This follows another group of studies, led by Robert Putman and his colleagues, that documents the dilution of social capital, which is also linked to an impact on the quality of life for the average American.  Their argument is that with fewer and less meaningful connections between people, society begins to break down and people become isolated.  This is then linked to the breakdown of a civil society, which requires networks of people outside of business and government to rally to preserve our collective values (for better or worse).

It is argued that one of the key roles of the nonprofit sector is to be this conduit for these two societal needs.  A 24 Hour Fitness for karmic health, a social club for the lonely and well intentioned, as well as a gathering place for revolutionists with small to large ambitions.

This is a distinctly American social design.  We enable thousands of social entrepreneurs to meet this need through nonprofit associations.  In some instances, service is simply part of their broader program ambitions and in other cases it is the core.  These organizations provide an on ramp for civic engagement and good deeds.

We even have a $1 billion federal agency dedicated to supporting service in this country - Corporation for National and Community Service.  As a society we consider service a right, as we see it as connected to our core values and to the basis for social networks and our democracy.

As an end onto itself, service is an odd goal for an organization.  Ideally it is a wonderful byproduct of another desired outcome.  For example, Operation Access, a San Francisco-based nonprofit, provides free surgery for patients without health insurance by using volunteer doctors.  It is great to have doctors do something altruistic, but the primary goal is to help the person under the knife.  We see the amazing volunteer work right after a natural disaster and first think about the victims, not the volunteers who get to feel like heroes.

This service culture is perverted occasionally by volunteer organizations and companies who try to placate volunteers through field trips to see "poor people" or faux volunteer projects to build team work.  The majority of volunteer work in this country, however, remains focused on improving the health and happiness of those in need and building associations of like minded citizens who are invested in making their neighborhoods, cities, states, country and world a better place.

The Role of the Nonprofit Sector
This is the third in a series of posts about the critical roles that nonprofits play in our society.  Previous posts were on the roles of nonprofits as canaries signaling problems in public policy and as a safety net for basic needs.

For some reason, I was recently looking at Maslow's hierarchy of needs.  For those who forget Psych 101, Maslow believed that while humans have a wide range of needs, they must first meet very basic survival needs like food, shelter and water before they are able to pursue psychological needs like love, esteem and self-actualization. It makes sense-- if you are starving to death, a BLT is more attractive than some TLC.

As societies evolve, they too seem to follow Maslow's hierarchy.  In a developing country where food, water and shelter needs are unmet, the government and society as a whole spend very little time concerned with supporting the psychological well-being of citizens.  In wealthy societies like the United States, we take shelter, water and food for granted as basic human rights, and we see our society's ability to provide them as core to our identity as a "civilized" nation.

In every community there are nonprofit organizations charged with meeting these basic needs.  Shelters and food banks crop up in every major city to ensure that all citizens have a safe bed and the sustenance to make it another day.  This is the core of the sector: non-profit organizations providing basic services to satisfy the baseline needs Maslow identified. 

This is a segment of the nonprofit sector that has been in transition for the last twenty years.  It has been at the heart of the Reagan and Clinton-inspired government outsourcing agendas and a common target of the venture philanthropy movement and its call for greater organizational effectiveness and efficiency.

According to Lester M. Salamon at Johns Hopkins, between 1982 and 1997 nonprofit market share in a range of basic direct service areas dropped significantly, by as much as 50% in some areas.

To understand this trend, it is important to get your head around the challenges of running a nonprofit providing these safety net services to a community.

These are hard organizations to manage.  By definition, the client can't pay for the services, so the organization must look to the community to pick up the bill, meaning that the organization becomes accountable to two sets of clients.  The latter client--the paying community-- wants some means of determining the fair market cost (FMC) of a safe night in a shelter, or a meal, to assess the effectiveness of a program.

You could determine the FMC of a night at a shelter by comparing it to local lodging costs.  It should certainly be less than the cost of a room at the local Motel 6, and an online search of shelters shows that it is.  The cost of a shelter ranges from $5 (Boise) to $35 (Cleveland),  and $43.99 to $41.39 for a room at Motel 6 in those same cities.  So it passes the Motel 6 test, but one is struck by the relative and inconsistent cost structure for non-profits (700% difference between the shelters vs. 6% in the motels).  One also wonders why it costs $35 to provide a bed in a shelter when, for $7 more, Motel 6 can provide a private room, bathroom, cable and other amenities (not to mention a profit for the company)?

The government and corporate America started asking these questions about 20 years ago and, finding the answers unsatisfactory, began to partner to address these needs outside of the nonprofit sector.  Companies like Lockheed Martin, a defense contractor, started winning contracts for social services programs when it proved that it could offer similar services at lower cost (or at least more transparent cost) than competing non-profit organizations.

The lack of nonprofit transparency is not intentional.  It is a byproduct of the origins of these organizations and their leadership.  Most of these nonprofit organizations were formed by compassionate neighbors, designed to serve a small community, and eventually evolved to take a more holistic approach, rarely providing just a single service.  After running a shelter for a couple of years and seeing the same faces everyday, they realize that providing a bed is not enough and that they need to find ways to enable their clients' independence.  With that realization, they instinctively begin to offer additional services and counseling, many of which are never reflected on the balance sheet. It is harder to calculate the cost of providing a service when it is coupled with a dozen other services in the same organization.

These services are often home grown, unique to the individuals providing them and the specific population served.  They are designed to meet a wide range of the root causes of an issue like homelessness, which include addiction, mental health, unemployment and domestic violence. They are often unique in their approach and mix of services, client populations and geographies served, making an apples-to-apples comparison between organizations hard.

The inability to make organization to organization comparisons contributes to the lack of transparent information.  How do you know what the FMV is for a service?  The origins of these nonprofits also discourage nonprofit mergers as each of these organizations develops an identity as a unique institution and overlooks the significant areas of similarity with peer organizations.  As a result of not scaling and merging, the cost structure does not achieve economies of scale.

The sector should consider separating out commodity services like food or shelter, and create a transparent and scalable model for delivering these services reliably.  We could consequently show society that we can provide these services with greater quality than corporations, and at a very competitive price.

We can then focus the attention of our community-based nonprofit service agencies on the critical services that move those in need out of dependence to independence.  Here we will see a diversity of approaches, and amazing innovation, that the nonprofit sector has delivered for decades, in ways that most companies would envy.

Using these two strategies we can show that the nonprofit sector can provide both basic services as efficiently as a company and local innovation that Lockheed Martin never could. 

The Role of the Nonprofit Sector:
This is the second in a series of posts about the numerous critical roles that nonprofits play in our society.  The first post covered the role of nonprofits as canaries, signaling ineffective public policy.

There were three questions I was taught to ask to uncover major growth opportunities:

1) What additional services or products can we sell to our existing customers? If you have a store, you can increase revenues by getting each customer to buy two items rather than one.

2) Can we sell our existing product to a new type of customer?  I recently learned that Diet Coke can be used to remove graffiti.  They could change the packaging and sell it at Home Depot.

3) Are there core parts of the product or the supply chain used to create the product that could be leveraged to create an additional product at low cost and give us a competitive advantage?  You see this done a lot with auto manufacturers that use the same engine or chassis for multiple lines of cars.  For example, the Passat and several Audis are built on the same chassis.

Working now as a nonprofit manager in an organization poised to introduce a new product line, I tried to use these same three questions to identify and prioritize our best options for growth.

What I am discovering is yet another impediment to nonprofit growth (and therefore cost effectiveness and efficacy).  It is tied to the challenge of having two customers - the client served and the public or private funding that covers the cost of serving clients who by definition can't pay themselves.

It is relatively easy to identify new services to provide clients.  There is an almost endless source of unmet need.

The challenge is that the funding sources are built to support single program organizations that are relatively similar in size. Foundations, specifically, do not proportion their investments based on relative market share or the cost per outcome achieved.  Rather, they cap the size of a potential investment (typically between $25k and $100k), and no matter how big or cost effective you are, you hit that ceiling.

So, if two organizations are providing the same service in a market, a foundation might give them each $25k per year (total of $50k for both organizations).  If those same organizations merged and were able to collectively serve 25 percent more clients on the same budget (assumes economies of scale), the foundation would reward them by cutting their grant in half to $25k, as that is their ceiling per organization.

Flip that around and you can see our challenge.  If we have a foundation funding the Taproot Foundation at their ceiling amount, the only way to get them to support a new program without cannibalizing our revenue for existing efforts is to start a new entity for the new program.  Taproot Foundation would do our current programs and get the $25k grant and the Turnip Foundation (spin off) could get a second grant.  This, of course, would double our overhead expenses, as we would need two HR, accounting, and IT departments, among others.

If Foundations are serious about outcomes and efficacy, they could address this in a couple of ways:

- create some grant programs based on market share (the more services you deliver, the larger the grant)

- allocate grants to providers who maintain quality while operating at the lowest cost until the grant budget is drawn down. So, if the best provider can use 80% of the grant budget to serve clients, they would get 80% of the funding.  the next best provider would get the remaining 20%.

- create a policy that if two organizations merge, they will be eligible for 200 percent of the ceiling of a single nonprofit going forward (or better yet, bump it to 250 percent to create incentives)

This is directly tied to one of the biggest criticisms of foundations.  The current common foundation model is based on the assumption that foundations exist to keep nonprofits in business.  It should instead be focused on partnering with nonprofits to achieve the maximum public benefit. 

All that said, if I had a ton of money and started a foundation, I wouldn't want people lecturing me about how to give it away.

I was reminded of the book this morning while reading Julia Moulden's blog on the Huffington Post. Julia refers to this type of leadership as the "New Radical Innovator" and today wrote about the appointment of Ronnie Abrams, a hot-shot attorney, as special pro bono counsel to one of New York's most prestigious firms, Davis Polk & Wardwell.   She describes Ronnie as someone "who stays inside their field or organization and drives change from within."

Over the last few years I have met a lot of outstanding Americans who are New Radical Innovators.  They are working across the business community and leading the pro bono movement at their firms and companies.  They are working in their field to create change within their companies, in their professions and in their communities. Pro bono is an ideal platform for this new form of change leadership.  It is awakening business professionals to their power to make the world a better place from the inside out.

Their conclusion is that breakthrough nonprofit managers follow four key principles:

1)       Costs of Serving Should Always Decline

2)       Market Position Determines Your Options

3)       Clients and Funding Pools Don't Stand Still

4)       Simplicity Gets Results

These are the four principles we use to run the Taproot Foundation, but they are almost exactly aligned with the four new Service Grants we are launching this year in our new Strategic Management practice.  We designed these four Service Grants based on a year of comprehensive research on nonprofit needs and the effectiveness of pro bono service to meet those needs.  The four new Service Grants are:

1)       Financial Analysis - Helps a nonprofit understand the true cost of their programs

2)       Competitive/Collaborative Analysis - Helps define the organization's role in their marketplace

3)       Strategic Planning Prep - Helps a nonprofit understand the changes in their community, especially changes to clients and funding environments

4)       Strategic Scorecard - Defines the simple core metrics for a nonprofit to use to measure performance

You can see how well they are aligned.  SSIR's research underscores the potential for pro bono consulting resources to make a huge impact in supporting and building breakthrough nonprofits.  Here is the full article:

http://www.ssireview.org/articles/entry/achieving_breakthrough_performance/