Business, Nonprofit, and Government

Some of my readings on strategy, sustainability, and stakeholder relations have led me to an idea about the similarity and differences between business, nonprofit, and government organizations.   I don't believe it's ever been stated quite the way I have come to understand it, and I have the sense that considering them in this manner helps to better understand the way in which these organizations relate to the stakeholders who receive the benefits they deliver.

A bit of a disclaimer: any mention of "government" seems to attract opinionated imbeciles from search engines: this is not a political blog, and I don't care to engage in political discussions.   Comments will be moderated and correspondence ignored accordingly.

Back on point: I am led to the sense that businesses, nonprofit organizations, and government agencies have a similarity in their core purpose and differ only in ways that are largely incidental to the fulfillment of their purpose.  Understanding this difference can help an entrepreneur evaluate whether his idea would best be accomplished by starting a business, founding a charity, or petitioning a government agency.

The similarity is this:  all of these organizations function to organize capital and labor to deliver a benefit to certain members of society.    From a functional perspective, they are interchangeable but for one thing - whether the people who receive the benefits they provide are willing and able to pay the expenses of providing those benefits.

• A business provides value to customers, who pay individually for the value they receive.   The organization is willingly financed by the same people it serves.
• A nonprofit provides value to beneficiaries, who do not pay individually for the value they receive.  Instead, the organization is willingly financed by donors who wish to gift the value to the beneficiaries.
• A government provides value to certain members of the public, who do not pay individually for the value they receive.  Instead, the organization is unwillingly financed by taxpayers, pay taxes to avoid having violence done upon them.

Granted, that is speaking in ideal terms and in a general sense.   For example, there are government agencies that collect fees that are willingly paid by those who receive the benefit or privilege of their service - the cost of obtaining a hunting license ostensibly pays the salaries of game wardens.   But my sense is that these general statements hold true in most instances.

My consideration of nonprofit and government organizations will trail off from this point forward - as I currently work in the commercial sector, I am primarily interested in how the relationship to financiers and beneficiaries functions for a commercial organization, but the other types may pop up by way of drawing similarities or contrasts.

Investors and Customers

I have stated that commercial organizations are financed by the customers they serve, and I will stand by that statement - but there is another set of stakeholders who also consider themselves to be the financiers of a commercial organization: its investors.

In terms of operating expenses, it should be clear that investors pay no part of the operating expenses of a business - they intend to profit from their investment, not to be roped into having to provide a constant stream of financial support to the business.   This sometimes happens when a business is poorly managed and cannot cover its expenses - it must borrow money or raise capital from investors (generally new investors, by issuing bonds or releasing treasury stock).   But in a successful and sustainable operation, all ongoing expenses are paid out of the revenue collected from customers.

Investment capital, however, is less clear.   Starting a business requires a lot of cash, and until a product is rendered there are no customers to provide revenue.   This is where investors come in: they provide the investment capital to found a business (or in some instances to expand its operations) in exchange for the promise of a future return.   It does seem possible for customers to found a business by paying in advance for products to be delivered in future, but I expect such situations are rare.

However, I stand by the assertion that customers finance the organization - the revenues of a business repay the investors for the investment capital they provided.  This is most obvious when a business borrows money from a bank - the amount it required to establish the operation is repaid, over time, from the revenue contributed by customers.  At some point, the loan is paid off by the customers.

When investment capital is generated by the sale of stock, the situation is less clear: the stockholders are not repaid (unless the firm repurchases all its stock and goes private, which is rare), but instead maintain an ongoing interest in the operation.  The customers repay the investment capital through revenue, but it is a debt that is never entirely paid off: so long as shares are outstanding, the inventors are constantly owed some portion of the revenue.

As much as I'm attempting to avoid ethical issues, I am feeling a bit queasy at the notion of a loan that is never repaid - but I suppose all organizations are a bit questionable in this regard: the donors to a nonprofit gave funds without any expectation of being repaid, and the taxpayers who support a government have no expectation of repayment and did not freely choose to provide funds.   And neither charitable of government beneficiaries have any right to expect to receive value.   But this gets a bit off topic.

Ownership and Control

The notion of "ownership" becomes very hazy in all regards.  In western culture, it follows the general principle that someone who pays for something owns it.   But in organizations of all kinds, this becomes hazy.

The donors to a nonprofit clearly do not have ownership of the organization, though the organization must appease their demands for the sake of getting future contributions from them.   The taxpayers of a government do not have ownership of the organization, but the organization must appease their demands to avoid being overthrown.   And the customers of a business do not have ownership of the firm, but their demands must be appeased in order to generate revenue.

Business investors, however, are problematic.   They are owed a return on their investment, as explicitly promised to creditors who loan capital or implicitly promised to shareholders.   It seems to me that they have little "right" to control the business in any way except to ensure the repayment of the funds they are owed.  And while investors show little interest in the day-to-day operations of a firm and relegate this task to employees (management), the strategic direction of a firm is another question.

It does not seem at all reasonable for an investor to demand that, in exchange for a loan of money, they have perpetual control over the strategic direction of an organization.  This is particularly true when the amount of the original investment has been repaid, in full and with interest.   A bank that loans money to a business has no rights other than to collect payments as agreed upon - but again, the perpetual debt to stockholders becomes problematic.

And again, the problem of ownership and control is not unique to commercial organizations.   Nonprofit organizations can often "go rogue" and completely ignore the interests of their donors so long as they have working capital.   Government organizations can completely ignore the interests of citizens until they have gone too far and incite a revolution.   Businesses can ignore their investors and customers until they have gone bankrupt.  This, too, merits consideration - but not here and not now.

Customer Relations

Of all the beneficiaries and financiers of organizations, my sense is that the relationship with the customer is most clear, direct, and ongoing.  Except in rare instances where a company provides a rare, unusual, or once-in-a-lifetime service, the business must constantly take into account the interests of its customers and ensure that its operations provide ongoing value in order to receive ongoing revenue.

Its relationship with investors is of no consequence - or should not be of any consequence.   Rationally, the investors should also be interested in providing ongoing value to the customer, because doing so is critical to the firm generating the revenue necessary to repay their investment.   But there are instances in which investors run a company into bankruptcy because they are interested in something other than profiting from their investment, or because they do foolish things to generate short-term returns while damaging the company's potential to provide long-term returns.

In that sense, the rational investor should be content to leave the management of the firm in the hands of the employees it has paid to management, so long as the firm is profitable and stable enough to provide the required or expected return on their investment.  Any encouragement should be for the sustainability of the firm.

Ultimately, that brings me to the conclusion that the customer is the most important stakeholder of the business, whose needs should be served above all others - it is neither a moral obligation nor an option, but a functional requirement that must be met in order for the firm to retain the customers who provide revenue to sustain its ongoing operations.

The Broader Scope

To summarize and make sense of all of this, the key point of this meditation has been that business, nonprofit, and government organizations all exists as means of coordinating capital and labor to deliver benefits to certain members of society, and that the difference between them is largely functional and financial: it is the difference in identity and interests of those who receive the benefits and those who pay for the benefits to be provided to the recipients.

In this regard, the function of a business is clear cut because the financier and beneficiary are essentially the same person - the operating expenses are paid, and the investment capital is repaid, both by the customers who receive the benefit - and because the customers contribute the revenue voluntarily and have the ability to stop their contributions at any time, their interests must be the primary concern of the organization.

Where the interests of financier and beneficiary cannot (or will not) be sustainably served, a nonprofit organization or government agency is the only effective alternative for establishing an organization to provide benefits.    This becomes a bit of an ethical quagmire, because what is "effective" is not always "ethical" - but I'll save that meditation for another time and another venue.

Recognizing You Have an Opportunity

Some time ago, I wrote a post about “Admitting You Have a Problem” in which I pointed to a number of flaws with mischaracterizing problems as opportunities.   From the feedback I’ve received, it seems that the opposite (mischaracterizing opportunities as problems) is far more pervasive.  While I mentioned this issue in the original post, it was in the nature of an afterthought and the matter deserves a bit more attention.

I do think that the same litmus test can be applied – i.e., if the current situation can perpetuate, then it is an opportunity rather than a problem.   And in either case, the solution is to properly identify whether a situation is a problem or an opportunity, prioritize it appropriately, and use the correct decision-making process to solve or pursue it.   But because the panic-mongers and manipulators can be so tenacious in attempting to mislead others into treating opportunities as if they were problems, some thinking on countermeasures is in order.

The first countermeasure is to apply that litmus test.   Ask “and what happens if we don’t take action?”   If the answer is “nothing” or “nothing serious” then the problem can justly be reframed as an opportunity and a more leisurely and broad-minded approach to pursuing it can be taken.

Naturally, the panic-monger will heap on additional conditions that would cause the situation to degrade – “What if [x] also occurs?”  The solution to that is simply to make them do their homework.  Refuse to consider the disaster scenario until they provide solid evidence that it will occur, and return to a more sane approach to addressing the actual issues.  (Of course, if they can provide evidence of a high probability that the additional conditions will exist, then accept the notion that it should be treated as a problem – though in that instance the answer is to address the condition.)

A second countermeasure is to insist that the panic-monger do some homework.   As them to find out what the root cause of the problem is, and back their analysis with solid information. People who are obsessed with problems are often merely complaining and don’t have a sense of what their desired outcome will be, other than seeing a reaction to their panic.   They also tend to be quite intellectually lazy: they want to get others to take action to solve the problem they have pointed out.    They may need assistance to discover the cause of the problem, but very often the investigation process will result in discovering that the scope of the problem is much less than claimed.

This leads to the third countermeasure, which is to understand the scope and impact of the problem.   Again, the irrationality and laziness of the panic-monger is such that they have failed to consider whether the problem is worth solving.  At any moment, there are innumerable problems and opportunities – why should this one take precedence over others?   Serious problems must be addressed, but trivial ones can be abided.

Finally, it must be said that these measures should not be undertaken to discourage people from mentioning problems – that would be dangerous and inadvisable.  But those who constantly seek to interrupt operations and spin up panic must be coached to be more deliberate in the identification and analysis of situations so that the problems can be understood and prioritized appropriately.

Ultimately, the goal is the same: to correctly distinguish problems from opportunities, prioritize them appropriately, and apply the proper tools and techniques to acting upon them.

Advertising: Necessary or Unnecessary

I heard an interesting but misleading axiom: that if a product needs to be advertised, then people probably don't need it.  It's interesting in that it holds a glimmer of truth - most people will buy the things they know that they need, and if you must push a product, it's often because people don't see a need for it.   It's misleading in that it is based on the premise that people are omniscient and industrious - that they know what they need and are willing to invest effort into getting it - both of which are false.

People are not omniscient.  Even those who are smart about some things are painfully ignorant about others, and they live with problems that they could quite easily correct if only they recognized the problem and were aware that a solution existed.   Advertising that helps to recognize problems and discover solutions is selling something that's very much needed.

People are not realistic.   In general, they tend to think that they can achieve things very easily and that problems will not arise.   And in some instances things do not work out as they wished, are harder to do than expected, and sometimes there are very negative side effects.   Advertising that helps bring them in touch with reality is selling something that's very much needed.

People are not industrious.   They are very economical, seeking to get the most benefit from the least cost or effort, and will often abandon goals if the effort seems too great, preferring to live with the problem rather than undertake the effort to solve it.  Advertising that identifies better ways of accomplishing goals is selling something that's very much needed.

But on the other hand, advertising goes awry when it misrepresents the truth: to suggest that there is a problem when it really is not, to suggest a product is efficient/effective when it really is not, and so on.   In essence, deceptive advertising to sell unneeded products is entirely unnecessary, and quite harmful in that it leads people to invest their time and money into something that does them no good, consuming resources that might have otherwise been used to achieve something necessary that is neglected.

So in the end, advertising is as necessary/unnecessary as the product it is advertising for the specific individual to whom it is being advertised.  And ultimately, it is the right and responsibility of each consumer to determine his own needs.   Critics of advertising are no better than advertisers in this regard: they presume to know what people really need, and wish to meddle in the lives of others.  If it is the right of an individual to choose the goals he wishes to pursue for himself, then it is the responsibility of an individual to consider whether any offer is worthwhile given his own priorities.  “Caveat emptor,” is not a phrase that expresses indifference, but respect for the individual consumer to make his own decisions.

Operation and Project Management

Traditional organization structures were built around ongoing and permanent tasks: the "marketing" department was staffed by individuals who perform marketing functions that are done as a matter of course.  And in such a department there is likely a person whose task it is to manage the weekly newspaper advertisement, which is a task they perform each week on an ongoing basis, in the same way they have always done it.   This work is performed over and over and is never expected to end: that is, the company will always place a newspaper ad each week and the clerk will always need to attend to the necessary tasks to do so.

Such an organization gravitates toward stasis and myopia: for the sake of efficiency and reliability, nothing is ever expected to change.   People settle into jobs in which they become very efficient, but it becomes the scope of their existence: it is "my job" to do this task, and they lose sight of its context and meaning within the bigger picture.   This is particularly true among the people who perform hands-on tasks, but also is evident in the attitudes of those who manage them.

Project-oriented teams within an organization depart from this: their work is to implement a solution to a problem for which there is no defined and existing pattern of behavior.  In many instances, they explore the problem and define a solution before implementing it.   Such teams in traditional organizations are ad-hoc - they effect a change on the rest of the organization and disband once that change has been made.

There have also been entire companies that are project-oriented, but this has traditionally been rare.  A construction company, for example, would assemble the personnel required to build something and manage the construction project.  When the building was completed, the company would move on to another project.   Its people needed to be flexible because no two days involve the exact same tasks, and the skills needed might change from one project to the next (building an office building or building a bridge require different skills).

Design consultancies operate in the same manner: each job they do for clients is a project that has a specific beginning and ending with work that tends to vary (that is, unless they are doing the weekly newspaper ad or some other repetitive job for a standing client) such that the agency must define the work to be done and then perform it.   In such an agency, an employee's responsibilities vary, and their work is better defined by the projects they are supporting than a job title or role.

Management in these organizations often consists of "putting our fires" - which is to be expected.   In a workplace where every project is unique, there are no regular duties.   The workers are specialists who do not merely perform tasks, but define the tasks to be done, and they are capable of doing this without much assistance - but when problems arise, management must step in to smooth out obstacles that to keep the work on track.  The problems will be as unique as the work.

The project-based model emphasizes collaboration - authority over a task is maintained by the person who performs the task.   There is usually a project manager who attempts to keep track of the work and overcome impediments, but because there is no formal process that drives the work of the team, there is not a management function to ensure people are doing what they are supposed to be doing - because there are no suppositions.

Project teams generally proceed through a number of phases in which the nature of the work fluctuates.  The problem-solving phase defines the criteria by which a solution will be assessed to be a success or failure.   The design phase hypothesizes a solution that is compared to the problem until consensus is reached that it is worth pursuing.  The development phase implements the solution that has been agreed upon.   After that is complete, the project is over, though it may result in follow-on work to provide continued support for the solution.

Thus considered, traditional firms are in the "continued support" phase most of the time - and this has been the historical approach to doing business, which can be maintained in a relatively unchanging environment, such that the same operations can be counted on to produce the same results consistently.   But in the present day, the environment constantly shifts, such that the problem-solving work cannot be a periodic task, but an ongoing necessity to remain functional and relevant.

Crowdsourcing Revisited

There is great potential in networked technology to bring together the ideas and work of millions of minds to accomplish substantial things – but to what degree has that potential been realized?   In over two decades, examples of successful mass-collaborative efforts are very few, which begs the question of whether the potential is real, or merely has not been realized.

Granted, the wave of enthusiasm about “crowdsourcing” has largely died down.  So it’s likely a good time to reconsider it from a more sober and less starry-eyed perspective – because there does seem to be a great deal of untapped potential, though not quite so much as the fanboys would have us believe.

With this in mind, I’ve read a couple of books on the subject and considered what the authors have to say:

• Jeff Howe’s Crowdsourcing speaks directly to the phenomenon – the author attempts to be objective, but is still rather an enthusiast who goes on long tares about what should be possible (but hasn’t been accomplished) and trots out “success stories” of businesses and projects that have failed since the book’s publication.
• Gustave LeBon’s The Crowd was written a few hundred years before the Internet was invented, but remains a valid exploration of crowd psychology.  And the behavior of crowds online, like that of people online, is very similar to their behavior in real life – albeit a bit worse given the ease of participation and the expectation of anonymity gives people the sense they can behave very badly without consequences, and they often do. 

Considering what Howe claims a crowd is capable of doing and what LeBon says about their habitual behaviors and cognitive capacity, it becomes clear that the crowd is good at a few things, but bad at most:

The crowd is very good at gathering

When it comes to collecting things, the crowd is a very good resource.  Expedia, YouTube, Pinterest, and similar sites that aggregate a huge amount of data benefit greatly from crowdsourcing, on the premise that many hands make light work – with the caveat that the work will not be particularly good.

The crowd is not good at creating

There is a significant difference between gathering and creating, in that creating requires effort and talent to produce something whereas gathering does not (it’s merely bringing together things others have created).   User-generated content is notoriously awful – and while there are members of the crowd who have the talent and the willingness to contribute it, they are few and far between.

Consider Sturgeon’s Law, which maintains that “90% of everything is crap.”   It’s more like 99%, and maybe 99.99% - but the Law of Large Numbers reminds us that if there are ten million contributions, the 0.01% of quality contributions means there will be a thousand good items – though finding them in the mass of inferior works is difficult.  This brings me to the next point …

The crowd is fairly good at moderating and organizing

Finding needles in a haystack is another instance in which many hands make light work.  Crowds are good at flagging inappropriate content or suggesting which items among a multitude are worth giving closer intention.   However, the reason a crowd is only fairly good at moderating is that opinions differ as to what constitutes quality – and the crowd is only capable of reflecting popular opinion, which may be inaccurate (see the later point about knowledge).

Sorting things into categories is rather more complicated than moderating.  Whereas moderation requires sorting them into two categories (good or bad), organizing often has an open categorization system, and the crowd must develop its own taxonomy – which again is a task that requires knowledge if the system of categorization is to be meaningful.

The crowd is very bad at anything that requires talent or knowledge

From the previous points about creating, moderating, and organizing, it becomes apparent that crowds are not good at anything requiring talent or knowledge.   Ask a crowd to paint a mural, and you get graffiti.   Ask a crowd for medical advice, and you get highly questionable and potentially dangerous folk remedies.   You’re better off commissioning one artist or consulting one physician for those things – and the same is true to some degree of an task that requires talent or knowledge.

The crowd is not very good at predicting

The financial markets are ample evidence that when people fall in line with a herd, they do not think very clearly about the future – they tend to be emotional and move en masse based on very superficial evidence.  Hence, there are bubbles and crashes.   They are also highly subject to groupthink – a person stating an opinion is prone to agree with the opinion stated by someone just before him, or express what he thinks will be acceptable to others.

This has been discovered in the field of marketing research: while it is easier to interview twelve people in a focus group, the results are less accurate than interviewing them individually and aggregating the results because the interaction causes them to normalize, and generally to the lowest common denominator.

The crowd is very bad at sustaining interest

Crowds are prone to get excited about doing something that is simple and quick, but they tend to lose enthusiasm and disperse very quickly – and this is the main reason they fail to accomplish much.   They follow fashions, which change rapidly, and have the attention span of a hyperactive teenager.   So if a task requires more than a few moments’ effort, or engagement over a long period of time, it will be left undone.

***

All things considered, crowdsourcing is an idea that should be considered – but before getting into the details of how the crowd can do something, it’s very important to consider whether the crowd is capable of doing it sufficiently well.   In many instances, it is not, and you’re better off hiring an expert (or assembling a team of experts) rather than throwing your project to the mob.

Reinforce, Optimize, Innovate, Destroy, or Let it Be?

This is the inherent difficulty when attempting to resolve a problem in an existing process: is it necessary to completely replace an existing solution with something new, or merely to make a few minor adjustments to an otherwise perfect existing solution?  The way to settle the dispute between innovators and optimizers exists, though it is very much neglected: as-is analysis.

The as-is analysis considers the present solution, acknowledging that it was put in place to solve a problem, and conceding that the present system was designed by people who were intelligent and insightful – but that even the most intelligent and insightful people make mistakes that lead to failure or partial success and it is possible for the people presently involved, equally intelligent and insightful, to find a way to improve.    Said another way, as-is analyst answers some basic questions:

• What was the existing solution instituted to accomplish?
• Are those goals (still) valid and worthwhile?
• Is the existing solution being implemented as designed?
• Is the existing solution effective in accomplishing its goal?
• Is the existing solution efficient in accomplishing its goal?

The answers to these questions help define the scope of the present effort: to reinforce existing solutions, optimize them, replace them with something innovative, or leave it alone?   It’s an important decision to make to put sufficient but not superfluous effort into the effort.

If the goals are no longer valid or worthwhile, then the solution should be to desist and destroy the processes – they are merely rituals that likely render no benefit and entail expense or inefficiency.

If the existing solution is not being implemented as designed, then reinforcement is necessary, as the evidence does not warrant changing or replacing it.  If it can be done properly, it may work.

If the existing solution is not effective in accomplishing its goal, the innovation is needed to replace it with an entirely new solution that will be more effective.

And if the existing solution is effective but inefficient, optimization is necessary because the solution is valid, but adjustments are necessary to improve upon it (get greater results with less effort/expense).

My sense is that a though as-is analysis is seldom done, particularly when there is a proposed replacement for an existing solution that has generated great enthusiasm, or a significant amount of resentment or dislike for the existing solution.   These are more psychological or political factors that have nothing to do with functional improvements.