Nonprofit organizations should not be managed like businesses, despite pressure to reframe their work as social enterprises. Nonprofit organizations have a few fundamental differences from businesses as organizations. These matter and must be considered by management.
In a business organization, typically, the money goes from many to few. The sale of goods or services to several customers generates wealth for the few owners or shareholders. In contrast, in a nonprofit organization, typically, a few rich donors spend their wealth to disburse the resources to many that need them, in the form of essential goods or services. These disbursements may take many forms, be it books, blankets, clothing, education, healthcare, housing or any of the core needs of the served populations.
Why does this matter? A business has to advertise their goods and services to generate demand, persuading future customers to buy what they are selling. In contrast, since nonprofits are typically setup for a purpose, they exist to cater to some unmet needs in the community. Often, the nonprofit organization will have a limited budget to provide this unmet need, and thus will prioritize who they serve. They may even have to resort to rationing their services, focusing on the most needy, and turn away people who they cannot help with their limited budget. Continuously raising funds is a challenge that several leaders in nonprofit organizations will tell you about. One founder of a nonprofit I talked with lamented that he has to spend as much as fifty percent of his time in activities related to fund-raising when all he really cares about is the cause for which he founded the organization.
Businesses tend to be structured as hierarchies with top management enjoying the positional power that allows them to use rewards or punishment as a way to get alignment on goals throughout the hierarchy of the organization. In contrast, nonprofit organizations tend to be organized with less hierarchy and more often as networked groups of volunteers who share similar values and care about the cause or mission of the organization. The executive directors of nonprofit organizations cannot offer sales-commissions or bonanza-bonus deals or fire people who may mostly be volunteering anyway. Thus, business leaders have and use executive power to accomplish their goals, while nonprofit leaders must rely on their influence instead. Instead of being at the top of a hierarchy, they are better off seeing themselves as being at the center of a circle.
Another difference between a business and a nonprofit organization is the kind of people who work at these organizations. At the risk of making a big generalization, one can still raise this as a consideration that leaders may keep in mind when managing people in different types of organizations. Businesses tend to attract those who are motivated by extrinsic rewards, as the hierarchical and other structures in these organizations are built on this basic premise. You have probably heard the phrase ‘climbing the corporate ladder’. The nonprofit organizations tend to attract those who find resonance with the mission of the organization. They are passionate about the cause and will often willingly take a pay cut compared to similar positions in the business organizations. It is a way to demonstrate their commitment to the cause and willingness to pursue it at a personal cost.
To learn more about how to modify business practices to better suit the needs of nonprofit organization, please reach out to me, or see my book Strategy Making in Nonprofit Organizations, co-authored with Mary Vradelis. (Illustrations by Tom Benthin).