Business-models between for-profit and not-for-profit

(This 'from the archives' article provides supplementary information for the YouTube video 'Every organisation is 'for-profit' - Episode 28, Tetradian on Architectures', released on 09 August 2018. The post was originally published on the Tetradian weblog on 31 December 2013 as 'Business-models between for-profit and not-for-profit'.)

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Is money the only possible form of profit? And if not, what does that imply for design of business-models? – and, beyond that, to economics itself?

This is one that I’ve been struggling with, both personally and professionally, for a very long time now. To be honest, I don’t think I’m all that much closer to a viable answer at present: but the struggle and the challenges do seem worth sharing with others, to see if there’s some possibility that between us that we can crowdsource something that might actually work.

What brought this to a head for me right now was a conversation with an Australian colleague, Helena Read, about the work of Muhammad Yunus, founder of Grameen Bank, and author of ‘Building Social Business‘. Note, though, that it’s a rather specific meaning of ‘social business’:

Social business is a cause-driven business. In a social business, the investors/owners can gradually recoup the money invested, but cannot take any dividend beyond that point. Purpose of the investment is purely to achieve one or more social objectives through the operation of the company, no personal gain is desired by the investors. … The impact of the business on people or environment, rather the amount of profit made in a given period measures the success of social business. Sustainability of the company indicates that it is running as a business. The objective of the company is to achieve social goal/s.

This is significantly different to the kind of definition of ‘social business’ that many of my ‘#socbiz‘ colleagues here would use, or the drivers that they would describe within and beyond the organisation. Yet is there some way to bring those definitions closer together? I think there is – though to do so requires us to rethink somewhat our understanding of ‘profit’.

Mainstream economics describes profit – in fact just about every aspect of the economy – almost exclusively in monetary terms. Hence, in turn, we get the strict split into two forms of economic activity:

• for-profit: the sole purpose of the organisation is monetary return to investors
• not-for-profit: the sole purpose of the organisation is ‘something else’, and must notprovide monetary return to the investors

Financial-return is often deemed to be the determining-factor as to what type of business an organisation does, and what type of law should apply to govern it. Cooperative businesses may have different business-drivers, but their supposed nominal aim is to ‘make money’ for their members, so they’re classed as a special case of for-profit. Government takes money from others, but isn’t supposed to ‘make money’, so it’s a special-case of not-for-profit. If it’s a for-profit organisation, people should be paid; if it’s a not-for-profit, the apparent ideal is that no-one should be paid. That’s it: the only choices.

(Social-conservatives sometimes take the latter case to extremes, and say that there should be no government at all: every social service and every function of government should be delivered by unpaid volunteers, who will come from, uh, somewhere – though any question as to exactly where that ‘somewhere’ might be, or how it might actually be organised, is swiftly sidestepped as Somebody Else’s Problem…)

All nicely simple, easy to understand, easy to enforce – and ludicrously incomplete. Oops…

In short, it doesn’t work. Or, to be pedantic, it does sort-of work for an increasingly narrow subset of organisations – leaving the rest with business-models that really do not and cannot work well, if at all.

In reality, there’s a whole spectrum of business-models that exist between those two extremes, and financial-return is merely one factor amongst many that we should consider. To me it seems likely that key drivers for this paucity of thought on business-model drivers would include:

• an historical focus on money as a trading-medium in a possession-based culture has led to the monetarist-economics delusion that money is the only relevant factor in economics – a term-hijack that has created perhaps the worst possible system for resource-allocation that anyone could devise
• a steady whittling-away of investor-responsibilities has led to an ‘investor-as-owner’ model (stock-exchanges etc) worldwide that frequently assigns highest ‘ownership-rights’ to investors with most destructive relationships and least responsibilities – scavenger first, symbiote last

But whatever the reason, the fact is that the usual finance-only description doesn’t work well enough to make usable sense at any scale. To make it work, we need to restart almost from scratch, with a rethink of what we actually mean by ‘business’, and a much better understanding of its real drivers.

I’ll use my own case to illustrate this. Start with Business Model Canvas [BMC]:

As is usual with BMC, I’d start with a list of the core ‘things that I sell’ (Value Propositions, shown as yellow ‘sticky-notes’), and build outward from there – Partners, Customers, Channels, Activities, Resources and so on:

I’d then typically show some of the flows and inter-relationships between all of these various items, to build up a sense of how the business-model actually works – such as in this summary for my ‘Consulting’ value-proposition:

The links to the pink-coloured ‘sticky-notes’ in the bottom-row summarise my financial-costs (Cost Structure, on the left) and financial-returns (Revenue Streams, on the right) – with the difference between them being my profit or loss.

It does all sort-of make sense, for those costs and returns that can be described in financial terms. The catch is that there’s no means here to describe costs and returns that are not financial – yet for many business-models, those are the costs and returns that matter the most.

From the point of view of the business itself, in most cases money is just a side-issue, a necessary requirement in order to do the real business of the business within a money-based possession-economy. Charles Handy summarised this point well with a sporting metaphor: “we don’t play cricket in order to get a good batting-average”, he said; “it’s just that we need a good batting-average to continue playing in first-class cricket”.

We won’t be able to keep going in business without ‘making money’, but as Daniel Pink and others have shown, ‘making money’ is not a good driver for business itself. We need to keep track of money-flow in a business-model and business-operations, but it’s very definitely not the only thing that we should track.

(In reality, the only people who are only interested in what money the business makes are parasite-investors – perhaps not the best people to be defining our organisation’s business-model?)

Worse, for me and, I know, for many others, ‘making money’ is an anti-driver for business – it’s exactly what our business is not about. A personal example: the other day I was in one of the local cafes, working on the structure and story for my current EA book. I finished what I was doing, got up to go, and noticed that the guy at the next table was reading a book called The $100 Startup. Being my usual happily-intrusive self, I struck up a conversation. He’s in his late 40s, having worked in government all his working-life, knows it’s time for a change, wants to start up something on his own, “maybe trucking, maybe a restaurant, I don’t know”. A long way to go to a solid business-model, then. But we talk for a while – some half an hour, perhaps – and I point him to various sources such as Business Model You and What Color Is Your Parachute?, all of which he notes with real interest on his smartphone. He got real value out of the conversation, and so did I – it felt like what I’m in business for, to help people find value in their own work.

The conversation was commercially valuable for him – particularly over the longer-term – and the service was delivered at a real time-cost to me. In the kind of business-contexts where I usually work, I ‘should’ have charged upwards of a hundred pounds or so for that piece of admittedly-unsolicited consulting. Yet it felt important that no money changed hands there: to put it at its simplest, it wasn’t that kind of business. The catch, for me, is that rather too much of my business is this kind of ‘it’s not about money’ business: as I say sometimes, somewhat ruefully, “I’m always working, and occasionally someone pays me”. In this insane economics that we live in, I do need find a way to pay my way somehow: yet most of what I do, and most of what drives me in my work, is such a long long way away from the kind of simple ‘quid pro quo’ that conventional money-based business-models expect, that talking in monetary terms simply doesn’t make sense. It’s not a not-for-profit charity, but it’s also not solely a money-centred for-profit business either: it’s somewhere blurrily in the middle that our current economics-models don’t acknowledge at all. Tricky…

Yet it’s not just that the money side of business gets in the way here: more, it often feels like an outright insult to even bring money into the picture. Imagine that you’re at your mother’s house, she’s cooked a special family meal: would you whip out your credit-card and ask her for the bill, the check? Not a good idea… reducing the relationship there to monetary terms really doesn’t work, in fact is an almost-guaranteed way to damage or destroy the relationship. There are very different values and forms of value at play in that interaction.

And that frequently extends to business too: the whole money-mess often feels personally obscene. As one colleague wryly put it some years ago, about the consultant’s life, “are you a prostitute, or a pimp?” – as a consultant, do you sell your own ‘personal services’, or do you procure and sell the ‘personal services’ of others? When I do consultancy-work, I’m not selling some abstract impersonal ‘thing’, what I’m selling is me – and converting that relationship solely to money really does have that obscene feel of prostituting myself, in the worst possible sense. Yuck…

In fact that almost perfectly summarises that rigid split between ‘for-profit’ versus ‘not-for-profit’:

• for-profit: body, mind and soul are sold to ‘make money’ = prostitution
• not-for-profit: everything of life must be given away ‘for free’ = destitution

Prostitution or destitution: often seems like those are the only two options that a money-based economics can offer us. Not a good choice to face: no wonder our economics is in such a mess… In short, we really need a better range of choice than that!

Which, in turn, means we really need to rethink and reframe what we mean by ‘business-model’ – restarting right from scratch.

I described the core principles for this some while back in my post ‘Modelling mixed-value in Enterprise Canvas‘, and it’s worth revisiting those principles here.

Start from the core idea that everything is or represents a service – an entity that delivers services of some kind, and also (usually) consumes services of some kind. An ecosystem of any form – business or otherwise is a web of interacting, interdependent services. This applies at every possible scale, from the smallest mote to an entire ecosystem as a whole.

A service serves. The underlying ‘why‘ or purpose for the service may be purely mechanical (as in non-living systems, following ‘laws’ such as those that underpin entropy), or partially or explicitly intentional (as in living-systems, which almost by definition are capable of creating some form of local reverse-entropy, if only at the species-level). In a business context, the ‘why’ may only be implicit (as in POSIWID), but preferably has some explicit intentionality to it (such as vision and strategy).

The ‘why’ for a service creates a tension between the desired-ends (definite and/or indefinite future) versus the realised-ends (what has been or is at present being achieved). This tension can be described in terms of values, as both drivers for action and criteria for success-in-action. The service represents a means via which a striving towards the desired-ends is made possible – and also a means via which the values can be expressed in real-world practice:

In a shared ecosystem, shared, interdependent and/or mutually-supportive values link the various players in the ecosystem together. Or, to put it the other round, the values of each player in the ecosystem must in some way support the shared-values of the ecosystem as a whole. (Note that this includes relationships such as predator/prey, or scavenger-as-recycler.)

Each player – each service-entity – engages in exchanges of value with other players: it is a provider of services (to ‘customers’) and a consumer of other services (from ‘suppliers’). (The player may also have partners with whom it has relationships as both ‘provider’ and ‘consumer’.)

To make better sense of that flow of value between players, it can be useful to partition the service into a three-by-three matrix of ‘child-services’ – the matrix being formed from a time-dimension (before, during and after the main service-transactions) and an orientation-dimension (inbound [service-consumption], self [value-creation] and outbound [service-provision]):

The arrows in the diagram indicate the emphasis of value-flow at each stage, which also often carry different types of assets and value. In a business-context, the stages would typically emphasise:

• ‘before’: relational/aspirational-assets – establish shared-connection and shared-purpose for value-transaction, based on this service’s ‘value-proposition’ [BMC: Customer Relations, implied Partner relations]
• ‘during’: usually exchangeable assets (physical/virtual), in terms of this service’s value-proposition [BMC: Channels, implied Partner channels]
• ‘after’: usually exchangeable assets (physical/virtual), for completions in relation to the value-proposition [BMC: Revenue Streams, Cost Structure]

If we translate this into a conventional business-model, we provide a product or service to a customer (‘during’), who then pays for it (‘after’ – ‘revenue stream’); and we obtain a product or service from a supplier (‘during’), and then pay them for it (‘after’ – ‘cost structure’). Note that the forms of value are usually different in the respective stages and value-flows: goods or services in the ‘during’ stage, versus payment or some other form of ‘compensation’ in the ‘after’ stage.

An essential point here, though, is that the forms of value are always in the context of the values or overall drivers for the service: the distinction between ‘value’ (‘horizontal’) versus ‘values’ (‘vertical’) is perhaps somewhat subtle, but is crucial here:

— The service’s vision and its concomitant values provide the the ‘why’ or reason that customers and suppliers choose to ‘do business’ with the service.

— Declaring that the service’s only vision is “to maximise financial returns to stockholders” tends to be a fairly serious disincentive to those who would be the source for those ‘financial returns’… it kinda devalues the service’s ‘value-proposition’ for others.

To validate the value-proposition, we need a vision that includes our business-partners and their aims – not one that treats them solely as objects to be milked into oblivion – and that links the various value-exchanges into a ‘story’ that has meaning for everyone involved.

In practice, the service often needs the assistance of other services – ‘guidance-services‘ for validation, direction and coordination – to help it on track to its vision. In Enterprise Canvas sketch-notation we’d typically show the guidance-services like this, as another set of related services ‘above’ the service that we’re interested in, and each tagged with the respective symbol:

The guidance-services intersect with the business-model, but are usually not regarded as central to the business-model itself. It’s very different, though, when we look at the other ‘external’ relationships in Enterprise Canvas, the links with the service’s investors and beneficiaries: a business-model is not complete unless it also describes its relationships and interactions with investors and beneficiaries. We typically show these ‘below’ the respective service-in-focus:

For example, these investor/beneficiary relationships are central to the split between for-profit and not-for-profit. That split assumes that the only relevant form of value is money, and that ‘profit’ is therefore defined as the monetary-value extracted by or for the beneficiaries from the operation of the business-model. Hence:

• for-profit: investor invests money (BMC: input to Cost-Structure), receives monetary-return as beneficiary (BMC: output from Revenue-Streams); primary external focus is on balance between investment and return (‘the [stock]market’)
• not-for-profit: investor invests money (input to Cost-Structure); no return in monetary form, therefore beneficiaries deemed not to exist (or are viewed as the ‘consumers’ of provided services – the transaction/’during’ interactions, not the backchannel/’past’ interactions); primary external focus is on investment (‘fundraising’)

In both for-profit and not-for-profit, staff are usually viewed solely in terms of Cost-Structure: employees are classed as monetary ‘costs’, whilst volunteers are categorised as ‘zero-cost employees’.

All of which should tell us that a monetary-only business-model is woefully incomplete…

To understand the business-model properly, we need to describe:

• all forms of value and value-interactions that apply in that business-context
• the interchanges (transforms) between forms of value
• the relationship of each form of value and value-transform to the vision and values for the service (‘the business’ or ‘the enterprise‘)
• the stakeholders from whom and/or to whom each form of value is provided
• the effective value-relationships between each of the stakeholder-groups
• the effective overall value/values balance for each stakeholder-group, to underpin a concept of ‘fair exchange’ in relation to the enterprise vision and values

The last point is extremely important: in the longer-term, a business-model is viable only if it provides ‘fair exchange’ for all of its stakeholders.

The service ‘creates value’ by the way in which it does value-transforms, in line with the values of the service and in relation to the values of the overall shared-enterprise or ecosystem. The service’s Value-Proposition is therefore much more than just a description of product-attributes or the like: it has to demonstrate how its various value-transforms provide ‘meaningful value’ and ‘fair exchange’ for all of the service’s stakeholders.

Again, the simplistic monetary-only ‘profit = price minus cost-of-production’ is woefully-inadequate for this. I won’t go into the detailed reasons here (because this article is too long already…), but in essence we need to summarise the exchanges and transforms in terms of the full set of asset-dimensions:

• physical asset-dimension: physical objects, physical ‘things’ – independent, tangible, exchangeable, alienable
• virtual asset-dimension: data, information – nominally-independent, abstract/non-tangible, non-alienable, ‘exchanged’ via copy
• relational asset-dimension: relations/connections between people – interpersonal/dependent on both parties, both parties are tangible, non-alienable, non-exchangeable but potentially replicable
• aspirational asset-dimension: anchor-point for ‘belonging’, motivation etc (e.g. as represented by brand) – personal / dependent on both parties; one party tangible, the other (e.g. brand) usually not; non-alienable, non-exchangeable but potentially replicable

Most assets and asset-interactions (service-flows) involve multiple asset-dimensions. For example, a printed-book is a composite of physical (the book itself) and virtual (the information contained in the book); money is a composite of virtual (information about quantity and money-type) and aspirational (‘belonging’ to the implied brand of a fiat-currency) and occasionally physical too (as cash – coin or notes). A composite has to be managed in terms of all of its asset-dimensions: hence a printed-book must be managed as both physical (inventory, storage etc) and virtual (copyright, version-control etc).

Assets pass through the horizontal flows between services in Enterprise Canvas:

Importantly, though, the types of assets that typify each of the ‘before’, ‘during’ and ‘after’ flows across and between the services:

• before-flows: primarily relational and/or aspirational assets
• during-flows: primarily exchangeable asset-types – physical and/or virtual
• after-flows: primarily information and/or money (virtual/aspirational composite)

We see much the same happening within the related Service Cycle: aspirational-assets (reputation and trust), then relational-assets (respect and relations), virtual-assets (the information to support attention and conversation), then physical and/or virtual-assets (the transaction, in the ‘during’-flow); and then the reverse order to close the whole cycle.

Other flows in Enterprise Canvas – such as with the guidance-services, and management-information flows between service-‘layers’ – tend primarily to be information (virtual-assets):

The ‘investment’ and ‘dividend’ exchanges with investors and beneficiaries may be any type of asset. In a commercial business, this may often be money, but that is not always so at all – as described in more detail in the post ‘Every organisation is ‘for-profit’‘. We could perhaps summarise this visually as follows:

Which also lines up with a visual summary of the organisation in relation to its market and broader shared-enterprise:

To summarise everything above:

• the usual sharp-edged distinction between ‘for-profit’ and ‘not-for-profit’ is often wildly-misleading – especially for larger-scope concerns such as enterprise-architecture and business-architecture
• almost all real-world business-models lie somewhere on a spectrum between ‘for-monetary-profit’ and ‘not-for-monetary-profit’ – often in a much more blurry form than current assumptions of legislation expect or allow
• in order to make full sense of how a business-model actually works, we need to understand and track all of its asset-types and asset-transforms – not solely the monetary flows
• whole-of-context model-types such as Enterprise Canvas and its Service Cycle can help in this, by providing a frame in which those asset-flows and asset-transforms can make sense

Once again, there’s no particular point I’m making here, other than that I hope this is useful towards building a better understanding of business-models, and the broader business of organisations in general.

Over to you for comment, perhaps?

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