What is the difference between a for profit and a non profit? Is one a place where serious work gets done and the other a place for people who don't like stress? Why would an organization choose to be non profit if they can create value that appears at the bottom of an income statement?
I certainly can't answer all of those questions but over the next two posts I can share a potentially interesting comparison between non profits and for profits that work within the same market. In this first post, I'll talk about the market for government contracting for international development and in the second, I'll talk about the differences between nonprofits and for profits in terms of that market.
Before coming to IESE I worked for a non profit organization (a 501(c)(3), if you know about US tax code) that implemented 'international development' projects for the US Government. We were contracted to, among other things, build schools, spur the economic growth of impoverished regions, provide access to clean water, support refugees and displaced people, and respond to natural disasters. We were hired to do jobs and were paid for our work, but any income above our costs could not be paid to our owners and had to be reinvested in completing our organizational mission. Some of our competitors earned a profit for their owners and we frequently found ourselves bidding against or partnering with for-profit organizations that also specialized in 'international development'.
The international development USG contracting market is dominated by a single US Government agency, the United States Agency for International Development (USAID), spending around $10B on international development projects per year, with those projects split almost exactly between for profit and not for profit organizations (about $4B for each with the remainder going to foreign governments). In this environment, with two types of organizations that are offering almost identical services to a single client it should be possible to see that one type of organization wins out over another, but in practice neither wins and there is an even split between the two because each model offers specific advantages to the client. Why does that happen?
The USG conducts the majority of its 'development' business through USAID, which hires organizations to implement projects primarily through two mechanisms, grants (usually a type of grant called a cooperative agreement) and contracts. With cooperative agreements USAID advances money to the contractor and has some involvement in the implementation process, while with contracts the contractor implements a project with a high level of involvement from the government and must implement the project with their own funds before being reimbursed by the government upon achieving indicators. Though both types of organizations can bid for projects under both types of funding mechanisms, non profits typically win cooperative agreements and for profits typically win contracts. Although I worked at a non profit I was involved in implementing contracts and cooperative agreements, so crossover does happen.
The decision for government agencies to hire non profits or for profits is based upon the needs of the project at hand and the capacities of the organizations applying for funding. For example, in the immediate aftermath of a natural disaster when quick response and adaptation are necessary for project success, it makes more sense to use cooperative agreements that give the implementing organizations the flexibility to respond to whatever problems might arise. For example, in the aftermath of the Port-au-Prince earthquake, my organization was hired under a cooperative agreement to remove rubble. As the environment was constantly changing, a cooperative agreement allowed USAID to let the project run without the bureaucratic formalities required under contracts.
On the other hand, in a stable operating environment or on a project that is more formulaic, a contract would be a better choice. For example, over the past five years my organization worked on two contracts to foster economic growth in Balkan countries that have had problems with security but are now considered very stable.
From the point of view of the government, cooperative agreements, and loosely by extension non profits, work well in regions and on projects that call for flexibility while contracts are more desirable when the project goal is clear and measurable or when USAID wants to have more control over the project. Given the nature of the work and the wide variety of countries that USAID operates in, there is an understandable constant tension over the merits of flexibility and control.