Should a nonprofit be run like a business?

Many leaders and participants in the nonprofit world believe that the introduction of businesslike practices have no place in an organization with a philanthropic mission. They suspect “corporatism” and the Monster of Metrics. If we look closely at what nonprofits do, however, it is clear that most are hybrids. They provide a product or service but their success is measured by their accomplishment of their philanthropic mission rather than the size of their operating surplus. This distinction is not merely descriptive. It is the foundation of effective leadership and board oversight of a nonprofit.

Similar to a private business, many organizations like hospitals, museums, universities and performing arts companies depend very heavily on user payments like tuition and ticket sales and on government contracts. Those that are the beneficiaries of philanthropy are unlike the private sector in that respect, but for the sector as a whole philanthropy is a surprisingly small part of total revenues – an average of 13% from 1995 through 2,000.[1]

Should a nonprofit be run like a business?

If they provide a service (e.g., teaching) or a product (e.g., a performance), they should, in many respects, operate like their for-profit brothers and sisters. Every nonprofit has a bottom line in that its revenues (including gifts and grants) must, over time, exceed its expenses and capital needs.

 

Nonprofits are subject to market forces. Performing arts groups, museums, universities, private schools and others all depend on the quality and effective marketing and sale of their products and services and the perceived value proposition of their price of admission. Even if they rely on charitable contributions to make up the revenue shortfall from ticket sales or to wholly finance themselves, the need to attract gifts to support their activities creates a kind of market in which they compete with other nonprofits for gifts and grants. Their ability to do so is a function of the clarity and compelling nature of their mission and the quality and creativity of their work.

Because of these parallels to the private sector, nonprofits can and should benefit from many good business practices like careful planning, clear goals, effective strategy, cost control, marketing, culture change, talent management and careful measurement of progress toward goals. [2]

At the same time, their success is not measured by the extent to which revenues exceed expenses. They are mission-driven. It is perfectly clear that the success of a nonprofit is not measured by the size of its profits.

The measure of success of every nonprofit is the degree to which it achieves its philanthropic mission. But too often that mission is stated so broadly that it provides no method to guide the allocation of resources or to judge whether an organization is successful. Unless the board and senior management establish the organization’s philanthropic mission with clarity and specificity, it isn’t possible for them to know whether the organization is doing a good job. Suppose the stated mission is to “feed the homeless” – how many homeless, how much food, in what kind of venues and in what time frame?

 

The search for clarity and specificity has led me to substitute for broad statements of vision and mission the question “what do we want to accomplish?” Not what do we want to do (provide excellent education, make superb documentaries, feed the homeless, etc.) and not a general statement of what do we want to be (the best university in our area for providing a liberal arts education), but what do we want the results of our efforts to be in terms of our philanthropic purpose and in what time frame?

Some examples:

  • In five years ABC Nonprofit will be feeding two meals a day, providing at least --- calories to -- hundred homeless people in [name geographical areas] from at least -- locations.

  • In five years, ABC University will have expanded its STEM curriculum to double the number of students in computer science, add two new undergraduate engineering degrees, and entered into a partnership with a major university to provide a joint BA-MS degree in computer science and in engineering with the first class entering in 20--. We anticipate that these goals will require adding – new faculty members, who will be on board as required to teach the new courses and added students.

  • In five years, ABC Modern Dance, will add – new dancers, increase the number of performance days by – days, and have a program for two part-time resident choreographers to create new works.

It is only by providing clear and specific objectives like these that a nonprofit can reasonably adopt strategies and action plans with milestones to realize its philanthropic goals. Side by side with those philanthropic goals are the “business-like” aspects of its “products and services” – effective strategy, revenue generation, cost control, marketing, culture change, talent management, KPIs and other techniques. Borrowing the techniques of business that lead to greater effectiveness enables the nonprofit to achieve its philanthropic goals as efficiently as possible.

 

One of the most important questions for the board and leadership of every nonprofit is:

“How do we know when we are doing a good job?”

I welcome your thoughts about the issues raised by this post.

 

[1] Richard N. Foster and Sarah Kaplan, Creative Destruction – Why Companies that are Built to Last Underperform the Market – And How to Successfully Transform Them (Currency/Doubleday 2001), cited in Engine of Impact at p. 2.

[2] The usefulness of business practices to nonprofits is explored in depth in a splendid new book by William F. Meehan III and Kim Starkey Jonker, Engine of Impact: Essentials of Strategic Leadership in the Nonprofit Sector (Stanford Business Books 2018), referred to as “Engine of Impact.”

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