03/25/2013 05:43 EDT | Updated 05/25/2013 05:12 EDT

Putting the 'Profit' back into Non-Profit

The way we think about nonprofits is all wrong.

Earlier this month, Dan Pallotta, a humanitarian activist and fundraising innovator, made waves with his TED talk about how our approach to charity is backwards. (Give it a watch if you haven't already done so; the 18 minutes are well-worth spending.) While championing the hopeful potential for business to continue raising up the mass of humanity from the developing world, Pallotta observes that a sizeable population always is left behind by these efforts. Despite philanthropy's ("the market for love") best efforts to tackle such problems, a lack of scale and a perverse campaign to deny the nonprofit sector the tools it needs to attract top human, social, and financial capital creates a charity case out of charitable giving.

Pallotta describes an "apartheid" against the non-profit world, with five primary areas of discrimination that do not apply equally to the for-profit sector. From compensation, to advertising and marketing, to risk-taking in fundraising, to time demonstrating return on investment, to profit for attracting risk capital, Pallotta argues that nonprofits are held to entirely different, and totally unjustifiable, standards than is the for-profit sector. This reality is reinforced by the surprise of discovering entirely volunteer-run chapters of respected, global non-profits. Can one similarly imagine an entirely volunteer-managed division of Goldman Sachs?

But with approximately 165,000 non-profits and charities in Canada (half of which are entirely volunteer-led), representing about 7 per cent of gross domestic product (GDP) and employing 2 million people, this is no small debate.

Reading the tweets and Facebook posts of my friends who watched Pallotta's talk, many of whom work or have worked with nonprofits, there appeared to be unanimous head-nodding -- "Higher salaries!" "More funding for creative!" "Longer delivery timelines!" -- and appreciation for someone having the courage and the pulpit to tell it like it should be. Pallotta makes a strong case against confusing morality with frugality. In his world, impact is created by enlarging the pie of charitable giving. To increase growth, and to scale efforts, operational investments must be made that call for "overhead" spending.

True, the non-profit organization, just like the technology start-up with a disruptive, yet unproven, new innovation, must sell its vision as much as its financial model and its metrics for measuring impact. But by reducing organizational survival to a simple sales-pitch ignores the fundamental truth that not all organizations are created equally, and not all ideas are worth their paper weight.

However, one idea with the potential to transform the charitable giving-ecosystem are social impact bonds (SIBs), a pay-for-performance delivery mechanism for scaling preventive interventions of nagging social challenges. Sometimes more broadly referred to as "social finance" or "impact investing", the idea is simple and powerful: like other debt or equity investments, government-brokered SIBs may return between two and nine per cent on an investment (which adjusts the scale of the social impact) based on the performance of the implementing organization in addressing the given challenge. The scale and replicability of the intervention, backed by well-parsed data to accommodate mid-course improvements, are prime.

From homelessness to carbon emissions to criminal recidivism rates, there are a suite of problems ripe for tackling by new "triple-bottom-line" (TBL) approaches - the TBL in this case being a potentially effective government intervention, a program to-scale by the implementing organization, and significant financial and social returns for the investor.

How this connects to Pallotta's vision for nonprofits is through the great incentives (and pressures) created by such investment potential for implementing organizations to achieve evidence-based results. The rub for such an arrangement is that both government and investors must be able to see the long game - something long understood by the Warren Buffetts of the world but of which governments, with political visions of five years maximum, are notoriously less capable. In failing to deliver on its programming promises, the organization likely will be passed on the next time an implementing partner is sought (unless, of course, you're chums with a governmental body with questionableoversight capacity), which may affect its future ability to retain or attract top talent and money.

It is difficult to speak of non-profits today without mentioning socialentrepreneurship, a process of "taking responsibility for an innovative and untested idea for positive social change." Many have heralded social entrepreneurship's promise as the natural solution to stubborn societal problems in today's austerity-strained economies. Others are more cautious.

For one, those non-profits not typically suited to or aligned with entrepreneurship may see their ability to attract resources impeded by their inability to maintain a vogue image. Eli Malinsky, executive director of the co-working incubator the Centre for Social Innovation, recently in Toronto observed that the "rush of enthusiasm" surrounding social entrepreneurship could distract from the truth that the most scalable change and social good likely will come from for-profit companies moving their corporate needles towards doing more social good. There's room of course for both, but this means appreciating that different roles exist. Perhaps blending those disparate worlds for enhanced collaboration is one answer - corporate nonprofit foundations or for-profit social innovation-incubators to the rescue.

Without an obvious, consensual way ahead, comfort can be found knowing that much more creativity and fresh thinking is leaking into an ambit once and solely associated with Birkenstock-clad do-gooders. Thankfully we're moving more closely towards a future in which the impossible exists only for lack of imagination.

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