Each of the prevailing economic forms of organization have contributed to the world’s progress and prosperity but they’ve also experienced material failures as resource allocation systems. There’s growing interest in combining approaches from the traditional economic forms to resolve these failures.

Note: The following post is based on a paper I wrote as part of my coursework requirements for the Executive Masters in Social Business and Entrepreneurship program, which is jointly run by the London School of Economics’ Department of Management and the Marshall Institute.

While each of the prevailing economic forms of organization – market, government and non-profit – have contributed to the world’s progress and prosperity, they have also experienced material failures as resource allocation systems. The reasons for and nature of these failures vary by sector but together they have generated a set of “large-scale, urgent, and complex” (Fourth Sector Group, n.d., https://www.fourthsector.org/what-is-the-fourth-sector) social problems. While there is growing interest in combining approaches from the traditional economic forms to help resolve these problems, questions remain as to whether these so-called hybrid forms of organization will be able to do so effectively. It is argued here that hybrid organizations can, in fact, move us closer to productive solutions when we first understand what is at the core of traditional failures and design hybrids to specifically overcome these barriers. But more than that, given the complexity of both hybrid forms and the problems they are working to help resolve, it is further proposed that hybrids be established within a robust framework that i) accurately defines organizational objectives based on the problem to be solved, ii) applies research on traditional and hybrid organizational forms to determine the appropriate mix of approaches the hybrid should utilize to overcome traditional barriers and achieve the desired objectives and iii) effectively draws from research on hybrids to establish internal systems that align with and support the chosen hybrid form. The framework will be discussed in detail; however, first we will examine the principal sources of failure for each of the traditional economic forms and the problems they have generated to understand and identify the issues at the core of the failures. The paper concludes with a brief comment on the need for both a supportive ecosystem and further research to continue to enable and empower hybrid organizations.

Sources of Failure and Problems Generated by Traditional Economic Forms.

As mentioned earlier, the reasons for and nature of failures vary by economic form. In this section, we will first look at the principal sources of failure for each of market, government and non-profit, alongside the resulting social problems they have generated. We will then examine the failures to identify the issues at their core and setup the central discussion around a framework for how hybrid organizations can help resolve the problems generated by the failures.

The market is comprised of privately or publicly owned firms whose primary aim is profit maximization (Le Grand & Roberts, 2021). All stakeholders in these organizations are said to be motivated by self-interest that aligns with the profit-focused objectives of the firm (2021, p. 2). In theory, when specific conditions exist, markets can allocate in such a way that all resources are put to their best possible use; a situation referred to as Pareto-efficiency (2021, p. 2). In practice, however, these specific conditions (perfect information, perfect competition, rationality and the absence of externalities) rarely exist and—across a range of industries—markets fail (Le Grand et al., 2008, p. 180-183). For the purposes of this discussion, we will focus on the principal failures of imperfect information, imperfect competition and externalities. When consumers have imperfect information about the quality of goods and their prices, or imperfect competition exists (monopolies or oligopolies), self-interested market actors will behave in a way that maximizes the profits of their firms rather than the public good, resulting in an unequal distribution of resources (Le Grand et al., 2008, p. 183). Similarly, externalities – the external costs or benefits of market transactions on uninvolved third parties – arise because profit-focused firms aren’t motivated to take them into account, thereby leading to an erosion in the public good (Le Grand & Roberts, 2021). The global climate crisis is an example of a negative externality and one of the most urgent and significant social problems of our time.

Government, on the other hand, is comprised of state-owned agencies whose primary aim is to “promote social well-being as ultimately defined by citizens in democratic elections” and stakeholders in these organizations are said to be motivated by public service (Le Grand & Roberts, 2021, p. 3). In theory, it would be reasonable to assume organizations with such consequential mandates could be relied upon to effectively promote the public good (2021, p. 3) but in practice governments the world over have experienced substantial failures. The principal failures of government are inefficiency and ineffectiveness caused by paternalism, corruption, bureaucracy and the absence of market mechanisms (Le Grand & Roberts, 2021). Perhaps nowhere was this more evident than in the deeply paternalistic and large-scale bureaucratic 1970’s and 1980’s era state focused interventions in several developing countries where, as Krueger (1990, p.10) pointed out “colossal government failures” were the direct result of wasteful government programs and sweeping corruption. These same tendencies persist in modern day governments around the world and coupled with the absence of market mechanisms, which leave state agencies lacking the signals necessary to adequately inform their programs and processes, lead to all kinds of inefficiencies and render many government interventions ineffective (Le Grand & Roberts, 2021). This kind of widespread failure has led to a growing issue with mistrust in government institutions in prominent countries like the United States, a critical problem when you consider that social trust is a basic requirement for healthy, functioning societies (Vallier, 2020, p. 1-2).

Finally, the non-profit sector is comprised of organizations whose primary aim is to “advance the well-being of a particular social group…or a wider social good…” (Le Grand & Roberts, 2021, p. 3). And stakeholders are altruistically motivated to serve their specific interest group or social cause (2021, p. 3). The nature of and reasons for non-profit failure are similar to those of government; however, the principal failures of inefficiency and ineffectiveness are caused by paternalism, corruption, particularism and the absence of market mechanisms (2021, p. 3). In the non-profit context, particularism refers to a focus on specific sub-groups or issues, thereby leaving other groups or issues underserved and creating wasteful duplication of scarce resources (Salamon, 1987). As in the case of government, recurring accounts of corruption, wastefulness and other forms of inefficiency and ineffectiveness can result in reputational and mistrust issues for non-profit organizations as well (Becker et al., 2020).

When the principal failures of traditional economic forms are considered together, they can be categorized into two types: i) motivational or ii) structural. In each of the market failures described above, since the self-interest of market actors is aligned with the profit-objectives of the firm, actors are motivated to behave in a way that prioritizes profits over the public good (Le Grand & Roberts, 2021). Similarly, in the case of government and non-profit corruption (2021, p. 3). On the other hand, inefficiency and ineffectiveness represent structural failures since they are the direct result of characteristics that are embedded in the underlying theories of government and non-profit. It is explained above how the absence of market mechanisms and particularism lead to inefficiencies and ineffectiveness. While bureaucracy, which is sometimes justified because of the need to satisfy multiple interests, results in the excessive use of resources (Barr, 2012, p. 61). And paternalism, which does not sufficiently consider the needs and wants of beneficiaries, leads to ineffectiveness and related wastage (Le Grand & Roberts, 2021). It follows then that for hybrid organizations to be able to resolve the problems generated by such failures, they need to overcome both motivational and structural failures. The following section proposes a framework for establishing hybrid organizations that can overcome these barriers, while also accounting for the complex nature of both the hybrid form and the social problems they are working to resolve.

A Framework for Hybrid Organizations.

Doherty et al. (2004, p. 418) define hybrid organizations “as structures and practices that allow the co-existence of values and artefacts from two or more categories.” This definition makes clear that the hybrid form is about more than having two or more organizational objectives and broadly encompasses the coming together of two or more economic paradigms and value systems, which in practice means hybrids are a complex collection of varied forms (2004, p. 418). While the framework discussed here is focused on overcoming the structural and motivational challenges of traditional economic forms, a viable framework for hybridity cannot ignore this inherent complexity. The framework also considers the nature of the problems hybrids are looking to solve and the setting of organizational objectives – this is where we’ll start the discussion.

i) Organizational Objectives

Typical practice for economic forms suggests that strategy or approach flows from objectives and objectives flow from the problem being solved (Barr, 2012, p. 76). In the case of hybrid organizations, Anheier and Toepler (2020, p. 496) make the point that while the recent emergence of hybrid organizations certainly coincides with a greater awareness of large-scale social problems, it is unclear whether hybridity has evolved as a response to them. Given the question being posed here, however, we will assume in this case that hybrids are specifically responding to social problems. This intentionality is important because Anheier and Toepler (2020, p. 503) speak about hybridity occurring almost as a by-product of shifts in organizational practices that increase complexity and dynamism. Whereas this framework is concerned with hybridity being actively pursued as a strategy for resolving exceedingly complex and dynamic social problems and demands a comprehensive understanding of the problem and clear defining of organizational objectives.

ii) Hybrid Approach

The strategy or approach a hybrid organization utilizes should depend on the mix that will most effectively achieve the desired objectives (Barr, 2012, p. 76) and overcome any relevant structural barriers. Research on prevailing economic forms point to a long-established understanding of the complementarity that exists among market, government and non-profit approaches in achieving organizational objectives (Salamon, 1987; Barr, 2012, p. 60). For example, an effective network of partnerships between government agencies and non-profits has existed for decades in the US that provides government with reliable service delivery and non-profits with a steady income (Salamon, 1987). This framework also highlights that hybrid organizations are in a better position to resolve social problems versus other sectors by specifically folding in approaches designed to overcome known structural issues with traditional economic forms. For example, social impact bonds align the interests of governments or donors, impact organizations and investors around the delivery of social outcomes such that investor returns are tied directly to successful social outcomes (Bridges Ventures, 2014). Governments or donors looking to deliver better outcomes with fewer resources make payments only if outcomes are achieved, impact organizations receive capital to deliver social interventions and investors looking to make a positive social impact receive returns only if outcomes are achieved (2014, p. 3-5).

The result of this exercise will be a hybrid organization with a structure that pulls and combines characteristics from each of the three traditional economic forms based on i) what will most effectively achieve the stated organizational objectives and ii) overcoming known structural issues with traditional economic forms to avoid failures.

iii) Support Systems

The final element of this framework involves establishing internal systems that align with and support the chosen hybrid form. Internal systems include leadership, culture, organizational design and more; for the purposes of this discussion, we will focus on internal systems related to overcoming motivational issues. It is also in this discussion that we will touch on the complexity of the hybrid organizational form.

Hybrid organizations may experience tensions in the complexity surrounding the coming together of different economic paradigms, which can have negative outcomes including mission drift. Mission drift occurs when one logic system dominates and the organization is at risk of moving away from its mission (Cornforth, 2014). For example, if market logic dominates it can trigger motivation related failures and compromise the social goals of the organization (2014, p. 4). Systems organizations can put in place to combat these kinds of pressures include governance, compartmentalizing and integrating (2014, p. 4-8). Governance involves the use of legal and other regulatory mechanisms, compartmentalizing involves separating different aspects of the business and integrating involves embedding protective processes into the organization, such as the careful selection and socialization of employees to maintain the values and goals of the organization (2014, p. 8-13).

Ecosystem and Further Research.

Hybrid organizations represent a new and developing area of study and practice, and while progress is being made more important work needs to be done. Specifically, hybrid organizations could benefit from the kind of supportive ecosystem (legal, financial, reporting, education, etc.) traditional economic forms currently enjoy (Fourth Sector Group, n.d.). Also, an ongoing systematic body of research could help to further enable and empower hybrid organizations.

Conclusion.

Hybrid organizations can help to resolve the complex social problems generated by the primary failures of traditional economic forms when they are specifically designed to overcome the structural and motivational issues that are at the core of primary failures. Further, hybrids should be established within a robust framework that ensures organizational objectives are clearly defined based on a comprehensive understanding of the social problem to be solved, the hybrid approach is determined through rigorous research and alignment with the objectives to be achieved and barriers to be overcome and internal systems put in place to support the chosen hybrid form.

Sources:

1. Fourth Sector Group. (n.d.). What Is the Fourth Sector?https://www.fourthsector.org/what-is-the-fourth-sector
2. Le Grand, J., & Roberts, J. (2021). Hands, Hearts and Hybrids: Economic Organization, Individual Motivation and Public Benefit. LSE Public Policy Review, 1(3), 1-9.
3. Le Grand, J., Propper, C., Smith, S. (2008). The Economics of Social Problems (4th ed.). Palgrave MacMillan.
4. Krueger, A. (1990). Government Failures in Development. Journal of Economic Perspectives, 4(3), 9-23.
5. Salamon, L.M. (1987). Of Market Failure, Voluntary Failure, and Third-Party Government: Toward a Theory of Government-Nonprofit Relations in the Modern Welfare State. Nonprofit and Voluntary Sector Quarterly, 16(1-2), 29-49.
6. Vallier, K. (2020). Trust in a Polarized Age. Oxford Academic.
7. Becker, A., Boenigk, S., Willems, J. (2020). In Non-Profits We Trust? A Large-Scale Study on the Public’s Trust in Non-Profit Organizations. Journal of Non-Profit & Public Sector Marketing, 32(2), 189-216.
8. Barr, N.A. (2012). Economics of the Welfare State (5th ed.). Oxford University Press.
9. Doherty, B., Haugh, H. and Lyon, F. (2014). Social Enterprises as Hybrid Organizations: A Review and Research Agenda. International Journal of Management Reviews, 16(4): 417–436.
10. Anheier, H., Toepler, S. (2020). The Routledge Companion to Non-Profit Management. Routledge.
11. Bridges Ventures. (2014). Choosing Social Impact Bonds: A Practitioner’s Guide.
12. Cornforth, C. (2014). Understanding and Combating Mission Drift in Social Enterprises. Social Enterprise Journal, 10(1), 3-20.