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The rise of the hybrid: Colliding sectors

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"Like Dr Dolittle's Pushmi-Pullyu, the animal that had trouble moving because its two heads could not agree on a single direction, the hybrid model for non-profits is proving problematic. On occasion, the need to generate returns for investors overwhelms the social mission. In other cases, the business falters altogether and cannot support the nonprofit."
Stephanie Strom in The New York Times, October 25, 2010

"Hybrids may answer a problem or cause more – we have to experiment, try and take risks or we'll never have change."
David Le Page, Enterprising Non-profits

The nonprofit and business worlds have collided. New types of organizations increasingly mix and match the characteristics of both sectors, which can collectively be referred to as hybrids, a relatively new term in the nonprofit lexicon.

One hybrid many have now heard of is the social enterprise — despite the fact there exists neither an agreed definition of social enterprise, nor such a legal form in Canada. Its very name stresses the fusion of public and private sector values at the heart of the hybrid concept.

The reach of businesss into traditional nonprofit territory is also reflected by the rise of philanthrocapitalism, a term used to suggest that business thinking not only strengthens individual organizations, but also allows the market to create bold new solutions to enduring social problems. Yet vocal critics, such as the prolific nonprofit writer and activist Michael Edwards, ask if this is more akin to mixing oil and water, ultimately resulting in the pollution of civil society. There is plenty of polemic talk on both sides, but so far, precious little theory to guide the debate.

So just what is going on?

The Fourth Sector Network, a group of US nonprofit practitioners and thinkers, argues that the traditional three sectors have evolved to form "an entirely new organizational sector that integrates social purposes with business methods; a fourth sector."

They suggest this is a result of government and nonprofits becoming more focused on earned income and sustainability, while traditional for-profits look to maximize social benefit. The label they use is for benefit organizations, the best of all worlds with inclusive ownership, stakeholder governance, reasonable returns, transparency, social and environmental responsibility.

It may sound great, but not everyone sees things this way.

David Billis, a prominent UK-based researcher, thinks we have stumbled into a period of intense organizational hybridity and are now drifting up the hybrid creek, not only without a paddle, but without a reliable map. In his book Hybrid Organizations and the Third Sector, Billis develops a theory of hybridity to describe what is happening, as well as its implications.

He argues that the private, public and third sectors have distinctive principles, what he calls "rules of the game". As one example he illustrates that the public sector works on the operating principle of public service, the private sector operates by market forces and the third (nonprofit) sector is characterized by its commitment to a distinctive social mission. Attributes such as this define the attractiveness of nonprofits for the public, the sector's workforce, as well as private and government funders.

For Billis, these different "rules" around operating principles, ownership, human resources, and governance mean organizations have different ways of responding to problems from sector to sector.

He does not believe that hybrids sit on a continuum with for-profit at one end and charity at the other. Instead he pictures the sectors as overlapping circles, each being a zone of hybridity where different principles compete for supremacy, pushing and pulling organizations in competing directions.

Examples of such overlaps and potential conflicts abound. In my own experience they've included:

  • A new CEO hired from the for-profit world finds generating timely consensus among vocal volunteer (elected) board members more akin to "herding cats".
  • Paid professional nonprofit staff from a world of contracts of employment, benchmarks and deadlines struggle to see eye to eye with free-spirited volunteers working for love, not money.
  • Government officials hold back funding, demand complex measures of efficiency, effectiveness and impact, while nonprofit staff desperately complete spreadsheets and are diverted from the very services they were contracted to provide.

Unlike the Fourth Sector Network, Billis does not believe there is evidence of a separate hybrid or fourth sector with its own distinctive and explicit principles of management. And having described the potential for competition between different "rules of the game", his question for the policy makers actively promoting and funding hybrid organizations is: are we really clear about the nature of these organizations and thus, the implications of this policy?

Take social enterprise, the hybrid we have all heard of. Even arriving at an agreed definition is proving a struggle. Defined by some as a nonprofit that generates revenues, by others as any business with a social conscience, one author (Jeff Trexler) has compared them to a Rorschach Blot, taking on whatever form is in the eye of the beholder.

Bob Wyatt, executive director of the Edmonton-based Muttart Foundation, a granting organization which focuses in part on strengthening the charitable sector, thinks many practical questions arise through all this, that remain unanswered: "It's not that I'm against social enterprise. Yes, I am a skeptic, but I am also happy for the sector to take risks. I simply want to understand the risks before I take them."

Wyatt raises a number of unanswered questions: the assumption that social enterprises will succeed (Like regular businesses, many will not, as up to 50 percent fail; what happens then to the government or private funding they have received, or the clients they were serving?); the risk of cherry picking the most attractive clients to ensure high success rates (What happens to those left on the side? Whose responsibility are they?); and where exactly we might find the pools of private capital waiting to fund expansion of a redefined nonprofit sector.

For him, maintaining perspective is key. "We will not have world peace or an end to hunger if we have social enterprise tomorrow. It may be a step in the right direction, but it's not the entire solution."

Mixing the hybrid cocktail

Reconciling the competing principles of the business and nonprofit worlds is not going to be easy. Harvard economists Robert Kaplan and Allen Grossman suggested last year in the Harvard Business Review that ineffective and inefficient nonprofits should go to the wall, as in the business world: "In an effective system, innovative nonprofits with the best management and social change agendas grow in scale and scope, while the less effective and efficient ones would diminish and eventually disappear." For them, most nonprofits are just too small, noting that 90 percent of 700,000 nonprofits in the US have budgets of less than $500,000.

Apart from the difficulty in developing accepted measures of "success" for much nonprofit activity, the ‘biggest is best approach' clashes with the belief that small is beautiful and represents the heart and soul of the nonprofit sector.

Michael Edwards, author of Small Change, Why Business Won't Change the World, argues that large nonprofits in the US are the tip of a huge iceberg, while under the water-line live hundreds of thousands of registered and informal organizations, and the majority of volunteers: "Less visible maybe, but crucial in holding communities together and undertaking the collective work of a democracy."

The same iceberg floats in Canadian waters, where one percent of 170,000 registered nonprofits account for 60 percent of sector revenue and the majority have no employees. A tiny one percent employ 40 percent of the sector's staff.

For Kaplan and Grossman, "effective nonprofits struggle to serve more constituents while ineffective and inefficient ones swallow up dollars better spent elsewhere." For Edwards, by contrast, civil society is "complicated and messy, but also dynamic, fluid and diverse...that's something to be celebrated, although I am sure it drives some philanthrocapitalists nuts."

It is hard to imagine these two views being reconciled in a well-functioning social enterprise.

The private sector. Limitless or limited capacity for public good?

The influential economist Michael Porter wants companies to drop their "social responsibility mindset" and instead put societal issues at their very core. His tool to do this is shared value, creating economic value in a way that also creates value for society by addressing its needs.

For Porter, companies need to focus on the right kind of profits: the ones that will create societal benefits, not diminish them. This will require a "more sophisticated form of capitalism, one imbued with a social purpose". The rise of hybrids is cited as proof that shared value is possible.

A number of corporations eagerly received Porter's idea at Davos earlier this year. But The Economist struck a cautionary note: "Is it true that shared value will 'drive the next wave of innovation and productivity growth in the global economy', or merely a pious hope? For all we know the next such wave may come from energy-hungry, socially divisive businesses, given the paucity of evidence Mr. Porter offers to support his thesis."

Debating new ideas should lead to new solutions for old problems. Porter says that government and NGOs "can enable and reinforce shared value or work against it." Bob Wyatt, for one, sees this with us or against us perspective as unhelpful: "We aren't going to solve societal issues by refusing to talk to each other. There is a need for an honest and safe dialogue, even if we finally agree to disagree."

Hybrids. Whether news or bad news, definitely news

What conclusions are possible about this complex and controversial hybrid world? Optimists claim a new organizational holy grail; pessimists the destruction of civil society as we know it. But whatever your view, the growth in number and size of hybrids seems inevitable and with it there is a need to discuss the implications– both for individual organizations and the nonprofit sector as a whole.

The second article in this series will specifically consider the legal and financial implications of the rise of the hybrid.

Further Reading

Theories of hybrids

  • David Billis, eds, Hybrid Organizations and the Third Sector, Palgrave Macmillian, London, 2010
  • Executive Summary, The Emerging Fourth Sector, The Aspen Institute, Washington, 2009 (published by the Forth Sector Network)

Contrasting views on the rise of the hybrid and the role of the private sector

  • Michael Edwards, Small Change, Why Business Won't Save the World, (Berrett-Koehler Publishers Inc, San Francisco, 2010
  • Bishop M, Green M, Philanthrocapitalism, How Giving Can Save the World, Bloomsbury Press, New York, 2008

David Evans is a nonprofit consultant based in Vancouver. He has worked as a director with UK, European and international nonprofits and is particularly interested in appropriate education and training for the sector. David can be reached at Evansdn@aol.com or 778 883 7951, or via his website at davidnevans.weebly.com/index.html.

Please note: While we ensure that all links and email addresses are accurate at their publishing date, the quick-changing nature of the web means that some links to other websites and email addresses may no longer be accurate.

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