Nonprofits Are Not Broken Businesses

I recently talked with Sarah Lutman for an article in Twin Cities Business Magazine about trends in the nonprofit sector. In it, I urged the business audience – and all of us – to stop using the phrase “Nonprofits should operate more like businesses.” It feeds the temptation to think that hiring a business executive to run nonprofits will automatically solve their financial problems or business models. A good leader is a good leader regardless of sector, yes, but overconfident business “transplants” can face a steep learning curve when they enter the nonprofit world. The underlying myth to bust: Nonprofits are not broken businesses. They are simply different entities with different purposes.

A Twitter post sharing the same sentiment raised a lot of emotions from both perspectives, so I thought it was worth spending more than 280 characters discussing. I should note that Phil Buchanan, author of “Giving Done Right” and the president of the Center for Effective Philanthropy, has done an excellent job of speaking to the need of ending the trope of nonprofits as broken business models, and I strongly recommend reading his book.

Let me be clear: As a person who also made the switch from business banking to running a nonprofit, there were skillsets that were helpful. I know many wonderful nonprofit leaders who also came from the business sector who are doing incredible work. However, those that succeed do so because they pair their business perspective and talents with a sense of humility and curiosity about what they have to learn.

When I teach classes on nonprofit management, the first thing I list out on the whiteboard is the distinction between the business, nonprofit, and government sectors. All three sectors are important and interdependent, but they are different both in the roles they play and in how they operate. These three questions make clear the differences between businesses and nonprofits (we’ll save the differences with government/public sector for another time):

What are your accountabilities and expectations?

Who has ownership and power? At the bank, there were two owners, and one was the president. When I started at Propel Nonprofits (then Nonprofits Assistance Fund), I was accountable to multiple board members with different views, loyalties, and histories. Ownership will shape your strategy, culture, and operations in a big way. Related to ownership, who you’re accountable to determines how decisions are made. Businesses are accountable to shareholders whereas nonprofits are accountable to the communities and mission they serve. How those two types of stakeholders provide feedback or buy-in is starkly different and creates different expectations of their leaders.

How does the business model work?

Where your revenue comes from determines what levers can be pulled. In business, revenue comes from the customer; the end-user is also the person paying for the service or goods. Nonprofits typically have multiple sources of income (donors, philanthropy, government contracts, and earned income), and the “customers” and “buyers” are not necessarily the same. Nonprofits generally don’t run a special or offer a discount to attract more grants and donations. Again, the business leader has to master new levers and tools to make a strong business model.

How do you define and measure success?

This one tends to be the most complicated and the biggest learning for transplants. When you’re used to looking at revenue growth and profit as the primary measures of success and must transition to needing to consider multiple measures – financial, yes, but also progress toward your mission, the impact of your relationships and way of doing your work, how you’re upholding your values – lean strategies and efficiencies are not going to be the magic solution. Business leaders may employ practices like donating to related causes, investing in their people, and working for double or triple bottom lines, but it’s ultimately for the goal of increasing profits. In nonprofits, financial sustainability and strategy are in service to the mission. Even what to measure for a nonprofit is complex – what metric will be meaningful if it’s not the financial return on investment?

What irks me about the message that nonprofits need to be more like businesses is the underlying assumption that nonprofits lack discipline, systems, and management practices. If anything, the opposite is true. Whether you work in business or nonprofits or the public sector, certain management practices are always useful, including good leadership. This includes valuing humanity, practicing empathy, and engaging with those you’re accountable to. Nonprofits often have a much better track record in these regards than the business sector.

There are well-run and poorly run organizations in every sector. Hence I also push back against nonprofits who complain that their work would be easier if they were in the business sector; running a business is also hard and comes with its own challenges. Let’s appreciate the value both business and mission-driven work bring to our communities, support both with the tools they need to succeed, and practice humility and good leadership all around.