Should Nonprofit Organizations Operate More “Like a Business”?

Experienced executives and managers in the nonprofit sector can often provide a wealth of wisdom, insight and perspective into the practical realities that go along with leading mission-driven, “helping” oriented organizations. As such these programs are purposed to provide mission-critical services to the clients and communities they serve. These “nonprofits” over the years have dealt with an evolving range of societal problems and needs. They include serving individuals with physical and mental disabilities, those who lack safe, affordable housing, the homeless, impoverished families, troubled, incarcerated youth, victims of abuse and violence adults and children, those suffering the serious and sometimes fatal consequences of alcohol and drug abuse to those persons simply in need of safe harbor. Everyone is impacted, in some way, by these societal problems be it a direct relationship to the affected person(s), their families and friends, to employers, companies, our economy and local communities. Nonprofit organizations are vital to our socio-economic way of life and in fact make up one of the largest employment sectors in the United States. The mission, purpose and presence of nonprofits is, in many ways, unique to our American way of life.

With that in mind, the challenge for nonprofits organizations is often that of trying to respond to the growing needs and expectations by those seeking services and having limited financial and/or physical resources to meet those demands. Overriding this charge is the expectation that services offered be of the highest quality and not compromised for the sake of meeting overwhelming demands. In some instances, service organizations, funders, evaluators and governmental entities have been forced to adjust their criteria and measures of quality and eligibility for the sake of trying to balance the resource gap between demands and capability. Examples include health care coverage variances and cost limitations, “teaching to the test” versus assessing students overall knowledge and applying practical learning concepts in our primary educational institutions and the recent and more stringent re-definition of homelessness by the US Department of Housing and Urban Development.  To be fair, significant strides have been made in allaying the even more serious impact of many of such potential shortcomings, due to the effectiveness and ingenuity of community-based, charitable and other third sector nonprofit organizations.

As a consequence, a common refrain heard over the years by many who  have led or are currently leading charitable nonprofit organizations is “nonprofits would do a better job if they operated more like a business” While there is not a universal and common framework for non-profit management, as is typical in the business and government sectors nonprofit organizations are, uniquely different entities and as such managing and governing present inherent differences.  In the absence of more formally identified management frameworks for nonprofits (also known as “third sector”) organizations, however, they are frequently under pressure to look like and be like something else. It is not uncommon for nonprofits to be advised (by others not in the field) to become more structured and acculturated as businesses and entrepreneurial ventures to be more successful.

These recommendations are often voiced by well-intended and dedicated private sector professionals and others, many who also serve on nonprofit boards, are volunteers and donors offering tremendous guidance, financial support and insight. The implication of their advice is “our way is better than yours” and nonprofits would better meet their obligations and commitments to the community by adopting and more “business savvy” approaches. It only makes sense to believe that a more business-oriented approach would lead to more “profitable” outcomes. So, given this, having non-profits operate more like businesses seems to be a logical conclusion.

Such advice suggests taking a deeper dive into the theory that nonprofits would be better off operating more like businesses. In such exploration the first task is to define what operating like a business really means. Here are some examples:

• A simple business definition is to say that “business occurs when a person or organization profits by providing goods or services in exchange for money.” (Duhaime’s Law Dictionary).
• “A business is an organization or enterprising entity engaged in commercial, industrial, or professional activities. Businesses can be for-profit entities or nonprofit organizations that operate to fulfill a charitable mission or further a social cause.” Business is also “the organized efforts and activities of individuals to produce and sell goods and services for profit”.: Business https://www.investopedia.com/terms/b/business.asp#ixzz5LRonn95M
• Stephenson defines business as, “The regular production or purchase and sale of goods undertaken with an objective of earning profit and acquiring wealth through the satisfaction of human wants.”
• According to Dicksee, “Business refers to a form of activity conducted with an objective of earning profits for the benefit of those on whose behalf the activity is conducted.”
• Lewis Henry defines business as, “Human activity directed towards producing or acquiring wealth through buying and selling of goods.”

The Balance of Small Business.com identifies the Characteristics or features of business as:

1. Exchange of goods and services
2. Deals in numerous transactions
3. Profit is the main Objective
4. Business skills for economic success
5. Risks and Uncertainties
6. Buyer and Seller
7. Connected with production
8. Marketing and Distribution of goods
9. Deals in goods and services
10. To Satisfy human wants
11. Social obligations

The conclusion, given such varying descriptions, is there seems to be no one common definition of what is a “business?” and may be best applied given the situation or endeavor. Certainly, one common theme that runs throughout these definitions is to equate business with profits though deviations in definition seem to be subject to interpretation from there.

Comparing the measures and criteria tied to profit and nonprofit entities is difficult one to make. For example, how does a company that has made record profits in a given year, paid handsome dividends to their shareholders and gained greater market share translate to measures of success of a nonprofit carrying out its mission to save and/or better the lives of others, as well as, address and alleviate a myriad of society’s ills. An argument can be made that yes there are some crosswalks that can be made. Perhaps market share is one measure, profits vs surpluses, reinvestment activities, new product or service lines offer some parallels. Though it seems many differences than similarities are at play when it comes to comparing profit and nonprofit “businesses”

Good to Great Author Jim Collins states when applying the principles of “greatness” to the social sector…” We must reject the idea-well-intentioned but dead wrong-that the primary path to greatness in the social sectors is to become “more like a business”. Most businesses-like most of anything else in life-fall somewhere between mediocre and good” Few are great …so why would we want to import the practices of mediocrity into the social sectors?’’

Some interesting facts to consider are:

• Nonprofit and other third sector organizations comprise America’s largest employment sector and a national growth industry.
• Nonprofits are considered helping organizations and “change agents” and are guided by community needs, problems and goals and providing for the common good.
• In the nonprofit world, measures of success are typically based on “softer” criteria that are more difficult to quantify than bottom line profits. Examples include how many people have been positively impacted and are changed human beings and assessing the social/emotional health and wellness of our communities.
• Having a large positive bottom line (surplus vs. profit) may, in fact, be an indicator that services invested in are not being fully rendered to fulfill the nonprofit organization’s stated mission (Nonprofit Quarterly, July 2013).
• Only about 30% (one third) of businesses or entrepreneurial ventures will survive their 10^th year in business (U.S Department of Labor Statistics, 2016). This is not a model that suggests it be applied to nonprofit start-ups.
• The average tenure of a corporate CEO is 4.9 years (Fortune Magazine) versus 12 years for nonprofit CEO’s (NonProfit Times), suggesting perhaps more stable and experienced leadership resides in nonprofit realm.

Given the uniqueness of both profit and nonprofit organizational entities, each of which are reflective of our American social cultural and economic value system, it is time to recognize and accept that differences exist, and each entity should be measured based on its own merits. Expecting a nonprofit to operate more like a business, suggests they are not and that profits know best and are models to emulate are often not true and forces an issue that seems to be worn thin over the years. Many nonprofits have evolved from informal or grassroots initiatives to more structured and formalized entities guided by corporate by-laws, corporate compliance standards, professional standards of care, and even research-based best practices, but still retain missions that are essentially focused on serving the common good and improving human lives.  Less emphasis and recognition has been placed on how many profit- oriented businesses, over time, have adopted principles and methods reflective of the values nonprofit entities have long espoused. These principles and practices have included promoting internal cultures of inquiry, implementing operational efficiencies (e.g. doing more with less) obtaining customer/ consumer feedback and pioneering industry standards of service excellence (e.g. JCAHO.CARF, COA)

To conclude, it seems most accurate to define nonprofit mission driven organizations as already operating as businesses. While for profit and not-for profit entities may be configured differently and serve different purposes in the marketplace both are and complementary and exemplify the best in of our American “business” way of life.

References:

• Collins, Jim. 2005. Good to Great and the Social Sectors (monograph to accompany Good to Great) www.jimcollins.com
• Drucker, Peter. Managing the Nonprofit Organization Principals and Practices, 2006
• Drucker, Peter. The Third Sector-America’s Non-Market Counter Culture. Social Contract Journal: Winter 1990-1991.
• Duhaime’s Law Dictionary  www.duhaime.org
• Business   https://www.investopedia.com/terms/b/business.
• The Balance  www.thebalanceof smallbusiness.com, January,2018
• The National Council of Nonprofits   https;//www.councilofnonoprofitsorg/print/131
• The NonProfit Times 2014 Salary and Benefits Report  http://thenonprofittimes.com/news-articles. January,2014
• Kaylan City Life  http://kalyan-city.blogspot.com/2011/03
• Fortune Magazine www. fortune.com/tag/ceo-pay