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.
Nonprofits meeting social needs
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.
Business stepping in to aid the needs of nonprofits
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 struggle to determine the fair market value of nonprofit service
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.
If, for example, a nonprofit were solely in the business of providing safe beds for citizens in need, we could easily measure the cost per bed and begin to reduce the cost to serve through scale and thereby increase the reliability and quality of the service, and develop more effective organizational structures at scale.
How the nonprofits can increase their effectiveness in the community
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.