Tuesday, March 31, 2009


Why charities are businesses – and should act like it

I finished my internship at Intelligent Giving last week, and one of the more interesting debates (of many) that came up was on the subject of precisely how much organisations in the charity sector can learn from for-profit businesses. The answer I would tend towards – “a lot” – actually resolved itself in my mind into a more controversial conclusion: that charities are, effectively, businesses themselves.

Is a charity a business? At first blush, the question seems obvious: of course a charity isn’t a business. Businesses are out to make money. Charities are out to help people. They’re entirely different concepts.

But look closer, and the differences blur away. There are commercial organisations which don’t set out to make profits – according to the Guardian, Aravind Eye Hospitals in India does around two-thirds of its cataract operations for free, and still manages to comfortably cover its costs. Meanwhile, there are charities which run up large annual surpluses - ORBIS Charitable Trust only spent about three-quarters of its income in 2007, equivalent to a massive 24% profit margin. Some businesses run loss-making divisions with charitable purposes, such as the pro bono work done by large law firms and consultancies. Some charities run large commercial subsidiaries which set out to profit-maximise in a classically businesslike way.

The key factor in deciding whether a given organisation is a charity or a business seems to be how it sees itself: pretty much any given organisation will define itself in one way or the other. To the extent that you can tell charities and businesses apart simply by asking them how they define themselves, the distinction seems to be safe.

But the distinction is overrated. Businesses and charities are both formal organisations. Many charities are registered companies. And a charity with its own legal personality has a formal responsibility to use its resources for a specific purpose. It therefore needs to organise itself in such a way as to effectively raise the money to carry out its work and to effectively spend that money to achieve its result.

In this regard, at least, there is no difference whatsoever between a charity and a business. Charities have their charitable objectives; businesses simply have a responsibility to maximise their profits while behaving in a manner acceptable to their owners. Both organisations need to manage themselves internally in order to achieve their objectives.

And the simple truth is that a lot of the organisational activities that charities carry out are identical to those carried out by businesses, as are many of the organisational problems that they face. How do you attract, retain, and train the best people? How do you structure your organisation’s workforce? How do you use technology so as to be most effective? How do you make sure that you have adequate controls over your spending, and how do you make sure that it’s all properly accounted for? All of these questions are faced by both charities and businesses.

Even in the crucial activities which form the core of any given organisation’s work, the differences are smaller than you think. The main difference is that charities don’t expect their customers to pay for the goods or services rendered. The difference between Oxfam’s famine relief and companies selling food? Oxfam’s food is paid for by people who don’t eat it. The difference between ORBIS and local ophthalmologists? Patients have to pay for their cataract operations at local ophthalmologists. Sometimes, companies which donate goods or services are essentially behaving like charities: when a law firm does pro bono work, it’s doing the exact same thing as charities are: providing help to people who can’t afford to help themselves. And charities which derive income from their charitable activities are essentially behaving like businesses.

In short, the provision of goods or services, whatever they may be, is done both by charities and by businesses. The only difference lies in the revenue model. Generally speaking, with businesses, customers pay for goods. With charities, donors do.

It’s even possible to overstate the importance of the profit motive as a crucial difference. Businesses certainly do work to maximise their net income, but as a great many people in the non-profit sector would tell you, the work that a charity does is rewarding in a different way. People working for charities are still being rewarded – they just derive their reward from the knowledge that they’re helping others, rather than from the prospect of a fat paycheck at the end of each month.

The implication from this is not only that charities are, essentially, just businesses which have a specific type of goal. It’s also that charities have a lot to learn from commercial businesses because of the implications of their different revenue structures. A business whose “beneficiary” is also its “donor” will tend to behave differently to a charity where the two roles are separated.

Consider a private individual buying a car: after getting as much information as possible about which car is best, the individual will then find out for themselves exactly how good a car is simply by driving it after the purchase. The car dealership therefore has an incentive to make sure that the cars it sells are of as high a quality as possible, and will engage in a number of activities to make sure that it does this as well as it can. If the car it sells is of a bad quality, the customer won’t return.

Compare this to a (totally made-up) charity which operates a car dealership where donors buy cars for poor people. The donor can still come to the dealership and get as much information as possible about the car, but after they pay for it, they have no idea if it turns out to have been a good car or not. Only the beneficiary can tell you that. But if the only way that the donor can find out about the quality of what they’ve paid for is by asking the dealership, then the easiest path for the car dealership is to just tell the donor that all the cars it sold were fantastic and that all the beneficiaries were really happy with them. This charity car dealership wouldn’t really have an incentive to be completely transparent to the donor about the quality of the cars it sells. It could get away with selling rubbish cars, and would still keep its income so long as it told a good story to its donors. And if beneficiaries can’t get a car anywhere else, they’ll keep accepting cars from the charity dealership no matter how bad their cars are.

Which is why charities can learn a lot from business. If a charity genuinely wants to operate responsibly, it doesn’t just need to be completely honest with its donors – which is what Intelligent Giving works to encourage – it also needs to strive to be as effective as possible. The organisations which have an incentive to be the most effective are the profit-making ones. Charities should therefore take a strong interest in how commercial businesses delivering similar goods or services operate. The charity car dealership, for example, has the potential to greatly improve the quality of its service by copying the activities that the commercial car dealership carries out to maximise its own quality standards.

This applies to pretty much anything that a charity can do, especially if it’s a large one. Medical charities can learn from private clinics. Famine relief charities can learn from private supply chains. Grant givers can learn from venture capitalists. There will, of course, be many things that commercial businesses do that charities would not wish to emulate: in our example, if the commercial car dealership puts mahogany panelling and surround sound speakers in its cars, the charity could reasonably decide that it has no reason to emulate that. But there will be many things that the commercial business does that the charity could usefully copy, for example advanced methods of quality control in relation to the car parts it uses. And commercial organisations which have figured out methods for cutting costs can often be copied wholesale.

(Naturally, charities can sometimes be more efficient than for-profit organisations. This is particularly true when it comes to reducing waste: charity workers do face certain incentives of their own, particularly the moral incentive not to waste money on non-charitable activities. Where this is the case, for-profit organisations can learn from the ways in which charities do things. The learnings need to go both ways.)

None of this should really be controversial. Many charities are already working hard at making sure that they hold themselves accountable to their beneficiaries, precisely because of the disconnect between donor and beneficiary as discussed above. (This follows critiques such as William Easterly’s 2006 book The White Man’s Burden.) But attitudes towards the commercial sector which continue to caricature it as grasping, greedy and faintly immoral need to change. Charities and businesses often do similar things, and can learn from each other. Charities are finding that commercial standards of organisation, career models, branding and customer service can make a big difference to their effectiveness. Businesses are finding that employees who can take part in ethical or charitable activities through their work will be better motivated, happier and more loyal. In both cases, the eventual winners are the people who the organisations serve and the people working at those organisations.

The difference between a charity and a business, in short, is mostly in our minds. That doesn’t mean that it’s not real: as I mentioned above, we can distinguish between the two pretty easily just by asking organisations what they consider themselves to be. But it does mean that people working for charities shouldn’t be closed to ideas from business. After all, if we’re doing similar things, maybe we have things to learn from each other.

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