What can NGOs learn from the private sector?

The not-for-profit sector is afflicted by a strange condition known as ‘private sector envy’. This is the unshakeable belief that not-for-profits are inefficient, bureaucratic, and boring, while the private sector is fast-moving, quick-thinking, and innovative. This deep-seated insecurity has worked its way deep into major donors; for example, DFID writes ‘business cases’, worries about their ‘commercial model’, and seeks to ‘maximise their investment’.

This is wrong for two reasons. Firstly, the not-for-profit sector can be hugely efficient. I started my career working for a small NGO in West Africa. With just five staff and unrestricted funding, it was innovative, impact-orientated, and a joy to work for. At a larger scale, the public sector has a long and distinguished history of innovations; the internet is a recent good example. (Thanks, US military!) In turn, the private sector can be quite incredibly inefficient, as anyone who has ever tried to change their gas supplier can testify.

More importantly, private sector envy often ignores the relative constraints and incentives of the public and private sectors. I realised this when I switched from working from large (and inefficient) charities, to private sector consultancies implementing donor-funded projects. Being afflicted by private sector envy myself, I honestly expected the private sector to be more efficient than the public sector, and it was quite a shock to find that it was just as bad.

After the initial frustration had subsided, I realised that the reason was simple – as a contractor, the private sector consultancy was now labouring under exactly the same incentives as the charities. They were risk-averse because the donor punished failure. They didn’t care about monitoring and evaluation because they didn’t want to uncover any negative news which might jeopardise their next bid. The HR department was useless because – well, HR departments are always useless.

When the private sector is more efficient, it’s often because they have clearer incentives and clearer metrics of success. In the public sector, by contrast, incentives are murky and often misaligned. Government bodies often want to spend their allocated budget and satisfy domestic lobbyists or constituencies, charities often want to get more money and expand. There is no simple metric of success which can be agreed on, unambiguously measured, and used to drive performance.

So trying to make the not for profit sector “more business-like” is a mistake. In trying to transplant practices from the private sector into the public sector, you risk getting the worst of both worlds. Management by results is a good example. Although better monitoring, evaluation, and tracking of results is certainly needed, most development projects cannot be managed by a simple dashboard of indicators. Current results management practices risk perverse incentives – encouraging a focus on the short over the long term, for example – and could reduce the intrinsic motivation of many working in the sector.

Instead, we should take inspiration from good practice wherever we find it – whether in the public sector, private sector, or behind the back of the sofa. We should pay attention to the incentives that programmes face, and recognise that these are mixed, ambiguous, and hard to set. We should measure success – but recognise that we can’t always attribute it and use it to drive programme performance. Finally, we should fire all HR departments.

3 thoughts on “What can NGOs learn from the private sector?

  1. I enjoyed the article. Your points about M&E and fear of reporting failure are well-taken.

    The point I have more trouble with is about misalignment of incentives. You discuss the awkward ménage à trois inherent in international nonprofit work: that donor governments, NGOs, and beneficiaries frequently want different things. As you put it, this can result in incentives being “murky and often misaligned.”

    Then, in your last paragraph, you mention “pay[ing] attention to the incentives programs face, and recogniz[ing] that these are mixed, ambiguous, and hard to set.”

    The question I was attempting to ask via twitter is basically this: what good does paying attention do, if incentives are different and at times incompatible? Compared to your other two points, which seem to be about accountability and implementation, this point seems to raise larger issues of power.

    To take a stark example, you could think about food aid in Haiti during the 80s and 90s. The US had policies it wanted to pursue in Haiti, in this case 1) for Haiti to become a better export market for US rice and 2) for formerly agricultural labor to be freed up for textiles so Gap, Gildan, Levi et al. could flourish. We coordinated our aid and trade policies (and their tariff policies) to achieve thes results. And I don’t believe this is conspiratorial, USAID bragged about it, and Pres. Clinton finally admitted it a few years ago in Congressional testimony. But in situations like that, the donor goals and the beneficiary goals are in tension, if not diametrically opposed. Is “paying attention” an answer? Or perhaps you would say this example is an extremely isolated case?

  2. Pingback: The business of development as a business | kristinastories

  3. Pingback: Development Consultants: Over-paid, Over-rated, and Over-used | AID LEAP

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