Competing for the Public Good

by Peter Manzo, Former Executive Director, Center for Nonprofit Management for the Los Angeles Business Journal

1. Attracting investment: The struggle to raise funds is fierce. In recent years, government support for public benefit organizations has dropped sharply, while giving by individuals and foundations has remained flat in real dollars and the number of nonprofits pursuing these funds has risen dramatically. Donors continue to increase their demands that nonprofits demonstrate improved performance and results.
2. Competing for customers: For-profit businesses increasingly seek contracts and customers previously left to nonprofit organizations in areas such as coordinating and providing social services and health care. Large corporations like Lockheed-Martin and Maximus have scooped up the lion's share of funding for administration of case services following welfare reform. In Riverside County, Marriott has steadily increased its share of contracts for meals for the poor and elderly, in large part because of economies of scale and an ability to absorb losses. For-profit companies have important advantages that nonprofits cannot match: they can raise capital by selling equity interests, can use debt and equity to move into new enterprises at significant scale, and can wait months, even years, before seeing profits. Of course, nonprofits also compete with each other, and this emerging competition with for-profit businesses is in addition to the traditional competition for reimbursable services to clients like Medi-Cal patients or job training participants.
3. Wooing and retaining skilled employees: Here again nonprofits compete with each other and with private sector firms. Nonprofits generally must offer greater personal satisfaction and involvement to professionals, since they usually cannot match private sector salaries and are unable to offer stock options. The tight employment market and the trend toward privatizing social services has raised fears of a "brain drain" from the nonprofit sector. A recent informal survey of Bay Area nonprofit CEOs indicated a possible trend toward leaving for the private sector after serving as the chief executive of a nonprofit.

These aspects of competition may seem surprising because nonprofits are rarely thought of as business enterprises. Unfortunately, understanding of the business nature of nonprofit organizations is obscured because, in most cases, there is no clear relationship between the products or services nonprofits provide and their market price or value. The typical nonprofit serves two sets of customers, the donors who fund the organization and the members of the public that it serves. This prevents observers from using the central measuring stick used to evaluate for-profit businesses, namely, the comparison of sales revenue to production costs, which leads to derivation of a market value for shares in the business.

A further complication is that the primary product of most nonprofit organizations is change, and this is very difficult to appraise: e.g., improvement in nutrition, educational achievement, employment and economic power, cultural enrichment. Even where there is a link between a paying customer and a service or product, such as with training and consulting organizations, those evaluating nonprofits go beyond revenue figures to ask whether the services sold produced a positive change in the consumers and the community.

This demand for results is the heart of the matter, and it is here that the crucial distinction between nonprofit and for-profit businesses comes into play. The question of whether a new product or strategy is positively good for the community is almost never posed by directors and managers of for-profit companies. For luxury goods or snack foods, and many other items, revenue growth is justification enough for investors. Likewise, the primary forces driving the proliferation of mega-mergers are market share and increased income; the question of whether the consumer will receive a better product or service is rarely raised (some would even say it is irrelevant), and given recent experience, cannot simply be assumed to be indicated when we see profits rise. Needless to say, whether the lives of consumers and their communities they live in are improved is completely outside the scope of the market economy.

While nonprofit organizations and for-profit businesses share very important traits, therefore, a marketplace analogy can only take us so far. The nonprofit sector's very existence is due to the need to pursue goals that neither the market economy nor government can address (indeed, needs that the market economy often exacerbates), such as alleviating poverty and its ills, providing access to health care or the justice system, improving educational opportunity, protecting the environment, and other important goals that cannot be accomplished by selling them to rational economic actors.

It is practically an article of faith that the invisible hand of competition forces businesses to deliver improved products and services or become extinct. Nonprofits must continually seek to become more efficient, but the emphasis must be less on doing something cheaply than on doing it as effectively as possible. Concerned members of the business community quite rightly expect nonprofits to work to cut costs and overhead. Cutting costs is only part of the equation, however. The mission of nonprofits is not increased value to shareholders, but improved lives and communities. The challenge for directors, funders and supporters of charitable groups is to respond to competition in a way that produces better results for the community, not just improved revenues for their organizations.