Should Non-Profits Operate More Like a "Business?"

Updated: Mar 11, 2019

Many of these health and human service organizations meet the criteria to be designated as 501.C3 (non-profit) entities by the IRS. As such these programs are purposed to provide mission-critical services to the clients and communities they servExperienced executives and managers in the health and human services fields can often provide a wealth of wisdom, insight and perspective into the practical realities that go along with leading mission-driven, “helping” oriented organizations.

Usually governed by a volunteer Board of Directors, these “non-profits” deal with a range of societal problems and needs from serving individuals with physical and mental disabilities, to those who lacked safe affordable housing, the homeless, impoverished families, troubled, incarcerated youth, as well as adults and children suffering the serious and sometimes fatal consequences of alcohol and drug abuse, to victims of abuse and violence and those simply in need of safe harbor. As such, we are all in some way impacted by these societal problems be it direct relationship to the affected person(s), their families and friends, to employers, companies, our economy and local communities to name a few. Perhaps this is one reason these non-profit organizations make up the largest employment sector in the United States,


A constant theme faced in running these many non-profit organizations is trying to respond to the growing needs and expectations by those seeking services and having limited financial and/or physical resources to meet these 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. Certainly, this required performing balancing acts not unlike those exhibited by the Great Wallendas*. Some service organizations, funders and evaluators 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, wide variances in the application of and criteria for States delivery of Medicaid waiver services, difficulties and the recent more stringent re-definition of homelessness by the US Department of Housing and Urban Development. To be fair, it should be recognized that 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, faith- based and other third sector non-profit organizations.


Nevertheless, a common refrain heard over the years by many who have led nonprofit health and human service organizations is “nonprofits would do a better job if they operated more like a business” As a rule, nonprofit organizations are, uniquely different from commercial businesses and government run entities. As such, one would reasonably expect to manage and govern them differently. However, there is not always a common framework for non-profit management, as is often the case in the business and government sectors. This dissimilarity is not to suggest that such models of management be applied to non-profit sector organizations. However, in the absence of more commonly identified management frameworks, non-profits (also known as “third sector”) organizations are frequently under pressure to look like and be like something they are not. 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 in order too be more successful.


These recommendations are often voiced by well-intended and dedicated private sector professionals, many who also serve on nonprofit boards, are volunteers and donors offering valuable 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 suggestions and advice have led me to taking a deeper dive into the theory that nonprofits would be better off operating more like businesses. In my exploration my first task was to define what operating like a business actually means. Here is what I found:


First there is no one common definition of what is a “business”

• 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 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 o produce and sell goods and services for profit.:

Business https://www.investopedia.com/terms/b/business.

Kaylan City Life www.kaylan-city.blogspot.com offers several definitions::

“Business is "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."

"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."

Business is defined as, "Human activity directed towards producing or acquiring wealth through buying and selling of goods."

The Balance of Small Business.com identifies the characteristics and 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 these varying definitions, is that the concept of “business” applies across a range of functions, situations and purposes. One common theme that runs throughout these definitions is to equate business with profits, (more recognized as “surplus” in the non-profit world) but deviates in definition from there.

Comparing the measures and criteria tied to profit and non-profit entities is difficult one to make. For example, how does a company that has made record profits each year, paid handsome dividends to their shareholders and gained greater market share translate to measures of success of a non-profit 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 more differences than similarities are at play when it comes to comparing profit and non-profit “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 additional and interesting non-profit organizational facts to consider are:

• Non-profit and other third sector organizations are Americas largest employer and a national growth industry.

• Non-profits are considered helping organizations and “change agents” and are guided by community needs, problems and goals and providing for the common good.

• In the non-profit 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 (profits or surplus) may actually be an indicator that services invested in are not being fully rendered to fulfill the non-profit organization’s stated mission (Non-Profit Quarterly, July 2013).

• Only about 30% (one third) of businesses or entrepreneurial ventures will survive their 10th year in business (U.S Department of Labor Statistics, 2016). This is not a model that suggests it be applied to non-profit startups.

• The average tenure of a corporate CEO is 4.9 years (Fortune Magazine) versus 12 years for non-profit CEO’s (Non-Profit Times), suggesting perhaps more stable and experienced leadership resides in non-profit realm.


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


To conclude, it is seeming most accurate to define non-profit, mission driven organizations as already, in fact, operating as businesses in the context of their core mission and purpose. While viewed differently by some of those oriented to the private industry concept of “business” both are essentially complementary and exemplify the special characteristics of balancing profits with principles and is what makes the American way of life special.


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 Non=Profits https;//www.councilofnonoprofitsorg/print/131

The Non-Profit 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


About the Author: Richard R. Karges, LISW-ACSW

Richard R. Karges, has more than 35 years of leadership experience in the behavioral healthcare field. He the Owner and CEO of Leadership Management Associates, LLC, an organization dedicated to identifying, developing, and enhancing professional leadership skills and expertise in the helping professions as well as improving the organization, mission and functions of both non-profit and for-profit entities.

Rick has been published and interviewed in Behavioral Healthcare Magazine and has contributed to several other professional journals and academic manuscripts addressing mental health issues and practice areas. He received both his BS and MSW degrees from The Ohio State University and completed training at the US Army Academy of Health Sciences.

He is a member of NASW and the Academy of Certified Social Workers.

www.leadership-management.org

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