The Non Nonprofit: Create Economic Value from Social Benefit
The sixth principle in Steven Rothschild’s The Non Nonprofit: For-Profit Thinking for Nonprofit Success is ‘Create economic value from social benefit’. What this means is, effectively, that nonprofit organizations should develop ways to assign a dollar figure to their positive impact on their communities:
Quality nonprofits create benefits to society by addressing social problems, and virtually all the social benefits they create have monetary or economic value that can be identified and measured. A nonprofit that calculates this value can leverage its success into more effective fundraising, revenue generation, pay-for-performance relationships, and better ways of capitalizing growth.
An organization creates economic value when it increases revenue or eliminates costs, or both, for a stakeholder. These benefits typically accrue over time. The three components—increased revenue, decreased cost, and time—hold true whether the organization operates as a for-profit or a nonprofit.
Rothschild, Steve (2012-01-12). The Non Nonprofit: For-Profit Thinking for Nonprofit Success (p. 146). John Wiley and Sons. Kindle Edition.
So, for example, an organization that helps the homeless should be able to explain why it is a cost effective way housing homeless people. In the example that Rothschild gives, an organization called Common Ground:
demonstrated that supportive housing is a good financial deal for the government. The apartments it rents to low-income and formerly homeless tenants cost approximately $36 per night to operate. This compares to public expenditures of $54 for a city shelter bed, $74 for a state prison cell, $164 for a city jail cell, $467 for a psychiatric bed, and $1,185 for a hospital bed. The differential between the cost of supportive housing and the cost of alternative methods for housing the homeless makes a simple, clear, and effective statement about the financial value that Common Ground is creating.
Rothschild, Steve (2012-01-12). The Non Nonprofit: For-Profit Thinking for Nonprofit Success (p. 142). John Wiley and Sons. Kindle Edition.
Other organizations, according to Rothschild, can and should develop similar metrics. Rothschild does note, however, that not all organizations can do this:
Virtually every effective nonprofit creates economic value. However, there are some vitally important organizations—like art museums, zoos, and orchestras—where the economic value would be extraordinarily difficult, perhaps impossible, to establish. Of course, these organizations are essential to the community’s quality of life and have an intrinsic value. But they also create jobs and contribute to the economy in many ways. How do you determine the specific cash value they generate for state government or some other entity? In these cases, the economic value equation is not a useful tool for management. Management’s time and energy are better spent in pursuing other ways to build a financially stable organization.
Rothschild, Steve (2012-01-12). The Non Nonprofit: For-Profit Thinking for Nonprofit Success (p. 147). John Wiley and Sons. Kindle Edition.
In the end, however, Rothschild suggests that most organizations – especially those that have an easily monetized social benefit – should perform the kind of analysis necessary to establish the monetary benefit of their services, and Rothschild uses a fair amount of space explaining how to perform such analysis, with a particular focus on determining Net Present Value (NPV) and Return on Investment (ROI). Obviously, making the actual calculations can be quite complex and require substantial amounts of data – and making comparisons to other ways of having the same social impact requires even more – so research and a financial professional are both necessary in actually carrying out such analysis and formulating a case based on the economic value of an organization’s work.
Rothschild also goes a step further, presenting several social investment options that not only allow for cost effective social impact but grant a return to those who invest in social change agencies. On the low return end of the scale are acts like pure philanthropy, which by definition provides no return to the donor. In the middle of the scale are social impact bonds which provide a below-market-rate return. At the high end of the scale are certain kinds of government bonds and human capital performance bonds which provide market-rate returns. Rothschild goes into some detail on each of these vehicles and gives examples of how they work.
Now, I cannot fault Rothschild for presenting this approach. It makes sense to present potential funders with information about the cost effectiveness and monetary benefit of an organization’s work. It even makes sense to present potential investors with the opportunity to see some return on their gift – other than the mere benefit of a better society. Both of these approaches – presenting economic value and creating economic value – can be powerful tools in gaining resources for social change.
However, we shouldn’t be naive about the noneconomic values we are espousing when we approach social change in this way. As I’ve been discussing in my other ongoing series, the major theological question is how we live in relation to whatever it is that we have designated as our evaluator of values. If you’re not interested in that series – or even theology generally – that’s okay, but keep your eye on this idea: we all have some concept or, more likely, some concepts that help us determine the value of things. These concepts tell us whether something is good or bad, beautiful or ugly, knowledge or opinion, etc. and even tell us whether something is more or less good, more or less beautiful, etc. Most of us hold these concepts naively – we are unaware that we have them or what they are – but we have them nonetheless.
In much of the modern world – indeed, a possible defining feature of the modern world – that valuating concept is money. We know if something is better worse by the monetary value it is accorded in comparison with the monetary value accorded to other things in the same category, e.g.: better houses or cars or computers or whatever are identified by the fact that they cost more.
The reason I bring this up is that philanthropy is also concerned with the question of how we live in relation to our values, and those of us who work with or for philanthropic organizations need to always be aware not simply with whether we are meeting particular social impact goals, but whether we are doing so appropriately given our values. If creating economic value isn’t one of our values – if, in other words, we are not a for profit enterprise – then we do not want to fall into the trap of over valuing the creation of economic value even if it helps us meet our social impact goals.
Put another way: while looking at our cost effectiveness, creating economic benefit to our communities, and utilizing giving vehicles that have an economic return to investors may be useful tools, we do not want our focus to become greater cost effectiveness for its own sake, economic benefit to our communities for its own sake greater return on investments for its own sake. Creating economic value can be a good thing, but it is not the business that we are in.
And so, all of the tools that Rothschild presents under this principle are useful and, I think, organizations should make use of them as appropriate. We should not, however, let the tool become the master.