International | Business principles

Charities are becoming more professional

Non-profit organisations are learning lessons from businesses. And businesses are learning from charities

WITH 3,700 square metres of retail space, the Emmaus megastore on the outskirts of Preston, a northern English city, is the biggest charity shop in Britain. Customers wander among endless rows of sofas, testing the cushions and examining the other wares, from bric-a-brac to bicycles. Some staff are volunteers. Others were once homeless, and the £250,000 ($337,000) the store makes a year goes towards their housing, training and food.

Charity shops increasingly resemble other retail outlets, with appealing layouts, professional customer service and managers who honed their skills on the high street. Indeed, all kinds of non-profit organisations have become more businesslike over the past few decades. This shift is global, says Lester Salamon of the Johns Hopkins Centre for Civil Society Studies. But it has progressed furthest in rich countries, where the non-profit sector (which we generally take to exclude hospitals, universities and religious groups) is a bigger part of the economy.

In the 1980s governments began to fund charities less through grants and more through contracts. The shift is continuing. According to the National Council for Voluntary Organisations (NCVO), between 2001 and 2015 the share of state funding of British charities that was in the form of contracts rose from 49% to 81%. The Economist’s analysis shows that, of 12 American government departments with plentiful data, ten increased the share of charities’ funding that came through contracts over the same period. In 2010 the European Commission noted the same trend.

Bidding for contracts has forced charities to find ways to undercut or outbid rivals. Often, getting paid has meant hitting performance targets, such as finding work for 100 jobless people within a month. They have also had to employ more qualified staff. To win a contract to care for disabled people, for example, a charity would need to employ a certain number of staff with degrees in social work.

A further impetus to professionalise came from “voucher” schemes, in which governments provided tokens to be exchanged for services. That turned a charity’s clientele into customers with choices. To woo them, it would have to make its offering sufficiently attractive.

With fewer grants, charities’ income streams became less predictable. Many sought to smooth their revenues by selling more goods and services. In America in 1982, such sales made up 48% of non-profit income. According to Janelle Kerlin and Muhammet Coskun of Georgia State University, by 2013 that figure (which includes government contracts) had risen to 56%. The recession that followed the financial crisis accelerated the trend. Between 2008 and 2015 British charities’ revenue from selling goods and services to the public rose from 18% to 23% of the total, according to the NCVO.

Managers from mainstream retailing brought a fresh eye to charity shops, says David Borrett, the director of retail at Sue Ryder, a British charity whose thrift shops help fund its hospices. After an IT update, it now tracks how store layouts affect sales. Charity shops have started selling new items, too. These typically make up 20-30% of revenue. Belts and gloves are donated less often than trousers, so charity shops buy them in to “round off the offer”, says Mike Taylor of the British Heart Foundation, another charity. And vintage gear, rather than always being sold in the shop that receives it, is now often shipped to youthful towns where it is in greater demand. The most valuable stuff, which might previously have mouldered on a cluttered shelf, is sold online, often via eBay for Charity, which has raised $725m.

Charity cases

As the non-profit sector becomes more professional, young people are keener on qualifications tailored for it. According to Roseanne Mirabella of Seton Hall University, the number of courses at American universities in non-profit management and philanthropic studies rose from 284 in 1986 to 651 in 2016. Charity work is also becoming more popular among graduates who studied other subjects. In 1980, 8% of newly minted Masters in Public Policy from Harvard University’s Kennedy School of Government took jobs in the non-profit sector. By 2015 that had risen to around 30%.

More MBAs are going into charity management. While studying at the Kellogg School of Management at Northwestern University, Matt Forti and Andrew Youn planned the One Acre Fund, a charity they launched in 2006 that lends to African smallholders so they can pay for agricultural training, equipment and high-yield seeds. Techniques from statistics classes helped them decide which interventions would increase harvests most. The contacts they made also proved useful. They raised about $36,000 from classmates and teachers for the pilot programme, and still occasionally consult professors for advice before expanding into new countries.

Oversight, too, has become more hardheaded. In the 1990s newly rich tech workers started to join the boards of grant-making foundations in America. Some became involved in setting up non-profit organisations, nurturing them like startups in what some call “strategic” or “venture” philanthropy. The trend spread. The European Venture Philanthropy Association, founded in 2004, now has 210 members in 29 countries. David Fielding of Attenti, a London-based recruitment firm for non-profit executives, says he speaks to around ten financiers a week who want to be more active in the charity sector.

Spare some change?

Demand for trained fundraisers has grown rapidly, says Michael Nilsen of the Association of Fundraising Professionals, a trade group active in eight countries. Jen Shang of the University of Plymouth measures the effect of tweaks to marketing materials on donor satisfaction and future giving. She shares her findings with students in America, Britain and China. To attract a new giver, she has shown, a charity should emphasise the good it does. The focus should then switch to the donor. Rewriting a thank-you letter to say “your donation has saved children like Tera” instead of “we have saved children like Tera” can boost future giving by roughly 10%.

Another effective fundraising technique is to make giving feel like shopping. A charity that used to ask for money for poor African villagers may now invite a donor to buy them a goat. World Vision, a Canadian charity, has an online catalogue with dozens of gifts to send to impoverished places. The most popular is an alpaca, which costs C$250 ($204).

Fundraisers have also got better at courting big donors. Firms such as Factary in Britain and DonorSearch in America find links between philanthropists and a charity’s trustees to help with setting up the crucial first meeting. A “steward”, a kind of PR officer for high-value donors, keeps them on board by organising trips to see the charity’s work and giving updates on its successes, says Elizabeth Zeigler of Graham-Pelton, a fundraising consultancy.

As charities have focused on results, they have sometimes overstepped the mark. Fundraising practices were called into question in Britain after the suicide in 2015 of Olive Cooke, a generous charity volunteer and donor. Data-sharing among fundraisers meant she was bombarded with begging letters. Though it is not thought that these caused her suicide, her family has said they greatly distressed her. Her death alerted the sector to the problem, says Peter Lewis of the Institute of Fundraising, a trade group. Later that year, after a government inquiry, a new code of conduct banned charities from passing on donors’ data without express permission. Charities across the EU will face similar rules from May 2018.

Charities have also been criticised for raising executive pay closer to business levels. Tax data show that between 1988 and 2014 the pay of senior management in American non-profit organisations (including hospitals and universities) rose twice as fast as that of other staff—and twice as fast as total expenditure. According to the Wall Street Journal, in 2014 about 2,700 American non-profit executives earned more than $1m a year. (Most of these ran big hospital groups or universities; a few were megapreachers.) Though an effective boss can be well worth a high salary, some volunteers and donors find such high remuneration a turn-off.

One of the biggest remaining differences between charities and businesses is in access to capital. Unlike a business, a charity cannot sell shares. But few have steady income streams or valuable assets against which to borrow. New types of charitable financing are starting to fill the gap. “Impact investing”, in which the promised return is a philanthropic outcome as well as (or instead of) a financial one, has boomed in recent years. For example, the W.K. Kellogg Foundation has backed Acelero Learning, an early-years education firm, and Revolution Foods, a company in California that serves healthy lunches in schools in hard-up areas.

Another idea is for a third party to guarantee a charity’s loan. In 2014 Root Capital, a non-profit organisation that lends money to farmers, needed cash for a programme to help coffee growers in Latin America. USAID, the international development arm of the American government, gave it a loan guarantee worth $15m. If Root borrowed money and could not pay it back, USAID would make up some of the difference. Without the risk of default it was able to borrow $12.5m, including from the Ford Foundation and Starbucks.

Loans to charities, like those to firms or individuals, can also be split into different tranches. The slice with the highest risk and lowest returns can be taken by foundations or government agencies. This makes the remaining slices more attractive to private lenders. Though such innovations are promising, they remain a rarity.

More businesslike charities should be better equipped to survive and thrive. They should also do more good. A literature review in 2014 by academics at the Vienna University of Economics and Business found numerous studies showing that better-qualified managers were associated with higher and more stable revenues. But charities also face new competition from a surprising source: the rise of the charitable business.

In America corporate philanthropy doubled in real terms between 1990 and 2015, to $18bn. A study of 20 European countries showed that corporations gave about €22bn ($26bn) in 2013, more than foundations did. Though much of this flowed through charities, it establishes businesses, in their customers’ minds, as entities that can have charitable aims.

A “fourth sector” (after public, private and voluntary) is springing up, consisting of organisations that straddle the line between business and charity. They call themselves “low-profit limited liability companies”, “social enterprises” and other names. These range from builders that seek to make a profit from housing poor people to fashion labels that employ disabled people to design and sell handbags. A report from the European Parliament suggests there are 200,000 in Britain, France, Spain, Italy and Poland. Over 2,000 B-corps, for-profit outfits that meet certain standards for do-gooding, have been launched in more than 50 countries.

Profiting from purpose

Many charity workers welcome this. The more minds thinking about how to improve the world, the better. Some fear, though, that if the line between charities and businesses fades further, donors and volunteers may become less willing to give away their money and time. But a charity that learns from business how to do good better should be able to persuade them.

This article appeared in the International section of the print edition under the headline "Business principles"

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