Why Nonprofits Should Be More Like Corporations

Nonprofits play a valuable role in communities at global and local levels. They provide much-needed services during crises. They offer help to vulnerable populations where government services do not exist or are inadequate.

Nonprofits have a charitable purpose and a special tax status, but essentially they are a type of business. Usually, one that delivers services instead of products. Like all businesses, they need to manage human resources, maintain infrastructure, monitor growth, forecast their revenue, and remain relevant in their market (cause) to survive.

Corporations have more resources than nonprofits to perform these standard business tasks. They also have greater motivation to do them since their survival depends on generating profit, and profit requires careful resource management. While acknowledging the differences, nonprofits would do well to borrow some of the corporate world's practices when it comes to resource management. Four examples where nonprofits could benefit from a more for-profit outlook are explored below.

Getting the Most out of Employees

Corporations are motivated to maximize the performance of their staff.

One form this takes is treating the performance evaluation process seriously.

In a for-profit setting, performance evaluations can be a vital management tool to identify ways to boost an employee’s performance and her contributions to a company. In the performance evaluation meeting, employee and manager review what went well, what could have gone better, and decide what steps can be taken—and resources applied—to improve the employee’s performance. While performance evaluations provide valuable feedback to the employee, the goal of the evaluation process is to help the employee perform at a higher level for the benefit the company.

In contrast, at many nonprofits evaluations are treated as an administrative function. Some nonprofits managers see the purpose of the evaluation process to be primarily about documenting poor performance, so it is on file in the event of future disciplinary action.

Part of the challenge for nonprofits is that the evaluation process can seem hollow when there are no benefits tied to a positive evaluation such as raises, bonuses, or promotions. While this is a challenge, performance evaluations can play a valuable function in the nonprofit's annual planning process. The performance evaluation meetings between a supervisor and her direct reports create an opportunity for the organization to learn what worked and didn't over the last year from the employee’s perspective and use this information to improve operations.

Performance evaluations can also be an opportunity to explore low- or no-cost opportunities for an employee to receive advanced training to increase her skills and contributions to the organization.

A second way corporations get the most out of their employees is by providing ongoing training, particularly to managers. Some people appear to be naturally gifted at managing others, but for most people, being an effective manager is a trained skill.

For-profit companies know this and invest in management training. One of the benefits of the training is that not only do the managers learn how to manage their staff, but also the training gives the company a common language and framework to discuss and approach management issues.

Nonprofits struggling with limited resources may believe they cannot devote time or money to management training. However, low-cost options for training exist. They include using an in-house facilitator to lead training sessions or having managers meet on a regular basis to discuss how to apply the organization's management principles in the work environment. The main thing is that managers are encouraged to take their management roles seriously and given access to resources to work continually on their skills.

Prioritizing Effectiveness & Efficiency

Corporations put a premium on effectiveness as well as efficiency.

When employees work efficiently and effectively, it saves the company money. When a company rewards effectiveness, it's indicating that it values working smarter and achieving results.

In comparison, nonprofits can interpret long hours in the office as a sign of greater commitment to the cause. Nonprofit managers may communicate, directly or indirectly, that they see those who work the most hours as working the hardest; a consequence of this messaging is that employees do not have an incentive to work more efficiently or consider whether they are working on the right things.

Hiring the Right People

Large for-profit companies have the resources to do more extensive recruiting than most nonprofits. But large HR budgets are not the only advantage for-profits have over nonprofits.

One of the things corporations seem to do well is hiring people with the appropriate levels of education and training for a position.

The best example is that for-profit companies hire professional administrative assistants for administrative assistant work, a hiring practice that is less common in the nonprofit world.

Nonprofits can get the HR piece right for their senior-level positions and hire people with the right balance of skills, education, and experience. For more junior positions--positions that are essentially administrative assistant positions--many nonprofits choose to hire individuals with advanced degrees.

Hiring individuals with advanced degrees for roles that might not even require a college degree can cause an undercurrent of discontentment in the organization. This is especially true if an organization has several admin roles filled by over-qualified individuals.

Everyone wants to apply their education and skills. If you put someone in a role where they will be unable to use their skills and training, they will quickly get frustrated. Frustrated and bored, they may not be motivated to do their job well. Hiring the level of skills and education needed for the job, and not putting over-qualified individuals in admin roles, can result in a happier work environment for everyone.

Understanding Who They Work For

Corporations ultimately serve their shareholders. They have client/customer groups they sell products and services to, but corporations, if they are public, ultimately serve their shareholders. Knowing who they serve gives a corporation a guide for its business decisions.

Nonprofits don’t have shareholders in the traditional sense, but they do have investors in the form of funders.

Funders fund selected projects or contribute, less commonly, to an organization's general operating expenses.

Nonprofits report on their work to the funders, just as companies provide annual reports to their shareholders.

Where things are fundamentally different is that nonprofits tend not to see their primary role as serving their investors (funders). Nonprofits can see (or want to see) themselves as autonomous. They know their funders are essential to their work, but they expect to manage the organization’s strategic direction without interference. They do not always welcome funder involvement as a natural by-product of the grantor-grantee relationship.

If a nonprofit has a for-profit wing and can fund its charitable works, then it is truly autonomous, similar to a privately held company that does not have to worry about pleasing shareholders.

If outside funding is needed to do the work, the reality is that the nonprofit works for its funders. Just as a corporation might need to move in a certain direction to please its shareholders, nonprofits have to please their funders, and at least some of a nonprofit's funders may have an interest in shaping an organization's direction and priorities.

Joining Forces

In the corporate world mergers between companies are common.

Sometimes the mergers are not mutually welcomed (as in the case of hostile takeovers), but planned mergers are not unusual. Trading assets, entering joint ventures, creating efficiencies by joining operations, these are all a part of business as usual. Corporations aggressively protect their assets, but they aren’t afraid to share them with another company if it helps them to reach a goal.

On the other hand, nonprofits rarely merge. Although they do collaborate with one another on occasion, the collaborations can be more hierarchical than peer-to-peer because of the nature of grant mechanisms, which has one organization as the principal and the others as subcontractors. If nonprofits embraced mergers more frequently, one benefit would be less competition for scarce funds. Nonprofits that join together could also realize cost efficiencies and be in a better position to offer an expanded range of services to their clients.

Serving Funders

What does this have to do with grants and grant writing? Funders, just as investors in for-profit ventures, are looking for a return on their investment. It isn't enough anymore (and maybe it never was enough) for an organization to work for a meaningful cause or even to do good work. Both private foundations and government agencies want to work with organizations that will be good stewards of their money. They want to work with organizations that can deliver results,  on-time and cost-effectively.

If your organization is structured to function efficiently and to maximize the use of resources to serve the funder's interests--from financial resources to human resources--the funder will want to continue to invest in you. Sending the funder required reports and meeting the basic terms of a grant is a given, but to really flourish, you need to understand and serve the funder's interests. The funder has invested in your organization in the belief that you can help it to achieve its desired impact on the world. If you are able to do that, the funder will continue to "buy shares" or reinvest in your organization by sending more grant funds your way.

Additional Reading

*Update 10.12.2015: For more information about nonprofit mergers check out the NonProfit Hub post When Your Powers Combine: Why Nonprofit Mergers Should Not Be Feared by Lincoln Arneal.

*Update 10.28.2015: If you have a subscription to The Chronicle of Philanthropy you may find this opinion post of interest related to the topic of what nonprofits can learn from for-profits, "What Nonprofits Need to Learn from Business" by Perry Yeatman

*Update 11.5.2015: Interesting article posted on Devex on nonprofit sustainability and the value of for-profit and non-profit collaborations and integrations. See "For-profit and nonprofit integration: The road to financial sustainability" by Neil Ghosh.