Tuesday, October 23, 2012

"The Non Nonprofit" by Steve Rothschild

A friend recommended "The Non Nonprofit" by Steve Rothschild and I'm glad he did, because the book takes a completely different approach to the problem of paying for social services from anything else I have read. The book is organized around seven principles, with an additional chapter about how important it is to put the principles into practice together.

Rothschild is a former executive at General Mills who went on to use his business experience, acumen, and connections to form a nonprofit, Twin Cities RISE!, whose purpose is to reduce concentrated poverty. Notice the use of the word purpose where you might expect to see mission. Organizations need both, Rothschild explains. Purpose guides programming, reinforces a long-term perspective, and encourages flexibility and innovation. Mission, on the other hand, is concrete. It sets out what the organization does (and does not) do; it puts the purpose into operation. Rothschild's first principle? "Have a clear and appropriate purpose."

The other principles are worth bearing in mind also - measure what counts, be market driven, create mutual accountability, support personal empowerment, and be learning driven. All good things, and Rothschild's take on them, particularly the mutual accountability and personal empowerment sections, are worth reading. Alert readers will have notice that so far I have mentioned only six principles.

The seventh is "Create Economic Value from Social Benefit." In this chapter, Rothschild argues that since every improvement in social good creates social value it is up to nonprofits to quantify who is receiving the value and what it is worth. As he puts it, our current approach to financing social service work "doesn't make sense." Why not? We have big problems, but pay small organizations to deal with them. The problems are systemic, but we spend money in one to two year cycles. Nonprofits focused on these issues don't have access to the long-term capital that for-profits do.

Rothschild outlines two alternative approaches to what he calls the "no financial return expected" approach - the one that government and philanthropic funders use now. These approaches go beyond performance based contracting as it is practiced now. Both depend on calculating a firm and credible return on investment.

I have discussed one of the alternatives, social impact bonds, here (as well as its cousin health impact bonds, here.) Rothschild's alternative, and he appears to have invented the concept (and founded an organization that worked for passage of a Minnesota law to try it out), is the Human Capital performance bond. One explanation of Human Capital Bonds is:
Human Capital Performance Bonds . . . are State AA "annual appropriation" bonds that fund high-performing human services.
The bonds pay market rates, and might be bought by private investors, financial institutions, or social investors. As Rothschild puts it:
The basic mechanism of the [human capital bond] is simple: if the social outcomes that a nonprofit generates create economic value that is greater than the state's cost of borrowing the funds, then the state will have both a social and economic incentive to sell the bonds.
Here's a diagram of how it works:


Human Capital bonds have yet to come into existence, even in Minnesota, and there are lots of questions remaining to be answered. For one interesting take, see this article.

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