Given this context, the timing seems especially ripe for Nonprofit Sustainability from co-authors Jeanne Bell, Jan Masaoka,and Steve Zimmerman. The authors, all respected nonprofit executives and consultants, have developed a framework that will help nonprofit executives take an approach that integrates financial performance and social impact considerations in strategic decision making. The book’s premise is that “financial and impact information can and must be brought together in an integrated, fused discussion of strategy,” which is true and increasingly important. Much as 21st-century corporations are integrating social responsibility and sustainability practices in their business models, 21st-century nonprofits must integrate financial considerations with their social impact priorities as well. It’s all reflective of the movement toward a broader perspective of organizational performance and the idea of “blended value” that Jed Emerson gave us many years ago.

Beyond this important premise, Nonprofit Sustainability’s primary contribution is a framework for operationalizing the integration of financial and social impact. The “Matrix Map,” a standard 2 x 2 matrix that is the trusted friend of every good consultant, is a simple but powerful model for assessing the impact and profitability of a nonprofit’s programs. In this model, programs are reclassified as “business lines” and include fundraising efforts as well. Each business line is assessed on its impact and profitability and then plotted at the appropriate point and scale on the matrix. Through this process, nonprofit executives get a clear picture of both the absolute and relative performance of each important program and fundraising effort. No doubt the picture this exercise reveals will be enlightening for many nonprofit leaders and put them in a better position to make smart resource allocation decisions. A simple, easy-to-use framework that gives nonprofit leaders sharpened strategic clarity about the value of programs and initiatives? For that alone, we should all hail the arrival of the Matrix Map.

It should be noted, and more overtly than it is in the book, that the Matrix Map is a direct descendant of Boston Consulting Group’s Growth-Share Matrix, which dates to 1968 and is familiar to everyone who has since pursued an MBA. The BCG Matrix famously gave us “Stars,” “Cash Cows,” “Question Marks,” and “Dogs,” and suggested that companies should classify and manage their product portfolios accordingly. Nonprofit Sustainability’s Matrix Map gives us “Stars,” “Money Trees,” “Hearts,” and “Stop Signs,” and suggests that nonprofits classify and manage their program portfolios accordingly. If it sounds like the Matrix Map is essentially the BCG Matrix applied to nonprofits, it’s because that’s exactly what it is. Even so, the Matrix Map’s lineage doesn’t change the fact that its application to nonprofits is at least somewhat novel, and it does create a potentially important new tool for nonprofit boards and executives.

The first half of Nonprofit Sustainability develops the Matrix Map as a model and helpfully illustrates its use and applicability through a variety of examples and situations. The second half is largely filler, seemingly purposed around the need to reach a certain page count to achieve book status. Part Four in particular, a 32-page laundry list of every imaginable fundraising and earned income vehicle, bears little relevance to the Matrix Map or its application. Rather than an encyclopedic list and description of earned income types, a chapter on how social enterprise models could be evaluated using the Matrix Map model would have been far more valuable. Similarly, although the book does devote a few pages to the Matrix Map’s usefulness in potential merger evaluations, surely there is more to say about how this tool can help facilitate nonprofit merger and joint venture activity, which has to be one of the biggest untapped opportunities in the sector.

Nonprofit Sustainability is a book that would’ve been, and probably should’ve been, a great article in the Stanford Social Innovation Review, where the core idea and useful Matrix Map could have found a larger audience. Nonetheless, I fully intended to order copies for the executive directors and board chairs I work with, until I found it priced at a whopping $35 for a paperback edition. Although Nonprofit Sustainability and its Matrix Map deliver an important idea for nonprofits, it’s an idea that should have been delivered more accessibly and affordably. Something isn’t right about a business model that takes a good (but hardly proprietary) idea for nonprofits and turns it into a high margin, low volume product. Perhaps that’s a critique of book publishers more than the authors, but Nonprofit Sustainability is ultimately a product of both.

Jim Schorr is a professor at Vanderbilt University’s Owen School of Management, where he teaches coursework on social enterprise and CSR. Previously, he was executive director of Juma Ventures and a co-founder of Net Impact. He currently serves as a trustee of the Nature Conservancy of Tennessee and as board president of Oasis Center, Nashville’s leading nonprofit organization for disadvantaged youth.

More Than Good Intentions lays out a new approach to exploring and testing solutions to the thorny problems of global poverty. Yale University professor Karlan and his coauthor, IPA project associate Jacob Appel, have produced a book that is very readable, hugely useful, and often entertaining. Metrics geeks looking for a technical manual will be disappointed; those of us looking for a practical way to understand what works will not be.

Karlan and his colleagues at IPA are part of a new movement in development economics, a movement spearheaded by Esther Duflo and Michael Kremer and represented by a small army of researchers all over the world. As Karlan puts it, their work consists of a “two-pronged attack” on the problem of f nding the best solutions to poverty: 1) using rigorous evaluation methods akin to clinical research to test poverty solutions, both old and new; and 2) understanding problems and interpreting results using the lens of behavioral economics.

Karlan and Appel believe that understanding what works for poverty alleviation programs boils down to one deceptively simple question: “How did people’s lives change with the program, compared with how they would have changed without it?” The primary—but not only—tool that Karlan et al. use to answer that question is the randomized controlled trial (RCT). In an RCT, a pool of subjects is randomly divided into intervention and control groups; the former gets the interventions and the latter does not. The two groups are fundamentally alike—both are measured before and after, and the impact is the difference between what happened to the intervention group and to the control group. RCTs are not new. The novel element here is the systematic and creative application of RCTs to test poverty solutions in the real world.

RCTs have their flaws, and there has been an understandable backlash against them. They can be expensive and complicated; perfect control groups are a myth; and results are too often too broadly interpreted. Yet Karlan is not doctrinaire about RCTs. He simply believes that you should measure from the beginning, measure the right thing, get good quality numbers, and make a case for what would have happened without you. One of the best examples in the book doesn’t involve an RCT, but instead a “natural experiment” in Kerala, India, in which areas without cell phone service served as controls for a study of how fishermen used their phones to find where to get the best price for their catch and increase their profits.

Both the work and book benefit enormously from the application of behavioral economics, which goes beyond the narrow utilitarianism of classical economics to examine how real people make decisions. Behavioral economists assume that we don’t operate on the basis of simple cost/benefit calculations, but have many different priorities, and that what may at first seem irrational often is not. Karlan and Appel use this approach as a tool to interpret results, make predictions, and come up with new ideas and hypotheses. In doing so, they draw on the strengths and flaws common to all of us and provide a respectful picture of the poor—not as some faceless other, but as us in different circumstances.

Given the overall clearheadedness of the book, one thing that puzzled me was the way that Karlan pulls his punches on microcredit. He reports that women entrepreneurs in Sri Lanka were often worse off after taking loans; that the poorer entrepreneurs in South Africa showed no effect from loans; and that even those entrepreneurs who did profits on consumer goods rather than reinvesting in their businesses. That said, he comments brightly that “it does not mean that … the enormous amount of enthusiasm [microcredit] has generated is necessarily misplaced.” Well, what exactly does it mean? Perhaps he’s just being nice, but if this methodology is as powerful as he’d have us believe, he should have something a bit more definitive to say about microcredit.

Still, More Than Good Intentions is a relentless and honest effort to find out what works and why. We really need what these new school development economists are providing. We’ve done far too many things that didn’t work for far too long. But it is not enough to show what works: The one missing element in Karlan and Appel’s fine book is a discussion of what it takes to turn research findings into real change. In a sector that does not yet channel resources toward impact, all that we learn about the behavior of the poor will be wasted unless we learn how to change the behavior of government bureaucrats, NGO executive directors, and the people who run foundations.

Kevin Starr is the managing director of the Mulago Foundations and the Rainer Arnholds Fellows.

“We tell you the suggested price but the choice is yours,” explains Panera co-founder Ron Shaich, who recently stepped down as CEO to focus more of his energy on philanthropy. (He continues to chair Panera’s board of directors and heads the Panera Bread Foundation.) “If you’ve got a few extra bucks, the right thing is to leave it. If you’re feeling pressure, you can take a discount. If you’ve got nothing, you’re free to enjoy your meal with dignity.”

Since opening its first “restaurant of shared responsibility” last May in a St. Louis suburb, the chain is poised to take its upscale version of a soup kitchen nationwide. A second Panera Cares café opened in November outside Detroit, and a third was slated to open in Portland, Ore., in January. Neighborhoods have been selected to include a mixed clientele, with well-heeled professionals dining side by side with homeless families.

The concept is groundbreaking in the food service sector. “It’s not like a free Grand Slam breakfast that Denny’s offers on one day a year,” Shaich says. “We want this to be sustainable.” Any profits generated by the cafés will be channeled into job training for disadvantaged youth and other community programs. Unlike the Ben & Jerry’s PartnerShops that are franchised to local nonprofits, Panera Cares cafés are managed by the corporate foundation.

The model offers the company a way to put its core strengths to work on social problems. Panera has long been active in philanthropy, donating more than $100 million worth of goods annually to local agencies, Shaich says, “but that product goes out the back door in brown bags. Nobody gets connected to where it goes.” He liked the idea of getting his workforce more personally involved in solving challenges. “How do we take our skills and add more value than just writing a check?”

An answer started to take shape when Shaich heard about a Denver-area nonprofit that was running a no-price café to serve the community’s hungry. The idea sounded promising but had taken years to implement. In the corporate world, Shaich says, he’s used to opening two restaurants a week. He also thought about an experience of helping his young children deliver food to shut-in elderly. “The three of us spent three hours driving to the warehouse, filling bags, and taking food to a couple of people. That’s nine hours of human capital for two bags of food.” The entrepreneur in him knew he could make giving more efficient.

To fine-tune the Panera Cares concept, Shaich visited soup kitchens in various communities. His decades in food service didn’t prepare him for what he saw. Waiting in line for a handout “is an experience that lacks in dignity. With all due respect,” he adds, “it’s negative energy.” That’s when he decided the new cafés needed to offer a full menu, not just bread and soup. “Then it became a dare to ourselves. If we’re serious about offering a high-quality experience to everybody, then we have to put all the power of our brand behind this.”

Patrons have responded favorably, with about 60 percent challengpaying suggested price, 20 percent paying more, and the rest taking a deduction. It averages out to 80 percent to 85 percent of suggested retail, which is more than enough to cover costs, Shaich says.

Nordstrom may be the next national chain to start retailing for charity. The upscale clothier will open a unique store in the SoHo neighborhood of Manhattan in fall 2011. All profits will benefit charitable causes. Devoting a whole store to charity goes beyond cause marketing campaigns like Product RED.

It’s not yet clear what merchandise will be sold or which charities will benefit, says Nordstrom spokeswoman Pamela Lopez. But unlike Panera, Nordstrom will not brand the store as its own. “There will be no Nordstrom sign,” Lopez says. “This is a chance for us to do something unique.” Not coincidentally, the store will offer the company a window into the New York retail market, “where we aspire to have a full-line store eventually.”

I have started successful and unsuccessful for-profit and nonprofit ventures. My goal in writing this article is to help other social entrepreneurs navigate these waters. I am not, however, a lawyer, and I cannot offer legal advice about creating a venture. Rather, I want to guide you through the issues that you need to consider before you even begin to think about choosing an attorney or getting help structuring your social venture.

The first thing to remember is that the legal structure is simply a tool for accomplishing your goals. Deciding structure first may lock you into a direction that won’t get you where you want to go. It is important to take the time to explore your idea first; then answering the legal structure question will be easier.

Selecting a legal structure is not a question of moral purity. I am structure agnostic: I believe that for-profit and nonprofit structures can both be good vehicles for improving society. You should look seriously at both as part of your toolkit as you’re creating your new social venture.

If personal wealth is a primary motivation and changing the world for the better is a nice benefit but not fundamental, it is pretty clear that you should create a for-profit structure. Being a for-profit typically gives you more flexibility and control, especially if you’re the sole or controlling shareholder. This flexibility gives you the freedom to completely change your business if you spot a new and more lucrative opportunity. And you can still create an ethical and responsible for-profit. If giving away money or providing services at below cost and feeling good about it is your primary or only motivation, then your answer is similarly easy. The U.S. 501(c)(3) nonprofit structure was created to serve this purpose. If your ideas fall somewhere between making lots of money and giving most of it away, there are many ways to structure a venture to accomplish these goals.

Before looking at what type of legal structure to create, you need to explore the four issues that will illuminate your ultimate decision: what your motivation is for starting the venture, what market you are targeting, how you plan to raise capital, and what type of control you want over the venture.

MOTIVATION

Most new ventures fail. If you are going to take on the risks and responsibilities of a new venture, you need to be motivated to succeed. That is why it is important first to understand your motivation for starting a new social venture and your definition of success. Social entrepreneurs are typically driven by the goal of making positive change in society, but other factors may also influence your motivation. Almost all ventures change dramatically during their formative periods. It’s certain that several things that you know for sure right now about your venture are wrong. You just don’t know which ones. In the face of that uncertainty, what is going to remain constant and guide you in making the hard decisions?

How fundamental is the social mission? Assuming that your motivations are not purely financial, you need to understand how essential the social mission is to the success of your venture. Is your primary goal social change? Are you willing to pass up lucrative financial opportunities that would take the venture away from social change? How will you prioritize the social bottom line if the venture is in peril? Does your venture exist if the social impact is removed or minimized?

What are your personal financial objectives for this venture? Many entrepreneurs make financial sacrifices in the course of creating a start-up. These sacrifices are often justified to oneself or to one’s family by the promise of an eventual financial payoff. As you approach a social venture, you need to be clear what your financial parameters are. How much of your own money are you willing to invest in the venture, either in the form of cash or in forgone wages (compared with your market value)? Even successful social ventures that reach financial sustainability (break even on an ongoing basis) may never recoup the initial investment. Can you (or the investors) live with that possibility? It’s possible to make a decent living running a social venture, but you are not likely to get rich. Is that okay?

How do you define success? Success does not need to be defined as personal riches. For many entrepreneurs, the drive to succeed is about proving oneself and making a difference. External forces, however, can shape what becomes your organization’s definition of success. If you take on a venture capitalist as a partner there will be intense pressure to define success in terms of delivering the required returns to your investors. If you take on a foundation as a partner, they will define success by social impact. Families and society often define success in terms of material attainment, and you may encounter strong social pressure to focus on personal riches rather than on social good.

MARKET

Entrepreneurs must understand their market. Just about every social question and issue you may address can be recast into market questions, such as: Who is the customer? What is the value proposition? And who is the competition? Understanding your customers, their environment, and their needs is crucial to any social venture. Determining how to best serve your customers will shape your decision of how to structure your venture.

Who are your customers? One of the most important questions you need to answer as a social entrepreneur is who your customers will be. What is the need your venture is going to fill? What community are you serving? How are you going to access expertise about the needs of your customers? What activities are the customers doing now that will influence the use of your product or service? Are the users of your product or service the same as the people who pay for it? Will you need to find a new payer for your idea to work (for example, funders to directly purchase goods or services for the actual beneficiaries)?

Who or what is the competition? Notwithstanding the frequent claim of start-up entrepreneurs that they have no competitors, even if there isn’t something precisely like your proposed product or service, there are other ways potential customers are spending their money or time to meet their needs. For example, if for-profit business competitors are exploiting a community, a nonprofit venture may be given the benefit of the doubt and have the opportunity to enter the market. Or if the nonprofit sector is not being responsive to a community’s needs, a business approach that treats people like customers might be more successful in making change. The organizations filling the existing need may even become a distribution channel for your new solution.

What is your value proposition? You must understand how you are going to differentiate your product or service from the competition. Are you presenting an incremental value proposition (my product is 10 percent better or 10 percent less expensive) or a revolutionary value proposition (it’s 10 times better or a tenth the cost of the existing option)? If you plan to offer a product or service that the for-profit sector already provides, be prepared for the Internal Revenue Service (IRS) to ask why they should issue you a tax exemption letter. Providing something below cost makes getting your nonprofit exempt status easier, but that may not mesh with your business plan and would generally require fundraising to close the gap between revenues and costs. On the other hand, a revolutionary value proposition might create the opportunity for high profitability and great scale, potentially making a for-profit structure appealing.

What is the market size and how profitable could you be serving that market? How much money can be or is being spent a year on addressing the need your organization is going to meet? It is easier to build a for-profit business when the market size is in the tens of millions or billions of dollars than if it is only $500,000 per year. Profitability is also important. Businesses with low profit margins are generally tougher to sustain because they can be quite sensitive to revenue fluctuations. If you know you’re going to lose 10 percent on every sales dollar, it is clear that you should consider a nonprofit rather than a for-profit structure.

CAPITAL

Capital requirements often play an important role in the decision to be a for-profit or a nonprofit. If you aren’t plausibly going to be able to pay back the money to investors or lenders with an additional return, the only for-profit investor you may be able to get is yourself. If you can’t raise or don’t have the capital you need, then you need to look seriously at the nonprofit structure, or reworking your business plan to start more slowly with less money.

How much money do you need to get your venture launched? Is it possible to start the venture with less than the amount you imagine and get to your destination more gradually, or does your business plan require accomplishing certain costly objectives before you can launch? Once you have a handle on the amount and timing of your funding needs, you need to seek out your options for finding that capital. If you need only $100,000 to get your venture off the ground you have many options. If, however, you need tens of millions of dollars, your degree of flexibility is vastly reduced.

How much money will you need to keep the business growing? How will your capital needs change over the first two, five, and 10 years? Unless you are lucky enough to hit upon a model that allows you to bootstrap your venture, it will take additional outside capital to bring your venture to profitability (as a for-profit) or sustainability (as a nonprofit). And profitability or sustainability does not necessarily end the need for capital. If you want to expand to new markets or scale up the organization, you will likely need more funding.

Will you have assets you could borrow against? Debt is a practical option for nonprofit and for-profit ventures that have or plan to acquire assets that can be used as security for the repayment of the loan. Ventures with substantial assets, such as those in the housing and microcredit sectors, have an easier time obtaining loans. Smaller working capital loans are available for those ventures with accounts receivable to borrow against. One significant difference between being a for-profit and a nonprofit is that foundations are more likely to make loans at below-market interest rates to quality nonprofits. These loans have to meet the requirements for a program-related investment (PRI), where the loan advances the charitable purpose of the foundation and income is not a significant purpose of the loan (typically satisfied with a below-market interest rate).

Will tax structure affect your business significantly? Nonprofits often have the benefit of being exempt from income and property taxes. But what if your venture is unlikely to have much income or property? Being exempt from taxes won’t make a big difference to your choice of structure then. If, however, the amount of income or property taxes would have a big impact on the viability of a venture, choosing a nonprofit form could make a significant difference in the venture’s long-term success. If your main practical source of capital is philanthropy, then becoming tax-exempt will make it much easier to raise capital in the form of grants. Government often creates programs where only nonprofit organizations are eligible to apply. If a government funding stream is essential to the viability of your venture, then that’s a strong case to organize as a nonprofit.

CONTROL

For-profit and nonprofit structures have very different control and governance regimes, so it is important to determine how much control you need to have over your venture. Nonprofit structures are generally less flexible than for-profits, because of the requirements to qualify for nonprofit status.

How important are confidentiality and secrecy to you and your venture? Privately held for-profits can be very secretive about their business information: tax returns are confidential, salaries are confidential, profits are confidential, and business plans are confidential. For some entrepreneurs, this is a privacy question. For others, control of this information is part of gaining a competitive advantage. Nonprofits, however, are legally required to operate with a much greater degree of transparency. All but the smallest U.S. nonprofits have to file a detailed tax return every year that is public information, disclosing assets, income, expenses, and top employee salaries. Moreover, this information is often freely available on the Internet or from organizations like GuideStar.

Can you run and fund your venture yourself? If you completely control the venture, you have a great deal of flexibility to run the organization the way you want. You may choose to run at break-even, never pay a dividend, or even give away your profits to a separate charity. As soon as you start sharing control with others, you create the possibility of a split. You may believe that parents, siblings, spouse, life partner, close friends, or mentors are good partners, but many ventures have split these personal relationships. Disputes over money are often at the root of these splits. Thinking these shared control issues through at the beginning reduces the chance of a schism forming.

Will you need to share control with investors? Typically, the ultimate authority in a venture is vested in a board of directors. The investors may or may not hold a majority of the board, but once you have a return-oriented investor, your degree of flexibility is reduced. In most cases, you have a very serious obligation to your investors to keep their best interests in mind. This is a legal obligation known as a fiduciary duty, and it requires you to place your obligation to your investors above your own interests. There is a growing movement in the United States to incorporate larger stakeholder interests in corporate structures and provide the board with some protection if it chooses to balance the interests of the shareholders with another valid social interest such as the environment. But this doesn’t obscure the complications from accepting capital from investors or lenders who have a legitimate expectation of being repaid with returns based on risk.

Will you need or want to share control with the public interest? When you operate a nonprofit, the board is acting primarily in stewardship for the public interest. As an entrepreneur, you need to recognize that as you move from sole control to shared control, you are placing your fate and the fate of your venture in the hands of others. Founders are often ejected from their ventures by boards whose primary obligations are to the venture itself, investors, or society. When choosing partners, investors, or board members for your venture, you need to choose people who share your vision for your venture, and who can be trusted with stewarding what may become your life’s work.

SELECTING THE BEST STRUCTURE

After answering the previous questions you are ready to think about what type of legal structure you want to create for your organization. Once you begin to consider a particular legal structure seriously, you will want to consult a lawyer, but first it is useful to consider all of the various options. What follows is an overview of five basic organizational structures, looking at both their advantages and disadvantages, along with examples of organizations that have adopted those structures. These particular structures are from the United States, but their analogues exist in many other countries.

| For-Profit | Social ventures can take on standard for-profit structures, such as a C corporation, limited liability company (LLC), or sole proprietorship. One of the principal advantages of a for-profit is that it can tap the large pool of investment capital. Because the social mission is not part of the legal structure, however, it is up to the board of directors and entrepreneur to make sure that the company fulfills its social obligations. The decision about what type of for-profit to create is often driven by tax considerations. Venture capitalists are almost always interested in investing in C corporations, even though profits can be taxed at the corporation level and again as dividends at the investor level. Some individual investors prefer LLCs because they are a pass-through for tax purposes and therefore do not have double taxation.

Advantages:

• Well-known structure that doesn’t need to be explained
• Relatively easy to raise money as equity or debt
• Can tap U.S. Small Business Administration grants, loans, and technical assistance
• Easy to sell or shut down (as long as you pay your creditors)
• Can convert to a nonprofit more easily than a nonprofit can convert to a for-profit
• Extensive precedents on best practices for managing for-profits

Disadvantages:

• The social bottom line is not built into the structure, but is instead dependent on the leadership
• Income and property subject to tax
• Governance is primarily focused on serving the shareholders, creating a strong fiduciary duty to act in the shareholders’ best interests by making money for them
• Cannot accept foundation grants or nontaxable contributions

Examples:

• Compartamos Banco is a Mexican microcredit bank that converted from a nonprofit to a for-profit, and then went public.
• D.light design is a privately held company that sells affordable solar-powered LED lights in the developing world. It has received investments from a variety of Silicon Valley venture capitalists.
• Grameenphone offers affordable cell phone service to Bangladesh. The founder raised angel capital in New York City before signing partners Grameen Bank and the Norwegian telecom company Telenor. Grameenphone’s initial public offering in Bangladesh was oversubscribed and the country’s largest to date.
• Whole Foods Market Inc. is a publicly held company that contributes 5 percent of its profits to charity.

| For-Profit with a Social Overlay | These ventures take the for-profit structure and make significant tweaks toward the social objectives. There are numerous ways of doing this. Some of these structures have been in place for decades, such as cooperatives (which can be for-profit or nonprofit) and employee-owned firms. Other structures are new, such as benefit corporations (enacted in Maryland) and low-profit limited liability companies, or L3Cs (now legal in several states). Other for-profit options include socially controlled stock structures in which a community has a controlling interest in the company though a preferential class of stock, non-stock companies, and the flexible purpose corporation (under consideration in California).

Advantages:

• Same advantages as standard for-profit
• Ensures some level of commitment to the social objectives of the organization through the governance structure
• Additional options for raising capital (for example, it is easier for foundations to invest in an L3C through a PRI)
• Marketing benefits from having a social orientation

Disadvantages:

• Control can be more diffuse (for some social entrepreneurs, this is considered an advantage)
• The social overlay may not hold through adversity or legal challenges
• Investors may not want to invest in these forms without strong social motivations
• Exit options may be more constrained than a standard for-profit

Examples:

• Equal Exchange (a cooperative) sells fairly traded and organic coffee, tea, chocolate, and snacks from farmers around the world.
• Impact Makers (a non-stock company) is a management consulting company that donates all of its profits to charity.
• Maine’s Own Organic Milk Company (an L3C) was created by family farmers and investors to sell the farmers’ organic milk.
• Seventh Generation (a B corporation) manufactures nontoxic cleaning products and donates 10 percent of its profits to charity.

| Hybrid | Rather than being limited to choosing either a for-profit or a nonprofit structure, some organizations take advantage of both by creating governance structures and contracts that bind a for-profit and nonprofit together in a hybrid structure. Sometimes the for-profit creates the nonprofit. For example, the for-profit brokerage firm Charles Schwab & Company created Schwab Charitable, an affiliated nonprofit that handles the donor-advised fund operations. In other instances, the nonprofit creates the for-profit. Typically, this is to pursue an activity that looks more like a business.

Advantages:

• The nonprofit and the for-profit entities each retain the advantages that are unique to those legal structures
• Creating a subsidiary can protect the nonprofit status of the parent by removing the unrelated income (if it becomes too large relative to the parent’s size)
• The subsidiary shields the parent from liabilities arising from the subsidiary’s activities
• The for-profit subsidiary can be sold at the nonprofit’s discretion

Disadvantages:

• Once assets are in the nonprofit, they are locked into the nonprofit sector and cannot be transferred back to the for-profit
• Shutting down the nonprofit affiliate requires its net assets to be transferred to another nonprofit
• Care needs to be taken that benefits flow from the for-profit to the nonprofit (and not the reverse) and that charitable restrictions are respected
• If the for-profit is the main source of funding for the nonprofit, it can be difficult to diversify the funding base of the nonprofit
• Additional overhead for two organizations

Examples:

• Hewlett-Packard Company Foundation is the nonprofit foundation affiliated with Hewlett-Packard Co. Although corporate foundations are formally separate from the corporation, often there is de facto control by the corporation.
• Greyston Foundation is a Buddhist charity. Greyston Bakery is a wholly owned affiliate that employs disadvantaged people who make the brownies for Ben & Jerry’s ice cream.
• The nonprofit Mozilla Foundation, makers of the Firefox Web browser, created the for-profit Mozilla Corp. to handle sales and distribution of the browser. It did this when Google started paying Mozilla tens of millions of dollars as part of an advertising agreement, putting the nonprofit status of the foundation at risk.

| Nonprofit with a Mission-Related Enterprise | These are typically tax-exempt nonprofits that have earned income that is clearly related to the social mission. Many types of nonprofits earn income from the sale of products or services, including theaters, museums, colleges, and thrift stores. Any income earned from the enterprise must be used by the organization to further its mission. In contrast to a for-profit, the income cannot be distributed to investors or shareholders (although it can repay loans).

Advantages:

• No taxation on mission-related income
• Ability to raise philanthropic money to fill the gap between the costs of providing the product or service and the revenues
• Opportunities for creating a selling advantage based on the charitable nature of the enterprise

Disadvantages:

• Two bottom lines means that sometimes there are tradeoffs
• Access to capital limited to traditional nonprofit resources, such as philanthropists and debt

Examples:

• Benetech operates almost exclusively mission-related enterprises with a mixed-income structure. Revenues from product and services are usually not enough to pay for the full cost of operating the enterprises, so grants and donations fill the gap.
• TransFair is the main fair trade certification organization in the United States that collects certification fees from the supply chain of fair trade commodities like coffee, bananas, and cocoa, which pay for the majority of the organization’s budget.
• Goodwill is a national network of local nonprofits that operates recycling, product sales, and employment training services.

| Nonprofit | The social mission of traditional nonprofits is clear and unambiguous. They raise all of their money through donations of money, products, or time, and do not have any earned-income enterprises. Examples of traditional nonprofits include 501(c)(3) charities and 501(c)(3) foundations.

Advantages:

• No conflict between the venture and the social objectives
• People receive a tax deduction for donations that are used to directly help the disadvantaged, or in the case of foundations, used to help other charities in the form of grants

Disadvantage:

• Dependent on traditional fundraising to operate the organization

Examples:

• The Robin Hood Foundation receives donations from thousands of people each year that are consolidated and given as grants to nonprofits to help alleviate poverty in New York City.
• Mercy Corps receives grants, donations, material aid, and government funds that it uses to fund disaster relief efforts and economic development projects.
• Music in the Schools Foundation pays for music classes in the low-income Ravenswood School District in East Palo Alto, Calif.

CONCLUSION

The world is facing big problems. More and more people are turning their attention to solving those problems. The old models of traditional for-profits and charities no longer are sufficient tools for meeting these challenges. The future is far more likely to be dominated by businesses that are tracking more than their financial bottom line, and nonprofits that see enterprise as a fundamental part of large-scale social change.

Policymakers are responding to the changing times by embracing new forms of social action that fall between the two poles of traditional business and traditional charity. Expect to see new organizational forms exhibiting these increasingly hybrid characteristics. I believe that the new generations of business and social leaders will fundamentally reject what they see as a false dichotomy of the past, and adopt new structures that can transparently deliver more social benefits. Both business and the social sector are going to change in these directions, and society will be the better for the change.

Author's note: The idea for this paper came during a meeting hosted by the Social Enterprise Alliance and the Aspen Institute in 2007, just before the alliance’s annual Social Enterprise Summit. I want to thank the social enterprise and legal leaders who made that such an inspirational gathering. I also want to thank Jeff Rauenhorst, Joan Mellea, and Barbara Morrison for their assistance in researching and drafting this essay. Finally, I’d especially like to thank Joshua Mintz, vice president and general counsel of the John D. & Catherine T. MacArthur Foundation, and Robert Wexler, partner at the law firm Adler & Colvin, for their assistance with the final draft.

Jim Fruchterman is a MacArthur Fellow, former rocket engineer, high-tech entrepreneur, and social entrepreneur. After starting two successful Silicon Valley for-profit technology companies in the 1980s, he founded Benetech as a deliberately nonprofit technology company in 1989 to develop solutions that respond to market failure in the fields of literacy, environment, and human rights. Fruchterman was a co-founder of the Social Enterprise Alliance and has served on three federal advisory committees in the field of disability.

Some entrepreneurs, however (especially the most intrepid ones), have found ways to combine the best of the for-profit and nonprofit models. They have done this by creating a hybrid structure: separate nonprofit and for-profit organizations that are bound together through governance or legal agreements. Hybrids, of course, are not new. They have been around for decades (consider Children’s Television Workshop, owners of the Sesame Street characters). For the most part, hybrids have been created by an existing nonprofit or for-profit to meet a new objective that could not be met under its existing legal structure. A for-profit corporation might create a nonprofit foundation to manage its philanthropic work. Or a nonprofit museum might create a for-profit retailer to sell posters, jewelry, and other merchandise.

In recent years, however, social entrepreneurs have taken the hybrid model to a new level, crafting it into what is in effect a single structure that can operate as both a for-profit and a nonprofit. Social entrepreneurs are now creating complex hybrid structures from the start, ones that use contracts to intimately tie together the nonprofit and for-profit organizations. I call these new entities contract hybrids, to distinguish them from the hybrids of the past.

NEVER THE TWAIN SHALL MEET

To understand what a contract hybrid is and how it works, one must first understand that the entire legal and regulatory structure that governs U.S. businesses and nonprofits is designed to ensure that the charitable sector and the business sector stay fundamentally distinct. In a nutshell, charity is supposed to be all about mission and not about money, whereas for-profit businesses are supposed to be all about money and not about mission. As a result, business and charities are regulated and operated according to fundamentally different principles, and any crossing of the lines is viewed with skepticism by regulators and the public.

As Dan Pallotta points out in his book Uncharitable, this divergence is not rooted in any law of economics or even politics. Rather, it is the result of historical accident. It is essentially the view propounded by the Puritans who settled in the United States in the 17th century. They believed that business and commercial activity was a sin, albeit a necessary one. To atone, one did charitable work, which had to be kept clean of any taint of commerciality. Although we have progressed in our thinking since then, Congress, the Internal Revenue Service (IRS), state regulators, the general public, and even nonprofit leaders remain locked into this outmoded mental model.

Creating a hybrid entity that can serve both charitable goals and business objectives simultaneously may sound simple, but from a legal perspective it is actually quite complicated. For-profit businesses have as their primary objective the pursuit of profit for the benefit of their owners. The directors and managers of a for-profit business have a fiduciary duty to maximize shareholder return, and if pursuit of a social mission interferes with that primary duty, the directors and officers can face legal jeopardy.

Nonprofits, on the other hand, have as their primary objective the accomplishment of a social or public mission. Nonprofit directors and managers must run the enterprise to further public rather than private interests. If they confer private benefits on individuals (other than reasonable compensation for services rendered, itself a touchy subject), they may face legal liability. And they generally cannot engage in profit-sharing arrangements with private investors or businesses. To put it another way, businesses and nonprofits are fundamentally single-purpose entities. Although the law allows them to stretch toward each other, a complete synthesis is not possible, and the further each model is stretched, the more legally uncertain the venture becomes.

The three most popular stretched models today are the B corporation, benefit corporation, and low-profit limited liability company (L3C). The B corporation is a brand, certified by B Lab (itself a nonprofit), rather than a legal form in the eyes of the IRS. To be certified a B corporation, the owners and managers of the organization voluntarily submit themselves to a rigorous battery of questions and tests that measure their commitment to social values and socially and environmentally responsible practices. B Lab makes the results of these tests public, so that consumers can find out what these companies stand for and how their claims of social responsibility are put into practice. B Lab promotes B corporations as a group, which gives them a marketing advantage and provides further incentive for them to justify social mission as a business strategy.

The benefit corporation, which is officially recognized in Maryland (and Vermont beginning April 2011) and is under consideration in several other states, is often confused with the B corporation but is actually distinct. Whereas the B corporation is essentially a brand, a benefit corporation is a legally distinct type of business corporation that is committed to accomplishing one or more social or public purposes. A benefit corporation must specify in its charter that it is formed to pursue a social purpose, it must have at least one “benefit” member on its board whose sole duty is to protect mission rather than profit, it must be certified by an independent third party as complying with standards promulgated by the certifying agency, and it must produce an annual report that explains what it has done during the prior year to accomplish its social mission. In return, the directors of the benefit corporation are protected from liability for decisions that further the social mission, even if they impair profitability.

The L3C, which has been legally recognized in several states and is under consideration in several others, is essentially a limited liability company (LLC) whose purpose is limited to “low profit” activities that further a charitable purpose, and the generation of income is not a significant purpose of the venture. The L3C was originally designed to be a special purpose vehicle to which private foundations could more easily make PRIs. Practitioners argue whether or not the L3C has any utility at all in this regard (because foundations can already make PRIs in for-profits), but the brand has caught on and many people now regard it as a way to signal their intent to place mission at a level that is equal to or greater than profit, while still enjoying the advantages of a business structure (the ability to accept private investment and enter into a broad range of business relationships). The B corporation, benefit corporation, and L3C do not qualify for tax-exempt status; they are all firmly in the for-profit sphere.

THE HYBRID

Standing in contrast to these stretched models is the hybrid. It is based on the principle that a single entity—be it an L3C, a 501(c)(3), a benefit corporation, or a traditional for-profit—cannot by itself do everything that a social venture needs to do. Instead, the hybrid uses a series of contracts and agreements to combine one or more independent businesses and nonprofits into a flexible structure that allows them to conduct a wide range of activities and generate synergies that cannot be done with a single legal entity. The two (or more) entities that generally make up a hybrid are distinct for legal purposes, and each is responsible for compliance with the laws and regulations that govern it, but when properly structured, the legally distinct entities can behave much like a single entity. For these reasons, a hybrid is often a better solution than a single legal entity that tries to incorporate a wide range of activities.

Hybrids, as mentioned before, are nothing new. For decades, nonprofits such as the National Geographic Society have created for-profit subsidiaries and entered into strategic relationships with for-profit companies to exploit their assets in the marketplace. Catholic Charities USA, the American Health Assistance Foundation, the National Center on Family Homelessness, Community Teamwork, the DC Central Kitchen, and the United Spinal Association are all examples of charities that over the past 10 years have created LLCs to carry out profit-making activity.

Hospitals, universities, and museums also routinely engage in commercial transactions and collaborations with for-profit companies, including joint ventures that serve the mission of the nonprofit and the financial interests of the businesses. Nonprofits contract with for-profits all the time, and it is now common to see businesses associate themselves with nonprofits using a variety of cause marketing techniques, including corporate sponsorships and commercial co-ventures. These arrangements are fairly well understood and have been approved by the IRS on numerous occasions.

Most existing hybrids are structured either as parent-subsidiary relationships, where the charity owns the business, or as “one-off” arrangements where the charity and the for-profit collaborate to achieve a particular project or activity. There are variations on these models (such as the corporate foundation and the joint venture), but the parent-subsidiary model essentially uses governance as the mechanism of control and is intended to ensure a high degree of integration over time. One-off arrangements use contracts as the mechanism of control but are limited in scope and the degree of integration between nonprofit and for-profit is usually limited.

What makes the contract hybrid different is the degree to which the goals, objectives, and strategies of the nonprofit and the business are coordinated to serve mutual interests. Rather than a one-off deal where a nonprofit licenses property to a for-profit company, or a company provides marketing dollars to benefit a specific charity event, the purpose of the contract hybrid is to create an ongoing, symbiotic relationship between a nonprofit and a for-profit to accomplish mission and business objectives on a long-term basis.

Some might describe the distinction between a traditional hybrid and a contract hybrid as a matter of degree, but from a legal point of view it is more than that. It allows synergies that simply aren’t possible with the other models, because both the nonprofit and the business are free to pursue their activities in a way that is most likely to be successful within the legal, financial, and regulatory framework that applies to it, without being bogged down in the limitations and regulatory burdens of the other party. Yet they are tied together in a way that allows the whole structure to leverage the strengths of each organization.

UP CLOSE

To understand what makes a contract hybrid special, it is useful to take a close look at one example. (These are real organizations, but for privacy their names have been changed.) The Appalachian Economic Development Corporation (AEDC) is a nonprofit that provides assistance to the chronically unemployed in the economically distressed region of Appalachia. In order to create jobs, stimulate the regional economy, and generate revenues to support its operations, the organization decided to use mail-order catalogs to market and sell products made by local residents. Because AEDC had little experience in this area, it entered into an agreement with the North American Catalog Company, a for-profit C corporation, to handle marketing, sales, and distribution. Under the contract, North American Catalog is paid a percentage of sales, with incentives when sales reach certain milestones. AEDC, in consultation with North American Catalog, selects the products to be sold, which must meet standards and guidelines set forth in the agreement.

AEDC assists the local residents with business advice and support, including low-interest loans provided by North American Catalog (the company lends money to AEDC, which in turn lends it to the residents). The loans allow the residents to expand their production and management capacities to meet the higher demand for their products that the catalogs create.

AEDC promotes the products (sold exclusively by North American Catalog) on its website and licenses its mailing lists and logo to the company, which can use the lists and logo only for catalogs that include products created by the residents. North American Catalog agrees to spend a certain amount of money on marketing and to distribute a certain number of catalogs each quarter. It also agrees to use local printers and designers so long as they can produce work of acceptable quality at an acceptable price. These arrangements are not just for a single season or for one or two products but cover a wide range of products over five years, with an option by either side to extend it another five years.

The agreement allows AEDC to withdraw without penalty if it determines that the arrangement is not in its best interest or would jeopardize its tax-exempt status. North American Catalog can terminate the agreement if sales don’t meet certain minimums, if it has a change in control, or if a certain percentage of the products selected by the nonprofit don’t meet the negotiated guidelines.

Sales are about $13 million per year, with North American Catalog earning about $1 million after expenses, AEDC earning about $400,000, and the local residents collectively earning about $3 million. More important, a large percentage of the expenditures are made within the Appalachian region, pumping between $7 million and $8 million into the local economy every year, creating jobs and increasing the local tax base. None of the parties could have done this on their own: it required a collaborative effort and a carefully crafted set of agreements to make it work. It required a contract hybrid.

PRINCIPLES OF CONTRACT HYBRIDS

Six basic principles govern the creation of contract hybrids. First, the nonprofit and the business must be legally independent of each other, with independent majorities on each board to minimize conflicts of interest and assure that each entity has the ability to comply with the laws, regulations, and best practices that apply to it. It is not uncommon for each entity to have its own accountants and lawyers to preserve this independence.

Second, the entities are tied together using a variety of contractual arrangements. These include contracts for goods or services, financing agreements, shared service agreements, intellectual property licenses, fiscal sponsorships, participation agreements, nondisclosure agreements, grant agreements, and leases.

Third, each of these contractual agreements is negotiated at arm’s length. For example, in the case of AEDC and North American Catalog, the sales, marketing, and distribution agreement was not a standard contract. Various provisions had to be customized and each side had to make concessions so that each party could fulfill its part of the bargain on commercially reasonable terms without either side taking unfair advantage of the other. This is one reason why many contract hybrids have separate boards of directors, lawyers, and accountants to ensure that each entity looks out for its own best interests, and that its advisers and decision makers don’t have conflicted loyalties.

Fourth, if the assets of the nonprofit are to be used by the for-profit, the nonprofit must receive fair value in exchange. For example, if a nonprofit has developed a product or service that the for-profit wants to use, the nonprofit has to ensure that the benefit to the investors in the for-profit is incidental, meaning that the benefit to the outside investors is not out of proportion to the overall venture or the size of their investments, and the arrangement is structured so that its primary purpose is to accomplish mission (or benefit the nonprofit) rather than to enrich the investors.

Fifth, any payments from the for-profit to the nonprofit should be taken as a marketing or other business expense by the for-profit rather than as a charitable contribution whenever possible. For example, the Sugar Bowl, a 501(c)(3) organization that hosts a nationally televised college football game, receives a significant payment each year from Allstate Insurance Company in exchange for naming its game the “Allstate Sugar Bowl,” and for providing prominent visibility for Allstate’s name and logos. Because this is a “qualified corporate sponsorship,” an arrangement whereby a company makes “donations” to a charity in exchange for recognition and the right to use the charity’s name and logo for promotional purposes, these payments are treated as contributions on the nonprofit’s tax return rather than taxable advertising income. These payments are treated as a business expense by Allstate rather than a charitable contribution because they serve a business purpose.

Last, all transactions and arrangements should be fully documented, everything should be reviewed and approved by the boards independently, and there should be special provisions in the documents to protect both the business and the nonprofit against allegations that either is being used to unfair advantage by the other.

There are downsides to the contract hybrid model: Because there are so many formalities to be observed, overhead may go up; and the structure can be complex and hard to understand, which may impair the venture’s ability to attract philanthropic and private capital. But those problems can often be solved by putting clear policies and procedures in place that minimize the need for improvisation and the concomitant risks of noncompliance. Furthermore, if done properly, the structure can be explained in a relatively simple manner. The greatest problem, ironically, is that most nonprofit and business lawyers are not yet familiar with these structures, so they often advise their clients to stay away from them because of perceived risk.

STRUCTURING A CONTRACT HYBRID

From a legal point of view, deciding whether and how to structure a contract hybrid depends on some well-understood considerations, in particular IRS rules on joint ventures, private benefit, unrelated business income tax, conflicts of interest, related party transactions, and the new IRS Form 990, each of which is discussed below.

Joint Ventures | Although joint ventures may be a practical option for nonprofits that want to conduct business ventures with for-profit entities, the contract hybrid may be a better choice in many cases. Unless the nonprofit has effective control over the joint venture (which many investors will resist), or the joint venture is small in comparison to the nonprofit’s overall activity (which is generally true only for very large nonprofits), there are substantial risks to the nonprofit’s tax-exempt status if it engages in a joint venture with a for-profit entity. By contrast, with a contract hybrid, there is no separate entity or partnership formed, and thus no joint venture in the legal sense. Instead, the contract hybrid consists of nothing more than a series of agreements that tie the parties together with respect to certain activities in which they have a common interest or in which exchanges for value are involved. Take, for example, a business that employs disabled workers. The workers need various support services, such as housing assistance and occupational therapy, that the business cannot provide. So the business enters into an agreement with a nonprofit. The nonprofit provides the needed support services and refers eligible workers to the business, and in return the business pays a referral fee to the nonprofit. The parties do not control each other, they are not obligated to look out for each other’s interests, they do not jointly conduct activities, they do not share profits or losses, and each party is free to conduct its own activities as it sees fit, subject only to the agreements it has signed.

Private Benefit | A charity cannot qualify for 501(c)(3) tax exemption (or retain its exemption) if it confers substantial private benefits on non-tax-exempt entities or private individuals. Take, for example, a nonprofit art museum whose only activity is showing the work of new artists. The museum enters into an arrangement with a for-profit art gallery in which the works shown by the museum are sold by the gallery on a consignment basis. The artists and the gallery keep 90 percent of the sales price, and the museum receives the other 10 percent. Because the museum’s sole activity directly and substantially benefits the gallery owners and the individual artists out of proportion to the benefits to the museum, and the activity that generates the benefit does not contribute to the accomplishment of the museum’s tax-exempt mission, under relevant IRS authority, the museum can lose its tax-exempt status. The rule, however, is not absolute. Private parties can benefit from joint activity if the benefits are inherently unavoidable, indirect, and insubstantial. For example, a nonprofit formed to clean and maintain a lake that is used for recreational purposes by the public would not lose its tax-exempt status merely because its activity benefits the homeowners who own property on the lake.

Unrelated Business Income Tax | Every 501(c)(3) organization must pay a tax on net income from unrelated business activity, called the unrelated business income tax (UBIT). The tax must be paid when the charity conducts a trade or business that is regularly carried on and that is not “substantially related” to its tax-exempt purposes. The classic example is a case involving New York University. The owner of a macaroni factory bequeathed the factory to NYU when he died. The IRS ruled that because the operation of a macaroni factory did not further the university’s educational mission, the income from the factory was subject to UBIT. An activity is substantially related to a charitable purpose only if it contributes to the accomplishment of a tax-exempt purpose in an important way other than through the production of income. For example, a pharmacy within a hospital that fills prescriptions only for patients of the hospital. There are several exceptions to UBIT, the most important of which are the exceptions for so-called passive income, such as rents, royalties, and dividends. A contract hybrid can avoid liability for UBIT by following several basic rules. Whenever possible, unrelated business activities should be conducted by the for-profit entity and not the 501(c)(3). The income should flow from the for-profit to the nonprofit either as compensation for goods and services, or as passive income; or the income should flow to the nonprofit in the form of donations, such as a qualified corporate sponsorship (the payments from Allstate to the Sugar Bowl are an example of this).

Conflicts of Interest | It is important that contract hybrids are structured to avoid conflicts of interest that may arise in transactions between the nonprofit and for-profit entities. It is well-established in nonprofit corporate governance that directors and officers must act solely in the interests of the organization, and not in their personal interests or the interests of another party. To ensure that this occurs, state corporate law and IRS rules require that directors and officers—indeed, anyone who is in a position to influence a nonprofit’s decisions on a particular issue—disclose any personal interest they have in the transaction and recuse themselves from participating in the decision. With a contract hybrid, the directors and officers of the nonprofit may sometimes have a financial interest in transactions between the nonprofit and the for-profit entity. For example, they may be investors in the for-profit entity. This creates a conflict of interest that must be disclosed, and the director or officer may not participate in decisions related to the transaction. So long as the transactions are approved by a majority of the “disinterested” directors (those who do not have a conflict), however, the transaction can go forward and will be legal. This is another reason why a majority of the boards of the nonprofit and for-profit should be independent of each other.

Related Party Transactions | A related party transaction is a transaction between a charity organization and one or more of its officers or directors, or anyone else within the organization who is in a position to influence the charity with respect to the transaction, or with an organization in which such a person has a substantial financial interest. An example of this is a director of a nonprofit who sells insurance to the nonprofit. The term also applies to transactions between a charity and another organization that controls it or is controlled by it, or where both are controlled by a third party. Transactions with “supporting organizations” are also covered. Finally, organizations, whether or not tax-exempt, that have entered into partnerships (including LLCs taxed as partnerships) with a charity are also treated as related parties. One needs to be careful of related party transactions because, although they are not prohibited, they must be reported to the IRS on the charity’s annual Form 990, and they may be scrutinized by the IRS to determine whether or not the related party received an excess benefit.

Form 990 | Charities are required to disclose on Form 990 whether they have invested in, contributed assets to, or otherwise participated in a joint venture. Unlike a legal joint venture, which requires the creation of a legal entity or partnership to carry out the venture, a joint venture for this purpose is defined broadly as a “joint venture or other similar arrangement with one or more taxable persons.” It includes a broad range of arrangements in which assets, revenues, gains, and losses are shared, regardless of who controls the venture or how it is legally structured. If an organization has participated in a joint venture using this broad definition, it has to answer a follow-up question concerning whether it has a written policy or procedure meeting certain requirements. It must also be able to assert that it has taken steps to safeguard its tax exempt status. The 990 disclosure requirement has not been used as a basis for applying the rules applicable to legal joint ventures. Nevertheless, disclosure may lead to scrutiny to ensure that the arrangements are appropriate. The contract hybrid probably has to be disclosed as a “similar arrangement” even though it doesn’t meet the legal definition of a joint venture. So thought must be given to how the arrangement is described.

CONCLUSION

In the absence of a legal form specifically designed to allow the pursuit of mission and profit simultaneously, practitioners are often forced to create structures that combine for-profit and nonprofit entities in ways that allow each to do what it does best. The contract hybrid is one approach that has been specifically designed to overcome the obstacles that current law imposes on partnerships and collaborations between nonprofits and for-profits.

The contract hybrid can be complicated to create and maintain, and it will not work in all situations, particularly where the rules are difficult or impossible to follow. In situations where a nonprofit or a business can accomplish its goals without the need for a hybrid legal structure (for example, where a business can accomplish its social goals by making donations, or a charity can establish a business venture using a subsidiary that does not require outside investors), those approaches may be preferable.

The concepts and techniques that form the foundation of the contract hybrid are, however, well established in law, and a number of experienced lawyers have agreed that the contract hybrid is a useful approach. Done correctly, it can offer the opportunity for charities and business to do things that they cannot do on their own. Although not the final answer, the contract hybrid represents an important step in the evolution of legal structures for social ventures.

Allen R. Bromberger is an attorney with Perlman & Perlman, a New York City law firm specializing in providing services to nonprofits and mission-driven businesses. Before joining the firm, he served as president of Power of Attorney, a private operating foundation, and as executive director of Lawyers Alliance for New York, a public interest law firm for nonprofit and community development organizations. Bromberger is the author of two books on nonprofit formation and operation, Getting Organized and Advising Nonprofits.

For the past two decades Cambia has been trying to upend that dominant model. Cambia is developing new scientific tools and processes for controlling and manipulating genes, and making them available to all organizations on a progressive pricing model: Large corporations pay a lot, whereas small shops pay little. Cambia’s approach makes it more likely that new drugs will be developed for otherwise ignored diseases, and that new crops will be developed that are more environmentally sustainable.

In this interview with Stanford Social Innovation Review Academic Editor Johanna Mair, Jefferson explains why the current patent process used for biological discovery inhibits innovation, why an open source approach is the answer, and what Cambia is doing to get scientific discovery moving in the right direction.

Johanna Mair: In the early 1990s you started Cambia as a nonprofit organization focused on biological innovation. Why did you do so?

Richard Jefferson: The vision of Cambia dated back to the late 1980s when I was a postdoc at the Plant Breeding Institute in Cambridge, England. While there, I began to realize that the ways in which science was used to solve problems and the types of solutions that were created, were shaped and influenced by who controlled the design and use of new scientific tools. This was during the dawn of biotechnology in agriculture. I sensed that it was necessary to dramatically democratize the process and involve a more diverse group of people in using these powerful new approaches to solve localized and scaled-down problems.

At the time, however, the apparent successes of the biotech industry had convinced many people that the blockbuster mentality would deliver the goods, and that a rent-seeking model was a viable way forward. In that model, you invent a new process, find a drug target, or discover a new gene, then wrap it up in intellectual property protection and try to sell it to the highest bidder. That bidder then has to try to assemble the puzzle into something actually useful. It’s a slow, expensive, and cumbersome process that requires so much capital that the only targets worth shooting for are the blockbuster products. It was not widely perceived how dysfunctional this process could end up making biological innovation.

What is wrong with that model?

When I started, genetic engineering was not yet considered to be the pariah it is today in some circles. It was generally thought that since so much crop development was done in the public sector, it would continue to be a public resource—a commons. I remember talking to directors of Greenpeace International who were quite excited about how biotechnology could eliminate our dependence on chemical agriculture and could be an enabling environment for agriculture to become sustainable.

A few years later it was a very different world. By that time, the control of innovation— including control of the actual toolkits necessary to put biotechnology to work—had been vertically integrated through acquisitions, mergers, and a skein of cross-licenses, to make it a no-go zone for small and medium enterprises. There are now thousands of patents covering almost every stage of the research and development process that could give the holders the rights to stop others in their tracks. That makes for a pretty constipated ecology.

As a result, we have vast acreage of a few crops, controlled by a few industry players, engineered for arguably higher performance in an industrial agriculture paradigm, as well as a public that generally doesn’t like it. Many people and small enterprises were cut out of the process—those who could have brought real creativity and perspective to bear—and local-scale solutions never make it onto the drawing board.

You keep using the word “tool.” What do you mean by that?

In software, tools are databases, web browsers, or programming languages—all methods for manipulating information. In life sciences they are methods or techniques for manipulating or understanding living systems, including genes. While I was in grad school, and then later when I was at the Plant Breeding Institute, I developed GUS, a widely used genetic technique—or tool— that allows you to monitor when, where, and how much a gene acts inside a cell. I distributed it freely to hundreds of laboratories before patenting it or even publishing a paper on it. When I did that I discovered something utterly fascinating—GUS changed the entire field in less than a year, and enabled real progress both scientifically and commercially.

That was very gratifying because it confirmed my premise that a tool, if properly designed and shared, can change the direction and pace of innovation. It led me to think, why couldn’t we have an institution that designed and shared tools for people who are currently outside the loop and used in a way to engage truly holistic problem solving?

The Rockefeller Foundation was a strong supporter of Cambia for many years. How did that happen?

Cambia’s first paying gig was funded by the Rockefeller Foundation, thanks to the visionary leader of the agriculture program, Gary Toenniessen. This only happened after four years of pounding on their door, loitering in their offices, and just not going away. In 1992 they gave us $100,000 and sent us off for a year to troubleshoot their rice program throughout Asia, with a nod and a wink. They knew that what we really wanted to do was to invent a new way of cooperative problem solving, sort of a biological open source, but as long as we did our work in troubleshooting their rice program that was fine. We went back after one year and they were pretty happy with our progress, so they ended up funding us for the next 15 or so years.

Our job was to visit every laboratory that did rice biotechnology in the world, to learn, evaluate, teach, help, invent, and support new technologies that would overcome the barriers these laboratories experienced. Our vectors [the DNA tools that are shuttles for genes] are in use in all those labs almost two decades later, and the people we worked with now run major institutions and companies in Asia, Africa, and Latin America. For us, that work was a great learning exercise because we also became experts in intellectual property and observers and strategists of the culture of the public sector.

Which led to your initiative, the Patent Lens.

Yes, which in turn led to our passion for innovation cartography. The patent system exploded during the biotechnology revolution. It reached such a point of complexity and opacity that almost no one really knew what was going on or who had what rights. The Rockefeller Foundation and Cambia were concerned that there was too much opportunistic and shortsighted use of the patent system by the universities that Rockefeller was funding, and too much consolidation by the multinationals that even then were coming to dominate the landscape. The foundation was funding universities around the world to contribute toward solutions of problems in plant sciences. But most of those universities were filing patents on their work and restricting distribution of their materials, all ostensibly to maximize their financial upside, although few did profit. This was never Rockefeller’s intention. They wanted these technologies to be widely available so that new options could be created that would benefit rice farmers and, of course, poor rice consumers.

So Rockefeller asked us to start shedding light upon the extent of patent coverage globally in agriculture. That work became the Patent Lens. It was the first and still the only nonprofit involved in integrated worldwide patent search. We set out to show who controls what patent rights and share that as public information that could be a basis for community response.

By doing that work we learned a lot about intellectual property. Cambia invented a number of technologies, filed a lot of patents, and did a lot of licensing. Almost every company in agriculture has paid to license our technology. We learned how to do tiered licensing so that it could be equitable with access guaranteed to anyone. We used the revenue stream from those who benefited a lot from the technology, like Monsanto, to help those who otherwise would have had very little access to the technology. This use of tiered pricing to fund a public-good activity was our foray into social enterprise, long before I’d ever heard of that term.

One of Cambia’s early initiatives was called Biological Open Source. Why did you think that open source was the way forward?

We mapped the thickets around the first Spring 2011 • Stanford Social Innovation Review 15 step of making genetically modified plants, dominated then and now by Monsanto and its ilk, and devised a new method that we reasoned would not infringe these patents. We published it in Nature, sent it out to thousands of labs, filed patents, and licensed it to hundreds of players in dozens of countries. The licensees agreed to share improvements to that technology, but still retain full rights to their own use of the tools. The problem was that it was too little, too late. By that time the industry was intensely consolidated in a few hands, and the public had already lost any confidence that their interests were being promoted and protected by a capable public sector.

My work happened more or less in parallel with the development of the free software movement that later morphed into open source. We knew nothing about what was going on in information technology at the time, and we didn’t develop our ideas modeled on open source. We developed our ideas modeled on what we perceived as a terrific opportunity for a general approach to enabling innovation in a field that we knew a lot about.

It’s interesting that what is called open source in software engineering was anticipated by several thousand years of plant and animal domestication that underpinned all of agriculture. We’ve actually had thousands of years of developing the norms and innovation models of open source. For millennia, new varieties of crops were selected or bred by farmers themselves. They were freely available to anyone who could collect the seeds, cuttings, or seedlings. It was impossible to stop seeds from getting out, so the focus was on producing something of value, and accepting that others would use your seeds to make better ones. Of course, that is now dramatically changing in the agricultural industry, since the advent of hybrids— crops whose seeds don’t breed true—and now transgenic crops, heavily controlled by contracts and licenses.

What has been your biggest disappointment since Cambia began?

That would have to be the public sector’s discouraging performance. I’ve felt for a long time that the public sector, in particular universities and national laboratories, has been very ineffective and inefficient as agents of public good. The feature that makes them public is generally the source of their funding, but sadly not the development and disposition of their work.

Right now the metrics they cleave to are things like monetization, spin-offs, publication, and career advancement. None of them have a direct correlation with social value. The metrics of career advancement are not aligned with the metrics of delivering benefits to society. The metrics of monetization of intellectual property are not aligned with the metrics of using intellectual property to create a new crop or medicine.

Tell me about the Initiative for Open Innovation.

It’s the culmination of our lessons from the last two decades. The Initiative for Open Innovation, or IOI, was designed to be a truly open global initiative to change how problem solving is done and by whom.

Let me explain it with a metaphor. In the first several thousand years of human economic development, almost all progress was made by moving physical material from one place to another. Global trade drove the development of civilization. The big problem with moving stuff across space is the space. The biggest risk was that you would hit a reef and lose your ship, or run across a hostile tribe and lose your caravan. So the single biggest tool for risk mitigation that made economics work was the map.

Cartography, the ability to map our physical environment, was the single most important breakthrough in economic development. In the 1400s and 1500s, the great maritime empires of Portugal and Spain dominated global trade because they dominated mapmaking. No one else knew how to make the long-distance passages. The Portuguese and Spanish kept it as a trade secret. In the biggest act of open access guerilla warfare ever done, in 1596 a Dutchman named Jan Huygen van Linschoten stole all the Portolan charts and navigation directions from the Portuguese and published them in Amsterdam. Within a few years the Dutch East India Company and the British East India Company were formed, and the entire landscape of commerce changed. It is unthinkable now that we would have trade in the absence of maps as global public goods.

Yet that is the situation we face in today’s information economy, the lack of publicly available maps.

Indeed. And that is exactly the transition we now have to make in the world of ideas. Today it’s not about moving stuff from one place to another; it’s about converting information through thought processes and creative innovation into new value. It’s the world of ideas rather than the world of things. But we have the same challenge of cartography. We need to create publicly available maps that can help us navigate this new world of information. We need to create as global public goods, a risk mitigation tool so that decisions that are aligned with self-interest and ambition can be made with as little avoidable risk as possible. Right now, the greatest risks are associated with intellectual property, regulatory compliance, and, of course, ignorance. Those can be reduced.

The vision of IOI is to create an ecology in which virtually anyone with ambition and a good idea can enter into the process with as small an entry barrier as possible. Five years ago it would have been considered unrealistic, even impossible. But today, by harnessing such trends as cloud computing, social software, and the trajectories of freedom of government information, there’s no reason we can’t anticipate that within the next few years we will have true innovation cartography that is shaped for diverse people as a decision support tool, just as maps are taken for granted in global trade. That’s our vision, and I think that making this happen will have a massive transformational change in global equity and economics.

Against these daunting odds, a remarkable exception seems to be emerging in Cincinnati. Strive, a nonprofit subsidiary of KnowledgeWorks, has brought together local leaders to tackle the student achievement crisis and improve education throughout greater Cincinnati and northern Kentucky. In the four years since the group was launched, Strive partners have improved student success in dozens of key areas across three large public school districts. Despite the recession and budget cuts, 34 of the 53 success indicators that Strive tracks have shown positive trends, including high school graduation rates, fourth-grade reading and math scores, and the number of preschool children prepared for kindergarten.

Why has Strive made progress when so many other efforts have failed? It is because a core group of community leaders decided to abandon their individual agendas in favor of a collective approach to improving student achievement. More than 300 leaders of local organizations agreed to participate, including the heads of influential private and corporate foundations, city government officials, school district representatives, the presidents of eight universities and community colleges, and the executive directors of hundreds of education-related nonprofit and advocacy groups.

These leaders realized that fixing one point on the educational continuum—such as better after-school programs—wouldn’t make much difference unless all parts of the continuum improved at the same time. No single organization, however innovative or powerful, could accomplish this alone. Instead, their ambitious mission became to coordinate improvements at every stage of a young person’s life, from “cradle to career.”

Strive didn’t try to create a new educational program or attempt to convince donors to spend more money. Instead, through a carefully structured process, Strive focused the entire educational community on a single set of goals, measured in the same way. Participating organizations are grouped into 15 different Student Success Networks (SSNs) by type of activity, such as early childhood education or tutoring. Each SSN has been meeting with coaches and facilitators for two hours every two weeks for the past three years, developing shared performance indicators, discussing their progress, and most important, learning from each other and aligning their efforts to support each other.

Strive, both the organization and the process it helps facilitate, is an example of collective impact, the commitment of a group of important actors from different sectors to a common agenda for solving a specific social problem. Collaboration is nothing new. The social sector is filled with examples of partnerships, networks, and other types of joint efforts. But collective impact initiatives are distinctly different. Unlike most collaborations, collective impact initiatives involve a centralized infrastructure, a dedicated staff, and a structured process that leads to a common agenda, shared measurement, continuous communication, and mutually reinforcing activities among all participants.

Although rare, other successful examples of collective impact are addressing social issues that, like education, require many different players to change their behavior in order to solve a complex problem. In 1993, Marjorie Mayfield Jackson helped found the Elizabeth River Project with a mission of cleaning up the Elizabeth River in southeastern Virginia, which for decades had been a dumping ground for industrial waste. They engaged more than 100 stakeholders, including the city governments of Chesapeake, Norfolk, Portsmouth, and Virginia Beach, Va., the Virginia Department of Environmental Quality, the U.S. Environmental Protection Agency (EPA), the U.S. Navy, and dozens of local businesses, schools, community groups, environmental organizations, and universities, in developing an 18-point plan to restore the watershed. Fifteen years later, more than 1,000 acres of watershed land have been conserved or restored, pollution has been reduced by more than 215 million pounds, concentrations of the most severe carcinogen have been cut sixfold, and water quality has significantly improved. Much remains to be done before the river is fully restored, but already 27 species of fish and oysters are thriving in the restored wetlands, and bald eagles have returned to nest on the shores.

Or consider Shape up Somerville, a citywide effort to reduce and prevent childhood obesity in elementary school children in Somerville, Mass. Led by Christina Economos, an associate professor at Tufts University’s Gerald J. and Dorothy R. Friedman School of Nutrition Science and Policy, and funded by the Centers for Disease Control and Prevention, the Robert Wood Johnson Foundation, Blue Cross Blue Shield of Massachusetts, and United Way of Massachusetts Bay and Merrimack Valley, the program engaged government officials, educators, businesses, nonprofits, and citizens in collectively defining wellness and weight gain prevention practices. Schools agreed to offer healthier foods, teach nutrition, and promote physical activity. Local restaurants received a certification if they served low-fat, high nutritional food. The city organized a farmers’ market and provided healthy lifestyle incentives such as reduced-price gym memberships for city employees. Even sidewalks were modified and crosswalks repainted to encourage more children to walk to school. The result was a statistically significant decrease in body mass index among the community’s young children between 2002 and 2005.

Even companies are beginning to explore collective impact to tackle social problems. Mars, a manufacturer of chocolate brands such as M&M’s, Snickers, and Dove, is working with NGOs, local governments, and even direct competitors to improve the lives of more than 500,000 impoverished cocoa farmers in Cote d’Ivoire, where Mars sources a large portion of its cocoa. Research suggests that better farming practices and improved plant stocks could triple the yield per hectare, dramatically increasing farmer incomes and improving the sustainability of Mars’s supply chain. To accomplish this, Mars must enlist the coordinated efforts of multiple organizations: the Cote d’Ivoire government needs to provide more agricultural extension workers, the World Bank needs to finance new roads, and bilateral donors need to support NGOs in improving health care, nutrition, and education in cocoa growing communities. And Mars must find ways to work with its direct competitors on pre-competitive issues to reach farmers outside its supply chain.

These varied examples all have a common theme: that large-scale social change comes from better cross-sector coordination rather than from the isolated intervention of individual organizations. Evidence of the effectiveness of this approach is still limited, but these examples suggest that substantially greater progress could be made in alleviating many of our most serious and complex social problems if nonprofits, governments, businesses, and the public were brought together around a common agenda to create collective impact. It doesn’t happen often, not because it is impossible, but because it is so rarely attempted. Funders and nonprofits alike overlook the potential for collective impact because they are used to focusing on independent action as the primary vehicle for social change.

ISOLATED IMPACT

Most funders, faced with the task of choosing a few grantees from many applicants, try to ascertain which organizations make the greatest contribution toward solving a social problem. Grantees, in turn, compete to be chosen by emphasizing how their individual activities produce the greatest effect. Each organization is judged on its own potential to achieve impact, independent of the numerous other organizations that may also influence the issue. And when a grantee is asked to evaluate the impact of its work, every attempt is made to isolate that grantee’s individual influence from all other variables.

In short, the nonprofit sector most frequently operates using an approach that we call isolated impact. It is an approach oriented toward finding and funding a solution embodied within a single organization, combined with the hope that the most effective organizations will grow or replicate to extend their impact more widely. Funders search for more effective interventions as if there were a cure for failing schools that only needs to be discovered, in the way that medical cures are discovered in laboratories. As a result of this process, nearly 1.4 million nonprofits try to invent independent solutions to major social problems, often working at odds with each other and exponentially increasing the perceived resources required to make meaningful progress. Recent trends have only reinforced this perspective. The growing interest in venture philanthropy and social entrepreneurship, for example, has greatly benefited the social sector by identifying and accelerating the growth of many high-performing nonprofits, yet it has also accentuated an emphasis on scaling up a few select organizations as the key to social progress.

Despite the dominance of this approach, there is scant evidence that isolated initiatives are the best way to solve many social problems in today’s complex and interdependent world. No single organization is responsible for any major social problem, nor can any single organization cure it. In the field of education, even the most highly respected nonprofits—such as the Harlem Children’s Zone, Teach for America, and the Knowledge Is Power Program (KIPP)—have taken decades to reach tens of thousands of children, a remarkable achievement that deserves praise, but one that is three orders of magnitude short of the tens of millions of U.S. children that need help.

The problem with relying on the isolated impact of individual organizations is further compounded by the isolation of the nonprofit sector. Social problems arise from the interplay of governmental and commercial activities, not only from the behavior of social sector organizations. As a result, complex problems can be solved only by cross-sector coalitions that engage those outside the nonprofit sector.

We don’t want to imply that all social problems require collective impact. In fact, some problems are best solved by individual organizations. In “Leading Boldly,” an article we wrote with Ron Heifetz for the winter 2004 issue of the Stanford Social Innovation Review, we described the difference between technical problems and adaptive problems. Some social problems are technical in that the problem is well defined, the answer is known in advance, and one or a few organizations have the ability to implement the solution. Examples include funding college scholarships, building a hospital, or installing inventory controls in a food bank. Adaptive problems, by contrast, are complex, the answer is not known, and even if it were, no single entity has the resources or authority to bring about the necessary change. Reforming public education, restoring wetland environments, and improving community health are all adaptive problems. In these cases, reaching an effective solution requires learning by the stakeholders involved in the problem, who must then change their own behavior in order to create a solution.

Shifting from isolated impact to collective impact is not merely a matter of encouraging more collaboration or public-private partnerships. It requires a systemic approach to social impact that focuses on the relationships between organizations and the progress toward shared objectives. And it requires the creation of a new set of nonprofit management organizations that have the skills and resources to assemble and coordinate the specific elements necessary for collective action to succeed.

THE FIVE CONDITIONS OF COLLECTIVE SUCCESS

Our research shows that successful collective impact initiatives typically have five conditions that together produce true alignment and lead to powerful results: a common agenda, shared measurement systems, mutually reinforcing activities, continuous communication, and backbone support organizations.

Common Agenda Collective impact requires all participants to have a shared vision for change, one that includes a common understanding of the problem and a joint approach to solving it through agreed upon actions. Take a close look at any group of funders and nonprofits that believe they are working on the same social issue, and you quickly find that it is often not the same issue at all. Each organization often has a slightly different definition of the problem and the ultimate goal. These differences are easily ignored when organizations work independently on isolated initiatives, yet these differences splinter the efforts and undermine the impact of the field as a whole. Collective impact requires that these differences be discussed and resolved. Every participant need not agree with every other participant on all dimensions of the problem. In fact, disagreements continue to divide participants in all of our examples of collective impact. All participants must agree, however, on the primary goals for the collective impact initiative as a whole. The Elizabeth River Project, for example, had to find common ground among the different objectives of corporations, governments, community groups, and local citizens in order to establish workable cross-sector initiatives.

Funders can play an important role in getting organizations to act in concert. In the case of Strive, rather than fueling hundreds of strategies and nonprofits, many funders have aligned to support Strive’s central goals. The Greater Cincinnati Foundation realigned its education goals to be more compatible with Strive, adopting Strive’s annual report card as the foundation’s own measures for progress in education. Every time an organization applied to Duke Energy for a grant, Duke asked, “Are you part of the [Strive] network?” And when a new funder, the Carol Ann and Ralph V. Haile Jr./U.S. Bank Foundation, expressed interest in education, they were encouraged by virtually every major education leader in Cincinnati to join Strive if they wanted to have an impact in local education.¹

Shared Measurement Systems Developing a shared measurement system is essential to collective impact. Agreement on a common agenda is illusory without agreement on the ways success will be measured and reported. Collecting data and measuring results consistently on a short list of indicators at the community level and across all participating organizations not only ensures that all efforts remain aligned, it also enables the participants to hold each other accountable and learn from each other’s successes and failures.

It may seem impossible to evaluate hundreds of different organizations on the same set of measures. Yet recent advances in Web-based technologies have enabled common systems for reporting performance and measuring outcomes. These systems increase efficiency and reduce cost. They can also improve the quality and credibility of the data collected, increase effectiveness by enabling grantees to learn from each other’s performance, and document the progress of the field as a whole.²

All of the preschool programs in Strive, for example, have agreed to measure their results on the same criteria and use only evidence-based decision making. Each type of activity requires a different set of measures, but all organizations engaged in the same type of activity report on the same measures. Looking at results across multiple organizations enables the participants to spot patterns, find solutions, and implement them rapidly. The preschool programs discovered that children regress during the summer break before kindergarten. By launching an innovative “summer bridge” session, a technique more often used in middle school, and implementing it simultaneously in all preschool programs, they increased the average kindergarten readiness scores throughout the region by an average of 10 percent in a single year.³

Mutually Reinforcing Activities Collective impact initiatives depend on a diverse group of stakeholders working together, not by requiring that all participants do the same thing, but by encouraging each participant to undertake the specific set of activities at which it excels in a way that supports and is coordinated with the actions of others.

The power of collective action comes not from the sheer number of participants or the uniformity of their efforts, but from the coordination of their differentiated activities through a mutually reinforcing plan of action. Each stakeholder’s efforts must fit into an overarching plan if their combined efforts are to succeed. The multiple causes of social problems, and the components of their solutions, are interdependent. They cannot be addressed by uncoordinated actions among isolated organizations.

All participants in the Elizabeth River Project, for example, agreed on the 18-point watershed restoration plan, but each is playing a different role based on its particular capabilities. One group of organizations works on creating grassroots support and engagement among citizens, a second provides peer review and recruitment for industrial participants who voluntarily reduce pollution, and a third coordinates and reviews scientific research.

The 15 SSNs in Strive each undertake different types of activities at different stages of the educational continuum. Strive does not prescribe what practices each of the 300 participating organizations should pursue. Each organization and network is free to chart its own course consistent with the common agenda, and informed by the shared measurement of results.

Continuous Communication Developing trust among nonprofits, corporations, and government agencies is a monumental challenge. Participants need several years of regular meetings to build up enough experience with each other to recognize and appreciate the common motivation behind their different efforts. They need time to see that their own interests will be treated fairly, and that decisions will be made on the basis of objective evidence and the best possible solution to the problem, not to favor the priorities of one organization over another.

Even the process of creating a common vocabulary takes time, and it is an essential prerequisite to developing shared measurement systems. All the collective impact initiatives we have studied held monthly or even biweekly in-person meetings among the organizations’ CEO-level leaders. Skipping meetings or sending lower-level delegates was not acceptable. Most of the meetings were supported by external facilitators and followed a structured agenda.

The Strive networks, for example, have been meeting regularly for more than three years. Communication happens between meetings too: Strive uses Web-based tools, such as Google Groups, to keep communication flowing among and within the networks. At first, many of the leaders showed up because they hoped that their participation would bring their organizations additional funding, but they soon learned that was not the meetings’ purpose. What they discovered instead were the rewards of learning and solving problems together with others who shared their same deep knowledge and passion about the issue.

Backbone Support Organizations Creating and managing collective impact requires a separate organization and staff with a very specific set of skills to serve as the backbone for the entire initiative. Coordination takes time, and none of the participating organizations has any to spare. The expectation that collaboration can occur without a supporting infrastructure is one of the most frequent reasons why it fails.

The backbone organization requires a dedicated staff separate from the participating organizations who can plan, manage, and support the initiative through ongoing facilitation, technology and communications support, data collection and reporting, and handling the myriad logistical and administrative details needed for the initiative to function smoothly. Strive has simplified the initial staffing requirements for a backbone organization to three roles: project manager, data manager, and facilitator.

Collective impact also requires a highly structured process that leads to effective decision making. In the case of Strive, staff worked with General Electric (GE) to adapt for the social sector the Six Sigma process that GE uses for its own continuous quality improvement. The Strive Six Sigma process includes training, tools, and resources that each SSN uses to define its common agenda, shared measures, and plan of action, supported by Strive facilitators to guide the process.

In the best of circumstances, these backbone organizations embody the principles of adaptive leadership: the ability to focus people’s attention and create a sense of urgency, the skill to apply pressure to stakeholders without overwhelming them, the competence to frame issues in a way that presents opportunities as well as difficulties, and the strength to mediate conflict among stakeholders.

FUNDING COLLECTIVE IMPACT

Creating a successful collective impact initiative requires a significant financial investment: the time participating organizations must dedicate to the work, the development and monitoring of shared measurement systems, and the staff of the backbone organization needed to lead and support the initiative’s ongoing work.

As successful as Strive has been, it has struggled to raise money, confronting funders’ reluctance to pay for infrastructure and preference for short-term solutions. Collective impact requires instead that funders support a long-term process of social change without identifying any particular solution in advance. They must be willing to let grantees steer the work and have the patience to stay with an initiative for years, recognizing that social change can come from the gradual improvement of an entire system over time, not just from a single breakthrough by an individual organization.

This requires a fundamental change in how funders see their role, from funding organizations to leading a long-term process of social change. It is no longer enough to fund an innovative solution created by a single nonprofit or to build that organization’s capacity. Instead, funders must help create and sustain the collective processes, measurement reporting systems, and community leadership that enable cross-sector coalitions to arise and thrive.

This is a shift that we foreshadowed in both “Leading Boldly” and our more recent article, “Catalytic Philanthropy,” in the fall 2009 issue of the Stanford Social Innovation Review. In the former, we suggested that the most powerful role for funders to play in addressing adaptive problems is to focus attention on the issue and help to create a process that mobilizes the organizations involved to find a solution themselves. In “Catalytic Philanthropy,” we wrote: “Mobilizing and coordinating stakeholders is far messier and slower work than funding a compelling grant request from a single organization. Systemic change, however, ultimately depends on a sustained campaign to increase the capacity and coordination of an entire field.” We recommended that funders who want to create large-scale change follow four practices: take responsibility for assembling the elements of a solution; create a movement for change; include solutions from outside the nonprofit sector; and use actionable knowledge to influence behavior and improve performance.

These same four principles are embodied in collective impact initiatives. The organizers of Strive abandoned the conventional approach of funding specific programs at education nonprofits and took responsibility for advancing education reform themselves. They built a movement, engaging hundreds of organizations in a drive toward shared goals. They used tools outside the nonprofit sector, adapting GE’s Six Sigma planning process for the social sector. And through the community report card and the biweekly meetings of the SSNs they created actionable knowledge that motivated the community and improved performance among the participants.

Funding collective impact initiatives costs money, but it can be a highly leveraged investment. A backbone organization with a modest annual budget can support a collective impact initiative of several hundred organizations, magnifying the impact of millions or even billions of dollars in existing funding. Strive, for example, has a $1.5 million annual budget but is coordinating the efforts and increasing the effectiveness of organizations with combined budgets of $7 billion. The social sector, however, has not yet changed its funding practices to enable the shift to collective impact. Until funders are willing to embrace this new approach and invest sufficient resources in the necessary facilitation, coordination, and measurement that enable organizations to work in concert, the requisite infrastructure will not evolve.

FUTURE SHOCK

What might social change look like if funders, nonprofits, government officials, civic leaders, and business executives embraced collective impact? Recent events at Strive provide an exciting indication of what might be possible.

Strive has begun to codify what it has learned so that other communities can achieve collective impact more rapidly. The organization is working with nine other communities to establish similar cradle to career initiatives.⁴ Importantly, although Strive is broadening its impact to a national level, the organization is not scaling up its own operations by opening branches in other cities. Instead, Strive is promulgating a flexible process for change, offering each community a set of tools for collective impact, drawn from Strive’s experience but adaptable to the community’s own needs and resources. As a result, the new communities take true ownership of their own collective impact initiatives, but they don’t need to start the process from scratch. Activities such as developing a collective educational reform mission and vision or creating specific community-level educational indicators are expedited through the use of Strive materials and assistance from Strive staff. Processes that took Strive several years to develop are being adapted and modified by other communities in significantly less time.

These nine communities plus Cincinnati have formed a community of practice in which representatives from each effort connect regularly to share what they are learning. Because of the number and diversity of the communities, Strive and its partners can quickly determine what processes are universal and which require adaptation to a local context. As learning accumulates, Strive staff will incorporate new findings into an Internet-based knowledge portal that will be available to any community wishing to create a collective impact initiative based on Strive’s model.

This exciting evolution of the Strive collective impact initiative is far removed from the isolated impact approach that now dominates the social sector and that inhibits any major effort at comprehensive, large-scale change. If successful, it presages the spread of a new approach that will enable us to solve today’s most serious social problems with the resources we already have at our disposal. It would be a shock to the system. But it’s a form of shock therapy that’s badly needed.

John Kania is a managing director at FSG, where he oversees the firm’s consulting practice. Before joining FSG, he was a consultant at Mercer Management Consulting and Corporate Decisions Inc. This is Kania’s third article for the Stanford Social Innovation Review.

Mark Kramer is the co-founder and a managing director of FSG. He is also the co-founder and the initial board chair of the Center for Effective Philanthropy, and a senior fellow at Harvard University’s John F. Kennedy School of Government. This is Kramer’s fifth article for the Stanford Social Innovation Review.

Raguvaran and the management team at Housing 21 (H21), a U.K. housing and health care charity for the elderly, had already proved to be innovative. The 46-year-old organization had won the only two Private Finance Initiative contracts for older people’s housing offered by the U.K. government. (Private Finance Initiatives are public-private partnerships in which public infrastructure projects are funded with private capital.) From its origins as a Registered Social Landlord (RSL), the enterprise pioneered the concept of extra-care housing, whereby tenants maintain their own apartments but are part of a community with on-site care and support services that ramp up as the tenant becomes mentally or physically frailer. H21 was also the first RSL to develop expertise in dementia care.

Nevertheless, the proposal to bid for a for-profit company was bold. As nonexecutive chairman, I felt my mind racing through a series of questions. Did the board have the expertise on to oversee such a bid? Did the senior executive team? Even if we had the necessary expertise, did the board and executive team have the ability to try? Would the Claimar owners and their professional advisors (KPMG) take us seriously? Was the invitation to bid genuine, or would we be wasting time and money? How would our new regulator, the Tenant Services Authority (TSA), view such a move?

H21’s 2007–2012 corporate plan was to double the size of its care business to 60,000 hours per week. We previously assumed that this would be organic growth through winning new contracts from local authority social service commissioners. We had looked at small acquisitions previously, and we had done a couple of single contract, family-owned business acquisitions in the previous year. But we had never considered buying a public limited company or national business. Claimar, however, fit with our growth objectives. The board quickly decided that the staff time and professional fees we would incur while examining the bid would be justified by the experience our management team would gain in reviewing the U.K. eldercare market. Furthermore, we had two experienced bankers on the board.

Did We Want to Win?

A few weeks later, and with a board working group delegated to oversee the bid process, we faced far more difficult questions: Did we want to win, and if so, what would be the maximum bid price? Were we being suitably cautious about assumed synergies? Did we have the management capacity for integrating Claimar if we won? Were there likely to be more interesting future opportunities that a successful bid for Claimar would preclude us from exploiting? Would tenants or the TSA react negatively to a bid?

After a few nerve-wracking days, we decided to bid 39 pence per share, valuing Claimar at approximately £19.5 million—and won. The press was uniformly positive. “Buy-out champions bowled out by charity amateurs” was the verdict of an Aug. 8, 2009, Times story. “Money well spent” was the headline on an Inside Housing article. My colleagues’ and my summer had been turned upside down, with 14 extra board and working group meetings, often held at short notice. The board had to cover issues unfamiliar to a number of us. As chairman, I was responsible—for the first time in my life—for a takeover bid conducted under the very rigorous rules of the U.K. Takeover Code and the Takeover Panel.

Now the question was what would happen after the successful bid. We asked every experienced person we knew: Why do commercial mergers and acquisitions (M&As) fail? How do we avoid the fate of the majority of M&As that don’t deliver the promised added value—and even destroy value? What are the specific integration issues facing a nonprofit that acquires a for-profit group of companies?

The initial integration was not without drama, as we grappled with sensitive organizational and personnel issues within the acquired companies. There was also the hurdle of absorbing a group of for-profit companies into the culture of a nonprofit social enterprise. Two senior Claimar staff left early on.

With input from friends and colleagues with wide commercial M&A experience, board members identified several critical success factors. They included communicating the timescales for restructuring and deciding which parts of Claimar would be retained or sold. We spent an intensive day as a board and executive team interviewing the leadership of each of the main subsidiaries we had acquired. This “eyeball” time gave us a better feel for the potential chemistry among the principals as well as the strategic choices we had to make.

We decided that our priorities were first to ensure no loss of service to clients. Only then would we try to seek synergies and business improvements. We aimed to identify the best practices of each organization, not just to maintain business as usual at H21. Claimar’s finance director became interim financial director for the merged organization, and Raguvaran became the merged organization’s new CEO.

Integrating and Adding Value

The businesses we acquired looked after some of the most vulnerable and high-need people in our society. They were not just elderly people in need of housing with care and health services. One of the acquired subsidiaries cared for patients injured in sporting and car accidents who required long-term intensive 24/7 care—very different from our core activities.

After some lively internal debate, we appointed a senior nonexecutive director—a banker who previously chaired both our audit and performance committees—to be the integration champion. He chaired a fortnightly integration working group (IWG) with top executives from H21 and Claimar. We added an implementation group meeting, on alternate weeks, to chase progress. We also hired a temporary integration project manager.

These operational groups have continued through the fall of 2010, overseeing detailed work, such as the rollout of H21’s health and safety procedures, the training of frontline care staff, and the rationalization of the local office network. The IWG also oversaw the development of a joint new business development function to pitch for new contracts; the merger of crucial back-end functions such as information technology, human resources, and finance; and the development of relations with the commissioners of care contracts.

We were able to use the values of H21—caring, individuality, empowerment, integrity, improvement, investment, and ambition—as the basis for a culture change program across the combined organization. This involved H21 “ambassadors” (senior and middle managers) visiting all the Claimar branches to explain the vision, values, activities, and future plans of the combined organization. Visible changes like new uniforms, signage, badges, and an integrated website reinforced the culture program. In parallel, professional advisors helped us decide which subsidiaries should be sold, closed, or retained. We decided to sell the high-acuity care business. We also closed Claimar’s loss-making training business and a subsidiary that installed home panic alarms for old people.

Now we are using the integration as stimulus to look afresh at everything we do, rather than to assume that either the old H21 or the old Claimar had it right. The board remuneration committee has agreed to a new compensation system for senior management. Board and senior management are working together to develop a new, long-term strategy for the merged organization. This is proving particularly timely as the United Kingdom’s new coalition government is driving dramatic change in the delivery, funding, and design of public services.

Currently, our combined organization is the second largest provider of sheltered social housing for older people in the United Kingdom, and we are the fourth largest care provider in the country. We have more than 8,200 staff across more than 500 locations, and we now are able to serve more than 30,000 older Britons. We also have added new services to our portfolio, including an online pharmacy and 24-hour live-in care.

Our considerably expanded size inevitably puts H21 on media’s and regulators’ radar screens. It also raises the stakes for us in ensuring that we have the procedures in place to protect our greater number of care customers and that we can remain agile in responding to a rapidly changing public policy and commissioning environment.

The lessons I draw from the acquisition experience are the importance of hiring and properly using professional advisors—and not skimping on this. Identifying and addressing stakeholder concerns is another critical lesson. The moment we announced our formal bid, Raguvaran wrote to all our tenants explaining what we were doing and why, and how the acquisition would enable us to offer more and better services for an increasing number of older Britons. The personal letters and e-mails she received from around the country informed the second wave of our communications with tenants. We kept our regulator regularly briefed on developments, which itself required dispensation from the U.K.’s Takeover Panel.

The Claimar acquisition was a significant social innovation. It represents a further extension of the blurring of the boundaries between the for-profit and nonprofit worlds and an important extension of the role of civil society organizations.

David Grayson chairs Housing 21. He is director of the Doughty Centre for Corporate Responsibility at the Cranfield School of Management in Bedford, England, and has 30 years of experience as a social entrepreneur.

Why all this enthusiasm? Let’s start with the fact that people don’t trust “real” business anymore. They’ve been whipsawed by sharp reductions in savings, home values, and access to credit, and the rounds of corporate belt-tightening and layoffs that followed. Add a seemingly bottomless pit of Wall Street greed, a massive oil spill, and businesses that seem tone-deaf to the long-term consequences of their products or investments, and you have a toxic soup of deep cynicism and anger at business.

But here’s the thing: Global business is the most capable agent we have to solve important problems—from climate change to poverty. It has far greater capacity than social enterprises, which are mostly start-ups or nonprofits with business activity. I’m happy social enterprises exist—they offer compelling stories of what may be possible in businesses structured around a social mission—but they are also capital starved and small in scale, and they fail to reach the starting gate in the race to solve the big questions of our day. We will not make progress on our most important problems without the active engagement of mainstream business.

In addition, all this attention to social enterprise sends a singularly unhelpful message to our current students, known for their values and social commitment: If you want to contribute to the public good, don’t bother with mainstream business.

There are no easy fixes, yet the opportunity exists now to make critical change. Let’s refurbish business with social entrepreneurship’s best features, in the following three ways:

First, we must revisit our narrative about the purpose of the business corporation. “Maximizing profits” may be an accepted mantra on Wall Street, but it is not enshrined in either law or practice. Realigning business purpose with the public good is a critical first step in integrating social impact or environmental sustainability as business strategy.

Second, we need to unleash social intrapreneurs—change agents already working deep within business—and encourage the next generation of managers to find business opportunity in our most daunting challenges.

Third, let’s move values from the ethics classroom to the core of business education, and let’s enable students to raise their voices in times of moral conflict. The end game: Future managers will have the will and the skill to treat ethical issues as strategically and effectively as they do business issues.

Rethink the Purpose of Business

If “ideas have consequences,” as William F. Buckley Jr. liked to say, the most consequential idea of our time is this: “The purpose of business is to maximize profits.” Although only an idea, it clearly has legs; this shareholder-centric business model has served as the organizing principle of U.S.-style capitalism for decades. Yet in the early days of the American republic, when legal corporations were created, limited liability was granted to investors to help amass capital for public purposes, such as colonizing trading locales and building railroads. With the future of capital markets—and capitalism itself—on the minds of so many, we have a remarkable opportunity to take a fresh look at this central idea.

Central to repurposing business are decision rules that will help managers consider environmental consciousness, healthy communities, and profit. Let’s take a page from social enterprises: Prioritizing meaning over money, business metrics are used that favor long-term sustainable growth and that internalize the societal costs of doing business. Social enterprises reward managers who look for investments and strategies that pay off over the long haul, even at the expense of short-term profits; and, ideally, their boards are able to focus on long-term strategy and risk management.

Of course, if it were easy to embrace fresh thinking about business purpose, we would have done it by now. The prevailing “theory of the firm”—taught in business schools and reinforced by consulting firms and investment professionals—seduces through its simplicity and measurability. Prevailing thought equates business success with shareholders (and executives) who make as much money as possible, quarter on quarter.

And yet we now see a crack in the armor. A growing number of critics—including the academics who helped to promulgate the theory and anchor it in practice—observe that the rule of profit maximization is out of sync with consumers, Web-enabled transparency in business, and a generation of job seekers demanding meaning at work.

Integrative and systems thinking lie at the heart of a better theory. New academics have begun to take up the challenge, joining those who have been questioning conventional thinking for decades. The work ahead will employ dialogue to bridge the best ideas from both academics and business leaders hungry for new measures of success.

Unleash the Social Intrapreneurs

Once we align the purpose of business with our long-term vision, then globe-trotting, resource-rich, profit-seeking businesses can field strategies for tackling our most complex social and environmental problems. Businesspeople naturally organize around opportunity. In the right environment they are natural problem solvers and social innovators who almost always see the glass as half full.

Indeed, many global corporations have already jumped on the social innovation bandwagon either as a matter of survival—often in the wake of NGO campaigns—or in pursuit of growth. Given their scalability, they serve as an inspiration to mainstream businesses.

Unilever, for example, has committed to selling 100 percent sustainably sourced fish, and in 1997 the company paired with the World Wildlife Fund to create the Marine Stewardship Council, a third-party certifier that promotes responsible fishing practices worldwide. Coca-Cola, meanwhile, developed a distribution system for parts of Africa that engages more than 12,000 entrepreneurs who in turn build the economy the old-fashioned way—through local purchasing power. Dow Chemical uses municipal wastewater in the Netherlands to generate steam power that runs a plant. Wal-Mart Stores embedded deep into its supply chain a complex set of decision rules to reduce waste and save energy. And Interface, the carpet company, revolutionized carpet manufacturing by taking responsibility for everything from the raw materials to the final product disposal.

I’d like to see more business school professors feature social intrapreneurs working in large public and private companies like these, who value complexity over simplicity and multiple objectives rather than either profit maximization or social mission. Students who study social entrepreneurship may otherwise conclude that meaningful work is limited to nonprofits or entrepreneurial startups with social objectives and little access to capital.

Social intrapreneurs offer the kind of leadership the world needs now. Professors who support them send a signal to the next generation of management talent, including those aiming for consulting and private equity, that to embrace complexity, transparency, and long-term metrics mitigates risk and creates value. Social intrapreneurship can become the new normal in business.

Teach Students to Voice their Values

Business schools can also help students give voice to their values, even when the current is running hard in the other direction. We learned from Enron, and now know from the market disasters playing out around the globe, that a lack of knowledge wasn’t the big issue, but rather “group think” fueled by short-termism and greed. Internal managers and agents, with adequate practice and the courage of their convictions, could have made a difference.

Giving Voice to Values, a new approach to teaching ethics created by Mary Gentile at Babson College (see “Turning Values into Action” on p. 42), deemphasizes philosophical constructs in ethics such as the “greatest good” and instead offers students the classroom’s safe space to practice applying their values to business—strategically and effectively. Most students know the right thing to do. They merely lack the courage and competence to build coalitions for change and raise their voice in times of moral conflict.

Last spring, at more than 50 business schools across the globe, students gathered at graduations to sign a pledge to “do no harm” in their business careers. This interest in a Hippocratic Oath for business builds on earlier efforts at Harvard Business School, at Thunderbird School of Global Management, and among young leaders at the World Economic Forum in Davos, Switzerland; it challenges peers to hammer a stake in the ground and recognize the human element of decision making.

A small but vocal group of educators and a growing number of business executives also think the time is ripe for a moral touchstone—a credo—to help managers sustain their commitment to practicing business as if the wider world matters. Work is under way to unite these efforts with the business oath. Cynics consider the oath a fad, but these doers deserve credit for constructing habits of mind and practice—whether it is the act of signing the oath with all your classmates, as happened recently at the University of Texas at Austin, or the simple commitment to consult a friend when an ethical issue arises.

Business engaged in problems of consequence: a pipe dream or the next wave of business innovation? We have nothing to lose by jumping in and finding out. Without fundamental changes, we will continue to be vulnerable to the bubbles and excesses that reward a few highfliers at the expense of many, and fail, tragically, to unleash the power of “real business” just when we need it most.

Judith Samuelson directs the Business and Society Program at the Aspen Institute. Since 2002, she has spearheaded a broad-based dialogue on curbing short-term thinking in business and capital markets that led to the Aspen Principles for Long-Term Value Creation.

Before joining Mercy Corps, Keny-Guyer spent more than a decade working in the social sector, first with at-risk American youth at Communities in Schools, then with Southeast Asian refugees at CARE/UNICEF, and finally with war-torn Middle Eastern communities at Save the Children.

Mercy Corps’s guiding principles are that those affected by a crisis are always the best people to direct their own recovery, and that in most cases the best way to do this is to help local people create market-based solutions. That’s why you will find Mercy Corps assisting local farmers and merchants as they reopen food markets or paying cash to local workers who are helping clear their streets and rebuild their homes.

In this interview with Stanford Social Innovation Review Managing Editor Eric Nee, Keny-Guyer explains why disasters can create opportunities to change society for the better, why Mercy Corps spends as much time making plans to exit a country as it does getting ready to enter one, and what steps he is taking to turn Mercy Corps into a learning organization.

Eric Nee: Your 2008 annual report is headlined “Turning Crisis into Opportunity.” Why did you pick that phrase?

Neal Keny-Guyer: We focus on countries in transition—the fragile states where there has been a crisis of some sort, either a natural disaster, a political or economic collapse, or a war or conflict. We believe that a crisis often opens up opportunities for profound changes that can be harder to accomplish in a normal situation. Sometimes a crisis can remove a corrupt government or unfreeze bureaucratic inhibitors and enable fresh ideas to take over.

Is a country ever too unstable for Mercy Corps to enter?

I can’t think of a situation in which we chose not to go in because it was too unsafe. Just look at the countries we operate in now: Iraq, Afghanistan, and Somalia. If you are operating in Somalia today, you probably have a high threshold for risk.

In Somalia, where there’s almost no functioning government, there is plenty of opportunity for relief, but how much development work can you actually do?

You clearly have to take a longer-term view in a situation like that. We are there because there is a compelling humanitarian need, and we have some amazing Somalis who know the country and who are social entrepreneurs in the best sense of that word. By working in Somalia now we can lay a foundation for community mobilization, so that when there is a local or a national government that citizen groups can work with, these communities will be more prepared.

Were you in Haiti before the earthquake?

No.

Wouldn’t it have been better to be in Haiti before the quake helping to build better homes and create more jobs, rather than trying to deal with the crisis after hundreds of thousands of people have died and a million or so people have become homeless?

Absolutely. Haiti was one of two high-poverty countries we weren’t in that we wanted to be. The other was Yemen. We had sent assessment teams into both countries and we were looking for an opportunity to become engaged. It was about that same time when the earthquake hit. So we were fortunate in that we had already done some prep work. That’s why we were able to move in very quickly. And because the earthquake was so severe and so many NGOs that were already on the ground lost staff and offices, this may be the first time I can think of when not already having a presence in a country struck by a major disaster was not a bad thing.

But you’re exactly right. Disaster risk reduction is critically important, and we wish there were more donors that would fund us and others to go into vulnerable communities that we know are at risk, because there’s a lot you can do before a disaster.

Now that the earthquake has happened, this crisis may have created an opportunity for significant change in Haiti.

It does present some new opportunities to address the underlying causes of Haiti’s poverty and poor governance. If there’s anything redemptive to come out of the earthquake, it will be that. It can also shake up the community of aid actors. It’s not that anybody there was necessarily doing bad work, but a crisis can spawn new thinking. It can help create new ways to invest in the countryside, new economic opportunities, and new ways to engage citizens to make the Haitian government more accountable and less corrupt.

Aren’t the skills required to provide relief quickly to a devastated area very different from the skills required to help rebuild a country’s civil society?

Yes and no. Yes, there are some specific skills and resources required for relief. For example, you need warehouses with standing emergency relief supplies and well-developed logistical networks and capacity, and the ability to provide immediate emergency health care.

The reason I say no is that not every organization needs to develop those capacities to be effective in providing emergency relief. Almost from day one there are elements of relief, recovery, and long-term development. For example, there have been enough studies that suggest that the extent of the recovery of the local private sector will determine how successful and how rapid the whole recovery is. From the beginning you can purchase local food and help organize local businesspeople. Local businesses can often provide food more quickly than outside actors who ship in food. You can almost immediately start paying cash for work to those affected by the crisis. If you can get money into people’s hands, they don’t feel totally helpless and it helps maintain their dignity. The money also helps rebuild the local private sector.

Why are market-based solutions central to your approach?

Market-based solutions are a bit of a proxy for demand-driven solutions. It is a way to tailor your solutions to what people want that’s culturally appropriate and that makes sense from a local standpoint. That’s in contrast to a solution being created from the outside and then imposed on a community. It ties into another principle of ours, that those most affected by a crisis or a challenge are always the best agents of their own recovery and development.

When you look at microfinance intervention, health intervention, or many other types of interventions, the evidence is clear that if you don’t have community participation in the design and implementation, it’s not going to work as well. People are always the best agents of their own change. Even in the evaluation phase, whatever the impact indicators are, they’re not going to be as strong if you don’t have community engagement.

The tougher thing to measure, for Mercy Corps and for the whole relief and development community, is whether we really move the needle in countries where we operate. In the communities where we invest we can create change, but that’s a microcosm of the whole country. How can we evaluate the overall economic impact of our programs? Those are the hardest indicators, because you need to do the evaluation longitudinally, something we don’t always have the resources to accomplish.

Speaking of moving the needle, one thing I am struck by is the large number of countries where Mercy Corps operates, some of which—like China, India, Indonesia, and Pakistan—are among the largest in the world, representing close to 50 percent of the world’s population. If you want to have an impact on an entire country and not just on a small locality, shouldn’t you focus on fewer countries?

You sound like our board, Eric. Here is how we think about that. We want to be considered one of the leading international relief and development organizations in the world. To be in that group you need to have sufficient presence in Asia, Africa, and to a lesser degree South America. That translates to around 30-plus countries, but you don’t need to be in 80 or 90 countries as some of our colleague organizations are. To be invited to the forums and to be at the leadership table, you need to have a sufficient presence in those 30 or so countries.

The reason we’re in China and India, frankly, is that sometime in the next 10 years those two countries are going to be major players and we’re going to be raising resources in those countries. So we need to be there building credibility now, and the best way to build credibility is to help them with some of their own development challenges. I wouldn’t consider either country a fragile or failing state in the way that the Central African Republic, Somalia, Afghanistan, or any number of other countries where we work are.

Mercy Corps engages in a wide variety of local activities—from setting up vaccination programs to building soccer fields and running agricultural training centers. Is there anything that you won’t do? And with so many activities, how do you take the learning that occurs in one country and impart it throughout the organization?

Let me start by saying that we’re not going to go off and suddenly become a health organization. We think there are a lot of other organizations that do a great job in health, and we wouldn’t add any value by being yet another one.

Most of the things that we do can be grouped around emergency relief—things like water and sanitation and helping children with their psychosocial needs—or around building civil society—such as creating sports organizations and microfinance institutions—which is where most of our work occurs. If you look at our in-house technical capacity that is top-notch and contributes to best practices, you will find it in those two general areas.

As for learning, when you find an organization that is doing a great job of capturing lessons learned and disseminating them throughout the organization, please call me. Let me tell you about a few things that we are doing. We created an intranet within Mercy Corps that has various communities of practice, such as agricultural development. Within these communities we have online chats or Skype rooms where folks who are doing that type of work around the world can contribute.

We have a design, monitoring, and evaluation team that is trying to build the capacity within all of our field offices to do good program design. It is hard to do an evaluation if you didn’t get the design phase right, because you don’t have the baseline data. We also have a digital library that everyone has access to where we post every evaluation, examples of great and poor proposals, and other materials.

One thing we’ve done as well as any nonprofit is to invest in management. Compared to the for-profit world, the nonprofit world underestimates the importance of management and leadership. We have put our major leaders through programs that are sponsored with the Center for Creative Leadership. We’ve had partnerships with a couple of universities where we really tried to invest in training our national staff. If you don’t create strong managers and leaders, it’s really hard to build a culture of learning.

One of the things that sets Mercy Corps apart is that you talk openly about leaving countries that you are in. You even go so far as to say you plan to exit most countries after 10 years. Why do you do this?

About seven years ago we first began explicitly talking about this in our own orientation and learning materials. We did it for a couple of reasons. We wanted to signal clearly that we’re not one of these organizations that sees itself staying in a country forever. And we wanted to signal to our teams, and in particular our country leaders, that it’s important to begin thinking about an exit strategy almost from day one. What that does is get you focused early on issues like sustainability, capacity building, and leaving behind a legacy.

In most of the countries we are in, it’s hard to create significant changes in anything like three to four years, or even five to six years. So 10 years seemed to capture our belief that there are no fast fixes or quick exits. But it also signaled that we’re not going to be there forever.

Last year we exited Bosnia and left behind two strong institutions. One is a local NGO that carries on development work. We had a five-year plan to create this organization. It started with building a governance structure that ensured the whole team was Bosnian, and laid out mileposts to reach along the way to localization. Now it’s a strong organization that has relationships with its own government and raises money locally, and a top-notch team of local leaders.

We also left behind a microfinance institution that makes money as a bank and has received awards for best practices in microfinance. Those two organizations alone are not going to solve all the problems of Bosnia, but having national institutions that operate with good governance, and with well-trained, local, talented team members, is a worthy contribution.

We have also exited from the Philippines, Serbia, and a number of other countries over the last 10 to 12 years. During that time the total number of countries we operate in has stayed between 34 and 40. Some fall off and then a Haiti comes on.

When you leave behind a local NGO, do they maintain an affiliation with Mercy Corps?

We try to do that. If they want to stay in touch with the learning that’s going on in Mercy Corps, they can do that; we encourage that very strongly. We invite our legacy institutions to our gatherings so that they can come and feel like they are a part of the team. But they are completely independent organizations. We don’t have any say in their running or management.

Much of your organization’s work is about getting people to help themselves. Yet the name Mercy Corps sounds like a religious organization that provides charity to the poor. Why is that?

Three or four years ago we brought in [the advertising firm] Foote, Cone & Belding to help us with a rebranding exercise. We were wide open to changing our name. They went around the world and interviewed our staff, the people we work with, the communities we are involved in, and our donors. They concluded that we’ve built up enough cachet with our brand that it would be dangerous to tamper with it. We brought together our global leadership and presented those findings, and there was general consensus to keep the name. We worked hard to build our name, and we’re going to let our work reshape the brand.

Indeed, when she first started working behind the counter at Mission Pie, ingredients like turnip and butternut squash were as foreign as quiche. But as a place to work, the bakery-café has found a steadfast fan in Lee. When she started as a 17-year-old intern, Lee was so terrified of customers that she would root herself to the sink and wash dishes. Three years later, she has had raises in pay, responsibility, and confidence—opening in the morning, supervising other workers during the day, and keeping up small talk with the regulars who file in on weekends. The bakery even helped raise money for her to join an educational sailing program in the Caribbean.

“Working here just opened everything,” says Lee, a budding hairdresser who gets to the café via a two-bus commute from her home in the city’s Bayview-Hunters Point neighborhood. There, she says, the sound of nighttime gunfire isn’t uncommon. “I understand so much more about life.”

Such transformations were high on Karen Heisler’s list of hopes when she opened Mission Pie in January 2007. Heisler had never run a food business, or even baked professionally. Yet she sold her three-bedroom house to fund a for-profit force for good: Mission Pie would offer job experience for at-risk urban youth while supporting local farmers. And it would do so while making money.

Three years later, Mission Pie is riding a wave of consistent profitability, buoyed by a tripling of revenue from about $300,000 in 2007 to $885,000 in 2009, all while training about 20 youth interns. It has had these successes even while holding its prices low so that everyone can participate in sustainable agriculture—an area too often tagged as a wealthy person’s concern—and community development. Along the way, the bakery-café has forged creative partnerships with other local farms, businesses, and organizations.

FROM SCRATCH

Heisler had previously pursued her interests in youth and food in the nonprofit realm. In 2002, she was a federal environmental policy analyst yearning for a more hands-on way to support sustainable agriculture. With two partners, she bought 14 acres of farmland near the Pacific Ocean an hour south of San Francisco. The land became “Pie Ranch,” and welcomed young students to farm and then bake pies with the produce they helped grow.

The pie in Pie Ranch was partly a clever marketing ploy to lure city kids to the farm. But it was also a powerful prompt for discussing social justice issues—like “Who gets what piece of the pie”— and for exploring the connection between what we eat and how it grows. The pies also built camaraderie. Nobody bakes a pie for one.

But as a city dweller, Heisler wanted to raise those issues closer to her home turf. That feeling grew after she learned that many kids could not visit the farm with their families because they lacked cars. At the same time, she knew the city could seem just as inaccessible to farmers, who felt unappreciated in an urban environment. Perhaps a pie shop could also bridge the two worlds, benefiting both.

Thus ensued a year of brainstorming, during which she and a half-dozen like-minded thinkers imagined everything Mission Pie could be while coming to grips with the realities of the business. Sometimes they would sit in other cafés, quietly measuring what volume they might expect. But nobody figured on the demand that has since transpired.

To meet that demand while keeping wages high and prices low, Mission Pie runs a very tight ship. “If it’s time to make apple galette, we don’t make eight, we make eight dozen,” says Krystin Rubin—who started as operations manager and quickly became co-owner with Heisler. “We make a lot of pie, and we don’t make a lot other than pie.”

Mission Pie’s success has let Rubin and Heisler invest in causes that overlap with the business and their beliefs. True to its roots, the bakery is a big supporter of Pie Ranch, which is a separate entity. (Heisler no longer directs the ranch.) The bakery supplies pies to Pie Ranch at wholesale prices for resale. It also pays a premium for the farm’s strawberries and wheat—an ideal situation for Pie Ranch, says Jered Lawson, the farm’s executive director. A high-volume urban business has cash flow and public exposure of which a remote nonprofit can only dream.

Indeed, when local growers could only provide a fraction of the heirloom wheat needed for the bakery’s crusts, Mission Pie bought a rusty 1953 combine harvester for Pie Ranch to share with neighboring farms. The $5,000 donation boosted wheat production from about a third of an acre to 10 acres.

One small ranch, though, can’t fulfill all the café’s needs, and Mission Pie has worked to establish steady sources of ready-to-eat produce from numerous small local farms, a benefit that goes right to customers’ bellies. Mission Pie’s desserts, for example, need less sugar than many pies made with wholesale fruit, which is picked to withstand days of storage, rather than when it is ripe.

Direct connections with local farmers have also led to more creative partnerships. When the bakery staff couldn’t find an organic rhubarb farm closer than Oregon, they approached Blue House Farm in Pescadero, Calif., which already supplied strawberries and tomatoes. Blue House was eager to add the new crop, but struggled with the up-front costs. So Mission Pie fronted $1,500—an expense it will recover in rebated rhubarb. In turn, Blue House has begun using its trips to Mission Pie as a drop-off for its subscription deliveries to the city, which then brings more people concerned about sustainable agriculture into the bakery’s orbit.

PREP WORK

In San Francisco, which has a wealth of eateries touting sustainable foods, running a locally sourced bakery is almost ho-hum. For Rubin, who had earlier started a successful bakery in Boston, what makes Mission Pie exciting is its unofficial philosophy: “Do More.” For the pie makers, “doing more” includes taking on a steady stream of interns, usually at risk teenagers with learning disabilities. The youth interns account for about a sixth of the workforce, but dominate the café’s thinking. Everyone is a model and mentor to the newcomers.

Often, the bakery hires students from nearby Mission High School (a multi-ethnic school with notable alumni such as rock star Carlos Santana and Pulitzer Prize-winning poet Maya Angelou) who have completed Pie Ranch’s program. From the beginning, the bakery attracted agencies like Jewish Vocational Service (JVS), which now administers the state-funded WorkAbility program that pays many of the interns’ wages.

About half of the café’s current workers are former interns like Lee. But permanent employees aren’t the café’s goal. Instead, Heisler and Rubin want interns to walk away with a positive relationship to work, an understanding of appropriate conduct, and a strong letter of recommendation. As with baking, Rubin says she’s found that the most important ingredient in mentoring is repetition.

The heavy involvement with the interns has made Mission Pie a model employer, says Kevin Hickey, JVS’s director of youth programs. Even small things—like scheduling so that workers who live in dangerous areas do not have to commute in the dark—make a huge difference, he says. In 2008, JVS named the bakery “Employer of the Year,” and Hickey says that among the hundreds of businesses with which he works, Mission Pie ranks in the top three.

“They’re a true partner,” agrees Tess Reynolds, CEO of New Door Ventures, another job preparedness service that helps young people, many of whom are in foster care, have dropped out of high school, or have had brushes with the law.

The bakery does little to advertise its good deeds. But over time, customers figure out that there’s more to Mission Pie than delicious pastry, Heisler says. Perhaps the occasional uneven service by an intern tips them off to the café’s mentoring program. Or customers may learn that the reason why the café serves walnut pie, rather than pecan pie, is that walnuts are more plentiful in the Bay Area.

By letting customers figure out Mission Pie’s mission, rather than hitting them over the head with it, the bakery gives its customers a sense of discovery and connection, Heisler says. “It offers people an option to feel that they’re participating,” she says. “A lot of people are looking for something more than just an exchange of goods. They want to contribute to something.”

Going forward, Mission Pie plans more of the same—expanding relationships with local farms and adding interns. A second retail-only outlet may be in the cards. In the meantime, imitation would be the sincerest form of flattery. “If the exposure this business has inspires other businesses to do some similar things, to create some similar relationships—even outside the food industry—that would be a success,” Rubin says.

Sam Scott is a San Francisco-based freelance writer and editorial consultant. He previously worked for seven years as a reporter for the New York Times Regional Media Group.

A low-tech alternative incubated on the Stanford University campus is now getting ready to roll out in India, which has an unfortunate corner on the world market of low-birth-weight babies. Embrace, a fledgling nonprofit, will soon begin distributing a baby warmer that looks like a miniature sleeping bag. It features a special insert containing a waxy compound. When heated by hot water, this phase-changing material maintains a constant temperature of 98.6 degrees Fahrenheit for up to four hours. At a unit price of about $25, the baby warmer is a low-cost but potentially highimpact innovation.

Embrace CEO Jane Chen was part of the product development team, which included engineering and business students in a class called Entrepreneurial Designfor Extreme Affordability. By the end of spring term 2007, they had reviewed medical research, dispatched a team member to Nepal for fieldwork, and come up with a basic prototype for the sleeping bag.

“We knew we were sitting on a great idea,” Chen says. They had other matters to attend to—such as finishing graduate school—before incorporating as a nonprofit in early 2008. That same year, Chen and cofounder Rahul Panicker were named Echoing Green fellows. Prizes and additional foundation support brought their 2009 budget to $400,000. A high-powered team of advisors includes Stanford President John Hennessy.

To gather more grassroots feedback, Chen traveled to India to share the prototype with the “midwives and moms” who will be the intended audience. “There was great receptiveness. This was something that people just understood immediately,” she says. Focus groups added critical feedback. Indians recommended against using white, for instance, because that’s the color associated with death and mourning. Design iterations have resulted in a product that’s waterproof, reusable, easily repaired, and made to fit snugly against a mother’s chest to ensure newborn bonding.

Embrace expects to start distributing in 2010 through a network of health professionals, midwives, and NGOs. To build its grassroots network, Embrace moved operations to India in early summer. In Hubli, located about 250 miles north of Bangalore, Embrace is the newest player in a regional “sandbox” funded by the Deshpande Foundation, a family foundation based in Stoneham, Mass.

“We’re trying to create an ecosystem for innovation and entrepreneurship in this region of India,” explains Nishith Acharya, the foundation’s executive director. Foundation support brings logistical help, including transportation and office space for the Embrace team and interns. It also means introductions to the 70 other NGOs at work in the sandbox, along with others whose buy-in will be critical to ramping up distribution and marketing efforts.

Stater and coauthor Deborah Carroll, an associate professor of public administration and policy at the University of Georgia, looked at all the nonprofit organizations registered with the Internal Revenue Service—almost 300,000 of them—over the course of 13 years (1991-2003). “As nonprofits become more diversified, depend more equally on a variety of funding sources, they reduce their financial volatility,” says Stater. “When they experience a loss in endowment, or donors are no longer able to donate, they are able to turn to another source of income to bridge the gap.”

A good example of an organization with a diversified revenue portfolio is a university, says Stater. They have endowments (investment income), charge student tuition (earned income), and receive contributions (donated income), and that has helped them weather recent storms. Nonprofits that rely primarily on donations experience more financial volatility over time. The researchers recommend adding grants and investment or earned income.

Does this mean that nonprofits should try to pursue three equally sized income sources? Not necessarily. The study shows that institutional size matters more than diversification. Larger nonprofits with higher growth potential are more likely to achieve stability “because they have more institutional flexibility,” says Stater.

Although an even spread among income sources may contribute to stability, William Foster, a partner at the Bridgespan Group, argues that it does not contribute to growth. “The key to growing, from our research, is developing a particular source that’s a good match and that you’re a specialist in,” says Foster. “The most successful high-growth organizations are actually highly concentrated by source [such as government funding or public donations]. Ninety percent of the organizations that reach $50 million have 90 percent of their money coming from a single source.”

Foster agrees with Carroll and Stater that it’s a bad idea to rely entirely on a single source, but he says it doesn’t take much of a secondary or tertiary source to make a big difference. “Their study showed that the first 5 or 10 percent of diversification matter the most.” This should offer some measure of relief. “It’s hard enough for nonprofits to do one really, really well, to find one source that is actually a good enough match with their work to grow,” says Foster.

Deborah A. Carroll and Keely Jones Stater, “Revenue Diversification in Nonprofit Organizations: Does It Lead to Financial Stability?” Journal of Public Administration Research and Theory, 19, 2009.

With police pressing for a confirmation, the boy identified Bain as his attacker—a claim that would later trump defense testimony that Bain’s blood type ruled him out as the rapist. In August 1974, Bain, just 19, was sentenced to life in prison. And in prison Bain likely would have died. But in the spring of 2009, his case caught the attention of the Florida affiliate of the Innocence Network, an international collaboration of pro bono legal and investigative organizations dedicated to righting wrongful convictions.

The Innocence Project of Florida had no idea if Bain was innocent, says Seth Miller, its executive director. They believed only that he had the right to a test that would add certainty to the verdict. With the project’s attorneys behind him, Bain’s years-long quest for DNA testing was granted. In October 2009, a lab examined sperm from the victim’s underwear. By December, results were in. Bain was not the rapist. Thirty-five years of wrongful imprisonment were about to end, thanks to a test that took two months to process.

On Dec. 17, 2009, Bain walked out of court a free man with a singular title—the person who had served more prison time than anyone yet exonerated by DNA testing. Otherwise, Bain’s story was alarmingly common. Since the first DNA exoneration in 1989, more than 250 people convicted in the United States have been cleared by DNA tests, a number that has risen faster as technology has improved. In 2009 alone, there were 22 DNA-based exonerations. “People are sort of enamored with the Bain case,” Miller says. “But I don’t know that his case is remarkable in any other way other than the length of incarceration.”

AN ADAPTABLE MODEL

Exonerations like Bain’s have made the Innocence Network a media darling. Books, films, and TV shows have covered its dramatic work, making wrongful convictions one of the most talked-about criminal justice issues of our time. But less attention has been paid to the network’s organizational style, which has enabled it to grow rapidly and flexibly. Over the past decade, the Innocence Network has multiplied from eight projects to a collection of nearly 60 projects spanning three continents.

The Innocence Network stands out as one of the most successful examples of the affiliate model of nonprofit growth. Most nonprofits follow the branch model, which concentrates control at a central headquarters. The less popular affiliate model favors decentralization, uniting loosely bound groups under a common cause. Some network members are 501(c)(3) organizations. Some are located within public defenders offices or private law firms. Most are part of law schools. Some take only cases with DNA evidence; a few take only those without it. Most pursue cases through legal services, though a couple approach them as investigative journalists.

“This model allows each project to adapt its service delivery method to the resources and needs of each local community,” says Keith Findley, president of the network and a law professor at the University of Wisconsin.

The network’s affiliate approach is less the result of well-honed strategy than of happenstance in the organization’s earliest beginnings, Findley says. In 1992, Manhattan defense attorneys Barry Scheck and Peter Neufeld founded the first Innocence Project at the Benjamin N. Cardozo School of Law in New York, tapping into the energies of students eager to help at a law clinic focused on using science to free the convicted.

At the time, forensic DNA was still a fledgling idea. But the men saw its unparalleled power not only to undo injustice in individual cases, but also to expose systemic conviction problems. Their hunch was right. A year after the Innocence Project’s start, Kirk Bloodsworth, a Maryland man convicted of raping and murdering a 9-year-old girl, became the first death row inmate exonerated by DNA fingerprinting. DNA not only freed Bloodsworth, it later established the real murderer, a man Bloodsworth had come to know in prison.

As awareness of DNA’s power to expose wrongful convictions expanded, Scheck and Neufeld recognized they couldn’t take on cases across the country and began assisting others to form similar groups. In 2000, eight of the groups—including the Innocence Project in New York and two successful projects at Northwestern University—formed the Innocence Network, a collaboration of like-minded organizations that could lean on each other for assistance and know-how across professional and geographic lines.

Membership since then has exploded. The network celebrated its 10th anniversary in April with groups in practically every state along with Canada, Great Britain, Australia, and New Zealand. The growth has stemmed in part from Scheck and Neufeld’s Johnny Appleseed approach, in which they encouraged professors, public defenders, and students to get involved. Theresa Newman, a clinical professor of law at Duke University and former president of the network, says the North Carolina effort began after Scheck and Neufeld lectured before law students who then rallied professors to the cause.

In other instances, new laws and increasing demand for DNA testing practically forced the creation of a local Innocence Project. The Florida project that helped exonerate Bain, for example, started in 2003 with guidance from New York to handle an onslaught of petitions to meet a state-mandated deadline for post-conviction DNA testing. Still, network members are only loosely tied. It wasn’t until 2005 that the network created a board of directors, whose 18 members meet twice a year, mainly to discuss ongoing cases, review new members, and plan an annual conference, says Maddy deLone, executive director of the Innocence Project in New York. No group is legally bound to another.

Yet there’s no doubt the groups help each other. The network serves as a way to pool resources, connections, and expertise. Professors share lesson plans. Attorneys tracking down witnesses may ask for recommendations for investigators. And in crunch times, the network can offer backup support. Jeff Chinn, assistant director of the California Innocence Project in San Diego, recalls when Innocence Project New Orleans sent an emergency request for help meeting a filing deadline with the Louisiana Supreme Court. The California project relayed the call to two San Diego appellate lawyers, who jumped in. “I can’t imagine doing this work in the relative darkness of our home states without communication with each other,” says Newman.

Although collaborative, each network member is responsible for raising its own money. Law schools, with their institutional support and tradition of legal clinics, have made natural homes for Innocence Projects. But other models also have thrived. The New Orleans project, an unaffiliated nonprofit, has freed 15 prisoners, one of the best records in the network. Yet deLone says that starting such independent groups can be financially tough.

“If you can start a project at a law school with the support of the administration, you are halfway there,” she says. “If you are constantly raising your operating budget, it’s putting a burden on yourself before you open a letter from the first client.”

Ultimately, new applicants must satisfy the network’s board of directors that they have the necessary resources. If a university wants to start a project, for example, there has to be faculty support that will outlast the interest of any one group of students. New members also must reach agreements with existing projects in their region to determine how they will divvy up cases. Applicants receive provisional membership at first; then, after 18 months, the board can vote on a project’s permanent status.

A COLLECTIVE VOICE

The network’s board also puts its combined heft into filing “friend of the court” or amicus briefs, using a collective voice to ask judges to consider issues in a case’s background, such as the fallibility of confessions. Perhaps the network’s greatest impact has been to identify errors before they become courtroom evidence. Eyewitness identification, for example, is particularly problematic. Bain went to jail for three decades because of an eyewitness mistake. Bloodsworth almost died because of it. According to the Innocence Network, erroneous eyewitness identifications contributed to more than 75 percent of convictions later overturned by DNA evidence.

Led by the Innocence Project in New York, the network uses these data to push for reforms, such as blind administrations of police lineups, in which the officer in charge is unaware of the suspect’s identity and therefore can’t accidentally steer results. Since 2000, network members have helped convince legislators in New Jersey, Ohio, North Carolina, Maryland, West Virginia, Wisconsin, and Georgia to implement changes in eyewitness policies.

As important, the network’s lobbying efforts—and its track record of success—have pushed states to pass laws granting access to post-conviction DNA testing. In 2000, only two states had such laws, according to Eric Ferrero, director of communications for the Innocence Project in New York. In 2010, 45 states and Washington, D.C., have such statutes.

The ideal, though, would be to go out of business one day, says Findley. But improvements in technology mean there will always be cases where DNA can be tested when once it couldn’t. There will always be cases where the defense didn’t think to look for DNA in trial. And there will always be mistakes that have nothing to do with DNA. “As much as we’d like to work ourselves out of a job and have a perfect system, it’s a human system and humans make mistakes,” Findley says. “Those mistakes will continue.”

Sam Scott is a San Francisco-based freelance journalist. He was formerly a reporter for the New York Times Regional Media Group. Jessie Speer is an attorney and freelance writer based in Tucson, Ariz.