“Profit is the price you pay for competence”
Work expansion isn’t just a good idea, it’s the Law
They’re called non-profits – or, more formally, ‘not for profit entities’ – and therein lies the great fallacy of their existence.
There are two sides to every question
Non-profits have to make a profit. The reasons are manifold.
Not that kind of manifold
1. To avoid loss, aim for profit. You’re going to lose some of the time, so you better win some of the time. It’s as simple as that.
I need something to make up for the embarrassing misses
Nobody hits the bulls-eye every time, and most of the misses are on the low side. Enterprises that aim for breakeven lose money on some of their ventures, and the Law of Economic Gravity is relentless. Lose money as a habit and you go out of business as a certainty.
2. Profit covers risk. Real estate is risky. Some risks happen. When they come true, that’s a loss. To cover losses, you need profits.
You need some of these …
… to counter some of these
3. Profit creates operating reserves. Non-profits are no more immune from the business cycle than are for-profits. To everything there is a season, and sometimes in the business cycle it’s the season of holding on and minimizing losses.
To every market/ there is a season
And a time for every stock sale/ under heaven
Non-profits need an operating reserve. The bigger the non-profit, the bigger the required reserve.
4. Every business needs equity capital to invest and experiment. Just as any business cycles, business environments change. What was state-of-the-art three years ago is yesterday’s news today. So businesses must periodically reinvent themselves.
Reinvention takes capital:
· To grow the business.
· To add new staff and create new job positions.
· To do things whose success one cannot prove beforehand.
· To make mistakes
Every now and then, you need a do-over
That’s the biggest reason – to make mistakes.
Business is about the mixture of doing the known and discovering the unknown.
As I’ve said before, if you cannot waste money, you cannot lose it. if you cannot lose it, you cannot risk it. If you cannot risk it, you cannot experiment. If you cannot experiment, you cannot innovate. And if you cannot innovate, you will be obsolete, and in this rapid twenty-first century world, the speed of obsolescence is greater than it has ever been before.
Make mistakes. It’s the lifeblood of business.
To make mistakes, you need equity. A non-profit business gains equity in two ways: grants and profits.
Grants depend on donors. Donors have limited attention spans. They have limited capital. They expect to see transformative change in the organizations they fund. They do not expect to find themselves having adopted new dependents, and after a while they stop funding.
The only source of equity that a non-profit can control is its own profits.
So go make some.
5. Non-profits too must compete for executive talent. Compared with the private sector, non-profits have the romance of a cause. Romance has a nasty habit, however, of running into reality, in the form of a spouse, a house, and kids. For-profits have the romance of money, and the romance of impact and scale. There comes a moment when the lure is irresistible, because it is so thoroughly rational.
Pursuit of profit makes the private sector competitive. If you’re not making as much profit as they, you’re very unlikely to be as good as they.
All too many non-profits are, as I once put it, one executive director elopement away from insolvency. That is not a business model, it’s a recipe for ever-renewing hopes and ever-recurring disappointments.
I always hope … and I’m often disappointed
Where is it written that non-profits should pay their staff less than for-profits? A staffer who works for less than market value is making a charitable contribution equal to the difference between what the non-profit is paying and what the executive could command at the for-profit across the street. Do we really want to say to those who are committed, Kid, we like you so much we want you to contribute 20% (40%?) of your income for the privilege of working here?
Commitment is a beautiful thing. To underpay is to exploit it.
6. Without top-tier talent, non-profits will never be competitive. I call it the updraft. It’s the constant brain drain of the sector’s brightest and most committed into the private sector. The updraft means that, in any given negotiation, the non-profit negotiator has less experience, less motivation, and quite possibly less capacity than her for-profit counterpart.
It can lead to the non-profit to be out-traded relative to the for-profits.
Are we getting out-traded?
For-profits pay for performance. Non-profits must do so also.
I’ve previously written that a non-profit is a for-profit joined at the hip with a charity. The need for profit as an essential element is why.
That being so, it leads to two further conclusions:
A. Government needs a strong non-profit sector. Government is in the business of taking non-commercial risk. It’s in the business of delivering policy outcomes even if they are uneconomic. In fact, it’s precisely the uneconomic endeavors – where there is a cost-value gap – that government must undertake.
Yet government, though it does a wonderful – indeed essential – job of defining roles, passing laws, and providing money, it is a poor direct implementer. For that it needs the private sector. Both the for-profits (for scale) and non-profits (for innovation).
For government to deploy its vast resources effectively, it needs non-profits that are capable of competing. Weak non-profits lead to weak government programs.
Non-profits may be small, but they’re an essential critter in the public-policy ecosystem.
B. Eventually, for-profits will (and should) displace non-profits in some areas. When it comes to productivity, nothing beats capitalism. This fact drove Leon Trotsky nuts. He was a good enough political analyst to realize that his utopian communism could work only if it never had to compete with capitalism anywhere, and he consumed piles of foolscap seeking to advocate universal socialism rather than Bukharin’s ‘socialism in one country.’
If we can’t socialize the whole world, we’ll just have to socialize the soviets!
He failed, and communism failed, because even if one establishes socialism it is non-entrepreneurial, and entrepreneurship – however expressed – is the seed of innovation. Even if one establishes socialism throughout a huge country, as
The idea’s expressed, with exquisite clarity, by that well-known philanthropist Gordon Gekko, in his most famous speech:
The point is, ladies and gentleman, that greed, for lack of a better word, is good.
Greed is right, greed works.
Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.
Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.
And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.
Thank you very much.
And I understand greed
Non-profits compete with for-profits. For-profits who see an opportunity to displace non-profits will do so.
There’s nothing wrong with this.
In a robust and healthy ecosystem, for-profits will dominate the market-solution spaces. This means it’s the role of non-profits to go beyond what the for-profits will do. Non-profits create a business model in pursuit of a policy objective. They do the R&D, the experimenting. They size or reduce the cost-value gap. It’s also the non-profit’s role to use government gap-closing resources to push a market activity further down the income pyramid, to take something that’s economic only for the middle income and use government resources to make the same business economic for the lower income.
Non-profits are pioneers. When they are no longer pioneering, they deserve to be supplanted – and they will be. When the cost-value gap has closed to zero, non-profits no longer have a comparative advantage, and generally give way to for-profits.
In fact, when a business has matured to the point where the for-profits are doing it, and it’s become part of the normal economy, from the government’s perspective, that mainstreaming represents not failure but success.
Non-profits would be less than human if they didn’t resent the for-profits’ entry into what had been their special pea patch, but we have to step away from our territoriality and realize that when the for-profit supplants us, it’s time to pick up stakes and go pioneering again, a little further out.
We’re looking for opportunity in the financial wilderness
For that next round of pioneering, profits are the essential grubstake
You put capital in to the enterprise, and hope to take profit out of the opportunity
“Profit is the price you pay for competence.”
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