This is an old classic that I had a much harder time finding this time around, so here it is for posterity's sake...
Online portal for this document:
http://nvs.sagepub.com/content/29/2/315-------------- • -------------- • --------------
Note: This text was the keynote address at the annual meeting of the California Association of Nonprofits, Oakland, CA, October 1999.
From:
Nonprofit and Voluntary Sector QuarterlyJune 2000, vol. 29 no. 2, pp 315-324--------------
Evolution Or Extinction: A Strategy for Nonprofits in the MarketplaceBy Edward Skloot
Surdna Foundation, Inc.THE VALUES QUESTION
How we break into this vast subject of privatization and competition is exceedingly important. Some of our nonprofit colleagues seek to discuss competition with the private sector in terms of morals and values. They say: "We have ours, which are nurturing and valiant and deeply American. They have theirs, which are grasping, mechanical, and destructive to individuals and community." Or something like that.
It is most important not to start this conversation from the point of view of values; whose are better and whose work better. If we do, we will speak in wholly different tongues. We simply will not be understood. The dialogue will quickly become polarized.
In addition, we have to build mutual confidence between proponents of different views—so that we can ultimately work together. Nonprofits must completely understand what others are doing in the marketplace before they can address moral concerns. We must dive into the subject fromthe empirical side first.
So what is happening? We are in the middle of major sectoral boundary shifts. They are incremental but undeniable. The service delivery map is changing. More and more, private entrepreneurs are taking over the work of both governments and nonprofits. Life is increasingly transactional, and nonprofits are increasingly vulnerable.
MARKETPLACE ECONOMICS
In the minds of most Americans today, the marketplace has triumphed. Market competition seems to be that longed for win-win solution—reduced costs and increased efficiencies leading to better results for all.
Simultaneously, governments are systematically degraded. They are no longer the agents of positive change that spanned the era from the Great Depression to the Great Society. Forces on the right have asserted governments are incapable, incompetent, or illegitimate—or all three. Sometimes they are right. As Alan Ehrenhalt (1999), the wise editor of
Governing magazine, recently wrote: "Gradually, without most of us stopping to notice it, Congress is ceasing to be a serious legislative institution" (p. A27).
Think about health care for a moment. Most people do not know that health management organizations (HMOs) were created in the early 1970s as a mechanism to ensure community benefits and cover more of the poor. Federal legislation, sponsored by Senator Ted Kennedy, required large employers to offer an HMO option. Nonprofit auspices were preferred.
But, federal financing ended in 1982, and nonprofit HMOs had difficulty raising capital for growth and expansion. Meanwhile, federal administrators began to encourage for-profits to enter the field. With easy access to capital, guaranteed reimbursement, and a natural drive to grow market share, private health care companies expanded ferociously. More than two thirds of HMOs are now privately held (as of 1993), covering a majority of enrollees.
The irony is stunning. Today, HMOs, created to ensure the average person could find quality health care, are hastening out of what they view as unprofitable markets. Last year, HMOs in 30 states began their retreat from Medicare, leaving 440,000 elderly patients to scramble for coverage. Today, nearly 45 million Americans have no insurance, including 11 million children. If the goal is decent health coverage at a reasonable cost for all Americans, then the marketplace and government regulators have both failed dismally.
Thus, our health care nonsystem lurches about while nonprofit deliverers of service, both hospitals and HMOs, steadily diminish in number through sale, conversion, or purchase.
It is easy to criticize or dismiss the encroachment of the private sector into roles traditionally done by nonprofits or government. But the fact is, competition and privatization, the right hand and the left hand of the marketplace, are here to stay. In health care. In corrections. In education. In human services.
Here are a few examples.
In September 1999, the College Board, the nonprofit organization that administers the Scholastic Aptitude Test (SAT), decided to set up its first forprofit subsidiary to compete with Kaplan and the Princeton Review (
New York Times, September 25, 1999).
In kindergarten through 12 education, the privately held Edison Project runs programs in 51 schools with 24,000 pupils. It recently announced its offer to give its teacher-employees stock in the company—a most intriguing incentive unimaginable in public schools.
Even the Archdiocese of Los Angeles has jumped in. It recently inked a joint venture with Stuart Enterprises, a major for-profit funeral chain, to build and run funeral homes on nine church-owned cemeteries. They share the profits (
Forbes, June 14, 1999).
In these examples, it is easy to see for-profit companies doing well. It is also easy to see nonprofits doing well. The fact is, there are horror stories on all sides, but little conclusive data on who does a consistently better job. And absent better data, the beat to privatize services goes on.
I do not believe decline in the sector is imminent. But, I certainly believe that barriers to entry are shrinking and competition is growing and nonprofits have a lot of work to do.
THE HUMAN SERVICES SUBSECTOR
Whereas each subsector presents different challenges, I want to focus on human services—where most of you make your living. Here, competition and privatization are emerging as the dominant force of institutional life.
The primary reason for this shift is the passage of the Welfare Reform Act of 1996 (formally known as the Personal Responsibility and Work Opportunity Reconciliation Act of 1996). As you know, the law essentially certified the outright failure of the welfare system as we knew it. Its most dramatic provision was a 5-year lifetime limit on public assistance and a 2-year deadline for most welfare recipients to get employment. Implementation of this law was devolved to the states.
The Welfare Reform Act gave an extraordinary boost to privatization and competition. The reasons have to do with the need for speed and the mandated integration of various postwelfare services.
In fact, one of the act's great accomplishments is that it compels local governments to break out of their destructive, artificial funding silos. Clients of the welfare system now have to be treated in a holistic way, connecting, for example, their transportation, child care, job training, substance abuse, and food stamps needs. When looked at from the view of the recipients, this is a tremendous win. For smaller, specialized nonprofits, however, it can be an insurmountable opportunity.
Many for-profit companies have been in and around the human services for a long time. The best known older player (since 1975) is Maximus, based in McClean, Virginia. Maximus is a human services company. It functions as an integrator of services for the numerous tasks bundled under the welfare law. It provides case management for individuals and families. It takes responsibility for emergency assistance. It does job training and referral. It handles placement transition services such as child care and transportation to work.
Maximus is decidedly for profit. It was Number 22 on
Business Week's "Hot Growth Companies" list last spring (Wollert, 1999). If it were a state, it would have the 29th largest social services caseload in America. According to
Business Week, Maximus holds a 30%share of the booming privatization market in health and human services. Last year, it billed out more than $230 million.
Maximus is not the only big player. Lots of newer ones come to mind, including EDS, Ross Perot's old firm, Deloitte and Touche, and Lockheed-Martin Information Management Systems, to name the most active.
What these companies offer are deep pockets, apparent management acumen, and almost guaranteed results. When the welfare law hit, local governments needed to act swiftly. Under tight federal guidelines that state legislatures often made tighter, they began to look elsewhere to get the job done. They did not have the capability. The big private companies were ready to roll.
THREE MODELS AND FOUR CHALLENGES
Three different models of service delivery now seem to be developing. The first model is sale and merger. Consider Pittsburgh-based Abraxas. This was a respected nonprofit organization that specialized in working with the hardest to handle young people. Three years ago, its CEO, Arlene Lissner, saw the handwriting on the wall. She feared large for-profits "would roll over us and put us out of business" (personal telephone interview). So Abraxas put itself in play. It chose to be bought out by a for-profit company, Cornell Corrections Corporation. It is now part of this $200 million comprehensive services firm. It runs both adult and juvenile correctional facilities from coast to coast.
A second approach seems to be the joint venture. Here we can look to Milwaukee and the local YWCA, which was already a sophisticated multimillion-dollar organization. The Y set up a limited liability company called YW-Works with two for-profit partners. YW-Works provides welfare to-work services. With her two for-profit partners, Julia Taylor, the CEO, bid for and won a $39 million contract to provide all welfare services to 2,400 clients in part of Milwaukee. They committed themselves to performance targets and, so far, they have met them. Ms. Taylor is bullish on her joint venture and believes that the for-profit/nonprofit business is "working out great."
The third approach seems to be that of Lockheed-Martin or Maximus: the managing corporation. Here, a large integrator of services employs many others, both for-profits and nonprofits. They deliver a wide menu of comprehensive services. Lockheed-Martin has done this in Washington, D.C., Florida, and many other states. In fact, many nonprofits around the country now find themselves working for commercial businesses as subcontractors—not as partners with government. They are increasingly accountable to business. They have a bottom line and performance goals to meet.
Privatization and competition raise four specific challenges. I want to talk about each briefly and ask you to see where you fit in.
The first is access to capital. The for-profits I mentioned can raise money and bid on almost any contract they choose. They can accept considerably higher risk. This is important because a lot of the state and local contracts demand that winning bidders pay for cost overruns.
Most contracts are large and multifaceted. Successful bidding may mean having to open new offices, pay salaries for months before reimbursements arrive, and meet unforeseen start-up costs. In Washington, D.C., Lockheed-Martin had to put together a welfare-to-work office to serve 5,000 clients in 3 weeks. For-profits can go to the financial markets to raise working capital to front these costs (and expansions too).
As we know, nonprofits do not have this option. They are constrained by their 501(c)(3) status, which forbids the distribution of profit—or even making it. They cannot raise capital in exchange for stock; they do not have any. And, many would choose not to even if they could. High finance is foreign to the nonprofit culture. It is often seen as a distraction from getting the job done.
Many do not have the money or capacity to deliver comprehensive services. It is not surprising that entrepreneurial nonprofits are looking for ways to merge, joint venture, be bought out, or set up for-profit subsidiaries.
Second, information technology (IT) is critical. IT enables providers to operate at sufficient scale and detail to provide all these integrated services. This includes the most mundane activities such as bookkeeping and keeping case histories. It involves complicated tasks too, such as calibrating payments to several family members in transition off welfare.
The new law mandates that numerous strands of client information be aligned and integrated. Often, they are kept separately, in different agencies, at different levels of government, with different computer systems and protocols.
Again, the resource problem emerges. Few nonprofits—and few for-profits too—have the funds to buy and use the IT systems needed to manage hundreds or thousands of clients. But, the ability to aggregate and manipulate vast amounts of data (and money) is the bottom line.
Benchmarks are needed to hold providers and their clients accountable too.
More than hardware and software is involved. Skilled personnel are also necessary. These individuals, always in high demand, command high salaries. Increasingly, IT capacity will separate the successful vendor from the mere survivor.
Third, welfare reform requires building large-scale operations. Together with IT, size permits economies of scale over large service areas. Size lets organizations implement master contracts. It offers the ability to aggregate and use trend data. Maybe most important, it reduces headaches for government servants. Large contracts let government officials rely on others to bundle and oversee their welfare-to-work responsibilities.
The final problem is attracting and retaining the best employees.
In the Washington, D.C., welfare-to-work contract won by Lockheed-Martin, the company receives fees pegged to the length of time the client holds a job—$500 on placement, $500 after 3 months, and $1,000 more after 6 months. Such pay-for-performance requirements are growing in frequency. These incentives run counter to traditional partnerships between government and nonprofits, which are paid through lump sum contracts. The new arrangements epitomize a managed care approach to human services filled with incentives and rewards.
This may be the most telling concern: With increasing frequency, for-profits are attracting accomplished public and nonprofit executives. They are anxious to break free from stifling work rules and inadequate—or perverse—rewards for performance. The brain drain from the nonprofit sector threatens its leadership.
Thus, in each of these four areas: capital availability, information technology, size and scale, and recruitment and retention, the nonprofit sector is at a distinct disadvantage. It has fewer resources, human and financial, less of a competitive urge, and a culture that is broadly anticompetitive.
Yet, there is a choice to compete or not to compete. If nonprofits choose to, they will need to refashion their organizations and show demonstrable results.
TOWARD A STRATEGIC RESPONSE
This means they will have to begin doing a number of critical tasks. The first is benchmarking, defining our current outputs and measuring them consistently going forward. Granted, the soft services are truly soft. But, we are in an era that demands greater accountability. Both the public and its public servants are asking, "Are we getting the most for our money?" They deserve an answer.
If for-profit companies can assign dollar values and outputs to their efforts, nonprofits must do the same. If not, they will be consistently outbid. Or, they will win contracts but lose their shirts. Nonprofits must do it for a second reason: Benchmarking helps them manage better too.
But, benchmarking without better information systems is a pipe dream. And, information technology is still a backwater in the corporate life of nonprofits. Yet one way or another, through the use of volunteers, donated hardware and software, graduate students and interns, and especially the determined application of institutional cash, the move toward computerization is absolutely essential. If nonprofits do not do this, they will forever be at the mercy of any institution that collects and controls the data they use.
This is one of the important messages of e-commerce. It could not operate without software to do everything, from taking orders to shipping purchases quickly. Successful dot.coms know that without profiling customers and meeting their needs with timely and efficient service, their efforts to attract faithful customers will be fragile.
The new economic rules make routine chores easier and faster. So, whereas computerized case management may look revolutionary to some nonprofits, it really is an evolutionary step. It creates efficiency and lowers cost through the use of new technology.
The
Economist magazine recently reported that Jack Welch, CEO of General Electric, recently ordered every senior manager to spend a couple of hours each week being bossed around by an "Internet Mentor," usually an employee from a younger generation ("The House," 1999). This is nothing more than a kind of knowledge transfer at which the best corporations excel. Nonprofits must do it too.
But think about it. IT is more than a tool for efficiency and for gaining a competitive edge. It can also help redefine and transform the relationships among nonprofits. When was the last time your organizations benchmarked best practices and then voluntarily shared the methodology with your colleagues? When was the last time you worked closely together to help each other out of service delivery jams? Could this be the beginning of a real competitive advantage?
Nonprofits can also form self-help networks. They can share information among different specialties to improve or reorganize services. They can create knowledge consortia as well as bidding consortia. They can treat clients better and share the secrets how.
CARE OF EMPLOYEES
If I were an executive director of a nonprofit, and I have been, I would couple investment in IT with a determined effort to support my employees.
Today, we cannot fail to notice the changes that have occurred in employment policies throughout the country. Short-term contracts and freelancing are increasingly the rule. Corporations are shrinking their commitment to employees, which includes providing health care, pensions, and related benefits. Employees are enticed or compelled to trade better short-term pay for meager benefits and job insecurity.
This is a hidden opportunity for the nonprofit sector. (It is also what makes the Edison Project stock options for its teachers so suggestive and so potentially threatening.)
Just as civil service jobs and teaching were seen as viable, enviable, longterm career choices for the post-Depression generation, there is every reason to assume that nonprofits could fill that role today. With a little imagination and hard cash, they can distinguish themselves competitively—and attract even better employees.
Human service institutions have not been known for their benefit packages or work rules. Why not do everything possible to improve them and make them attractive to new and current employees? Pay for professional courses. Support flex-time and home-based schedules. Offer financial and other incentives to enhance productivity. Pay for performance improvement. This approach is what the best for profits now do for their employees. It is part of the reason they pick off the best of the nonprofit leaders. It is time the sector did it too.
Just as TIIA-CREF was created to strengthen the college teaching profession by making pensions broadly available and portable, the nonprofit sector must look to the deepening of its own incentives and benefits. This will help it compete in the increasingly unstable marketplace and improve its own supply of talent too.
Yes, this takes money. Of course it does. But I would imagine, first, the cost is less than you think. Second, the sector now has more money pouring in than in recent memory. If not now, when? Finally, if we do not find the way to invest now, we may not be around to serve later.
JOINT VENTURES
Add joint venturing to IT and improved benefits and working conditions. If nonprofits can work out joint ventures with richer, bigger for-profits or other nonprofits, they could specialize. They could extend their reach and serve their clients better. Each could build off its core competencies.
For example, business could apply its technology, management tools, and bidding expertise. It could help upgrade the skills of nonprofit partners or subcontractors for mutual benefit too. Nonprofits, on their part, could do what they do best—skilled one-on-one personal involvement, assistance, and steady care. They could build community capacity and support and represent local needs.
This is also a lesson from e-commerce. Technology and speed alone cannot guarantee market dominance. Or market performance. You have to deliver a high-quality product or service to successfully compete for the long haul.
A prototype for this has occurred between Lockheed-Martin and the Urban League. It is in Baltimore, centered around child support enforcement and family unification. Under contract, the Urban League does the skills training for custodial parents. In 3 years, it has placed more than a thousand people in jobs. The organization is bullish on its partnership with Lockheed-Martin. Furthermore, the company has upgraded the staff's technical skills. In return, it got improved access to the community and to local politicians. This is a model very much worth developing.
THE NEED FOR ADVOCACY
But, you can ask, will all this lead to an inescapable role conflict for nonprofits? Can they serve two masters, a private sector contractor and a human services client at the same time? Can they serve the bottom line and at the same time advocate for changes in contracts or policies?
In New York City, in particular, we have seen how difficult it is to deal with a government that throttles the opposition. Service deliverers are often cowed by politicians and bureaucrats. Implicitly or explicitly, they threaten to cancel contracts for disagreeing with established policy.
I have spoken with numerous nonprofit executives who talk of the need to tuck in their advocacy sails. They are unsure they could keep their contracts if they became critics of government or private sector contractors. This is a very hard problem. It is the iron fist behind the Istook-type amendments (1) that seek to restrict advocacy by nonprofit organizations.
One possible response is for national offices of nonprofits to step up their advocacy on national and state policy. This might provide cover for locals who have to deliver on contracts day-to-day. One timely opportunity is to strenuously advocate using more than $3 billion now being sequestered by states in Temporary Assistance for Needy Families (TANF) money. Another is the billions more lying unspent for the Children’s Health Insurance Program. Opening up these funding streams could literally transform human services. And, they could capitalize much of the internal management changes that nonprofits have to do.
It is in advocacy where the issue of values really rises up. In my view, nonprofits can do it much more effectively from the strength conferred by delivering excellent services. Some groups, of course, will do only advocacy. But, my reference point is those that choose affirmatively to engage in both.
At bottom, I am suggesting that nonprofits really have little choice. If they choose to compete, they must do it whole hog. They can distinguish themselves by systematically investing in IT, in management, and in their employees. By upgrading themselves, they upgrade their ability to compete and to advocate. When they do that, they will also advance their values of inclusion, civic engagement, democratic participation, and community building.
If we can join together and deliberately pool knowledge and strengths, I believe we can reach a new sectoral balance that gives a proper, important, and even enhanced place to the nonprofit sector. Most of all, I believe the sector can succeed if it starts first from the demonstrable quality of its work, not from the power of its vocal chords or its political muscle. As Christopher Marlowe once wrote, "Honor is purchased by the deeds we do." To that, I would add, robust health.
Note (1). Named after Ernest R. Istook, Republican Congressman from Oklahoma, who for several years has proposed legislation to restrict lobbying by nonprofits that receive government support.References
Ehrenhalt, A. (1999, October 4). Demanding the right size government.
The New York Times, p. A27.[/list]
Fisher, Daniel. (1999). Grave Dancer.
Forbes (pg. 17.)[/list]
The house that Jack built. (1999, September 18).
The Economist, 23.[/list]
Wilgoren, Jodi. (1999, September 25). Aged Upstart, College Board, Is Joining Gold Rush on Web.
New York Times, p.A1.[/list]
Wollert, L. (1999, May 31). Maximus, Inc.: Welfare privatizer.
Business Week, p.76.[/list]