The Thin Mint Paradox, Non Profit – For Profit: Yes, It’s Delicious Girl Scout Cookies…

The best non profit devote a great deal of thought to defining their organization’s mission. They avoid sweeping statements full of good intentions and, instead, focus on objectives that have clear-cut implications for the work their staff and volunteers perform ~Peter Drucker

We have a ‘delicious‘ problem. The millions that Girl Scouts and other non-profits make each year don’t actually go to the organization; more often than not, it’s funneled into investments to make more money. Steve Fortier writes: We also have to question misalignment between the mission of an organization and what it is selling. I see an incongruence between the Girl Scouts’ mission and them selling $200M worth of sugar-filled treats... especially given the health crisis that affects so many girls.

According to the New York Times article, ‘Thin Mints’ were the third best-selling cookie in the United States behind Oreos and Chips Ahoy. The spectrum of Girl Scout cookies accounted for over 200 million boxes sold. Gasp. Great article, it also goes into an explanation about how Boy Scouts keep 35% of the purchase price of their popcorn and peanuts, while Girl Scouts only take home 17%.

In the articleThe Thin Mint Paradox by David Zax writes:  The more money brought in by a non profit side business, the smaller the share devoted to the organization’s actual mission, suggests a Pace University study.  Does it help a non-profit to have a profitable side business? Apparently not. A study presented by a Pace University researcher at the ‘Satter Conference on Social Entrepreneurs’ at New York University examined 700 tax returns from New York non-profits, finding that the more money brought in by side-businesses, the smaller the proportion of total expenses spent on the organization’s actual mission. The organizations examined included well-known examples like the American Foundation for the Blind, God’s Love We Deliver, and Boy Scouts of America.

The study by Pace’s Rebecca Tekula, follows a hunch articulated in a 1988 book by the economist Burton Weisbrod called “The Non-profit Economy,” a book which noted an increasing trend toward profit-making arms of non-profits.

By 1982, for instance, the Girl Scouts were selling 124 million boxes and grossing $200 million annually. Though Weisbrod had hypothesized that the trend was not good for the non-profits, the hypothesis had not been tested till Tekula’s study, who look at 700 organizations that provide human services concludes that, in the words of a press release, the more they brought in from their businesses, the smaller were their proportion of total expenses spent on programs.”

Tekula speculates that many organizations actually don’t invest their profits in the actual services of the organization, but simply reinvest them in the side-businesses. “Running a gift shop or anything that isn’t an integrated part of your program may be bringing in money–gross revenues–but if it’s not making a profit, you’re keeping it going with funds that you could have spent on counseling and food for your clients,” she said.

It’s a problem that could benefit from further study. Even if it were true that the rise of the ‘Thin Mint’ has resulted in a smaller fraction of Girls Scouts of America’s organizational dedication to services, one could argue that so long as the pool has grown substantially, services still benefit.

Quick thought experiment: 10% of 200 million dollars is far more than 100% of 200 thousand dollars, after all”. Still, the notion that the increasing trend of for-profit arms of businesses might be leading to a sort of “mission distraction,” in Tekula’s words, is troubling. For groups that may be taking the enterprise component of social enterprise too seriously, she counsels an old-fashioned strategy: Just asking for charitable donations.

In the articleThe Thin Mint Effect by Peter Klein writes: The article “The Thin Mint Paradox” (noted above) finds that as non-profit organizations increase their for-profit activities, the share of resources going to the core mission decreases.  This strikes me as a good illustration of multi-task principal-agent problems. The output of for-profit activities is more easily measured than the output of non-profit activities, giving agents (under performance-based pay) the incentive to increase effort toward those for-profit activities…

‘The Non-profit Reporter, Inc.”, a 501(c)(3) organization, was formed in March 2006 to strengthen the operations of American non-profit organizations and it was created to assist and encourage United States charitable organizations to improve accountability, transparency, and governance, and to spur the development and use of program performance measures. The following statistics highlight a vast sector comprised of U.S. non-profit organizations and demonstrate the need for a national assessment system:

  • According to the World Factbook, the asset base of the American non-profit sector would make the “non-profit economy” the sixth largest in the world – larger than the economies of Brazil, Russia, Canada, Mexico, and South Korea.
  • There are 1.9 million non-profit organizations in theUnited States, a figure that has doubled in the last twenty-five years.
  • The Internal Revenue Service (IRS) reports that there are more than 70,000 new non-profits formed annually.
  • The collective assets of the non-profit sector total nearly $3 trillion or the equivalent of the United States federal budget for one year.
  • 9 percent of the workforce is represented by those in the employ of a non-profit organization, more than the American finance, insurance and real estate industries combined.
  • From 1987 to 2005, the numbers of charitable organizations in the United States experienced nearly triple the growth rate of the business sector, according to the Independent Sector’s “2006 Facts and Figures about Charitable Organizations”.
  • In 2006, $295 billion was given to American non-profits by individuals, corporations, charitable bequests, and foundations, representing 2.2% of American GDP. Adding in earned income, investment income, contracts and grants, etc. would approximate 10% of GDP, as reflected in Giving USA: The Annual Report on Philanthropy, published by the Giving USA Foundation and researched and written by the Center on Philanthropy at Indiana University.

Unfortunately, unlike business investors, social investors have almost no information with which to compare one non-profit against another, one social investment choice against another.  Although it is easy to acquire basic information about administrative, fundraising, and program costs for the roughly 250,000 non-profits that file annual reports with the IRS, even these data are suspect—the rules governing the reporting are loose and auditing is rare.

Social investors have little knowledge on which to make thoughtful choices between non-profits, let alone conduct due diligence on the actual operations of the organizations they support.  Although they regularly assess the financial performance of each organization in terms of growth, deficits, possible diversification in revenue, and the strength of internal controls such as auditing and real-time budgeting, their investments are often based more on hunch and the salesmanship of a given organization than hard-nosed assessments of operations and impacts…

In the article How the Increasing Number of  ‘For-profit’ Arms of  ‘Non-profit’ Businesses are Leading to Mission Distraction by Burton Wiesbrod writes: Non-profit organizations are all around us. Many people send their children to non-profit day-care centers, schools, and colleges, and their elderly parents to non-profit nursing homes; when they are ill, they may well go to a non-profit hospital; they may visit a non-profit museum, read the magazine of the non-profit National Geographic Society, donate money to a non-profit arts organization, watch the non-profit public television station, exercise at the non-profit YMCA. Non-profits surround us, but we rarely think about their role in the economy, or the possibility of their competing unfairly with private enterprise.

Burton Weisbrod asks the important questions: What is the rationale for public subsidy of non-profit organizations? In which sectors of the economy are they of real importance? Why do people contribute money and time to them and why should donations be tax deductible? What motivates managers of non-profits? Why are these organizations exempt from taxes on income, property, and sales?

When the search for revenue brings non-profits into competition with proprietary firms–as when colleges sell computers or museum gift shops sell books and jewelry–is that desirable? Weisbrod examines the raison d’être for non-profits. The evidence he assembles shows that non-profits are particularly useful in situations where consumers have little information on what they are purchasing and must therefore rely on the probity of the seller…

According to Steven Rathgeb Smith, non-profits face important challenges: “Arguably, the non-profits, governments, and foundations are at a crossroads in terms of next steps and where they go in the future.” Smith noted the economic crisis — which has forced funding cutbacks at the state and local levels, forcing many non-profits to reduce services — as one of the challenges facing the sector. “The severity of these cutbacks has been exacerbated by reductions of funding from foundations and private donors,” he said.

Smith also pointed to new initiatives to increase demands for accountability, noting that state governments have embraced ‘performance‘ contracting with non-profits in which agencies that receive public funds are not reimbursed by governments unless they meet certain performance targets.

With government and private funders placing more emphasis on evaluation and performance measurements, Smith said “the pressure for accountability and improved performance, combined with the ongoing financial pressure on non-profit organizations, means that non-profit agencies are engaged in complex and sometimes contradictory relationships with other agencies in the service field.

Funding cutbacks can prompt non-profits to join together to influence public policy, and the growing interest in efficiency is spurring agencies to explore ways to share cost, including co-locations of some programs and services. So there is pressure on agencies to be more collaborative, and yet ‘performance’ contracting and the sheer growth of the number of agencies in many communities are actually encouraging more competition among agencies for funding and clients.”

Because of the fiscal cutbacks, as well as the increase in competition among non-profits, Smith said he believes it is a very important and critical time for government, non-profits, foundations, corporations and universities to rethink how they’re working together. Because we have so many organizations out there and the funding is scarcer, there is a need to rethink how we’re doing business”.

Smith said, government should take an investment approach when working with non-profit organizations, “one that emphasizes accountability as well as results and sound governance of community engagement.”

Smith finished his talk by saying that with the increasing interest in the American non-profit sector, urgent public problems are in need of attention and with the economic crisis to effectively respond, “non-profit agencies, foundations, universities, corporations and government will need to think creatively and constructively about their roles and responsibilities in order to successfully address social problems and local needs.”

Non-profit organizations are at work every day in our communities, and their work is evident in the people they are serving.” ~Grace King