Nonprofits as Network Organizations

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 Nonprofit organizations are different from business and government. One would reasonably expect to manage and govern them differently. However, in the absence of a general framework for nonprofit management, third sector organizations are under persistent pressure to look like something else. On the one hand, nonprofits are advised (sometimes by “venture” philanthropists) to become more entrepreneurial and business savvy, orienting their organizations more closely to market forces. At the same time, organizations are urged to make increasing the accountability of their “outcomes” their highest priority, by controlling internal processes and structuring and orienting themselves as hierarchies.

These two contrasting models for nonprofits, markets and hierarchies, have strong institutional support and powerful examples in business and government. However, both management approaches tend to diminish the associational aspects of nonprofits, mimicking business and bureaucratic modes of operation instead. Neither approach is well suited to helping nonprofits increase their stability, autonomy or influence or clarify their larger role and contributions to the rest of society.

The starting point for managing nonprofits as market organizations is sales: what goods or services can our organization provide that others will buy? Market awareness and commerce are so culturally pervasive that it is the customary way people understand how organizations work.

People in business frequently observe that nonprofits are not well managed—as evidenced by their small firm size, slow decision-making, modest pay and failure to show a profit. In this view, nonprofits need to learn the discipline of the marketplace and managers need to spend more time on pricing, cost control and marketing. Paying attention to non-paying customers and collateral community issues and the practice of involving large numbers of people in deliberation are perceived as management deficiencies.

Peter Drucker, founder of the Peter F. Drucker Foundation for Nonprofit Management, captured this view best when he said, “the vast majority of nonprofits are not so much badly managed as they just are not managed at all. One of the reasons I spend so much time on nonprofits is that it is so incredibly easy to improve them, because you start from such a low base.” The Drucker Foundation provides training to nonprofits to redirect their focus by asking questions such as “Who is the customer?” and “What does the customer value?”

For the earned income activities of some nonprofits, paying attention to these marketplace cues and behaviors can have obvious and immediate benefits. In this context, the familiar SWOT analysis for strategic planning works—focusing on strengths, weaknesses, opportunities, and threats. However, market forces are just one important consideration in a very complex world for nonprofit leaders. Nonprofits need robust financial systems and skills, but being well administered should not be confused with being market driven.

Wholesale adoption of traditional business techniques and incentives would be a disaster for nonprofits—obscuring their ability to mobilize non-financial community resources. The idea that nonprofits would be better off if they acted more like businesses needs to be put to rest.

The key management task for hierarchies is process: how can the organization control the predictability of its outputs? Since donors and funders of nonprofits want to know whether their funds have been used effectively, government agencies and United Ways are requiring proof of “outcomes.”

In this view, while the market is a cost efficient mechanism for most goods and services, certain types of transactions are more reliably controlled and documented if they take place inside a firm rather than in the marketplace. Organizations that vertically integrate—with clear departmental boundaries, reporting requirements, and formal decision-making—can track and report their outputs, reduce costs and increase stability. This approach is especially suited for large organizations engaged in mass production and distribution, leading some to conclude that nonprofits also need to consolidate many smaller organizations into a few large institutions.

Clearly, the business world has benefited from increased management attention to quality, customer satisfaction, internal processes and benchmarking. These techniques also hold great promise for nonprofits. However, when they become the organizing principle for management, they send nonprofit organizations in the wrong direction. Akin to the good intentions for reform and efficiency at the front end of implementing managed health care, intensely rational systems lead nonprofits to a depersonalized result. Foundations and United Ways would be wise to learn from the high hopes and due diligence goals of HMOs that gave birth to a system of low satisfaction and management by the numbers.

A third framework is a better fit: nonprofits as network organizations. The model is rooted in sound practice, native nonprofit tradition, and a growing theoretical base. Network organizations put a priority on managing their economic and policy relationships with other organizations, suppliers, community leaders, government officials, and so forth, to increase their flexibility, access to resources and policy influence.

“One of the things I enjoy about my job is being part of a network within the community,” says  Michelle Woster, executive director of Person to Person in Minneapolis. “Because our organization is small, it’s really important that we work with other agencies. We can’t just create programs left and right to serve needs. We’ve had to go out and find all sorts of agencies and churches and groups that provide things that our families need that we can’t provide.”

Nonprofits managed as network organizations look at the world from the perspective of their relationships. The starting point for setting this strategy is not the traditional SWOT analysis, but community mapping, laying out the organization’s current situation and needed connections. The nonprofit function of network connector has important benefits for the rest of society—teaching mediation and group decision-making, building trust, bridging communities and providing opportunities for individuals to engage in activities larger than the circles of their family and friends. Network strategies offer a powerful set of tools to manage the key tasks and challenges faced by nonprofits and strengthen their community connection.

Nonprofit leaders want to increase the reliability and autonomy of their funding, and need to mobilize the power of numbers to influence public spirit and public policy. Nonprofits can use network strategy to organize work across functional areas of organizational activity—board roles, fundraising, government relations, public education, communications, civic engagement, volunteer recruitment, and so on.

Community-based network practices are lacking in most nonprofit management programs, but many successful nonprofits intuitively function as network organizations. Community organizers and grassroots organizations have applied network concepts for years. Saul Alinsky incorporated network analysis into the training of community leaders and organizers, community mapping is a key element of John McKnight’s work, and the approach is part of the curriculum of both the Midwest Academy and the Industrial Areas Foundation.

Ironically, while the business world is recognizing the flexibility and leverage gained from network strategies in a network society, nonprofits are being schooled in basic market or bureaucratic approaches. Network analysis has attracted interest from sociology, business administration, public policy, economics, behavior science and information science. While most recent examinations of network organizations have examined business applications, the early work in the field began with nonprofit organizations, reflecting the natural application of this framework.

Most nonprofits share the key characteristics of organizations that can most benefit from networks: resource dependency, changing environment, complex external relationships, high need for trust relationships with suppliers (including funders), need for flexibility, and the need to influence policy. At the local level, where most nonprofits do their work, managers and boards need the capacity to assess the strength of their network relationships, map the linkages and understand how network strategies can advance the work of their organization.

Nonprofits need a clearer idea of their own function before we can build a more influential and better-understood nonprofit sector. The strategic view of network organizations offers practical tools for managing at the level of individual organizations, and a picture of the larger nonprofit sector as a decentralized open network, the multi-hub exchange of information and initiative that Michelle Woster describes.

Citizens in every democratic country have a proven affinity for non-governmental organizations formed for as many purposes as people can imagine. What societies need from these organizations is not to be more businesslike, or more bureaucratic, but to excel at making connections and bringing together people and organizations that would probably not otherwise work together.

Jon Pratt is the executive director of the Minnesota Council of Nonprofits (www.mncn.org) and is currently developing a book and series of organizational tools on network strategies for nonprofits.