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Directors who bring to nonprofit boards the same business expectations and analysis that they bring to for-profit boards could make a significant difference in the outcomes that non-profits produce. Too often, however, directors from for-profit enterprises leave those viewpoints behind when they join the boards of nonprofits and of foundations that contribute to them.
Peter York
Instead of applying their business smarts to nonprofits, many directors who are new to the nonprofit world use the same narrow perspective that unreflective donors often adopt – that the chief indicator of a non-profit’s performance is the percentage of its budget that goes to programs versus the percentage that goes to infrastructure. It is simply assumed that the more money that goes to programs, the better.
Yet in the business world, these same men and women certainly encourage management to invest in infrastructure – the technology, talent, research, and other resources – that enables the company to produce its products and services and to succeed on an ever growing scale. Encouraging these standards is precisely how some of the largest and most successful nonprofits such as the Girl Scouts or Big Brothers/Big Sisters have been able to bring the benefits of their programs to larger and larger numbers of people.
Unfortunately, most nonprofits remain stuck in the bind of overhead versus programs, preventing them from scaling up their activities to produce greater impact. Directors with for-profit experience are in a unique position to help. They understand the logic, economics, and metrics of infrastructure investment. For most, scaling up an enterprise is a core competency. And because breaking out of the overhead/programs mindset is such a fundamental reorienting of the organization and its policies and priorities, it requires not only the support of the board but its active involvement and leadership. Specifically, these board members can:
- Insist on the same expectations for infrastructure investment that exist in the for-profit world. In their oversight roles, directors with for-profit experience should ask to be shown program results, as well as what has been invested strategically to take those programs to scale. In the for-profit world it is simply unthinkable that an enterprise could function on a large scale without systems, technology, marketing, HR support, appropriately compensated leaders and a host of other resources. Success comes with costs, and directors from for-profits should not shrink from applying these fundamental principles to nonprofit boards.
- Acknowledge that data about the costs of outcomes is fundamentally lacking. Those infrastructure investments should of course be cost-effective, producing the biggest bang for the buck. But the truth is that most nonprofits have no data about the proper ratio of overhead to programs, no notion of the possible ‘margins,’ no research on the cheapest way to achieve the greatest impact. Unless that fundamental fact is acknowledged, the organization is simply likely to try to keep overhead as low as possible rather than trying to achieve the optimal balance of overhead versus programs.
- Urge the organization to work with other nonprofits to collect data and establish the costs of results in specific programs. In the for-profit world, companies calculate costs and margins for each product or service. The only way for nonprofits to answer the overhead question is to undertake a comparable effort with specific services and programs. By pooling data with organizations that pursue similar programs, non-profits can collectively calculate the cost for particular results and develop realistic cost models that donors and other stakeholders are more likely to accept.
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Good article and strong points.
However, I think that goals like “changing the quality of education” are perfectly acceptable. Then program designers will define the indicators of success to measure the change. Such indicators would include things like – improved graduation rates, higher test scores, less drop out, etc. Having broad goals allows the board to focus on outcomes that matter, while leaving the details to staff.
Even goals like “ending homelessness” are useful at the broad strategic level. Such a goals would require the non-profit to partner with other agencies, government and otherwise; such partnerships become part of the strategy.
The article is a good start but stays at too high a level of abstraction. If the author gave a few specific examples of useful performance measures for a couple of not for profit organizations and programs it would be more helpful to the reader who want to apply the concept. Since measurements and goals influence behavior, choosing good measures for the most important or most costly programs will help focus the organization to improve performance. However as the author points out in his critique of the focus on the ratio of program expenses to total expenses, choosing a poor measure of performance in a less important part of the business may result in improving that one area at the expense of overall effectiveness.
Great article and very useful information! If more people understood that not-for-profits are still businesses and need to be run in the same way I think we could do more good.