The Emerging Market for Nonprofit Control: Business Model Implications

Abstract

EXECUTIVE SUMMARY

The Great Recession and its aftermath have adversely impacted the operations of nonprofit organizations (Nonprofit Finance Fund 2011) at the very time that demand for services is increasing.  This circumstance, and recognition that the current economic downturn may be of extended duration, has prompted renewed discussion of how nonprofit organizations might create economies of scale through innovative business combinations.

While the scale of individual nonprofit organizations may have little relevance to solving some social problems (John Kania Winter 2011), it is an important and timely consideration in the evolution of the fragmented behavioral health and social services industry. Changes in the industry’s operating environment are harbingers of rapid consolidation, especially within the fragmented nonprofit provider sector. These changes include differences in the way services are delivered and financed, shifts in legislation and regulation, consumer preferences and provider leadership.  This new environment presents the typical undercapitalized nonprofit human service provider with the need to provide an expanded array of often technology-enabled services, under an unfamiliar, at-risk contractual arrangement, frequently during a period of executive transition. These challenges have been exacerbated by the economic downturn, which has given rise to an intense provider rivalry encouraged by payors seeking to reduce costs.

As in other industries, these circumstances encourage industry consolidation and hence, the evolution of a market for corporate control. Yet very few nonprofit organizations possess the capital, competencies or experience required to execute a consolidation strategy.  Furthermore few are in a position to develop the required capabilities due to structural and other barriers associated with traditional nonprofit business models. These models have historically been program-centric and differentiated primarily as a consequence of their size, as measured by annual revenues.

Clearly, a new business model is needed for the new paradigm; one that enables nonprofit organizations to adapt to the Industry’s greater demands and the emerging market for corporate control, without sacrificing core values. The goals of the new business model will be rapid growth supported by improved governance and new mechanisms for accumulating capital. The measure of its success will be unprecedented compound annual growth rates of revenues and net assets resulting from business unit expansion across a broad geography and range of human services.