80:20 and the Nonprofit Sector
Corporations are often able to scale by identifying which solution will meet 80% of the market's needs. They realize it is rarely doable to find a solution for all 100% and pursuing it would be too costly. The gains are to be made by focusing on the 80% and ceding the remaining 20%.Public policy often works the same way. You can't create policy to meet the needs of every American. At best, it can serve the needs of 80% of the population. Nothing on a large scale can ever meet every stakeholder's needs.
The nonprofit sector is often left to deal with the remaining 20% of the market--the most challenging part of the population, which has been left un-served. It is not uncommon for nonprofits, and those they serve, to feel like society and "the Man" have left them exposed to the elements. This naturally creates resentment and an underdog mindset.
It is therefore not surprising that most nonprofits create models designed to meet the needs of ALL the 20% left exposed by macro policies. These programs are intended to be optimized and focused on each individual's needs rather than to most efficiently serve 80% of that remaining 20%. Although focusing on only 80% would de facto enable them to serve more people at a lower cost, following this logic would be an acceptance of the decision-making strategies used by large companies and the government (those bodies that initially left nonprofits' target populations un-served).
Over the last decade an entire generation of "social entrepreneurs" has bucked this assumption, has adopted the 80/20 mindset and has been able to build scalable organizations that are generally more efficient and effective. They are often criticized by traditional, local nonprofits for using solutions that don't fit the exact needs of a particular neighborhood or child.
This criticism is fair, but the reaction should not be a call to shut down these national organizations or to have them change their strategy for further customization. In order to best serve the under-served, society must both support these organizations that effectively meet the needs of 80% AND support local nonprofits which are needed to catch the remaining 20%.
For example, if there are 100 million people in need, public policy is responsible for serving 80 million (80%). That leaves 20 million people (20%) under-served and exposed. The social entrepreneurial segment of the nonprofit sector can then focus on serving 80% of that population, or 16 million. That leaves 4 million (20%) to be served by small local nonprofits--society relies on these organizations to fill in the gap. These nonprofits have the hardest job--customizing their solutions for individuals and working on the most challenging situations.
That is the architecture of our safety net when it works. We need to recognize the reality of the structure and consider it a success when the government and social entrepreneurs can provide solutions for 80% of us. We must also celebrate local nonprofits who are asked to do the hardest part of the job securing the safety net and not criticize them for being inefficient or call for their consolidation. They are part of the equation we need.
This is excellent analysis, and you've accurately hit on differing roles that social entrepreneurs, larged scalable organizations, and small NPOs need to play in creating a safety net. I do worry that the trendiness of social entrepreneurship, and the affinity of the business sector for this model, may lead to disinvestment in the more localized and specialized approaches of the "traditional" nonprofit sector. But, as with all good solutions, you have identified the "and" rather than the "or" in this situation. I just finished reading Danielle Allen's Talking to Strangers. It's some fairly dense political philosophy but basically makes the point that a winner-takes-all/ignore the minority opinion approach to politics and citizenship undermines trust, and therefore undermines democracy. The perspective you've articulated here is an elegant solution to the majority/minority problem in the context of the social sector -- speaks to impact at different levels.
This application of the 80/20 rule is a very clear, short and powerful message.
It reminds us that even the social enterprises need to budget for "traditional" philanthropy... and in fact might have even more incentive to do so since they are mission aligned with the 20% doing the really hard work.
Never forget the power of tiny food pantries, a couple people doing an after school tennis program or a couple of neighbors providing mentorship... these solutions don't scale, but that doesn't mean we throw the people that only grassroots solutions can serve under the bus.
Aaron, I agree with 80% of your thoughtful, astute analysis, however we are seeing more and more social entrepreneurs whose models are designed to be "owned" and customized by local communities.
I have never accepted the notion that citizen sector organizations (NPOs) are less efficient than the corporate sector. Given that they operate without the access to capital that business entrepreneurs enjoy, it reminds me of Ann Richards saying we can do anything they can, backwards and in high heels! Thanks for standing up for the leaders who create organizations that tackle the hardest problems, and do so brilliantly! Imagine what they could do with reliable sources of capital.
Maybe that time is near...
Very good post.
I fully follow and concur with the 80/20 framework you lay out, but I disagree with the premise, as always.
Your controlling axiom: "public policy" serves 80%. But I challenge you define this more clearly, because governments provide a dizzying array of services ranging from incarceration to welfare to roadwork. Different citizens partake in services at different levels of intensity. Criminals, of course, cost the state more than healthy, law-abiding middle-agers. Long-winded way of saying we're not talking about a monolithic 80% here. And that this population is certainly not homogeneously wealthy or poor.
So this leads me to wonder whether the remaining 20%, the "inefficiencies" as it may be, are actually in need of services or simply those that just don't need the government as intensly as others.
Maybe I'm wrong. Hey, it's happened once or twice before. But I think for this argument to really take off (and let me say I really like where it's going), you need to more deeply discuss who's in the 80 and who's in the 20.
The better model is Cosco. They do not meet everyones’ needs “best”. For example, they may only stock three brands of shampoo. They may never stock your favorite brand. But what if they also cut the cost by 50%? Suddenly that brand that isn’t exactly your favorite becomes such a great value that its your best option and you buy it happily.
Most nonprofits do not think this way at all. They do not recognize the opportunity to cut costs through scale, scope, or limited options. And unfortunately the market structures actually often work to make efficiencies a bad thing. You might be able to offer better services (along the Cosco model) to everyone if have national scale, but funders are not actually cost conscious buyers: they may look at overhead, but not at your value proposition. And they’ll surely notice that you’re not offering the shampoo brands that are needed in their locality. So you gain on costs – which they don’t really care about – and lose on meeting unique needs or being local. In this and in other ways, the highest value proposition is not regularly rewarded.
I conceptutally agree with your trickle down on policy/governmental infrastructure, ideally some effective/efficient program that gets at a large swath of what is left, and then small organizations getting the slices that are a fit for them. And I agree that local/traditional programs feel frustrated to see “thoughtless” players serving easy to serve people at lower costs -- I recall lots of dialogs of this sort when I worked in the disabilty sector.
But, I would observe that there are a lot of failures in the system that skew the direction in the numbers -- I don't think that these are simple 80/20 calculations.
For example, given public policy failure, 50% of the kids in the US public education system don’t have access to music education. As a result, Little Kids Rock (www.littlekidsrock.org) has the opportunity to serve more than its 16% share.
Or if there is even more fundamental system breakdown – like that 5% of the adults in sub-Saharan Africa are HIV-positive, then Grassroot Soccer (www.grassrootsoccer.org) is in a position to take on a mandate that is much more broad and aggressive.
I will also observe that in the smaller slices, I think we have lost our ability to weigh cost/benefit or to ask where incentives lie by trying to align costs with benefits – which I think means that we take on slices that are too small and really are being inefficient. I differ with Barbara here, as though I don’t disagree that organizations aren’t frugal and cash constrained, I do think that they make sub-optimal trade-off with resources by undervaluing opportunity costs and focusing on serving the people right in front of them, as opposed to the larger group that need service and are right in front of their sights.
Thanks for putting the frame out there, Aaron.
AM
hmmm....I think I'm with Jason on this. The theory of 80/20 makes sense, and IF in fact, social entrepreneurs are building and scaling organizations capable of delivering for 80% of the 20% that others leave behind, I understand that as a society we need to support the organizations (Aaron argues the small grassroots and less than optimally efficient organizations) capable of doing the rest. But I'd like to see the theory articulated with real examples both because I'm not sure it holds and also because I wonder whether it's an issue of scale or an issue of real cost - higher cost - associated with more intense services...so we aren't missing efficiency in the small organizations...we're missing the point - that it costs more to do more.
jb
Clearly 80/20 only works 80% of the time - at best. It also assumes that public policy is sound and doing its job which is probably more like a 20/80 assumption - true about 20% of the time.
The connection between public policy and the nonprofit sector was not really the core of what I was attempting to describe. My goal was to explain the mindset and market needs that contribute to making scaling hard.
There are two key points that stand out to me:
1. It is much easier for a company to let 20% of the market go and focus on the remaining 80% than for a nonprofit to turn away those 20% in need given the known consequences and the "social" motivation of a nonprofit.
2. Unlike in companies, we do need a patch in our safety net that meets the needs of the remaining 20% of the market so they don't fall through. This need will require some "cottage industry" solutions which are not scalable or terribly cost effective relative to the 80% of the market already served.
Bottom line = we need to recognize and value the role of the small local nonprofits in the saftey net and realize they are providing a service that neither large nonprofits or the government want to play.
Aaron, you're always great for getting us to see things differently. I agree that there is a role for more customized non-profits to play in the social sector to address the 20% that get left out in the 80/20 scenario. I also agree that this type of work is typically less cost effective and scale is a challenge, but I think there are two ways to leverage the investment in harder to treat cases. First, we should think replication vs. scale (I see scale as the same organization expanding its practice) and look to apply the learnings to other organizations addressing the same or similar issues, but perhaps in a different geography, age group, etc. Larkin Street Youth Services is a great example of an organization that shares learnings with other organizations serving homeless youth. Second, we should look to trickle-up learnings to the 80% where the underlying patterns related to a particular issue may not be as apparent as they are in the 20%, but are still there or are at risk of developing.
Aaron, thanks for the thought-provoking post.