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Strengthening the performance of nonprofits: A conversation with Steve Rothschild of Invest in Outcomes

Author and nonprofit leader Steve Rothschild discusses the principles social enterprises should follow to achieve success.

July 1, 2013


Jacob Wascalus Community Development Project Manager
Strengthening the performance of nonprofits: A conversation with Steve Rothschild of Invest in Outcomes

Steve Rothschild is the founder and president of Invest in Outcomes, a Twin Cities-based organization that developed the Human Capital Performance Bond, a new financing vehicle for social enterprises. The term social enterprise broadly refers to nonprofit organizations that adopt a business approach to addressing social problems.*/ Rothschild is also the founder, former CEO, and current board chair of Twin Cities RISE!, an anti-poverty workforce development organization that helps unemployed and underemployed adults—primarily men of color—secure and retain living-wage, skilled jobs. Before founding Twin Cities RISE!, Rothschild worked for General Mills as an executive vice president, where he launched Yoplait, USA.

Rothschild’s passion for community development is extensive. Currently, he is a director at both the Minneapolis Foundation and American Public Media/Minnesota Public Radio and an advisory board member of the University of Minnesota’s Hubert H. Humphrey School of Public Affairs. In the past he served as a board member of Greater Twin Cities United Way, the Citizens League, the Bridge for Runaway Youth, and the College of St. Benedict. He also was a founding chairman of ALTCARE, a joint venture between General Mills and the Wilder Foundation to establish innovative practices in elder care.

In 2012 Rothschild wrote The Non Nonprofit: For-Profit Thinking for Nonprofit Success, in which he distills four decades of non- and for-profit experience into seven principles that social enterprises can follow to propel them to success. In order to share the benefits of his experience with our readers, Community Dividend recently spoke with Rothschild and discussed some of the principles he covers in his book.

Community Dividend: What compelled you to write this book?

Steve Rothschild: I wrote this book for two reasons. One is that after 40 years of working in the for-profit and non-profit sectors, I’ve learned that there are a number of principles that the highest-performing organizations tend to follow that help them achieve superior results. I wanted to explain these principles and create a resource that people can use to improve their own organizations. The other reason has to do with the fact that nonprofits, which deal with the most daunting issues we face, now have to do their work with fewer resources. This makes it incumbent upon our social enterprises to conduct their business more effectively and efficiently, including finding creative ways to finance their operations. My intention was for this book to be a resource that social enterprises could use to help strengthen their organizations.

CD: You stress that organizations should have a clear and appropriate purpose. Could you expand on that a little and explain why it’s important?

SR: Sure. Purpose is why an organization exists. It drives the passion that brings entrepreneurs, employees, and volunteers to their work. The best organizations not only know what their purpose is but hold themselves accountable to that purpose in everything they do. They focus their efforts and resources on what will accomplish their purpose. That’s critical, because it’s easy to get sidetracked. For example, your clients need so much more than you offer, so you start more and more programming that’s off-target or you chase grants that may pay the bills but will divert you from your purpose. Knowing exactly why you exist—knowing your purpose—is a crucial part of meeting your original intent.

CD: How can organizations better use metrics to enhance their programs? That is, what should organizations focus on when measuring the effectiveness of their programs or services?

SR: Metrics have a way of focusing our attention. For a Fortune 500 company, it’s your return on assets. For a prospective college student, it’s your SAT score. It’s human nature to spend your time on things that are being measured, so it’s really critical to measure what counts. Organizations get what they measure. You can measure a lot of things, and much of it won’t be very helpful. For social enterprises, what matters is the long-term outcome, the real-world results that you need in order to achieve your mission and your purpose.

Unfortunately, much of what is measured in the nonprofit and philanthropic worlds are outputs, not outcomes. For example, for an anti-poverty workforce development organization, an output might be the number of classes taken by clients, or even how many people graduate. Those are helpful, intermediate metrics, but they don’t measure how effectively the organization is helping move people out of poverty. You have to take measurements beyond how many people graduated. You have to measure how many people graduated, secured a job, improved their income, and stayed in that job over time. Outcomes like these are more difficult to evaluate because they take longer to measure, require more thought, and are often costlier. But without knowing what your social outcome is, there’s no real way to know if your organization is fulfilling its mission and purpose.

CD: You write that all social enterprises have a range of stakeholders—clients, customers, employees, funders, government—and that while each of these stakeholders is important to the success of the organization, it’s especially important to serve the customers. Why is that?

SR: Because among all of the stakeholder relationships, the one with the customer is the most critical to an organization’s survival and success. For example, the organization Playworks hires and trains adults to supervise playgrounds at elementary schools. The underlying purpose of the supervisors is to teach children conflict-resolution skills, because the playground is often the setting for bullying and for learning some poor social habits. Playworks’ purpose is to succeed with children, who are its clients. However, if Playworks doesn’t satisfy the school principal—its customer—he or she won’t hire Playworks in the future. Meeting the market standards of customers in the nonprofit world makes it possible to succeed with your clients and fulfill your purpose.

CD: One of the principles you discuss in your book is for organizations to create mutual accountability with their stakeholders. Why is that so important? And what’s an example of an organization doing it?

SR: The relationship between organizations and their stakeholders needs to be a two-way street. If a donor is giving money and not getting something back that they think is worthwhile, they’re not going to be a donor for very long. If a client, or actually any human being, has no reciprocal responsibility for the services they are being provided, they see little value in them and learn the wrong lessons—lessons that often reinforce old beliefs that have kept them from succeeding in the past.

One of the most successful organizations I’ve seen that practices mutual accountability as a central component of its mission is Habitat for Humanity. When a client is going to be given a house, they first have to work on the construction of their house for many hundreds of hours, and also likely work on somebody else’s house. Doing this enables clients to get to know their neighbors, have an investment in their community, and build “sweat equity” in the actual house. So there’s this two-way commitment that yields mutual accountability.

CD: What is an example of creating economic value from a social benefit?

SR: Economic value is created from all successful social interventions. For example, training someone for a better job, enabling an elderly person to stay in their home rather than going to an expensive nursing home, helping someone overcome a drug addiction, helping a disabled person find gainful employment, assisting a homeless person or family to obtain stable and long-term housing. Whenever an organization successfully facilitates one of these preventive actions, they are creating not just positive social value but also positive economic value. And the economic value accrues not only to the individual but also to another entity, typically the government—the county, the state, the feds—and comes in the form of taxes and lower government expenditures for low-income housing, Medicaid costs, etc.

A big problem is that as a society, we don’t measure this phenomenon. We don’t capture these values and we don’t reward organizations for achieving success. If we regularly did “pay for performance” based on the economic value achieved, we could reward high-performing social organizations with greater support while cutting the support for those organizations that did not perform. It would be an objective, transparent, and effective approach to improving the return on our social investment.

Twin Cities RISE! has pioneered this concept with the state of Minnesota since 1997. TCRISE! is paid only for success, which is defined as one of its graduates being hired for a job that increases his or her earnings by $10,000 or more a year and pays more than $20,000 a year, and also staying in the job for at least one year. The amount TCRISE! is paid is based on the economic value to the state from increased taxes and decreased state spending—for example on low-income health care, housing, and childcare—for the successful individual. Over the last 15 years the state has received a 7-to-1 payback on its investment. This “pay for performance” model is the basic structure for many innovative financing tools now being piloted worldwide, including the Human Capital Performance Bond that we developed at Invest in Outcomes. [For more on one type of pay-for-performance tool, see the article “Social impact bonds offer promise of savings, profits, and positive outcomes” in this issue.]

CD: What are some examples of organizations that are incorporating your principles effectively?

SR: There are lots that I don’t even know about, but I wrote about some outstanding ones, in addition to those that I previously mentioned, in my book. Lumni has created an innovative financing model in which it sells mutual funds to support poor students in obtaining college educations and then pays investors back based on the incremental income students’ educations generate. CaringBridge, headquartered in Minnesota but available internationally, does a great job of understanding who its customer is so it can serve its clients better. Grameen Bank of Bangladesh has done a very good job of redefining what measurements it needs in order to achieve its ultimate purpose. There are many of them, nationally and internationally, and I just highlighted a handful.

CD: Any closing advice for social enterprises?

SR: Yes. One key thing to keep in mind is that the best-performing organizations aren’t distinguished by getting it right the first time, or sometimes even the second or third time. But they persist. They keep learning until they get it right. Sometimes they even have to re-invent themselves. Being learning-driven is critical, since assumptions don’t always pan out and there will be unforeseen events. Nonprofits are especially challenged because of continuing government cuts in social service spending that will undermine their economic model. They will need to become even more efficient and effective and will need to find new sources of revenue. Those that successfully question themselves, experiment with new approaches, invest in analysis, and keep experimenting over and over will thrive.

The seven principles for building successful social enterprises

  1. Have a clear and appropriate purpose.
  2. Measure what counts.
  3. Be market-driven.
  4. Create mutual accountability.
  5. Support personal empowerment.
  6. Create economic value from social benefit.
  7. Be learning-driven.

*/ In a narrower definition of the term, social enterprise can refer to for-profit businesses established by nonprofit organizations. For more on this, see the article “Earning income, serving the community: Guidance for building a social enterprise,” by Nonprofits Assistance Fund Executive Director Kate Barr, published in the January 2009 issue of Community Dividend.