Many people see NPOs as being run by volunteers (not professionals) and as “do-gooders” (i.e. more interested in saving people than operational and financial efficiency). For the most part, the reality is quite different.
There are many parallels between for-profit and non-profit organizations. Most non-profit professionals are driven primarily to provide high-quality services and maintain sustainable organizations, not change the world. They do understand, however, that when they achieve their goals, the world is a little better off. But isn’t that what most people feel about their professions?
Running a good company, employing people, providing quality goods and services, and generating returns on investment are all things that benefit society. Ideally, employees strive for these things. In a slightly different form these same concepts can be found in non-profit organizations.
The gap between the two sectors is not as wide as you might think, but there are differences. The economic fundamentals of a non-profit offer a good opportunity to see these parallels and differences. For the sake of simplicity let’s limit them to four categories: capacity, sustainability, staffing and return on investment (ROI).
Capacity refers to the degree to which an organization can carry out its mission. For a factory it means how many widgets can be manufactured. For a service provider it means how many clients can be served. For a retailer, how many sales are possible during a given period.
The following factors have a great influence on capacity: physical infrastructure, institutional knowledge, technology, staffing, and available resources (i.e. finances, parts/ingredients, and raw materials).
The second challenge is sustainability. Anyone with business experience will tell you that a sudden, dramatic increase in sales is a bane because anomalous sales increases are usually not sustainable. When a new product – be it shoes, a smart phone or a toy – is a hit, there is huge demand followed by increased expectations from investors that higher earnings will follow.
Yet production and sales are rarely in sync and the sales boost is often short-lived. In the non-profit world, a sudden windfall in donations is problematic because funding is often tied to a specific project or fiscal year. You are very lucky if a commitment for support is for more than one year, and if you ramp up operations without a sustainable economic model, who is going to cover the costs of these new services in the following year(s)?
I first faced this problem in 2006 when a donor contacted me and said, “We have ¥20 million (US$195,000) we want to give you to use this year. Draft a proposal for us.” There was one condition: they wanted some sort of capital investment on which they could put their logo. I quickly realized that spending that kind of money is not so easy. Any capital purchase incurs long-term running costs the original donor would rarely cover.
In the end we found something that worked for both the donor and us, but the experience made me realize that getting a windfall is not the same as establishing a sustainable business model.
Next, a significant difference between for-profits and non-profits is the availability of and reliance on volunteers to support non-profit work. Volunteers are an incredibly valuable resource, but there are real limitations. The most pressing two are time and priorities. Volunteers are limited to how much time they can give. If other priorities come up, then volunteering time gets sacrificed. Non-profit managers know that no matter how committed a volunteer is, there is always a chance he or she may suddenly have to cancel.
Volunteers come to help with the best of intentions, but not always the best preparation or professional experience. I responded to both the tsunami disaster in Japan and Typhoon Yolanda in the Philippines, and in both cases I heard numerous stories about volunteers rushing in to provide assistance, only to find themselves in way over their heads. In some cases the volunteers were the ones needing to be rescued. Intentions alone should not dictate the appropriateness of an action. We cannot simply say, “At least they were trying to help” to justify an action. It is a perverse situation when volunteers intending to do good leave more chaos in their wake. On the other hand, when volunteers are directed they can become force multipliers.
Return on investment
The last factor is ROI: what do donors expect to get from their donations? Will we be able to meet their expectations? In my business, food banking, I am often asked, “If I give you X amount of yen, how much food can you deliver?” This is a legitimate question, but not always easy to calculate for us. For example we have three different delivery models. We provide hot meals, emergency groceries, and wholesale distribution. All use donated food, but all have different financial models.
The second problem is that overhead is often viewed as an unnecessary expense. I encourage you to watch Dan Pallotta speak at TED about this topic. Dan makes an excellent case for why we hold non-profits to a double standard.
Here’s where for-profit and non-profit organizations are worlds apart. In the former there is a direct relationship between revenue and the goods/services being sold. More sales should generate more profits. If a company increased its ROI from 5:1 to 10:1, one would expect both that the company is doing great and that the staff deserve a fantastic bonus.
But for a non-profit there is a disconnect between the services/goods being offered and who pays for them. Increased efficiency does not yield bonuses or an immediate increase in pay. In my 11-year-old organization, we delivered twice as much food during the last three years as we did during our first eight. During that same period, our cash donations remained relatively flat while our volume of delivered food increased by 253 percent. In other words, our ROI dramatically improved. Yet these savings were never passed along to my staff in the form of bonuses, which leads to the next difference.
When we “save” money on a project through higher efficiency or other measures, we are required to return those savings to the donor, which is a legitimate request. One can see the disincentive to come in under budget or be more efficient. And this inequality in efficiencies plays out in another way.
Imagine that a natural disaster has occurred and both the Red Cross and Second Harvest Japan have been given $10,000 to provide aid. Both organizations deliver aid equivalent to 5,000 meals. And the cost of overhead and logistics for both organizations is the same $1,000 (almost certainly not true in the real world).
But here is the big difference. The Red Cross spent its remaining $9,000 purchasing food while Second Harvest Japan used donated food. The Red Cross is applauded for providing timely service and can make appeals for more funding. On the other hand Second Harvest is asked, “Why do you still have $9,000 unspent?” Furthermore, we cannot merely fold that money into our general operating expenses because it was designated for disaster relief.
Partnership with the for-profit world
My non-profit organization relies on partnerships with for-profit companies. But we want true partnerships, with both sides seeing and treating each other as equals. I have rejected donations from organizations that did not see things that way.
A partnership with Second Harvest Japan offers many benefits to our donor companies. First, by donating rather than dumping excess food, companies can reduce their disposal costs. The average cost of surplus food disposal is about ¥100 (US$0.98) per kilogram, and in 2012 Japanese companies saved an estimated 312 million yen (US$3.05 million) on disposal and return costs by donating.
In addition, our partners reap rewards in terms of employee morale and CSR.
Finally, food donation provides marketing benefits to donor companies, whose popular goods may be purchased in future, as well as positive brand image effects.
Our work would not be possible without our many supporters, volunteers and stakeholders. Our goal is to make food banking and food pantries as common and culturally acceptable as hospitals and libraries. We want people to move beyond seeing these as charitable institutions carrying out good works to understanding them as public assets providing vital services to our society.
Charles McJilton is the founder and CEO of Second Harvest Japan and Second Harvest Japan Alliance, Japan’s de facto national food bank.