The International Journal
of Not-for-Profit Law

Volume 7, Issue 1, November 2004

Edited by Dennis R. Young
National Center on Nonprofit Enterprise and the Foundation Center / 228 pp. / $34.95 (paper)
(Buy Now)

Reviewed by David Robinson*

Dennis Young, editor of Effective Economic Decision-making by Nonprofit Organizations, is founding CEO of the National Center on Nonprofit Enterprise (NCNE). This book is the first publication of the center, which aims to help managers and leaders of nonprofit organizations by “offering current and relevant knowledge on critical economic and business decision-making issues.”

The book covers eight areas relating to economic decision-making: pricing, employee compensation, outsourcing, fundraising costs, investment and expenditure, commercial ventures, institutional collaboration, and Internet commerce. Each chapter is based on the work of a task force that deliberated before the NCNE inaugural conference in January 2002. The task force reports, which were revised following the conference discussions, form the basis for the core eight chapters. As well as editing the volume, Dennis Young provides an introduction and a final chapter setting out seven key insights of effective nonprofit economic decision-making drawn from the preceding discussions.

This book is directed at filling a critical space in the nonprofit literature, with its focus on economic decision-making within nonprofit organizations. The sector has tended to focus on what makes it different from the business or government sectors, rather than confronting areas where decisions are subject to similar influences. However, this publication does also clearly identify the special nature of nonprofit organizations, in particular the importance of their mission, the values that underpin their operation, and their genesis “outside” the usual economic sphere.

Nonetheless, the special nature of community or nonprofit organizations does not remove them from having to deal with economic issues. Setting wages and salaries, collaborating or “making deals” with other organizations through outsourcing, and so on are in reality, whether openly recognized or not, heavily subject to economic influences. It is critically important that managers of nonprofits understand the economic factors that affect these decisions, and that they recognize when the special nature of the community sector is predominant and when generally accepted economic guidelines best apply.

For a community sector manager rather than an economist, the discussion of the difference between efficiency gains and effectiveness gains is especially useful. Combining activities in a similar activity, such as the shared use of an MRI machine by two nonprofit hospitals, can lead to an increase in efficiency. Combining different and complementary resources can improve existing services or create new services that contribute to greater effectiveness in meeting both organizations’ missions. Above all, the nonprofit sector has an emphasis on being effective.

As the above comments indicate, this is a book that would repay being read in a process of “dip, delve, reflect, and act,” depending on the issues facing an organization at a particular time. The very density of issues covered makes it difficult to pick out any specific section for comment–they are all important and insightful, with the degree of relevance depending on the situation within an agency. Looking briefly at three of the areas covered–employee compensation, institutional collaboration, and use of Internet technology–gives an indication of the wide range of issues canvassed.

In the recruitment of staff, in many cases, nonprofits must compete in an open market with for-profit businesses and therefore need to understand and promote the difference or advantage the nonprofit offers a potential employee. For some employees, there may be little immediate difference between working for a commercial or a nonprofit organization. Doctors in a private hospital and in a charitable hospice would expect similar work conditions and salary, for example, while a lawyer in a community law center may accept a lower salary than a lawyer in private practice but might expect parity with lawyers in the public (government) sphere. The growing importance of technical skills in the nonprofit world and the use by for-profit organizations of human relations staff means that many workers can move easily between these different forms of organization, in addition to the more traditional movement within each sector.

Nonprofit organizations may not be able to compete with the business sector on financial reimbursement. However, as chapter 3, “Compensation in Nonprofit Organizations,” points out, understanding why highly educated professionals are often attracted to work where wages and salaries are on average below salaries paid to similar individuals with similar attributes in other industries may help suggest the kind of compensation structure that can retain and motivate other employees. Non-financial factors such as the mission and values may make working for such an organization more attractive to some employees, and therefore allow a “discounting” of the salary offered.

Beyond this dependence (and even “faith” in some cases) on the mission and values to recruit and retain staff, more complex influences are covered. An example is how to recognize and reward employees for their performance in agencies where even measuring the desired outcome can be difficult. A connected issue is that of the advantages and disadvantages of employing staff directly or outsourcing services (chapter 4).

Chapter 8, “Institutional Collaboration,” raises the concept of developing and managing a “partnering portfolio” and recommends that organizations assess the desirability of alliances based on relative benefits and costs. The chapter suggests that collaboration for the sake of collaboration is seldom justified, and goes on to state that “measuring social value and the benefit to society is complicated methodologically and often lacks the degree of precision one would desire.” Although useful as a general reminder of the importance of understanding why an alliance or partnership might be of value and when it is useful to move in this direction, I would have liked to see consideration given to the often unquantifiable but very real outcomes of a consciously collaborative approach “for its own sake.”

As Dennis Young states in the final chapter, trust is one of the key underlying values in the non-profit sector. The role of the sector in building this trust, and not just in using it, could have been covered in more detail. Collaborative forms of working, whether through a “cluster” of agencies involved in a similar field of work or more formal alliances and partnerships, are a key element in building trust. This suggests that taking a collaborative approach can be justified as a matter of policy, not just for an instrumental purpose.

In focusing on “economic” decision-making, the book does not cover in detail the informal and unplanned “organic” partnerships that are often the reality and the strength of the sector. Too much focus on planning and achieving defined outcomes can risk losing this essential aspect of the sector. The discussion is based on an assumption of the nonprofit organization as a planned enterprise. In reality, partnerships often grow out of a combination of social and community functions. The role of these connections as a vital element in building social capital is not covered in the text, although reference is made to social capital theorists and practitioners at the end of chapter 8.

While chapter 9 focuses specifically on Internet commerce and fundraising, the whole area of understanding and dealing with changing technology, especially IT, represents a particular challenge to many nonprofit organizations, especially those with a social service focus. In the initial development of the Internet, it was particularly difficult to get community sector agencies engaged with this technology. In general, the environmental movement was more innovative in dealing with these developments. The human social services were extremely suspicious of the concept–agencies that were built and employed staff on the basis of personal contact could be excused for feeling uncomfortable with the concept of “electronic communication” that could potentially exclude face-to-face dealings.

In the long run, technology has caught up with them all. The moral of this is that you ignore technological change at your peril, while the message of this book could be stated as “you ignore economic realities at your peril and the peril of your organization.” This is not to suggest that the unique aspects of the nonprofit organization should be rejected in favor of economic determinism. Rather, it is a matter of engaging, understanding, and ensuring that nonprofits retain their core values. Then technology can be turned to the advantage of the organization.

Where is the defining difference in the nonprofit world? One difficulty conceptually is the term “nonprofit” itself. The term begins by defining the sector in relation to what it is not and in terms of its economic purpose, even when those funding, working in, and being served by the sector see the organization in terms of what it is: what services it carries out, what values underpin these activities, and the underlying values of the organization. In spite of the focus in terminology on “for profit” versus “not for profit,” terms that highlight economic differences, it is issues of values and mission that often hold overriding significance. The essential difference between the sectors, in other words, lies in the mission of the organization and the values that underpin it.

In the final chapter, Young draws out these underlying factors. The word “mission” appears in the headings of four of his “seven insights of effective nonprofit economic decision-making.” I would underscore this mantra of “mission, mission, mission” with “values, values, values.”

In Young’s words, “Mission is a primary concern, central to all wise economic choices in nonprofit organizations.” The second insight says, however, “As a practical matter, mission-related effects are often difficult to codify and quantify, but they should be made as precise as possible.”

This book is directed to ways of dealing with this “tension between mission and market that must be understood and appropriately managed.” In particular, the final chapter could well be copied and produced as a pamphlet (copyright permitting) for distribution to all management and administration staff in a nonprofit.

Young cautions that

“danger lies in the mistaken but common notion that becoming an entrepreneurial nonprofit economic enterprise means becoming just like an aggressive, corporate business enterprise. Certainly at this point in the early 21st century, one cannot say that corporate business is serving well as a model for nonprofits to emulate. If anything, the recent accounting scandals serve as cautionary tales of what can happen when institutions entrusted with public confidence betray that faith. The nonprofit sector is built on trust. Trust lies at the core of why these institutions are granted their special status in public policy. Accordingly, nonprofits must responsibly demonstrate their trustworthiness by applying sound economic principles to their business decision-making–in the service of achieving their social missions rather than selfish or self-serving ends. This is a constant that transcends whatever changes take place in the environment of nonprofit organizations over time.”

(Emphasis added.)

The message I take from this collection of essays is a dual one:

1. Understand the similarities with other forms of business; don’t neglect your understanding of basic technical information, skills, and practices throughout the organization.
2. Don’t underestimate or neglect the importance of the uniqueness of your agency–especially its values. A key component of the charitable or nonprofit sector is that organizations are based on values. These values are not a secondary factor to profit-making or technological advancement; they are the core of the organization.

A key attribute of the nonprofit sector is that it provides a place for the expression of values. The combination of elements is what is unique about the sector–that is, both elements shared with public sector social and community services (caring for others, development of individual potential, etc) and elements shared more with the private sector (independence, entrepreneurial spirit, etc). Independence, a caring nature, and a reliance on collective action are what set the voluntary sector apart.

Notes

* Based in Wellington, New Zealand, David Robinson (david.robinson@vuw.ac.nz) manages the Institute of Policy Studies Programme on Civil Society, directs the Social and Civic Policy Institute, and serves on the Advisory Council of ICNL.