy, but is no longer an option if we want to achieve big things.

 GOVERNMENT, BUSINESS AND NONPROFITS

We hear a lot about the supposed realignment of the roles between government, business and nonprofit organizations. What is your take on this?

I think it’s about smoke and not fire. I just read in today’s paper that some country music star is going on a tour, and in each of 25 cities, he’s going to buy a house mortgage free for a veteran there. That’s wonderful, and great publicity for him. Unfortunately this is not really an example of private dollars helping veterans in a significant way, it is more about winning a lottery, and that is no way to help those around us. We have over a million veterans in the United States and he’s buying houses for 21 of them. So I think that the idea that private money is going to supplant the need for government money will never be true.

I‘m jes’ tryin’ to help best I can. Don’t be dragging me into your whiney little blog.

 So, kind of like with Tom’s shoes concept, which sounds great (and full disclosure, my ten month old, Mia Regina has a ‘metallic tweed’ pair she received at her baby shower) but actually does little to build a sustainable way for people in those countries to create the businesses to help provide shoes for themselves. 

Tom’s Metallic Tweed Shoes for Baby

Yes. I member a California foundation that poured millions and millions into working with the schools and weren’t getting much in the way of results and someone explained that they had really only put in about as much as the lightbulb changing budget for the Los Angeles Unified School District. These problems are too big for most foundations to move the needle on, or for government to excuse themselves from.

What about the ways in which businesses and nonprofits can work together more? Don’t you think that businesses are starting to approach some things like a nonprofit and vice-versa?

Businesses always absorb what is the culture of the day, in order to sell their products. So for example there was a time when paisley prints were radical and wild. So people who wore paisley or had long hair practically saw this as being anti-corporate. Then business took that over and people with long hair were in commercials for cars. I think that right now we have a similar cultural view, which is about doing good in the world and being community-oriented. Don’t get me wrong, it is important and valuable, but I think like every other cultural movement business uses this and when the cultural movement passes, business will pass too.

Maybe if he hadn’t been wearing a paisley hoodie…

But, corporations are run by and made up of people (just ask Mitt Romney) so those people can always express their generosity and concern about the world, despite the business imperative. We’ve come a long way from Johnson and Johnson’s shareholders suing the company when it attempted to divert some dollars to philanthropic activities. Helping the community is always smart business, so I don’t see that changing.

Sure, but when doing good crashes up against consumerism is where things often grind to a halt. So, for example, all the people who are passionate about sustainable agriculture might not want to realize that the most significant thing they could do about reducing the energy cost in agriculture would be to stop eating lettuce. Lettuce uses more energy cost related to the nutrition it provides than any single produce item on the planet. And yet you don’t see environmentalist calling for the end to eating lettuce. So I think that it can become a symbol of how we want to do things and see ourselves, but we don’t really want to make any changes to our consumer lifestyle.

COLLECTIVE IMPACT

COLLECTIVE IMPACT

On a local level, how do you think that nonprofits can collaborate and get some kind of collective impact?

I think the way that food banks work with their member agencies is an excellent example of bona fide collective impact that is generating extra value. For the most part, the smoke around collective impact and collaboration is not about something that genuinely works but creating the appearance of something that’s going to work. Almost all of these efforts are funder-driven and the funders put money into them and when the funders take the money out, it collapses. And that suggests that it’s it’s not a business model that works.

 So what sort of examples can you give where that’s happened?

Foundation after foundation has created local collaborations and they’re around many different areas. Sometimes they are focused around a particular neighborhood and they’ll create a collaboration of different nonprofits and businesses to work on that neighborhood. Sometimes they might be a collaborative of something like domestic violence shelters working across 6 counties or the like. Many of these collaborations have grown organically over time, so they actually work. But others failed, like the Hewlett Foundation’s neighborhood improvement initiative and Annenberg’s initiative in public schools, the San Francisco Foundation’s Lifeline collaborative. They were put together in a way that didn’t make business sense for any of them and so when the outside money disappeared, the collaborations evaporated. So the collaborative initiatives that last are the ones that genuinely make sense for people and almost all of them are started by the nonprofits themselves, not by funders and their consultants.

I think funders have got to build on existing community strengths. And if there is not an organic community strength in that particular community then maybe you can’t fund them successfully.  Maybe you have to look for a different community or maybe you have to take a longer view and say maybe there are 6 or 7 weak organizations in that community but let’s take a longer view of building their strengths. Instead I think what tends to happen is that a foundation that wants to work in a particular community or field and they see 5 or 6 weak organizations, then they figure if they just had a consultant to bring them together for collective impact, then it will all work out. It won’t.

One of the things that keeps nonprofits honest is that we get feedback from the market and we have two markets – a client or patron market and then we also have a funding market, so we have to work in both of them. Whenever you’re in a situation when you don’t have to work with those markets, then things can go wrong and you’ll never know it. That’s kind of like back in the old Soviet Union when the state decided  what a factory should produce. There was no reason for anybody to get any better. Any institution that is not kept in check by some kind of market goes bad and doesn’t know it.

And so how can a foundation avoid getting into that situation then?

They can support community-based efforts as opposed to starting their own initiatives. I visited a foundation recently and they had on the wall a large poster that they had created with a circle. And in the middle of that circle was their logo, very large. And then around the outside of the circle were other foundations and nonprofits. They said to me that this represents our view of how we collaborate with other people and I felt like – No! – this represents your view of how you’re in the center of the universe.

EARNED INCOME

I did a recent post about earned income for nonprofits. What is your take on this area?

A former consulting client of mine, for example, was running an organization they did a lot of psychological counseling for people and families across the spectrum. They received funding to support this work and then when that funding declined, they focused more on earned income. So, they were able to successfully grow their earned income side, and their budget didn’t look any smaller. But if you look closer, they’re now primarily serving people that can afford to pay rather than across the economic spectrum. And I think that this story writ large has been the hidden story of the move toward earned income.

You don’t feel that this can be balanced by having scholarships or sliding scales?

I think it can be mitigated and it’s a partial answer for some organizations but we need to be alert that so far at least many of the earned income gains have come at the cost of helping middle class people rather than economically disadvantaged people.

Many food banks resell purchased food or require a shared maintenance fee of a few cents a pound for some food items that they provide to member agencies. Some food banks don’t do that but we have found that in situations where there is no fee, it leads to inefficiencies with organizations taking more than they need.

So you introduced in a market element, right?

Yes, we’re not charging individuals, we’re asking organizations to take a financial stake in what we’re doing.

You should realize that I’m not trying to sound like I’m anti-earned income. I’m just saying earned income is not a replacement either for charitable dollars or government money.

I read your recent Blue Avocado post “In the Titanic Recession, Which Nonprofits Get the Lifeboats?” and this touches on the ideas you have just expressed about a shift from services to the very poor.

Yes, nonprofits that provide “the most basic anti-poverty for the poor and homeless failed at around twice the rate of more mainstream services.” Also, only about 16% of foundation funding is targeted to low income communities.

Which you lay at the doorstep of the focus on “innovation, social enterprise, outcome metrics and the coolness factor.” Jan, this is hitting me where I live!

It should! But I think food banks are hardly the type of organizations that are in this situation. They are doing some of the most important and pressing human work. And these and other organizations are where the money and focus should go.

Thanks Jan. There is a lot to think about there. Please continue to challenge us.

Earned Income for Nonprofits: Four Dirty Little Words?

What happens to fundraising if we follow the preventative healthcare model that has been expounded on this blog? What if, in a few short years, our programs are demonstrating wonderful health impacts? How is that going to play with our existing donor base?

Would it mean that our direct mail might have to stop looking like this:

Our operators are standing by for your calls.
And start looking like this…
Now we all know that the Ghost of Food Banking Past  (yes, I’m exaggerating to make a point) helps keep those donations flowing in, so that we can get food out to people who can truly benefit from it. Yet once we begin to focus on that same food leading to health outcomes, are we going to be able to pull on the hunger heart strings in the same way?
I don’t think so.
We asked our direct mail company why some recent mailers had brought soft returns, and their response was that our mailers were too positive. The kids looked too happy.
Tricks of the Photographic Model Industry # 234: Hop em up on Mountain Dew and then switch out the Hot Cheetos for fresh fruits and vegetables right before the cameras start clicking.

We all know it.

In the hunger business, negative sells.

Positive is understood by a different type of donor or  foundation, looking beyond immediate the immediate need, towards a long-term solution.

Nevertheless, I guarantee that whatever organization you represent, in the next 3 years you are going to have to come face to face with the need for an increase in …EARNED INCOME.

Much as you want to wear the garlic around your neck and make crosses out of two rolled-up annual reports, you are still going to have find more money from non-charitable sources – there is simply no way around it in the world we find ourselves in.

I attended a workshop with noted nonprofit consultant Andy Robinson last week, that focused on this very area. Andy is the author of Selling Social Change (Without Selling Out) – and the title suggests that he understands a little of the ambivalence in nonprofit organizations around this subject. I’d like to share some of the things that came up in the session.

Nonprofits need to decide what is the best mix of resources that is going to make them sustainable. We all agree that the old borders between non-profit, business and government are eroding. Businesses acting like nonprofits, nonprofits acting like businesses and the government…well that situation has always been fluid.

Let’s consider the pros and cons of generating earned income, starting with the positive:

• Diversified funding base – a key to sustainability

• An expanded prospect pool for individual gifts – doing business can be a great way of meeting people who can be inspired by your mission and give.

• It reduces reliance on grant income and also provides unrestricted funds.

• It provides new publicity and advocacy opportunities.

• It builds new skills and leadership with the organization.

That sounds great, but what about the downside:

• Most obvious is risk – sometimes you are going lose money. Research by the U.S. Bureau of Labor Statistics shows that nearly six in ten businesses shut down within the first four years of operation. You could bring your nonprofit down with your business if your comb-over is not as impressive as Donald Trump’s.

• The up front costs – it takes money to earn money, so the lower the start-up costs the better.

• Mission creep. If your commercial empire takes off, you may find the tail wagging the dog.

• You already have enough work to do, so this will need dedicated staff time. Otherwise it’s a hobby and hobbies don’t make money.

• One other concern is the potential tax liability. if you are a charitable organization and are charging for services that are directly connected to mission, you don’t have to pay tax on that income. However, if you set up an unrelated business, you may have to pay UBIT (Unrelated Business Income Tax). Finding that connection can be important. The YMCA used to regularly get sued in different states by other for-profit health clubs saying their charitably subsidized clubs presented unfair competition. However, the Y won every one of those cases because they could clearly point to their actions as a way of delivering on their mission statement. Girl Scout cookies get away with the same thing, because they teach leadership – girls track product, log payments, use merciless sales techniques…

Now get out there and sell, and don’t think about the nutrition issues! Whaddya mean ‘mint thins’ is an oxymoron?

• One key area of concern that I voiced to Andy at the workshop, was the need to educate contributors so they realize that you as a charitable organization still need donations.

It is clear that market research and feasibility studies, no matter how simple, are a vital first stage. As a nonprofit you need to consider what services could you sell? What publications? What cause-related marketing? What goods (wholesale preferably).

There was naturally some pushback from workshop attendees about the notion of charging for services, many of which in one form or another would have been offered free by the organization. Andy referenced a study that looked at vocational training courses that were either free or charged a modest fee. Far better outcomes were identified amongst those who paid something for the service. They valued it more. Whether this is a sad reflection of our society or not, it is a reflection. People value what they pay for and do not value so much what they get free.

This is a stimulating challenge for us in non-profits. Sliding scales, scholarships, are both possible. Andy suggest we do some testing with any charge for services and track the results. From my perspective the difference between a business and a nonprofit charging for services is that the non-profit is not afraid to potentially put itself out of business, by providing a product which can help the recipient move beyond the need for those services, or into a place of new possibility where they can generate more for themselves and their families. That ‘more’ might be money or community or advocacy for improvement in their neighborhood. In contrast, a for-profit wants to keep you endlessly coming back to buy ‘newer, better’ versions of the same thing.

Don’t try this at home, folks.

As a food bank, we are looking very carefully at earned income. We have always been in the earned income business, in that we charge a very modest shared maintenance fee on some food items that we provide (which prevents agencies from just taking more food than they can effectively use, and which goes some small way to defray the costs of running the warehouses). This is a clear case of putting a value on something that would be valued less if it was free. We also do our own attempt at social engineering by spending hundreds of thousands of dollars on purchasing fresh produce and making that available with no shared maintenance fee, because we want to drive agencies to provide more fresh produce to their clients.

We are already expanding our resale food selections (where we buy food and resell to agencies), charging a modest 10% mark up, with the stipulation that we will only charge this if we are able to provide the food cheaper than they could source it via a local wholesaler or superstore. We want to expand this to make more food and non-food (cleaning products, paper goods etc) available to the full range of local non-profit organizations. (Member and non-member alike).

This approach is already happening successfully with Second Harvest Food Bank of Central Florida’s Power Purchase program. The CEO, Dave Krepcho, affirmed this morning that their purchase program has the dual role of providing lower prices to agencies and netting surplus revenue. “If they can get it cheaper somewhere else, we suggest they do so…This year the net revenue number will be approximately $250,000 on close to $3 million in sales. We are designing a Community Kitchen program now so that it will be economically self-sufficient in three years. I affirm your looking into entrepreneurial programs, it’s the direction we must go.” 

I also recently looked at a study done by another urban food bank that examined at the feasibility of undertaking such a resale program and decided it would not be successful for them. There were a concentration of Catholic agencies in their area who were mandated to purchase from a central purchasing agent (no jokes about the Pope getting his cut, please) and that there was a possibility of a similar arrangement being in place with local YMCAs. This negative report, which highlights all of the challenges (many of which would not necessarily apply to us in Santa Barbara) is extremely useful to us. If we move into a business area with a clear understanding of the challenges we would face, as opposed to clutching starry-eyed dreams of flowing streams of golden sustained income, then we will be far more likely to be successful.

The number one challenge identified was the issue of pricing. Most ventures fail by not knowing how to price services effecively. We don’t know how long it will take us to do something, and often the cost of a unit of service remains opaque to us. Andy believed that nonprofits almost  always underprice the value of the services they provide.

When looking at your business proposition, you need to consider whether it represents a ‘market push’ whereby you need to convince the market of the need for your service (like the electric toothbrush vs. the old school manual) or ‘market pull’ whereby there is enough existing demand, that if you provide enough services, you can meet currently existing needs.

The other painful reality is that being a nonprofit is not going to get you any free pass on the customer service side. If you don’t get things right the first time, they won’t be back again, no matter how compelling your mission is.

It is helpful to consider case studies, so we can consider a range of approaches nonprofits are taking to make earned income work. At one end, you can take an organization like Minnnesota Public radio which after 25 years was spun off as a for-profit subsidiary for $175 million dollars, most of which went to their endowment. Another interesting organization is the Okanogan Highlands bottling company, which you can find at www.purewater.org.

It is a fascinating case study, because they had a specific ‘ill’ that they were fighting against, which was a gold mine. It would bring pollution and they provided studies which showed that the value of the water they could bring out of the same site in the form of bottled mineral water would actually be more valuable than if it operated as a gold mine. They did this by commissioning studies that demonstrated how much water was used to extract the gold. You should check out the video they have at their website, because they show how the empty bottles can be repurposed as advocacy tools to send to our representatives at the congressional and senatorial level, to convince them of the efficacy of their course. Perhaps there is a way your agency could incorporate the same approach to get the message across.

Nativeseeds.org is a great website to look for the kind of  nonprofit that recoups 30 to 40 percent of their income through sales of food, crafts and products.

As organizations, we often have fabulous ideas at the programmatic level. How can this be monetized? Check out www.swop.net to look at how they developed their ‘products’ to move from a text book on Chicano studies (which had resulted from a ‘market opportunity’ they identified, because this area was being ignored in traditional history programing). So they created a text book, which then became a DVD, a coloring book, a mural magnet series, a t-shirt etc. This is a pretty politically-minded right-on organization and they’re selling refrigerator magnets? Maybe it’s time we questioned the stereotypes! If the content is solid, the expression of that content can play out across a number of media.

Another example organization is www.globalexchange.org. They are a human rights organization that focuses on tourism. Their proposition – both a value proposition and an advocacy proposition is “What would happen if we brought the people who were interested in an international social cause to the place in the world where that cause is actually playing out. A week in the jungle with the Sandinistas? Not quite. Nevertheless it has resulted in an organization that has 3 million dollars a year in tourist income. Is there a way we can  involve people in the excitement of our day-to-day mission? And then charge them for the pleasure?

A food bank was also considered in our discussion, the Food Bank of Western Massachusetts. www.foodbankwma.org. They used a CSA model for a farm they purchased. The plan involves CSA shareholders paying the full cost of $200k per year but only taking half of the food that is generated. The rest goes to the food bank.

One final example was www.pedalpower.org, which was a community bike organization that had a fascinating  business proposition. Rather than upset the existing marketplace, which you could argue something like the CSA proposal might do, they presented themselves to existing business organizations an entity that would build the market. They would focus on the low-end of the market and offer people sliding scales of rates. They could either fix their own bikes with supervision or with Pedalpower stepping in with physical help. They sold this to the other businesses in the market with the explanation that they were drawing people in at the bottom end of the market. Once people entered the market and wanted to find more sophisticated bikes, they would seek out the other businesses in the market. It worked and the other businesses began to offer them free spare parts and other help.

The final example we considered was www.farestart.org in Seattle. Like Catalyst Kitchens and other organizations, they focus on teaching culinary skills and how to hold a job. They also help with job placement. This was an organization that acutually switched from being a for-profit to a nonprofit organization.

We have all been victims of workshops with consultants who want to draw you in with the promise of education, which is really a promotion for their services or their books. I have no reservation in letting you know that Andy’s book is simply essential for any nonprofit hoping to focus energy on new sources of earned income. It will make you think long and hard about how earned income could work for your organization.

Good luck, and let’s start shaking up the old nonprofit/business divide even further. We have much to learn from each other.