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Evolving from a Not-For-Profit to a Social Venture
by Dexter W. Braff
The profit motive is singularly powerful in business. It drives strategies to increase revenues and seek out efficiencies--to stay vigilant to threats and opportunities that can either bring a business down, or launch it to even greater heights. Profit is also easily measurable, objective, and useful in comparing the performance of one business to another. But shift the primary objective from making money to doing good--to pursuing social missions and causes--and the business of doing business becomes fuzzy.
In a not-for-profit freestanding or hospital based home health agency, profit dollars are theoretically being eschewed for social value creation, but how do you measure social value? And absent objective profit measures, how does a not-for-profit know how it's doing--if it is maximizing its opportunity to create social value or if some of this potential is being lost in strategic miss-steps, inefficiencies, and the like?
These questions pose critical challenges to not-for-profits. The answer(s) though, while difficult to implement, are rooted in a relatively simple concept. "Nonprofits have to recognize that they're businesses, not just causes. There's a way to combine the very best of the not-for-profit, philanthropic world with the very best of the for-profit, enterprising world".[1] In doing so, they begin to evolve into what is referred to as "social ventures".
Much has been written about the topic (see a sampling of resources below) with several themes that are particularly relevant to not-for-profit home health agencies.
It's about culture
First and foremost not-for-profits must stop defining themselves as "not-for-profit", a tax code designation that does little to inspire an innovative business culture. Rather, home health leaders should strive to adopt a culture of "social entrepreneurship", which, as defined by Gregory Dees of Stanford University embodies (a) the adoption of a mission to create and sustain social value, (b) the relentless pursuit of new opportunities that serve that mission, (c) engaging in processes of continuous innovation, (d) "acting boldly without being limited by resources currently in hand ", and (e) "exhibiting a heightened sense of accountability to the constituencies served and for the outcomes created" [2] (emphasis added).
Earned Income is the key
According to Jerr Boschee, Executive Director of the Institute for Social Entrepreneurs, non-profits have traditionally relied on "philanthropy, voluntarism, and government subsidy [to survive]. Earned income has been viewed as something extra. Social entrepreneurs have turned that formula on its head: on the revenue side, earned income has become the primary goal. Philanthropy, voluntarism, and government subsidy are welcome, but not central".[3] From a practical perspective then, when HHAs prepare financial statements, donations, or any other form of "unearned income" should not be included with revenues. Rather they should be booked to an "other income" account, leaving operating income as a "pure" measure of self-sufficiency.
Distinguishing between "Earned Income" and "Mission Focused" services
In an ideal situation, home health agencies would establish an "earned income" division whose sole purpose is to maximize income (or surpluses, in n-f-p terminology), which would then be used to supplement and fund the services of a second, "Mission Focused" division. By doing so, the "funding" division would mimic a for-profit agency and could be operated and benchmarked accordingly. Inefficiencies that often creep into not-for-profits could then be more easily identified and addressed. Moreover, with a separate, "mission focused" division, an agency's success in creating social value could be more easily measured and understood.
Unfortunately, it can be extremely difficult to isolate and allocate "earned income" vs. "mission focused" revenues and expenses to separate divisions. But given the extraordinary value of doing so, attempts should be made nonetheless. At the very least, agencies can track and budget a mix of high margin earned income services to low margin (or loss generating), mission focused services. For example, for "x" number of 10 physical therapy orthopedic cases, the agency can afford to provide "y" number of charitable home health aid services. By doing so, the links between earned income, the mission, and self-sufficiency become real and strategic. One not-for-profit hospital based agency mentioned another innovative approach. Rather than provide mission driven services within the agency itself, the hospital system aggregates all of the surpluses (and deficits) of all of it's operating divisions, and then uses the funds to meet its social objectives.
These are but a few of the strategies not-for-profits can employ to evolve into social ventures. An evolution that can go a long way to keep such noble pursuits thriving.
Other Resources
1 From "Genius at Work", an interview with Bill Strickland, CEO of the Manchester Craftsmen's Guild and the Bidwell Training Center, Source: Management Assistance Program for Nonprofits
2 "The Meaning of Social Entrepreneurship", J. Gregory Dees, Professor of Public Service, Graduate School of Business, Stanford University
3 "Eight Basic Principles for Nonprofit Entrepreneurs", Jerr Boschee, Non-Profit World, July/August 2001
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