Within the Market, For the Mission

In the nonprofit world, social mission and market-based operations and financing are seen much too often as a contradiction in terms. Relating and aligning both dimensions of organizational performance, has been perceived by many as incompatible tasks. SEKN research is looking at experiences of civil society organizations that challenge this engrained assumption.

Common wisdom would suggest that NGOs are not the appropriate institutional form to run market based initiatives and that they are best suited to operate social endeavors targeted to LIS and supported by public sector and donor funds. However, some cases demonstrate that NGOs can develop market initiatives themselves which achieve social purposes as well generating social value for the poor.

In this issue of ReVista, most of the cases are based on experiences of corporations, in which community organizations are part of the ecosystem either as bridging organizations that facilitate reaching low-income sectors (LIS) as clients or as organizers of low income persons working as providers of critical elements—e.g. raw materials, traditional techniques and know how—or as members of distribution networks.

However, as pressure to diversify income sources increases, civil society organizations have also looked for ways to provide services and sell products in the market, what has been labeled as “earned income strategies.” With the exception of those working on formal education and health services, NGOs in Latin America traditionally have relied on donations of money, time or in-kind contributions, subsidies or contracts as main source of funding for their operations. Although there have been exceptions in the past to that generalization, NGOs now increasingly apply earned income strategies to fund their operations. Most of them, however, engage in strategies that are neither related to their social mission nor aligned to their social intervention methods. Here, we focus on what it is still a minority group of NGOs which develop earned income strategies, and thus market based initiatives, that are related or aligned to their social missions.

NGOs can become involved in market-based activities as a way to advance their social mission by facilitating the access of their target populations to goods and services, thus improving their quality of life. This approach is illustrated by one of SEKN’s previous case studies in El Salvador, that of Acosama, which provided water services to the poor applying a fee for service model. In most cases LIS are the exclusive focus of the goods and services provided by NGOs, although in some cases the client base may include members of the middle class as well. Looking at a different field, NGOs have been critical in developing micro-lending operations that give access to financing to LIS in several parts of the world, charging interests for the loans provided. One of the cases previously studied by SEKN, Fundación Pro Vivienda Social, offered microcredit for home improvement in the outskirts of Buenos Aires, helping 5,500 families in five years, until the 2001-2002 crisis in Argentina forced the foundation to interrupt that line of work and focus on local development.

In other situations, NGOs developed market initiatives that do not target LIS as clients or customers. Rather, they involved LIS in their operations as part of their intervention strategy, providing employment or developing employment skills for people who have been excluded from the labor market. For example, NGOs working with former street youth often develop small businesses such as bakeries or small grocery stores. Youth receive opportunities to learn job related skills as trainees or workers. Similarly, organizations working with the homeless have developed newspapers that are sold by their clients as a way to re-connect them with the world of work while at the same time generating income for them in a dignifying manner.

La Fageda, another of the NGOs currently under study by SEKN in Spain, shows how an organization can involve the mentally ill in productive processes such as yogurt production, giving them an opportunity to generate income and at the same time achieving other socially valued goals, such as a sense of belonging to a community, job related habits, and the satisfaction of self-realization through work. In addition to the cases cited earlier in ReVista, the Ropa Amiga program in Spain illustrates this approach. These examples can be considered income-generating strategies that are intertwined with their social strategies. This approach might be familiar to a U.S. reader who has heard about Goodwill Industries.

Still, NGOs can develop market initiatives as part of their earned income strategies which are unrelated to their social mission, but the market reached by these operations might be totally or in part LIS. For example, several social agencies serving different beneficiary groups operate second hand clothing and used goods (such as furniture and appliances) stores which are very successful as revenue streams to finance their core social service activities (such as employment training, counseling, income assistance and health services). However, their store clients tend to be LIS members, who find there clothing and other household items at very low prices. One of the cases currently under study by SEKN is the Salvation Army in Buenos Aires, which operates Escudo Rojo, a very successful store of used clothing and home items, garnering funds that cover a significant portion of its annual budget. These kinds of initiatives can be seen as attempts to cross-subsidize other NGO operations, which are targeted to other social groups. However, a closer look indicates that they can generate simultaneous social value, helping the poor to have access to products that improve their life conditions, albeit as a positive unintended consequence of their action. These and many other examples illustrate that the common wisdom about the apparent tension between social mission and economic results is not always right. Several NGOs that serve the poor have managed to resolve that apparent tension.

Previous SEKN research on management practices of effective social initiatives suggests that working to achieve mission goals and economic sustainability at the same time tends to generate some “virtuous effects” for NGOs. Among these virtuous effects, SEKN research identified stricter measurement and reporting discipline, greater autonomy from donors, larger scale of operations and therefore social impact, and stronger financial position and organizational capacity (Effective Management, Ch. 10).

However, these effects were observed in NGOs operating in competitive markets that did not focus on LIS. The benefits observed in these NGOs cannot be necessarily extrapolated to those operating in different contexts NGOs that offer goods and services to LIS or include LIS or other socially excluded groups as suppliers, distributors or workers many times emerge and formulate their approaches as responses to market failures. Therefore, it remains to be seen whether the same benefits observed in our previous research are accrued by NGOs operating in this kind of situation, in which markets do not yet operate, or where NGOs are creating, facilitating or stimulating the operation of markets.

A number of issues must be addressed by NGOs to make the market-based mechanisms that benefit LIS effective. They must review both their assumptions and operating principles. Setting prices for the services provided to the poor using marketing and economic criteria is often considered by NGOs as “selling the soul to the devil.” The culture of providing goods or services for free or charging below market rates is strongly established in the nonprofit sector. Understanding that making the poor consumers or clients who pay fair prices can contribute to mission effectiveness represents a paradigm change for many. NGOs that achieve economic sustainability through market based activities gain financial resources to pursue their social purposes. However, this kind of market-based initiative can also enrich NGOs’ social methods by contributing to the improvement or transformation of opportunities, capabilities, assets or well-being of LIS and other socially excluded groups. At the same time, by articulating the social methods with economic value generation, those traditionally considered beneficiaries of social programs acquire an active role in their social initiatives. This process generates other types of intangible benefits for them and for society as a whole.

Thus, success in achieving both financial sustainability and social mission goals require that NGOs engage in a number of tasks. First, they need to generate consensus about the importance of understanding and adopting economic and business oriented principles and criteria as part of their decision making processes. Second, they must strengthen and professionalize management and operational staff through the acquisition of the technical skills needed to identify opportunities to develop and implement market based initiatives that include the poor as part of the economic value proposition of the organization. Third, they have to examine whether their social methods that are at the base of their intervention strategies can create a role for the poor as workers, suppliers or distributors, creating social impact in new ways. Fourth, they should consider how to incorporate these approaches, not just as compromises to the economic—or business oriented—world but as means to foster their ability to achieve their social mission.

Gabriel Berger is a professor in the Department of Administration at Universidad de San Andrés where he teaches on management of social purpose organizations and corporate social responsibility, and directs the Graduate Program in Nonprofit Organizations.

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