Is scale the Achilles’ heel of non-profits?

Michael Porter is a respected professor of strategy at Harvard School of Business. In this TED talk, he explains why profit is the key to social impact.

Business creates a profit when it meets a need at a price that exceeds the cost of meeting the need. Profit provides ongoing funding, something that non-profits struggle to obtain. Ongoing funding supports scale, which is necessary to solve large problems and something that non-profits struggle to achieve. Profit is so powerful that the for-profit sector has 20 times the resources of the non-profit sector.

If business uniquely controls the current resources and the ability to generate future resources needed to solve social problems, then what do we do?

  1. Business can give more resources to the non-profit sector, so that the non-profit sector has ongoing funding to scale solutions.
  2. Business can tackle societal problems themselves by using the tools of business, including profit.
  3. Non-profits can be permitted to make a profit.

Option one seems unlikely. Business would need to either donate voluntarily, which they can already do, or to agree to higher taxes that would allow government to distribute funds to non-profits.

Options two and three here are essentially the same–any entity that is not government can make a profit.

To me, this sounds like the death of the non-profit. I’m surprised, since Porter says that he’s founded four non-profits in his career.

At the end of the TED talk, Porter says that business can’t solve societal problems as effectively on their own as they can in partnership with non-profits and governments. Since I think Porter essentially wrote off non-profits, let’s focus on government.

Porter says that government needs to enable business to solve social problems, and has many ways to do so. What are those ways? Porter doesn’t list them, but I think he’s referring to financial incentives to encourage market entry and return on investment for companies tackling societal problems. Examples might include

  • Incentive tax credits for certain sizes and types of businesses.
  • Loans and grants for businesses targeting societal problems.
  • Education and training programs to teach skills necessary to address societal problems.
  • Removing or changing regulatory barriers causing friction for businesses addressing societal needs.

This sort of government action can work, as witnessed by the increase in wind power production and drop in price thanks in part to tax incentives and training programs.

Department of Energy chart showing progress of wind energy
Department of Energy chart showing progress of wind energy

So, is the need to scale the Achilles heel of non-profits? Not necessarily. Non-profits can use the models of business to create scaleable solutions. See my series on the Business Solutions to Poverty and Governing the Commons for examples, and this post for tools for creating business models.

There’s one other way that government can help–by changing the economics of non-profit work. Non-profits could be allowed to retain more earnings for longer without having them considered profits. Donors could be given incentives for donations to support core non-profit operations and incentives that extend over longer periods of time.

Porter fails to mention that business, too, struggles to find ongoing funding. If social impact was easy, with or without profit, everyone would do it and our problems would be solved by now.

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