Competition is the engine of a market economy, imposing discipline and efficiency on competitors that must meet the pace set by their rivals. The struggle for market share and profitability results in winners and losers—the failure of some is necessary to the success of others. Competition is desirable when it induces greater performance and accountability among market players. But as nonprofits are hastening to enter arenas where they compete with commercial firms, an increasingly important question becomes: in what contexts and under what conditions can competition promote preferred social outcomes?

The nonprofit sector enjoys tax-exempt status in the expectation that it will uphold the larger purposes of society by producing public benefits. Being organized for public benefit implies openness, sharing and cooperation with many parts of a community. Yet the logic of competition induces successful competitors to elevate market values above all others and thus, has the potential to distort nonprofits’ missions away from public purposes. How nonprofits can continue to meet the expectations for which they were designed in an increasingly competitive service environment is a significant challenge facing the sector.

State and local governments are increasingly expanding their tools of public provision through privatization. Outsourcing has long been an option embraced by local governments in a wide variety of service areas, and nonprofit organizations have historically assumed a key role in extending the arm of government as service providers in the health and human services. Recent welfare reform legislation, mandating job placement and caseload reduction, has loosened the constraints on local governments and hastened the entrance of for-profits into an area historically dominated by public and nonprofit providers. Nonprofits are increasingly facing the challenge, usually reserved for the private sector, of how to be competitive.

Added to these competitive pressures, nonprofits are facing increasing pressure to reform their operations. A growing management literature and a spate of “how-to” manuals reflects an increasing call for management improvements and accountability reforms with dubious results on nonprofit performance. The growing ambitions of the business sector to capture a share of public contracts in human services now add yet another formidable challenge. Nonprofits are now “competing” for massive government contracts with aggressive and well capitalized behemoths such as Lockheed-Martin IMS and MAXIMUS. Case studies in the welfare-to-work area are beginning to paint a complex picture that is at once worrisome and encouraging about the likely fate of nonprofits when they compete.1

Nonprofits in employment and training have long served cities and counties through training contracts for numerous Health and Human Services welfare-to-work programs and Department of Labor funded programs under the Job Training Partnership Act (JTPA) for welfare and other disadvantaged populations. But under Transitional Assistance for Needy Families (TANF),2 states and localities are faced with new mandates to increase dramatically job placement and participation in employment related activities. The increase in the number of clients to be served and the inclusion of short deadlines for caseload reductions have increased the need and willingness of jurisdictions to restructure their delivery systems and change the number and character of their contractors. In many cases this has led to fewer, larger contracts for both nonprofit and for-profit providers, often under performance based payment schemes. These conditions favor large, well capitalized and technologically sophisticated organizations that can sustain services while they demonstrate and verify performance and wait for payment. Many smaller and medium-sized nonprofits are therefore at a disadvantage in gearing up to compete.

These conditions have spurred some nonprofits to restructure their management, information systems, investments and hiring to allow them to compete with large, well capitalized and managed for-profit players. Some nonprofits are making the necessary organizational changes. Others are finding it difficult to resolve the inherent contradictions that the situation poses for their missions and organizational cultures. Many organizations have opted out completely where they judged that the necessary compromises would be counter to the interests of the women and children they serve. In New York, Milwaukee, Houston and San Diego, to name a few dramatic instances, nonprofit providers have scrambled with uneven success to make themselves competitive or face being closed out of an opportunity to take leadership in areas central to their values and missions.

Competition in the private sector induces producers to achieve efficiencies and improve quality of production as well as conduct product innovation—all in order to reduce costs, maximize profits and increase market share. This requires a large number of producers and buyers. But the meaning of competition in the welfare-to-work environment varies. In most jurisdictions we have looked at, nonprofits compete in two ways.

First, in a competitive request for proposal (RFP) process, competition takes place in the selection process—with those whose size, experience, finances and management systems are sufficiently developed having a competitive advantage. Here local governments are the buyers. But at this stage, many nonprofits are simply financially and managerially ill equipped to respond to the RFP process. In a system like New York’s, for example, where contractors must be invited to apply, experience with complex negotiations and connections to public officials are undeniable assets. But these characteristics are more likely to characterize for-profit firms or large nonprofits, and thus even highly competent local players face a disadvantage.

So competition operates at the front end to narrow the opportunities for some nonprofits to enter the market on an equal footing. Once a contractor is selected, market competition between contractors begins, but not in a conventional sense. In no site that we studied3 did nonprofits compete head to head for clients. In no cases are the buyers welfare clients. Local governments are the buyers. As time goes on, contractors compete for contract renewals, which by definition compares the performance of providers. Since contract terms are generally short, performance measures are narrowly defined (with a primary measure being job placement), and current contractors are forever looking over their shoulders at what their competitors are doing.

Trying to meet the requirements of a government funder on the number and quality of their placements and exceed the performance of their competitors places great pressure on any organization. Nonprofits, however, are also accountable to their boards and constituents to provide services in ways that do not compromise their values and missions. And they have additional goals that include operating as instruments of civil society for public purpose.4 In managing the day-to-day operations of any agency, however, these values may pale in the face of losing a large service contract.

Efforts to meet complex performance and reporting requirements place significant organizational demands on nonprofit providers. Contracts generally involve large investments to meet the timing, reporting, service, and performance expectations—with a fee based on performance, not costs. Meeting these demands requires capital, information technology, an ability to realize scale economies and sophisticated, experienced management. Large and highly professionalized organizations have had an easier time meeting the demands of the new competitive environment and many have expressed enthusiasm for the management improvements and efficiencies that have been induced by the new contracting environment. In many ways these organizations look more like their for-profit competitors than like many of their nonprofit counterparts.

Many smaller, under-capitalized nonprofits that have worked for years as partners with local governments in this area, often at the community level, have limited capacity to compete for these contracts. Those choosing to compete face extraordinary pressures to simultaneously reengineer the management of their operations, meet their traditional commitments to their clients, and finance their operations on a firm footing. Many have been unable to compete for prime contracts and instead have had to serve as subcontractors for larger nonprofits or for for-profit vendors looking for community access and political protection in this highly charged environment.

Unable to meet the economic and management demands, some smaller organizations are shifting their service focus or simply closing their doors. There is a big shake-up going on that may represent losses to the community even as they result in a smaller number of stronger, better performing providers. Many competent, community based efforts are also threatened. When they are forced to compete with the for-profit sector, the challenges are evident and significant for the future of nonprofits.

The future of mission driven nonprofits is threatened. While systems of managed competition with the private sector may be improving the administrative management, capacity and performance of many fiscally sound nonprofits, many others are in danger of “losing their souls” and distorting their missions. Still others “living on the brink” are in danger of extinction. Untempered competition will drive civically valuable organizations out of the market, reducing aggregate capacity, service quality and diversity.

Creating a level playing field among public, for-profit and nonprofit providers is a significant challenge. Better contracts can help reward mission driven nonprofits on the kinds of accomplishments that create public value and service quality. Better measurement of performance that takes into account the unique contributions of nonprofits can begin to reorient the balance currently struck when local governments continually squeeze the margins to lower costs, thereby inducing lower quality service to clients that goes undocumented. Further, better oversight and accountability mechanisms can insure that lower priced competitors are not cutting corners and ultimately injuring clients and communities. Nonprofits must act as advocates and innovators if they are to succeed in making their unique contribution to public service.

The sector has already demonstrated creative responses to the challenge. Nonprofits can go a long way toward sustaining their role by approaching their work with greater combined strength. SEEDCO, a highly respected intermediary in New York City, successfully obtained a $7.4 million contract for welfare-to-work services in New York City. It formed a consortium of smaller community based providers and acts as a management service entity to them, increasing their capacity and reducing their administrative costs by providing centralized support services and technical assistance. Further, by forming a limited liability corporation for this purpose, a variety of private sector advantages accrue to its members, such as the syndication and sale of tax credits. Additional private fundraising has improved the capitalization of the enterprise. While it is early in the contract cycle, chances are that these kinds of innovations have the potential to support creative programming that goes well beyond what other contractors (both for-profit and nonprofit) can provide. Yet, they do so in a way that maximizes the value to the client and the community—in a competitive environment.

Similarly, Catholic Charities in San Diego met the challenge when the county designed a delivery system with public, nonprofit and for-profit providers serving clients in each of six areas. Committed to having a voice at the table for a constituency that they were committed to serving, Catholic Charities bid on and won a contract and successfully reengineered their management operations from top to bottom to meet the contract demands.

The local YWCA in Milwaukee partnered with CNR Health and the Kaiser Group in a limited liability corporation. In the arrangement, the YWCA was the managing partner of YW-WORKS, controlling day-to-day operations while Kaiser and CNR Health provided many of the management systems and technological support. These kinds of responses represent creative efforts to adapt to a changing environment—efforts that allow nonprofits to sustain their missions while adding value.5

Competition is unlikely to disappear anytime soon. Answering this challenge will necessitate combining the sector’s demonstrated strengths in advocacy, creative programming and innovative organizational partnerships and collaborations. The key strategy for nonprofits is to advocate with local governments for better measures of performance that capture true quality outcomes. Further, nonprofits must seek innovative solutions, such as those of SEEDCO, that maximize the unique characteristics deriving from their missions and community values while exploiting desirable private sector advantages. There are obstacles ahead and serious threats to the survival of many, but early advocacy, strategic approaches and improved performance are likely to go a long way to improving the sector’s prospects.

1. Preliminary findings from our ongoing research can be found in Mary Bryna Sanger. 2000. “When the Private Sector Competes: Lessons From Welfare Reform.” Presented at the Annual Research Conference of the Association for Public Policy Analysis and Management, Seattle, WA, November 2-4. An updated summary of the findings and policy implications will be published in Reform Watch, The Brookings Institution, 3 (August) 2001.
2. TANF is the welfare program created under the 1996 federal welfare reform legislation known as the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA).
3. Our study, cited in Endnote 1, is examining the experiences of local governments and their for-profit and nonprofit contractors in four jurisdictions where they currently provide welfare employment services together. These sites are New York City, Milwaukee, San Diego and Houston.
4. Mark Rosenman with Kristen Scotchmer. 1999. “Morphing into the Market: The Danger of Missing Mission.” Aspen Institute Nonprofit Strategy Group.
5. YW-WORKS has recently severed its relationship with its partners, confident in the most recent contract renewal that it could go it alone.

M. Bryna Sanger is professor of Urban Policy Analysis and Management, Robert J. Milano Graduate School of Management and Urban Policy, New School University, and a non-resident senior fellow at The Brookings Institution. In addition to teaching both urban policy and nonprofit management students, she has served in a number of senior management positions at the university level. Sanger has sat on the boards of both nonprofit and for-profit organizations and has consulted with dozens of nonprofits and government agencies on a wide range of policy and management issues.