Newsweek International on NGOs as global businesses

Thanks to Don D'Cruz for sending along this article from Newsweek International on the business of international NGOs:

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Where the Money Is
The $1.6 trillion non-profit sector behaves (or misbehaves) more and more likebig business.
By Rana ForooharNewsweek International
Sept. 5, 2005 issue -

If it wasn't for the raffia coasters and folk art in her office, it would be tough to tell Oxfam GB director Barbara Stocking from the CEO of a multinational corporation. She's got the no-nonsense manner, and the power broker's schedule. A glance at her summer calendar shows a meeting with EU Trade Minister Peter Mandelson, a fund-raiser with European business leaders, aprep session for a meeting with the World Bank president, a trip to the G8 summit in Scotland. Minions shuffle in and out, briefing Stocking ondevelopments affecting Oxfam projects: tsunami relief, elections in Ethiopia, a Chilean earthquake. "Right, is that all the disasters?" she asks briskly.

Stocking says it's her mission to "save the world." But unlike many do-gooders of the past, she's doing it in a suit rather than sandals and so are many others. Spurred by a growing number of global conflicts, increased outsourcingof aid work by Western governments and the boom in private philanthropy, nongovernmental organizations like Oxfam have become big business. In the first global estimate of just how big, the Comparative Nonprofit Sector Project at Johns Hopkins University studied 37 nations and found total operatingexpenditures in 2002 of $1.6 trillion. To put these figures in context, the authors point out that if nonprofits were a country, they would have the fifth largest economy in the world. The sector is dominated by charity schools and hospitals, which account for 57 percent of the expenditures, and includes everything from soup kitchens to professional associations, as well as aid-cum-activist NGOs like Oxfam. Yet just by adding up the fast-growing budgetsof the biggest NGOs, it's clear these increasingly visible players on the global political scene have become a multibillion-dollar industry.

The result is a growth story with few parallels in the annals of business, for as NGOs boom they face tensions unique to their mission. What is the bottom line for a nonprofit? How to judge success, or regulate and police a sector in whichmany executives now make good money, yet still are not exactly in it for the money? All these gray-area issues are coming to the fore now, more than 10 years after a U.N. investigation into the debacle of aid to Rwanda produced calls for greater accountability, and on the eve of a big NGO summit at the U.N. next week. ''Currently, a lot of money is being channeled to good causes, through organizations we know very little about," EU antifraud commissioner Siim Kallassaid in March. ''Noble causes always deserve a closer look." Next month, in response to scandals in the NGO world, U.S. Sen. Charles Grassley is due to introduce rules for nonprofits modeled on Sarbanes-Oxley, the corporate-governance code inspired by the scandals that began with Enron.Remarkably, nonprofits grew faster than the rest of the U.S. economy even during the late-1990s boom that produced Enron. The director of the Johns HopkinsCenter for Civil Society Studies, Lester Salamon, says that U.S. nonprofit expenditures grew 77 percent faster than the American economy as a whole between1977 and 1999, and did not miss a beat in the ensuing recession. As the U.S.economy fell into a "jobless recovery," with total employment falling between2001 and 2004, employment in the nonprofit sector grew by 2 to 4 percent a year.While international data are sketchier, Salamon says the largest developed countries show similar trends. In the U.K., employment in the voluntary sector increased by 17.7 percent between 1995 and 2000, compared with an 8.5 percentincrease in the for-profit sector.

A big reason for this is the growth of the global service economy. Most NGOs are, after all, service providers, delivering things like health care and education. They are also dropping their image as anticapitalist do-gooders and adopting the look of the Fortune 500 companies that they have been known to criticize. With multibillion-dollar budgets and responsibilities that range from fieldwork to fund-raising and lobbying, "economies of scale become very important," says Oxfam International executive director Jeremy Hobbs. ''Call it the 'moral economy,' if you like," says Nicholas Stockton, a former executive director and 20-year veteran of Oxfam. ''There's a market for good works, and it's big business."Where there is big money, there are consultants. Oxfam recently hired McKinseyconsulting to review its entire operation. Stocking, who was a high-level executive in the British National Health Service before coming to Oxfam, lists"finding great people with management skills" as her No. 1 challenge. "The ideological dispute of the 1990s on whether people within NGOs could be managerial and still have passion is over," she says. "We've realized we need toget more professional." The World Wildlife Fund has changed the title of its"country director" post to "CEO," and has annoyed lifelong greens by hiring business executives for these posts.In fact, salaries at nonprofits are rising as recruits arrive from the corporateworld. Marsha J. (Marty) Evans, president and CEO of the American Red Cross,manages a $3 billion budget, and makes $450,000 a year. She regularly hires from big businesses (her new finance director came from a major bank), or from one of the dozens of new NGO-specific business programs and courses at schools like Harvard and the London Business School. ''The days when you could keep funds in a cigar box are gone," says Evans. ''Our blood-donation program, for example, is run like a modern pharmaceutical business. When I'm spending $100 million on hurricane relief, I need people who can negotiate the best deals with suppliers."

NGOs are also increasingly looking for ways to raise money without governmentstrings attached. Oxfam has launched its own fair-trade-coffee shop in London's Covent Garden. The Chicago Children's Choir runs a singing-telegram business; one California organization for the homeless has started a property-management firm; groups like the Rainforest Alliance have taken consulting fees for advising timber firms on environmental issues. According to Johns Hopkins data, service fees paid to nonprofits (mainly schools and hospitals) account for about half their revenue, or nearly $880 billion a year.

Independent income allows NGOs to stand up to public donors. In Iraq, where theUnited States has pressured NGOs to display American logos on aid deliveries and to clear discussions with the press, the pressures are clear. Oxfam GB, which has 550,000 regular individual donors, was able to come out firmly against the war in Iraq; others, like American CARE (which gets about half of its $561million budget from the U.S. government), had to tread softly. The leverage of independent wealth is not, however, easy to come by: Bridge-span, a U.S.consulting firm, surveyed the business ventures of 41 high-profile U.S.nonprofits between 2000 and 2001, and found that 71 percent were unprofitable.

Still, the NGO business is set to get even bigger. But for a brief dip in the1990s, due in part to fiscal trouble in donor nations, international aid has been on the rise since the late 1940s and hit a record $78.6 billion in 2004, up from $59 billion in 1995. Experts say 2005 will bring a new record. And with governments everywhere privatizing just about everything in sight, the share of those aid flows that are funneled through private NGOs has nearly tripled from4.6 percent in 1995 to 13 percent last year (and roughly 30 percent for emergency relief efforts). Britain already provides much of its aid through NGOs and plans to increase funding for key groups by 40 percent in the coming year, strengthening the role of NGOs in British foreign policy.

Private aid flows are growing too: in the United States, the number of private foundations has tripled since the early 1990s.The result is a blurring of lines between aid workers and soldiers, government agendas and charitable missions. It's increasingly clear that like governments or companies, NGOs have vested political interests, as well as financial motives: the need to attract aid to stay alive. But unlike governments, they aren't elected. And unlike businesses, they aren't subject to the curbing forces of the marketplace. Global regulation is mixed at best. America and Britain have fairly rigorous reporting requirements for NGOs. In many other countries, there is virtually no government control. While many big NGOs like Oxfam, Save the Children and CARE have strong internal rules, NGOs as a class are generally much less transparent than business or government. ''In many ways, they are the least accountableactors on the global scene," says Alexander Cooley, a professor of political science at Barnard College in New York.

Such issues have been brewing for a decade or more. Several African governments have asked for ''mission holidays," as they don't have enough staff to coordinate all the groups offering aid, including some that are not fully qualified. ''It's not unheard of to have plastic surgeons who've never seen a case of cholera" operating in Africa, says James Bishop, head of InterAction, an umbrella group for 160 U.S. NGOs. Still, he notes, ''competitive pressures are afact" and can push groups to go where the action is in order to keep the aid flowing. Jagdish Bhagwati, a Columbia University trade expert, has criticized the expansion of groups like Oxfam and Action Aid into areas outside their core expertise. "These groups are huge and diversified, just like multinationalbusinesses," he says. "And like businesses, they have the profit motive, which pushes them into new markets." Bhagwati also criticizes NGOs for entering policy debates beyond their economic competence, particularly in attacking free-trade deals that help poor nations.

"There is a terrible tendency in this business to try and do it all ourselves,"admits Barbara Stocking, but she defends the NGO entry in the global-trade debate and says the roles of aid worker and policy adviser are now inextricably linked. "It all goes together, bottom to top. Decision makers only want to speak with me because I see what's going on at the ground level," she says. And sheer size can be a practical advantage. "We're in 120 countries," says Save the Children managing director Rudy von Bernuth. "The fact that we are there before conflicts start, and after they end, helps us maintain our neutrality, and that's crucial to security in conflict zones."

As in the corporate sector, scandal has brought the accountability question to the fore. High-profile incidents include the misuse of children's aid funds byU.S.-based groups in the late 1990s, the American Red Cross's use of 9/11donations for other causes, and a series of shady land deals by theWashington-based Nature Conservancy in 2003. A study by Harvard's Hauser Centerfor Nonprofit Organizations listed 152 incidents of misconduct by U.S.nonprofits between 1995 and 2002, including 104 cases of criminal activity; the author, Marion Fremont-Smith, does not view the numbers as alarming compared with recent corporate cases, but notes that as NGOs operate more and more like businesses, there will inevitably be a greater need for tighter rules and enforcement.

It hasn't been easy for NGOs to accept such scrutiny. Bhagwati says he "can always count on lots of hate mail" when he writes critically about NGOs.' 'Historically, there has been a sense that 'we're doing God's work, and couldeveryone please leave us alone?' " says John Elkington, head of SustainAbility, a consulting firm that advises both corporations and NGOs.That began to change after the 1994 genocide in Rwanda. As refugees fled to camps in Zaire and Tanzania, so did Hutu war criminals, who used the camps to regroup and run smuggling operations. Alex Cooley, who wrote about this chaos in''The NGO Scramble," says NGOs competing for short-term contracts from governments that didn't want to hear bad news had little incentive to report theHutu infiltrations. The problems triggered a massive U.N. review and a call for stricter accountability.

The effort to set clear rules is still controversial. Many NGOs rejected calls for binding standards. Nicholas Stockton says Americans worried about getting sued by Third World governments, while the French gave existential arguments about how aid, as an ''act of solidarity" between individuals, is impossible to regulate. The result: there are now many "global" codes of conduct to which various NGOs have signed on.There is also no clear way to rank performance. The more NGOs act likebusinesses, the more they struggle to find a bottom line - a nonprofitequivalent of profit. A number of for-profit consulting firms have sprung up toadvise donors and aid recipients on how to choose an NGO. Stockton, who now runs the Humanitarian Accountability Project in Geneva, is still trying to establish a ranking system with the support of groups like Oxfam, CARE and Save the Children.

But many resist. ''There's still a lot of naivete in the NGO world,"says Stockton. "We haven't been as good as we should have been at recognizing that we are a business."While NGO blunders resonate more powerfully than corporate ones because lives, rather than profits, are at stake, the industry is learning quickly. Recent missteps and scandals may turn out to be a kind of capitalist phase of creative destruction, spawning greater efficiency. Already, the NGO world is going through a shakeout, merging, streamlining and moving into specialty niches that make the best use of its specific strengths. The American Red Cross is eschewing controversial policy work and beefing up its relief-delivery systems. Many national branches of Oxfam, like the Dutch operation, are farming out on-the-ground tasks to local groups that can do them more cheaply, and sticking to lobbying around issues like trade and development. Action Aid, a well-knownBritish relief-and-development NGO, recently decentralized its operations and moved its headquarters to South Africa to be closer to its real customers.

Meanwhile, Oxfam GB continues to expand its reach. As the driving force behind the Make Poverty History campaign, the group will continue to play a major role in the trade, aid and poverty debate. It will shortly publish a piece of research done with Unilever, analyzing that company's footprint in Indonesia, part of its new scrutiny of global supply chains and their effect on local people. There are plans to increase involvement in issues from climate change to HIV and AIDS prevention, to explore new commercial enterprises (beyond the coffee shop) and add more global celebrities to its promotional roster, which already includes Bono, Michael Stipe and Alanis Morissette. With the goal of growing the business by 50 percent or more within the next few years, Stocking may well turn Oxfam into the Microsoft or McDonald's of the nonprofit world. And some in the NGO world will see that as high praise indeed.

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