Non-Profit v. For-Profit

A friend and I, who hope to become social venture partners, have been debating the relative merits of non-profit and for-profit organizational structures.  What opportunities does each form present?  What challenges does each form place in the path of our mission?

One of our primary social impact objectives is to employ individuals who cannot find employment elsewhere.  I argue that the profit motive underlying a for-profit business empowers a strong managerial approach that makes workforce development more effective.  The theme of “innovate or die,” “sustain yourself or die,” trickle down from the venture managers to the entry-level employee.  In addition to developing hard skills, effective workforce development must instill a sense of responsibility and accountability in its clients, to whom genuine opportunity is rarely presented and who have become desensitized to the potential return on initiative and perseverance.   What better way to model the values of accountability, responsibility and perseverance than to transparently present the P&L statement to each employee?  Our costs are $10,000.  If we (you and me together!) don’t find a way to earn $10,000, we are all out of a job.  Now certainly we need carrots to go along with this big stick, but the profit motive is a clear message that can cut through the many educational, cultural and social barriers that can stifle effective workforce training.  Perhaps this seems paternalistic or pedantic.  Perhaps I am underestimating the potential of “soft power” approaches like vision setting, charisma and mission-driven ventures.  But in three years of retail management, the profit motive resonated with my team members.  The more clearly we defined sales and productivity goals and tracked our progress towards them, the more we all pushed each other towards them. 

The entire preceding paragraph may apply to non-profits as well.  Certainly a non-profit can set sales and revenue targets.  Certainly a non-profit can hold its employees accountable.  However, when push comes to shove, the temptation of another grant, another funding source may derail an organization’s progress towards sustainability and ultimately, its impact.  That one additional grant also might preserve that one non-value adding employee or that one ineffective program.  In the context of workforce development, I believe a social venture that wants to train and develop workers from an economically, socially and culturally marginalized community harms its mission if it does not model the “real world.”  My first “real” summer jobs were with non-profits.  What a shock it was when I had transition to working at a grocery store.  If you cut my hourly wage in half, eliminated the peer pressure applied by my wife, parents and in-laws, I kid you not, I probably would have quit.  The customers were mean.  My boss was a jerk.  My work lacked fulfillment.  Maybe I’m lazy.  Or maybe I fallaciously extrapolated my non-profit employment experience and created a false expectation.  (Did anyone else want to run right back to college when you graduated into the real world?  Then you know what I’m talking about.)   The problem is that most jobs available to under-skilled worker are not ideal jobs.  Ventures that pursue a mission of workforce development must model the “real world” in some way.  I believe that the profit motive is an effective check against the (good!) impulses towards idealism and compassion that can easily exert hegemony over non-profit’s strategy.  

I realize this argument may strike some readers as paternalistic in nature.  I certainly make some strong assumptions about the background of “at-risk” or “under-skilled workers.”  I only make these assumptions because I think non-profit managers with master’s degrees can also be detrimentally swayed by a non-profit organization’s incentive scheme.  As a social entrepreneur, it is all too easy to settle for grants, charity and donations.  We may tell ourselves we will use them to create a sustainable organization, but that rarely happens.  What I’m trying to say is that my main rationale for arguing that “at-risk” employees need to feel the stick of the profit motive is the realization that I need to feel that stick.  

Other considerations in this debate include the tax implications of an organizational structure.  With all of the tax credits, loan guarantees and incentives for business to locate in under-served areas, the non-profit advantage in this domain is mitigated.  

The organizational structure also shapes growth opportunities.  The article “The Funding Gap” argued that for-profit oriented funding vehicles are often better optimized for rapid growth and thus more rapid and wide-reaching social impact.  

I’m curious to know how you would argue for a non-profit structure.  Also, what’s missing in this dichotomous debate that limits itself to either one or the other?  Does anyone have experience with hybrid organizations?  I found this article that presents an analysis of non-profits owning a franchised restaurant strictly for the purpose of revenue generation.  But it doesn’t explore the idea of a non-profit/for-profit hybrid in which both arms of the organization pursue social missions.