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Steve Rothschild On How Non-profits Can Learn From Market-Driven Organizations

   /   Apr 3rd, 2012Interviews

Steve Rothschild’s recent book, The Non-Nonprofit, argues that issue-focused non-profits would do well to take some cues from corporate, market-driven approaches. After an extensive career in the corporate world, Rothschild managed several non-profits–including Twin Cities Rise, which focuses on training men from underemployed communities and placing them in jobs, and Invest In Outcomes, which is piloting a human capital performance bond in Minnesota.

His experiences led him to be a strong advocate for the idea that non-profits can best survive if they demonstrably create economic value while providing social benefits. In a time of increasingly tight belts at all levels of government, this couldn’t be more important, he believes. Below, Rothschild elaborates on this approach and others he describes in his book, giving context through his non-profit management experiences.

Dowser: Your book advocates for a high-performance model for non-profits. Is that argument is partly based on your successful experience with the pay-for-performance model you’ve used with Twin Cities Rise?
Rothschild: I spent 22 years in the for-profit world, and I started the Yoplait yogurt company for General Mills, and I was on numerous non-profit boards and I started a few non-profits. Over that period of time, and while starting Twin Cities Rise, I came to understand that there are principles in the for-profit world that are being used in the non-profit and social enterprise world—and that these principles were improving results.

Twin Cities Rise’s pay-for-performance model is based on the idea of creating economic value out of social benefit. It was developed in the early Nineties, with the state of Minnesota. We went to the state economist and we said, ‘Anytime an organization can take someone from one level of income to a higher level, and that person had been using public subsidies, this is not only beneficial to the individuals and their families, but it’s also beneficial to tax payers.’ In pay-for-performance, we only get paid for success, and it’s based on economic value. And looking at non-profits as there are more cuts to government spending, it’s clear to me that we can’t rely on government funding. So, we’ve created the human capital performance bond, which is a state-issued bond that can be used to fund high-performance non-profits that demonstrate that they are generating economic value to the state, above the cost of the state borrowing money from the bond-holders.

And are you seeing the bond in use yet?

Steve Rothschild

This was just passed in Minnesota last July, as a pilot. The state authorized $10 million of bonding authority to pilot it, and they’re now in the process of implementing it. And what it will do is demonstrate that high-performing non-profits create economic value for the state, not just social good.

And this is particularly important now, because non-profits are faced with a difficult future as government cuts back spending on what are called ‘discretionary programs.’ Organizations that are doing well need to be thinking about new strategies and approaches for the future—new ways of funding themselves. My book provides for-profit ideas for organizations and suggests that they marry it with the best ideas from the non-profit world.

What are some of those ideas, from the for-profit and non-profit worlds?
I would say that the main aspect of successful organizations is that they have a clear and appropriate purpose. They are focused entirely on their purpose. Non-profits have typically done that very well. The best for-profits have also learned to create passion in the work that they do. I remember a story about a CEO of a company that made pace-makers, and he visited the factory and met the woman who was the highest-quality and fastest assembler. He congratulated her and said, ‘Why is it that you assemble these pace-makers so fast?’ And she said, ‘I’m not assembling pace-makers. I’m helping people get well.’ The problem with some non-profits is that it’s one thing to be focused on your mission, but it’s another thing to be accountable to it. Too many non-profits get off-track because they either chase grant money or government contracts that aren’t necessarily aligned with their purpose. Or they keep adding programs because they feel the people they serve need other things—job training, drug prevention, ESL—and the result is they dilute what they’re doing. So, I try to point these things out and I ask a series of questions at the end of each chapter to help people think about whether they are focused on their original purpose.

Another main thing is measuring what counts. The for-profit world does a good job of that, because there are standard and objective measurements—like return on investment. In the non-profit world there really is no standardization, so organizations can choose their measurements. Often they choose outputs instead of outcomes, because outputs are easier to measure—how many people took classes or graduated, as opposed to how many people got a living wage job and stayed in it, which is a longer-term result that really counts. Organizations need to focus on outcomes more than inputs and outputs—that’s how to truly measure whether you’re meeting your purpose.

The third advice is to be market-driven. Organizations have lots of stave-holders—government, donors, foundations, employees, clients. But market-driven organizations choose one group as their customer–the one they count on to survive–and interestingly in most cases the customer is not the client. For example, Twin Cities Rise is about helping people out of generational poverty, but our client is the employer because employers have the jobs. If we don’t meet their standards, we lose them and then we can’t help people.

How does this advice apply to non-profits that don’t focus on structural poverty?
The book’s aim is to get people to think about whether what they’re doing is in their best interest. I find that many non-profits start with a behavioral-centered model, saying things like, ‘Dress for success, don’t get into any arguments, show up for work on time.’ And that’s all fine, except it may only last for a few weeks. But accountability is very important. It’s very important that people don’t come to work with a non-profit and feel entitled to something. They have to earn what they get. And it’s a two-way street—you get what you give.

There’s the principle of personal empowerment. Working with people who live in generational poverty, I learned that those people often don’t know what accountability is, because they’ve lived on the streets and their sense of the future is not good—they see people getting shot and going to jail. That’s counterproductive if you’re trying to get a job, and so changing the person’s belief system from the one I described to a hopeful one, is our approach. We learned that you can’t get people to change by focusing on behavior; you have to focus on beliefs first.

Interview has been edited and condensed.

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