I recently published a two-part series on SocialEarth called, “If you were the non-profit god, what would you fix?”

The series was well-received (woohoo!… Thank you!), so I thought it worth taking the time to point out one apparent inconsistency in my proposal.  At least it’s apparent to me; it hasn’t seemed to bother anyone else.

If you haven’t read the SocialEarth posts, go there first – Part I here, Part II here.

In Part I, I discuss a couple of the problems associated with the way non-profits have implemented the three-party market model.  In that section, I include the issue of having to cater to multiple customers with sometimes disparate needs (donors vs. target populations).  In doing so,  I suggest that for-profit businesses who rely on the same model (radio stations, Google, Facebook, etc.) don’t have this same problem.

This is of course not the case.  Any business who serves multiple masters ultimately struggles to balance their interests.  In fact, every business that receives third-party funding struggles with this same challenge, regardless of whether that funding is coming from donors, third-party customers, banks, or private investors.

The big difference is that in most of the for-profit world cases, effectively serving your primary customer also directly and positively impacts your secondary customers/funders.  So, Google creating more and more free applications gives advertisers more and more opportunities to get in front of their target audiences.  Likewise, as D.Light expands and becomes increasingly effective at providing affordable and energy efficient lighting solutions to the BOP, investors at the Acumen Fund will be rewarded for it.  It’s a win-win-win scenario.

In the non-profit world, however, when an organization improves its ability to serve its target population (something that is often hard to measure or prove), donors may receive more or better stories of good deeds and see more compelling impact numbers in the annual report, but they are still not likely to receive anything more tangible.  That is, I think, the essence of what makes the non-profit model so much less sustainable.

Put a bit more conceptually (feel free to tune out here if you’re not interested in the academic speak), we do not seem hard-wired to use optimal-decision making methods when it comes to altruism.  We seem to be content knowing that our money is going to a “good cause” (or that we’re getting a tax write-off), and  few of us will take the time to look hard for better or “optimal” causes when it comes to how we invest our philanthropic dollars.  So when it comes to giving, we’re somewhat arbitrary and especially fickle.

Another way to think of it… if you’re 401(k) or 403(b) was only returning 3% in a good economy, wouldn’t you look to put your money somewhere else?  Probably, and your fund managers know that.  So you are, even without knowing it, putting pressure on your fund managers to maximize returns.  On the other hand, if you’re seeing regular returns of 20%, you’re going to leave your money right where it is, and fund managers know that, too.  Your decision is logical, predictable and, therefore, more sustainable.

But the same “you” may very well be sinking money into a non-profit that hasn’t substantially improved its operations…well…ever.  Do you care?  Maybe.  Maybe not if you just like the cause (or tax write-off).  Either way, you are probably not putting much pressure on the non-profit’s management to improve.  At the same time, if another similar but seemingly more effective non-profit came along, would you move your money over?  Maybe. Maybe not.  Here, your decision is seemingly arbitrary, fickle, and much more difficult for the non-profit to predict and sustain.

There is much more to this whole conundrum, and this post is already giving me ideas for another post that might take a deeper look.  But I’ll leave it here for now.   If you have any reactions or suggestions, please let me know!