Why the Social Sector Needs M&A

Why the social sector needs M&A :
How bringing business principles to the social sector will drive efficiency and effectiveness

For years I've been straddling the worlds of business and philanthropy. First as a corporate executive and now as a consultant helping companies meaningfully leverage social impact to drive their businesses. So I've seen both sides. Contrary to what even I expected, this has made me an even more ardent believer that business engagement is the key to finally solving social problems in ways that are sustainable, scalable and replicable. Why do I think this? Because despite all the things that business has gotten wrong in the past 25 years, it has still been the most efficient and effective allocator of resources - time, money and natural resources - as well as the single most powerful force in pulling people out of poverty. It's arguably accomplished more than government, religion or academia during that same time; maybe even more than these three combined.

That got me wondering; why has business been so successful compared to the social sector? It isn't because the social sector attracts incompetent people. Quite the opposite. Some of the smartest, most dedicated people I've met work in the social sector. So what is it? I would argue the problem is waste - both time and money. The US government today spends more than six trillion dollars on social programs. That should be enough to do what needs to be done. But instead many major indicators are moving in the wrong direction. Why? Because like John Wanamaker famously said: "I know 50% of my advertising is wasted. I just don't know which 50%". While few want to admit it, we all recognize there is waste. We just don't know what to cut and what to invest more in. That's because the social sector is missing three key features that make business successful, namely: transparency, comparability and accountability. Let's examine each of these in a little more detail.

1) Transparency - Some people think that business is highly opaque but I would posit that there is more publicly available information about US listed companies than about institutions in any other sector. Doubt this? Just ask yourself - which is more forthcoming: IBM or the Catholic Church? And if you have a question or concern for leadership, is it easier to raise it during an annual general meeting or during the State of the Union? I think you get my point. Business may not be an open book but it's far ahead of the other sectors on transparency.

2) Comparability - Not only is there more information available but the type of information that's available can be readily compared on an apples to apples basis - thanks in large part to common accounting standards etc. That makes it relatively easy to tell who is "winning" and who is "losing" - and not by some largely meaningless internal standard like spending 10% or less of funds on overhead, but where it actually counts - in the market they are serving.

3) Accountability - The third advantage business has over the social sector is that in business you get paid for outcomes not activities (for profitably selling a product not just for getting it onto the grocery store shelf). That accountability for your performance against stated outcomes is swift and clear - eg, investors can move money out of your stock in an instant if they no longer believe your company is the best bet to achieve their investment aims. We need a way to help social investors make the same types of assessments.

I understand this might be scary to many. After all, these three features also made the rise of activist investors and agitators of all types not only possible but indeed likely. Since outsiders can see what's working and what's not, they can often persuasively push for change. Now I'm not saying the short term mentality of activist investors would benefit the social sector but I am all for this type of intense external scrutiny of social sector programming. After all, there must be some duplication and waste in a system where nearly 1,500 separate 501C3 organizations in the US alone are trying to fight the same disease, namely breast cancer. (http://www.marieclaire.com/politics/news/a6506/breast-cancer-business-scams/) Yes, that's a big and critically important job. And there are many needs - from finding a cure to caring for those who already have cancer. But, wouldn't say 10 or even 100, larger, better resourced organizations have a greater chance of tackling the problem? If ever there was a sector that could benefit from some smart M&A activity, it's the social sector.

In fact, I'd say the writing is on the wall - my prediction is that no NGO will continue to excel trying to be all things to all people. It's time NGO leaders had the tough conversations in order to determine where they have true competitive advantage and to then focus on that space - leaving the rest to others. I know it's hard to say no to funders. But in some instances, that is the right thing to do. We need to bring more "market-like" pressures to this sector to both jump start innovation and to root out waste.

Yes, this will create winners and losers and many NGOs may go out of business or be taken over by others. But I see this as largely positive. As a business person, my belief is that the "winners" - big or small, new or old - should be those organizations that are truly delivering and able to "prove" that they do so better than the rest. If this happens, we'll greatly reduce waste, making us all winners because we'll finally achieve real progress on these intractable issues and maybe, just maybe, actually solve some of them in our lifetime. Wouldn't that be worth whatever disruption is required?