Posted on: Sunday, March 7, 2004

HAWAI'I'S NONPROFIT
Nonprofits should seek balance in business, mission objectives

By Kelvin H. Taketa

"Nonprofit organizations need to be more businesslike." Legions of commentators on the sector have offered this mantra as a solution to many of the woes that seemingly plague nonprofit organizations. But before board members, regulators, the general public and the media rush to adopt wholesale changes, we should pause to reflect on the context that distinguishes and explains much of why the nonprofit sector operates differently.

Certainly, there are many instances where nonprofit organizations resemble big business more than they do an environmental group or a preschool. The largest private landowner in Hawai'i is a charitable trust. There are several human service organizations that provide an array of services contracted through state and federal agencies that approach $50 million in revenue annually. Several of our largest private schools resemble small towns, with large campuses, hundreds of employees and scores of facilities to manage.

These organizations and dozens of others operate at a level of complexity that rivals many of the largest companies in Hawai'i, requiring sophisticated financial, employee and information management systems. The reach of their programs often extends statewide and involves multiple constituents.

It is hard to imagine how more "businesslike" they could be.

But aside from scale and complexity, large nonprofits actually share many of the same challenges as their smaller counterparts. The fundamental issues are structural, not the consequence of poor management or lack of businesslike practices. Consider the following:

Unlike private industry, nonprofit organizations exist to serve a public benefit. The vexing challenge of trying to measure their effectiveness or progress is tremendously more complicated than measuring profit. Often, what you can measure — contributions, operating budget, number of clients served — don't capture performance against mission. And what matters often can't be measured. In an effort to demonstrate value, nonprofit organizations are pushed to produce measurable results. In many instances, what gets measured is a distraction — or worse, a devastating mission drift.

As part of the public benefit, nonprofits often find themselves subsidizing certain parts of their work. Schools subsidize the cost for students who cannot afford to pay full tuition, theater companies discount tickets for school groups, and clinics provide treatment to patients who cannot afford to pay. All of these examples point to one reason nonprofit organizations are perennially constrained in resources: They are not in the business of serving only those clients or delivering only those programs that prove most financially successful.

With rare exception, nonprofits have limited access to capital, other than through fund raising. In the business world, there are tremendous financial and technical resources available to structure loans and investments for businesses large and small. Few of these institutions and professionals understand the nonprofit sector or develop similar products and services for them — even though nonprofit organizations accounted for approximately $2 billion in revenue in 2000.

As a result, nonprofit organizations spend a lot of time searching for money. Many of the executive directors I know spend at least 20 percent of their time fund raising. Consider what the impact would be for a small business if the head of the enterprise spent one day a week raising the money to keep it going.

And this effort is separate from marketing. Nonprofit organizations must contend with multiple constituents that often have little connection with each other: funders, members, clients or customers and a board of directors.

Still, the sector shows remarkable resilience. In the Hawai'i Community Foundation's 2001 study of nonprofit agencies, about three-quarters of them with revenue larger than $25,000 have been in existence at least 10 years, and more than half at least 20 years.

There is no doubt that nonprofit organizations can and must pay attention to improving performance and developing adequate systems and oversight. Through our Organizational Effectiveness program, the Hawai'i Community Foundation provides financial and technical assistance for these efforts (see hawaiicommunityfoundation.org).

Still, it is time to do away with the notion that what separates nonprofit organizations from their business counterparts is certain practices. They are as different as cats and dogs. We need to borrow the best practices from each, while celebrating the differences that together make our community stronger.

Kelvin H. Taketa is president and chief executive officer of the Hawai'i Community Foundation. Reach him at kelvin@hcf-hawaii.org.