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Theory
& Practice
Economists in utopia?
Practice:
Elizabeth
Howard,
Assistant Dean and Director of Development
Nonprofits
seek a better way to earn: Competition has led nonprofits
to embrace economic theory and act more like their for-profit
cousins
Economics,
even utopian economics, was not a subject that overly concerned
many nonprofit managers about 10 or 15 years ago.
At that
time, “doing good” was the important aspect of
nonprofit work. Today, however, there is a stronger emphasis
on “doing well while doing good” and the nonprofit
sector pays greater attention to basic economic theory and
business skills. This shift does not mean that nonprofits
have abandoned their missions, ignored their clients and customers
or sacrificed their commitment. It simply means that in a
competitive external environment, nonprofits need to run their
organizations more efficiently and effectively — be
more “market driven,” as economic theory teaches.
To be
efficient is a cornerstone of economic theory: Successful
markets are efficient markets. Nonprofits need to be efficient.
Resources are scarce and donors are demanding. Funders now
ask and encourage nonprofits to collaborate to become more
efficient and effectively serve the population in need. In
his essay (facing page), Professor Julian Jamison illustrates
this point with his reference to preventative health care.
More hospitals may not be as efficient as more outreach, and
collaboration will help nonprofits expand to reach a larger
population, offering potentially life-saving services. Strategic
alliances among nonprofits are on the rise as they strive
to achieve their missions and make maximum use of the resources
available.
Efficiency
also means high return with some specific measurement of that
return. Nonprofits are incorporated with a responsibility
to society as a whole. Their “shareholders” are
the funders, clients, members and the greater community. So
the return on investment is different than that of a for-profit
enterprise, but no less important. How we measure that return
or performance demands metrics that are understandable and
tangible. There is a movement among several community foundations
in the Midwest to create new performance metrics for nonprofit
organizations. This movement would ask nonprofits to quantify
their goals and objectives so funders can see the actual impact
of their grants.
Economics
is also concerned with accountability. Increasing accountability
of executives, accountants and board members is a topic much
in the news today. Nonprofits are also concerned with accountability.
Since the constituency of the nonprofit is society in general,
nonprofit managers need to be accountable to more than simply
15 board members or 10,000 shareholders. Thus, the reporting
nonprofits do today needs to be more transparent. Since 990
forms are available on the Internet, donors are requesting
more information about where dollars are spent, and are more
concerned about how institutions invest their gifts now and
in the future. Professor Jamison’s research includes
consideration of the reasons why donors are concerned about
what happens after they die. The answers to this question
certainly have important implications for nonprofits, since
they rely on planned gifts and bequests to fulfill their missions.
This concern means that the organization has to be accountable
not only to the donor, but also to the family and the legacy
the donor leaves behind. Funds must be invested for the long-term
stability and success of the enterprise, not the short-term
gain. This is a unique economic strategy that nonprofits must
employ.
Economics
is market-driven. Nonprofits explore new markets, analyze
the costs and benefits of new directions and employ various
financial analytical tools. The key difference is that although
market response is important, mission is paramount. We want
to do well, but we must continue to do good.
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