06 May 2002  Research & Ideas

Profits for Nonprofits:
Earning Your Own Way

"Profit" need not be a dirty word at a nonprofit organization. In a discussion led by HBS professor James E. Austin, three experienced managers discuss the advantages and pitfalls of building a for-profit unit within a nonprofit.

 

"Pay our own way? No way."

Not long ago, that was the mantra of many a proud nonprofit organization, living on the largesse of government grants and private donations. But with those income sources drying up, suddenly nonprofits are learning to earn their own way.

What are the pros and cons of mixing business with social service? Can nonprofits effectively serve two masters, their nonprofit mission and the call of the market?

At the annual Dialogue on Social Enterprise, a daylong event held April 20 at Harvard Business School and the John F. Kennedy School of Government, a lively session was devoted to the topic "Profits for Nonprofits: Challenges of Earning Your Own Way." (Starbuck's CEO Orin Smith addressed a related theme—can for-profit companies integrate non-profit values—in his keynote speech earlier in the day.)

Can we teach the importance of being self-sufficient while not being self-sufficient ourselves?
— Alfred Wise,
Share Our Strength

The session, led by HBS professor James E. Austin, featured three managers whose experiences highlight the challenges and benefits of thinking about profitable segments within nonprofits. According to all three, the goals of profit and nonprofit mission do sometimes collide. When the goals complement each other, however, they bring real, unexpected, and refreshing advantages.

For example, profits can bring in more than money. As non-profit director Alfred Wise wondered aloud to the audience of students and managers: "Can we teach [the people we serve] the importance of being self-sufficient while not being self-sufficient ourselves?"

Bread means business

The bakery at Boston's Haley House is a case study in how one group has explored the benefits of profit while remaining cognizant of the difficult issues that profit brings to a social service organization. Founded thirty-five years ago, the small, multiservice nonprofit Haley House is a spiritually based community organization that serves "society's forgotten people"—the homeless, the elderly, alcoholics, and others. Its mission stems from the Catholic Worker movement's personalist tradition, which means that Haley House staff and volunteers work intensely with small numbers of people as a way of trying to create deeper change in them. Haley House launched the bakery several years ago to spur economic independence among its clients, most of whom had low skill and education levels.

Marketing at first was fairly simple, said artisan baker David Ekstrom, a panelist at the session who joined the bakery a year ago as full-time manager. "They got the word out when they baked bread. People smelled the bread. It was a 'If you build it, they will come' kind of marketing."

"Our goal is to foster habits of mind, ways to be present to one's work," he explained. "We realize that because of our small size we're not going to train people to become bakers in the baking industry; but we can help them address the issues that kept them from being employed well in the past."

The bakery's challenges include limited financial resources—its budget is $200,000 a year—and learning to be profitable while training and employing people who struggle with multiple problems. Some donors to Haley House also assumed that because it had a business it didn't need their support anymore.

The bakery helps not only individuals but also the organization as a whole, Ekstrom insisted. Individuals "get the incredible motivation from being able to participate in the building of a small business, which gives them dignity and earnings. This may be the first money they've earned in quite a while or the first money they've earned ever. The bakery is an added facet to the services we offer."

For Haley House as a whole, he said, the bakery offers credibility to neighbors as well as donors: They see Haley House building a business that trains people and stands by its values. The bakery storefront is also a gateway to potential volunteers and donors and allows Haley House to get its message out.

Not that it's all been a cakewalk. Ekstrom said the organization has worried that its mission could get watered down in an effort to "play the game." The internal discussions the business provokes have been good for Haley House culture, he said. "It allows us to go through a process of defining the issues that are important to us and the ways we communicate them. It's almost like purifying metal through intense heat.

"The bakery allows us to bring our mission to others. Normally the people who would interact with Haley House are either in need or are very socially radical. We can then connect with people who might have very similar core beliefs but very different ways of expressing them. It's really pretty exciting. It brings new perspectives and lessons we wouldn't otherwise get."

Buy-in at the top

Several factors make it clear whether a profit-driven entity will succeed or flop, said Alfred Wise, director of the Community Wealth Ventures for-profit consulting unit within Share Our Strength, an anti-poverty nonprofit. He said that nonprofit senior management needs to buy in to the business idea for it to succeed. If the idea is shunted off to junior staff members it will never gain traction, he promised. Business ventures also need to be adequately capitalized.

Wise's consulting group charges fees for their efforts, and he conceded that the price might put his services out of reach for cash-strapped but worthy nonprofits. However, he said, foundation grants can be tapped to pay for consulting.

The main hurdles he sees in bringing profits to nonprofits, though, are not administrative. "The biggest challenge we face is a cultural shift. People who by and large get into these organizations have amazing compassion. They want to clothe the homeless and feed the hungry. And for them to create a business is often at odds with what their real core values are."

A for-profit enterprise has to cope not only within the nonprofit that backs it, but also within the world at large, said Toby Sherman, director of food service for Greyston Foundation. Greyston, a $13 million organization in Yonkers, New York, runs self-sufficiency and other programs for people in need; its food service makes brownies for, among other clients, Ben & Jerry's ice cream. Appetizing as it sounds, the business is subject to market fluctuations like any other, cautioned Sherman.

No one should attempt to run a business without a clear-eyed concept of what the market landscape will welcome and reject, she added.

"If your expectation is that people are going to support your business because of who you are and what you do as an organization, those people may come to you once," she said. Thereafter, most people buy based on what they need as consumers; they will evaluate your product on price, quality, and service—not pity.