Capitalizing on Convergence By James E. Austin, Roberto Gutierrez, Enrique Ogliastri, & Ezequiel Reficco Stanford Social Innovation Review Winter 2007 Copyright © 2007 by Leland Stanford Jr. University All Rights Reservedby JAMES E. AUSTIN, ROBERTO GUTIÉRREZ, ENRIQUE OGLIASTRI, & EZEQUIEL REFICCOILLUSTRATIONS BY JOHN WEBERIN THE 1960S, BUSINESSES AND NONPROFITS TRUNDLEDalong on separate tracks, having little to do with each other. IBM’s over-whelmingly male workforce, for example, may have donated to Goodwillduring the holidays, or volunteered with the Boy Scouts on the weekend.But come Monday morning, employees were back in their blue suits andred ties, ready to widen their company’s profit margin. For their part,Goodwill and the Boy Scouts were pleased to receive donations and vol-unteers. But they didn’t expect much else from IBM, or, for that matter, fromany other business.Over the past three decades, however, that has all changed. The pathsof businesses and nonprofits have not just crossed; they have converged. Inthe 1970s, corporations started listening – albeit reluctantly – to nonprof-its, as environmentalists clamored for more Earth-friendly practices. Thenthe 1980s ushered in Margaret Thatcher, Ronald Reagan, privatization, andthe slashing of government social services. Charged with serving the worldon a shorter shoestring, nonprofits had to become more entrepreneurial,Nonprofits and businesses are converging – in the value they create, the stakeholders they manage, the organizations they form, and the financial instruments they use.The era of convergence is upon us. Do you know how to take advantage of it?24 STANFORD SOCIAL INNOVATION REVIEW / winter 2007 www.ssireview.orgCapitalizing onconvergence~ DO NOT DISTRIBUTE ~ FOR PERSONAL USE ONLY ~~ DO NOT DISTRIBUTE ~ FOR PERSONAL USE ONLY ~efficient, and professional, and so looked to business for man-agement models. Meanwhile, corporations began increasingtheir social contributions and even started delivering social ser-vices commercially, such as healthcare, childcare, eldercare,education, and prison management.Next came the telecommunications revolution of the 1990s,which not only shone a spotlight on environmental and labortransgressions around the world, but also helped consumersorganize against offending corporations and governments.With the 2000s came a slew of scandals in both sectors, whichleft donors and shareholders alike demanding that nonprofitsand businesses more clearly account for their activities.Now it’s 2007, and the business and nonprofit sectors haveso much in common that it’s sometimes hard to tell themapart. IBM partners with the nonprofit Women in Technologyto co-host an engineering camp for middle-school girls andhas become a national champion for excellence in public edu-cation. And though Goodwill Industries still accepts donations,it’s as much a booming business as it is a charity: Goodwill’s $2.21billion in revenue from nearly 2,000 stores made it one of thetop 15 discount retailers in the United States in 2003.IBM and Goodwill are not alone. In our research, we findthat nonprofits and businesses are converging much morequickly, broadly, and deeply than most people suspect. Throughour studies in the United States and Europe, as well as ourrecent work with the Social Enterprise Knowledge Network(SEKN) in Latin America and Spain1(see sidebar on p. 27), wesee many areas of convergence between the two sectors. In thisarticle we explore four of the most important areas: value cre-ation, stakeholder management, organizational structure, andcapital mobilization. This multifaceted melding of the sectorscreates opportunities to improve not only nonprofits and busi-nesses, but also society as a whole. Seizing these opportunities,however, requires a new managerial mind-set.Creating ValueBack in the 1960s, everyone knew that nonprofits created socialvalue, whereas corporations created economic value. But thisdichotomy no longer holds. As the nonprofit sector growsfaster than does its funding, nonprofits keep pioneering waysto fill their coffers, often by creating income-generating oper-ations. For example, the biggest charitable organization in Mex-ico, Nacional Monte de Piedad, I.A.P., stocks its kitty by runningpawnshops. And in the United States, the YMCA networkreports that it earned the bulk of its $5.06 billion revenues in 2005from its health and fitness, childcare, and camping services.Indeed, some critics, including Burton Weisbrod of North-western University, believe that nonprofits are unfairly encroach-ing on business’s terrain.Globally, nonprofits earn 57 percent of their income fromselling services and goods, but only 13 percent from privatedonations, according to Lester Salamon and colleagues’ bookGlobal Civil Society: An Overview. Some nonprofits even outpacetheir for-profit and public sector counterparts, such as Associ-ação dos Pequenos Agricultores do Estado da Bahia (the Asso-ciation of Small-scale Farmers of the State of Bahia, or APAEB),a Brazilian nonprofit that aims to improve the living standardsof the sisal growers of Bahia. For-profit companies were notcreating business opportunities in this impoverished, drought-stricken region of Brazil, so APAEB decided to create thoseopportunities itself. The organization first coordinated pro-duction among hundreds of independent sisal growers, thenexpanded into transporting and processing the fiber, and ulti-mately began manufacturing sisal cords, rugs, and carpets. Intwo decades, APAEB created 3,900 jobs in a city of 20,000people, and the region’s per capita income tripled. At the sametime, APAEB’s own assets went from $4,000 to $9 million.APAEB now injects more funds into the local economy thandoes the local government.Meanwhile, corporations assume more and more socialresponsibility, viewing it as good for business. Starbucks, forinstance, figures that it saved about $36 million – about 20 per-cent of its net income in 2001– because the company’s sociallyresponsible projects helped keep employees loyal and thereforereduced turnover costs.2And the outdoor apparel company Tim-berland believes that giving employees paid time off to performcommunity service attracts, develops, motivates, and retainssuperior personnel.National and global data reflect corporations’ growing com-mitment to social responsibility. Almost all Fortune 500 companiesnow make charitable