Not For Profit Organisations And For Profit Organisations

Written by on July 22, 2008
Categories: Business Funding, Business Growth, Success Thinking

I suspect that many of us consider nonprofits and for-profits to be so fundamentally different that they require entirely different management approaches. It makes sense. A for-profit’s purpose is to build shareholder value. Since a business is ultimately worth what it will earn, there’s a logical emphasis in business on growing profits by increasing revenues and controlling costs. A nonprofit’s purpose on the other hand is to promote a cause or help the needy — those who otherwise would not be served because there’s not enough money in the activity to attract private investment. A nonprofit’s worth is a function of how many are helped or how much good is contributed. It’s the passion for helping the unfortunate that motivates people to operate soup kitchens and volunteer their time.

But nonprofits and for-profits have a lot to learn from each other. Nonprofits would likely do better if they placed more emphasis on business-like operational and financial performance measures, and for-profits would make more profit if they focused more on the passion and giving side of the equation.

New Nonprofit Perspectives

Let’s begin by examining the term “nonprofit”. It’s essentially a tax code designation indicating that these organizations are not taxed on the annual surplus they generate. But the term “nonprofit” does not mean that they’re supposed to spend more money than they have coming in. In fact, donors, be they individual, institutional, or public sector want a nonprofit to live within its means. They know that keeping a keen eye on the finances will ensure the organization’s survival and long term health.

Beyond survival, there’s the matter of productivity. Everyone involved with a nonprofit should care about how efficiently the nonprofit uses its money. A common measure is the percent of each dollar that goes directly to the delivery of services versus fund raising expenses or overhead. But what about measuring the productivity of each donated dollar? For example, how many mouths are fed or how many people are housed or how many jobless are trained and placed per dollar?

Productivity is most influenced by the caliber of an organization’s people, including both paid staff and unpaid volunteers. Granted, it’s harder to hold people accountable to high standards of performance when you’re paying them below market salaries or nothing at all. But that doesn’t mean a nonprofit should settle for less. Helping the needy requires that we do our absolute best. And most people like to be held to high standards — as long as they have the support they need to meet them.

New For-Profit Perspectives

For-profits don’t have any trouble focusing on the financials. In fact they have the reverse problem. A business can be so profit-minded that it forgets that good business starts with knowing the customers’ needs and then directing its collective talent and energy to satisfying those needs at less cost than the price it charges.

And then there’s passion. For-profits can learn some lessons about this powerful motivator from their nonprofit brethren. It’s passion for the cause or the needy that motivates nonprofit employees and volunteers to offer their time at a discount or for free. Successful businesses develop similarly passionate employees willing to go the extra mile to deliver maximum benefit to the customer regardless of compensation.

Sharing Perspectives

For-profits and nonprofits can learn from each other in several ways. One way is by having business people serve on nonprofit boards. When this happens, as it frequently does, the business people contribute valuable financial and business perspectives. They benefit in turn from the nonprofit’s reminder that the customer is the focus and that passion for service fuels results.

Another way is for each to use a management framework that draws attention to a well balanced set of objectives including customer, financial (and mission for nonprofits), as well as learning (i.e. people) and process. The Balanced Scorecard framework does this beautifully. It describes the organization from these interrelated cause-and-effect perspectives and places as much emphasis on the customer perspective (the “giving” part) as it does on the financial/mission perspective (the “getting” part), which includes revenue and profit targets for all, as well as mission objectives and targets for the nonprofits.

Whether you set up your own formal Balanced Scorecard or not, I encourage you to think through the four perspectives and establish measured objectives in each. You can start by looking at what benefits you need to deliver to turn your customers into raving fans. Then figure out what particular internal processes, when performed excellently, will a) deliver superior customer results, and b) help control your costs. Next, determine what kind of learning will grow your peoples’ capacity to perform. And finally, select the financial and mission outcomes you plan to achieve and that your investors and donors want to see.

Although nonprofits and for-profits have their differences, the elements of success are universal. And every organization will do better if it minds them all.

(c) SUMMIT Performance Systems 2008

Brian Kinahan is the Managing Partner of SUMMIT Performance Systems (http://www.summit-performance.com). SUMMIT works with CEOs & P&L managers at organizations of 200-2000 employees with multiple divisions or business units who want a proven, systematic way to increase revenues & profits. SUMMIT helps clients improve financial performance, customer satisfaction & employee morale using a strategic framework (including the Balanced Scorecard). Brian has 10 years of C-level management experience, including as COO of a publicly traded company, and understands the challenges of leadership. He has also been consulting to companies on performance improvement for 13 years. He earned an MBA from the UCLA Anderson School & has received extensive training in the Balanced Scorecard & strategic management from Norton and Kaplan’s Palladium Group. Subscribe to Brian’s ezine at http://www.summit-performance.com/mailinglist.htm

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