How 'Hybrid' Nonprofits Can Stay on Mission

Published: October 17, 2011 Author: Carmen Nobel Executive Summary: As nonprofits add more for-profit elements to their business models, they can suffer mission drift. Associate Professor Julie Battilana says hybrid organizations can stay on target if they focus on two factors: the employees they hire and the way they socialize those employees. Key concepts include: In order to avoid mission drift, hybrid organizations need to focus on whom they hire and whether their employees are open to socialization. Because early socialization is so important, hybrid firms may be better off hiring new college graduates with no work background rather than a mix of seasoned bankers and social workers. The longer their tenure in a hybrid organization, the more likely top managers may be to hire junior people. HBS Faculty Member Julie Battilana Julie Battilana is an associate professor in the Organizational Behavior unit at Harvard Business School. For those who like to view things in black and white, it's tempting to divide the working world into two camps. There is the for-profit sector, primarily driven by the prospect of financial success. And then there's the not-for-profit world, which eschews the almighty dollar in the pursuit of curing societal ills. In reality, though, the line between the two is growing blurrier. "In the not-for-profit sector, a number of organizations are trying to be less dependent on donations and grants," says Julie Battilana, an associate professor at Harvard Business School. "In the meantime, facing increased public pressure to help address societal problems, for-profit firms have adopted social responsibility policies, which have pushed them to focus more on social initiatives." "Some of them have been accused of losing sight of their social mission, or even having a negative impact on the populations they were trying to help" In the wake of this evolution over the past decade, more organizations have adopted a hybrid business model in which a social mission is the primary goal, but they still aim to generate enough commercial revenue so they can survive and thrive without depending on charitable donations like a typical nonprofit would. Commercial microfinance organizations often adopt a hybrid model, for example: they provide business loans to poor people who wouldn't traditionally qualify, but they still depend on the loan recipients paying them back with interest. The main problem with the model is that hybrid organizations run the risk of suffering from so-called mission drift—meaning that they stray from their original goals—usually by focusing on profits to the detriment of the social good, but sometimes vice versa. "Mission drift has been identified as a potential problem among microfinance organizations," says Battilana, who has been studying hybrid organizations for several years. "Some of them have been accused of losing sight of their social mission, or even having a negative impact on the populations they were trying to help." According to Battilana, there are two key questions that leaders must address to keep the mission on course while still making enough money to sustain that mission: One, whom should you hire to strike a healthy balance between idealism and the bottom line? And two, what's the best way to socialize new hires to stay focused? Lessons from Bolivia In a recent Academy of Management Journal article, Battilana and Silvia Dorado from the University of Rhode Island tell the true tale of two Bolivian microfinancing organizations, Banco Solidario and Caja de Ahorro y Préstamo Los Andes. Both were hybrid orgs created in the early 1990s as spin-offs from existing NGOs. Both set out to avoid mission drift. But each took a different tack in hiring new employees. BancoSol hired employees based on their previous experience and proven capabilities. Because the mission required know-how in both profit making and social work, the organization ended up hiring a mix of social workers, sociologists, anthropologists, bankers, and economists. The idea was that these seasoned employees would complement each other with their disparate backgrounds, after training them to work together toward the common good. But the reality was that their single-purpose backgrounds made it hard for them to adjust to the hybrid model. Those with social work experience and those with a financial background ended up resenting each other to the point of constant fighting, such that the organization could hardly operate. Loan officers quit left and right, the number of active borrowers plummeted, and the profit margin dropped, too. "They basically had to deal with conflict that became intractable," Battilana says. Los Andes's launch in 1995 came three years after that of BancoSol's, meaning that Los Andes would learn from BancoSol's hiring woes. Los Andes took what Battilana and Dorado call a "socializability-focused" approach to hiring. Rather than looking for job candidates with experience in either social welfare work or finance, Los Andes hired people with essentially no work experience at all—recent college graduates—and then trained them specifically to be microfinance loan officers. The idea was that it would be easier for the employees to adhere to the hybrid mission if they were not hampered by their preexisting work logics, be they either social-based or profit-based. Whereas BancoSol was more focused on the dual end-goal of helping loan applicants while still making a profit, Los Andes was more concentrated on the means to an end—the process of training and managing the novice employees. Because it took longer to train newbies than it would take to coach seasoned professionals, measurable progress was slow, but steady at Los Andes. "Instead of relying on commitment to the end pursued by the organization (i.e., its mission), Los Andes's approach to socialization thus relied on commitment to the means used to achieve this end," Battilana and Dorado write. "You might be better off hiring blanker slates" In the end, in addition to avoiding interpersonal strife, Los Andes was more successful than BancoSol in avoiding mission drift. By the turn of the century, Los Andes had both lower average loans and a lower percentage of delinquent loans than its predecessor. (Higher values on either are signs of mission drift.) "So what we found was that in the early days, you might be better off hiring blanker slates and then try to socialize them in the way that you want them to work in the hybrid organization," Battilana says Managers have baggage, too Be that as it may, top managers at hybrid organizations may find it difficult to make the best hiring decisions because of their own preexisting biases. Battilana explains the problem in a yet-to-be-published paper, tentatively titled "Neither Corporations Nor Not-For-Profits…But a Combination of the Two: The Challenges of Sustaining Hybrid Work Contexts." "In the same way as new hires' work habitus influences the way in which they will enact the market and social welfare logics within hybrids, the work habitus of top managers influences the way in which they enact both logics in their daily practices," the paper states. Thus, even knowing the importance of the hybrid mission, a manager with a strong background in the nonprofit social sector is likely to be drawn toward candidates who also have a social sector background. And a manager with a background in finance is more likely to hire a financier over a social worker, all else being equal. Firms can address this inherent bias problem by enacting strict and scientific hiring mechanisms. For instance, rather than vetting possible hires via job interviews, Los Andes both hired and promoted its employees almost solely on the basis of how the candidates performed on written exams. This prevented the possibility that hiring managers would be swayed by their own backgrounds, meaning that sporting either a finance degree or a social work degree didn't result in preferential treatment for a potential candidate. But Battilana's research also suggests that managers are likely to learn from experience; the longer their tenure at a hybrid organization, the more probable it is that top managers hire junior employees. "What we expect is that the more time they spend in a hybrid context, the more likely the managers are to become familiar with the problem of hiring, say, both bankers and socially minded employees," Battilana says. "The more experienced they are, the more likely they may be to hire blanker slates, especially in the early days of the organization when its hybrid culture is not yet strongly established." About the author Carmen Nobel is senior editor of HBS Working Knowledge. http://hbswk.hbs.edu/item/6795.html