Cityview: The Profit Motif

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From child care to home care, job training and placement to youth services, for-profit entities across the country are eyeing–and increasingly delivering–the kinds of services and programs that have long been the province of settlement houses and other community-based nonprofits. The business sector has been making steady headway for some time. Several years ago, settlement houses and other community groups were the sole providers of home care services to neighborhood residents under contracts with the city’s Department for the Aging. Today, one-third of those contracts are held by for-profits.

The mounting competition between the business and nonprofit sectors, coupled with a rising emphasis on performance measures and technological proficiency, is changing the face of social services. It is also one of the key challenges facing community organizations in the coming years.

To many public officials around the country, the growing presence of for-profit service providers is a welcome alternative. A vice president at Res-Care, a for-profit chain that operates group homes for the developmentally disabled and programs for at-risk youth in 28 states, put it this way in The American Prospect: “As states are downsizing and moving people into the community, we have access to working capital that smaller providers don’t. This significantly reduces risk for states and allows a much faster implementation of community services.”

Ideally, competition with for-profits can prod settlement houses and other community groups to become even better service providers. There are certainly management lessons worth gleaning from the for-profits, such as methods for more accurately calculating costs in order to better negotiate contracts. By their very definition, though, for-profits must devote much of their management energy toward profit maximization. When the private sanitation hauler Waste Management found that some of its customers were not cost-effective. It received permission from City Hall to simply dump those clients. In social services, this bottom-line protection often translates into reducing the scope of services or preventing losses by “cherry-picking” program participants.

Recent experience with managed care, where many insurers have concentrated on marketing to groups of healthy consumers, is an example of how to carefully select participants in a way that will limit the likely expenditures on services. If such “risk selection” is followed in other service areas, it is an approach that potentially leaves community groups with the neediest people–and open to the charge that they are less efficient and effective.

The public’s growing demand for accountability in the expenditure of tax dollars is leading to an increase in performance-based contracting, and adding to the competitive pressure of the marketplace. New York City has developed performance-based contracts that often require organizations to achieve certain service milestones before any payments are made. For-profits can shoulder the risks and raise the cash from shareholders to compete in this environment; settlement houses and similar nonprofits cannot. But these performance milestones may offer only a limited kind of accountability. If the service becomes unprofitable, a for-profit may choose to simply shut its doors. Settlement houses have a more fundamental form of accountability to their mission, board and community: They have but one market, their neighborhood.

For-profits tend to employ narrow measures of success or failure, such as earnings. A corollary may be test scores, which are increasingly being used to define a school’s success or failure just as for-profits are taking a bigger role in school operations. Heralding a school’s test scores makes for good marketing, but one-dimensional accountability. Test scores may tell us more about a school’s ability to teach students to take tests than their success at producing intelligent and informed citizens.

Technology is also affecting nonprofits’ ability to compete as service providers. Information technology offers many possibilities for improved service delivery and for providing the performance measures sought by government and foundations. It can also be an important tool for increasing administrative efficiency. But technology also demands increased financial outlays and staff skills. That means more money up front for investment in hardware and software, as well as continuing maintenance and upgrade costs. Again, community organizations are at a disadvantage because of their limited access to capital for infrastructure investment, upgrading and staff training.

Competition with for-profits, performance measures and technology pose formidable challenges in the coming years but also present opportunities to improve community groups’ services and strengthen neighborhood and organizational infrastructures. If there is to be a level playing field between for-profits and nonprofits, the public sector needs to remember that there is more to evaluating the effectiveness of a program than unit cost. And settlement houses and other community organizations need to do a better job of communicating the added value they bring.

Emily Menlo is executive director, and Doug Turetsky director of policy and public affairs, for United Neighborhood Houses.