April 5, 2023

Are Nonprofits Really Different?

Someone once told me, “Bart, you don’t understand nonprofits.” Interesting insight – probably would have been helpful to have also been told the why or what that formed the basis for the conclusion.

I’ve been following Michelle Guillermin on LinkedIn, particularly her posts on the state of and challenges facing nonprofits. My background is largely in the private sector, with one very fulfilling nonprofit experience at the Food Allergy Research & Education organization. I modestly think my private sector career has been successful, so I decided to reflect on what I might not understand about nonprofits. Maybe that individual was correct, so I decided to do some research and personal education.

In my for-profit experience, three key communities were joined somewhat like a Venn diagram—customers, shareholders, and employees. Success is measured by market share, revenue, customer satisfaction – with the emphasis on growth. Shareholders prefer increasing, predictable returns. Employees face the challenge of harmonizing the expectations of customers and shareholders, and employee satisfaction is usually a key area of management’s focus. Please sample some of the articles on the PowerSource website which explore these topics in more detail.

So, are nonprofits really not the same as their for-profit cousins? With the probable exception of employee compensation, there are close parallels between for-profit and nonprofit organizations that we have highlighted in the following table:

So maybe I really didn’t understand nonprofits with my background – but that raises the question, what must anyone understand to be successful in the nonprofit sector? So, off I went with a series of Google searches to find enlightenment.

I really enjoyed an article in Harvard Business Review written by Dr. Arthur C. Brooks, “AEI’s President on Measuring the Impact of Ideas, (March-April 2018)”, who went from teaching public policy at Syracuse University to becoming the President of the American Enterprise Institute (AEI). He asserts that nonprofits should not be measured on Outputs or Inputs, but on Impact. As he developed his thoughts on nonprofit leadership, he described two typical mistakes:

  1. Nonprofits believe their work is unique and their organization can’t be compared to any other organization, and
  2. Lamppost Error: in brief, you were walking down the street that has streetlights, and you drop your keys. One streetlight is dark, one is working. So, you look for your keys around the streetlight glowing brightly. Nonprofit leaders in this category look to measure inputs and outputs – such are contributions received versus last year, or how many people attended the annual conference.

I found the first mistake he identified, the ‘nonprofit views itself as unique’, humorous as it completely parallels my experience as a consultant to for-profit clients. In every one of my initial client meetings, the CEO invariably would use the word ‘unique’ to describe their business and the nature of their business issues. Still, I do believe the proliferation of nonprofits targeting similar recipients of service as direct evidence of the founder’s belief they have a unique answer and/or passion. Unfortunately, this tends to dilute the Impact of donor financial support as each organization must have HR, Finance, and other overhead fixed costs.

I encourage everyone to take a moment to read his article, and how he struggled to come up with objective measures of Impact. Do either of his common mistakes remind you of a specific nonprofit organization, or a group or similar organizations?

As I thought more deeply about Dr. Brook’s article, I developed a couple personal insights. First, the concept of measuring Impact to differentiate nonprofits on the surface seemed on target. His discussion on the challenges in measuring Impact rather than inputs such as annual revenue or outputs such as the number of programs undertaken by the organization highlighted some of the hard work necessary to really understand if the organization is successful. For-profit organizations also aim for Impact. I’m probably exposing my somewhat shallow intelligence here, as I understand words matter and maybe we need to imbue the term Impact with special meaning for nonprofits, so we all understand we are discussing just nonprofits. I will leave the subtleties to the deeper thinkers, please comment on this article to help better understand the different meaning of Impact for the nonprofit sector.

So, while I found much to agree with in the HBR article, I still didn’t achieve that ‘AH Ha’ moment with the breakthrough in understanding what I did not understand about nonprofits. Consequently, I decided to expand my research to other articles in search of my personal answer.

I went to another reasonably respected source, Forbes magazine and an article based on comments from the Forbes Nonprofit Council. (Forbes Magazine, 12 Effective Ways to Operate a Nonprofit like a For-Profit Business, March 7, 2018.). Again, I encourage you to add it to your reading list, as it contains 12 short topics from and equal number of Council members. Imagine my surprise when the first recommendation was: Raise Funds and Save Money. In fact, I will list the twelve recommendations if you don’t have time for the entire article:

  1. Raise Funds And Save MoneyCarlotta Ungaro, Fayette Chamber of Commerce
  2. Speak The Same LanguageAaron Alejandro, Texas FFA Foundation
  3. Focus On ROIGloria Horsley, Open to Hope
  4. Build Models Of Earned IncomeKristine Sloan, StartingBloc
  5. Run Your Nonprofit Like A StartupJason William Johnson, Chicago Urban League
  6. Generate Revenue Through CorporationsPamela Hawley, UniversalGiving
  7. Don’t Ignore Expenses Lindsay Crossland, The Salvation Army
  8. Match Costs And BenefitsDoug Shipman, Woodruff Arts Center
  9. Make The Mission Itself ProfitableNaomi Maisel, First Step Staffing
  10. Make Investments In Member NeedsPeggy Smith, Worldwide ERC
  11. Use Data To Make DecisionsAna Pantelic, Fundación Capital
  12. Be An Ecosystem WarriorGeorge Tsiatis, The Resolution Project

That list could have been compiled in a brain-storming session of MBAs for their next for-profit venture. More seriously, each of the 12 (as starters) should be applied and customized in the context of a specific nonprofit organization. My bias tends to emphasize the following after the mission and Impact are defined:

  • Revenue rules, and diversifying sources of revenue is essential. Make every effort to develop a product or service that is valued (market research and data overrule opinions) and creates s source of semi-assured revenue independent of donors and grants.
  • Beware of spending more than you raise. Being a nonprofit means you don’t have to pay taxes on your bottom-line surplus – your Board will quickly explain to you the issues with recurring deficits.
  • Treat the money provided by donors and other contributors as special, spend it with care, and treat your donors with care. A recent study noted that the number of donors contributing to US nonprofits has declined 7% in the last several years.
  • Use data and market research before you make decisions, particularly decisions with multi-year funding requirements and that require growth in your internal fixed costs.

I also found the “Run Your Nonprofit Like a Startup” resonated with me for additional reasons than those described by Jason Johnson of the Chicago Urban League. My experiences with for-profit startups were filled with employees coming together with a passion to accomplish something new, different, worthy of a tremendous commitment of time and thinking. The “it” product or service would make a difference in society at large or specific segments in the community. I found that same passion and commitment at FARE, making it deceptively easy for this for-profit capitalist to feel like a mission-driven nonprofiteer.

To coin a phrase, Dr. Brooks posited a strategic imperative that a nonprofit needs to define and execute to achieve the desired – Impact. I will refine his discussion on Impact as determining the organization’s measurable Impact IQ. I think the second strategic imperative for a nonprofit must be, to coin a phrase- High Fiscal IQ, based on the Forbes list. Fiscal IQ will be a key determinate in the nonprofit’s ability to achieve sustainable Impact.

My Australian friends taught me the phrase,” horses for courses” so I have tentatively concluded the person sharing their insights that started this article may have thought they were correct. I chose to disagree. I advise individuals who are in or considering a position in nonprofits to go one level down and make sure you understand the health and degree of the organization’s Impact IQ and Fiscal IQ.

As I circle back to where we started, I still believe that I understand nonprofits and how they should be led. I also believe that apart from employee compensation, both for -profit and nonprofit organizations are more similar than different. Motivating employees in a nonprofit will necessarily be different as ‘success’-based compensation and equity incentives are either limited or nonexistent compared to the private sector. For the rest, I conclude nonprofits really are less different than many imagine, and any differences are more a matter of degree than absolute uniqueness.

I am interested in your comments.

In this article:
In this article we will explore if nonprofits are unique in their approach to Impact and Execution, or do they share many similarities with their for-profit cousins. We will also discuss the role of Impact in measuring the success of nonprofits, and we coin the phrases Impact IQ and Fiscal IQ.
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