Wise nonprofit executives and board members will carefully manage the influence wielded by various types of funding sources as they work to ensure responsiveness and accountability to those whom they exist to serve. This issue is fundamental to nonprofits because they work in a “muted market,” a market in which those paying for services are not necessarily those who receive those services. This can result in a situation where those being served by an agency have too little influence over program design and program quality. In other words, the degree of client/constituent influence over an organization set up to benefit it is determined by the type of funding in an organization, unless the organization makes internal policy and procedures that ensure otherwise (see article by William Ryan on page 10).
This graphic shows in general terms the varying degrees of influence exercised by different types of sources under different circumstances. The interaction of three key factors is illustrated in this figure:
Program profitability: the degree to which a given program or service is profitable;
Stakeholder influence: the balance of the degree of influence exercised by the two different kinds of customers of the organization; and
Resulting Influence: the propensity of program profitability to affect who tends to exercise significant influence.
The nature and type of organization that will provide a program or service will be different, depending upon the profitability of that program or service. Highly profitable services will be provided by for-profit organizations and, given the values of our capitalist economy, it is generally accepted that nonprofits should not compete with for-profits to provide goods or services. Businesses, however, can and do compete with nonprofits in fields where there is potential for making a profit.
A service may be unprofitable for a couple of reasons. Sometimes, the organization can’t create a basis or vehicle for charging for a service (for example, clean air). Sometimes, the clients receiving the service cannot expect to have adequate resources to pay for anything more than the most bare bones cost of a service (for example, homeless shelters). In either case, the inability to make a profit makes the service unattractive to for-profit organizations. Nonprofits have the ability to operate in such unprofitable niches by subsidizing their work with charitable donations and using volunteers to carry out tasks for which a for-profit might have to pay.
There is a “questionable profit zone” in the continuum from low to high profitability, and this zone is where we often see a blurry mix of for-profit and nonprofit service delivery (e.g., certain arts organizations, healthcare organizations). For-profits may operate in this zone until it is clear that they cannot make a profit, then they will abandon the niche. Nonprofits that are pushed to be “entrepreneurial” and to create enterprises with earned-income streams are being forced to move their operations up the profitability curve toward this zone of higher profits. However, this move into the new zone creates other challenges, including an increase in the likelihood that they will be in competition with for-profits (which has the potential for significant political tensions, as we have seen between some YMCAs and the private health club/gym industry).
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The mix of types of stakeholders who have the greatest influence over the terms and conditions of service delivery will differ depending upon the profitability of the program. One way nonprofits differ from for-profits is that, as a group, they generally have two overlapping but different sets of customers: the service beneficiaries and the payers. This is different from for-profits because, in the for-profit world, the beneficiaries of a service usually are the payers. There is much variation in the world of nonprofits but, in general, the beneficiary of a service usually pays much less than the full cost, while a separate payer (i.e., a donor, a funder, etc.) assumes the remainder of the cost. Both beneficiaries and funders are customers of the nonprofit. Each has their own interests and expectations that the nonprofit must meet to succeed in the service relationship, but their interests are different and typically will only partially coincide. Not surprisingly, they sometimes conflict.
One of the inherent challenges of nonprofit leadership is balancing the relative levels of power and influence that buyers and users tend to exercise over the program while the organization works to stay true to its mission. Left to find its own equilibrium, the relative influence of funders and beneficiaries will tend to change as the funding mix changes. The curve in this graphic illustrates the likely shift in the relative influence of beneficiaries when there is a change in the profitability of a service. As profitability decreases, the funders’ influence increases. Alternatively, with a shift to an increasingly profitable service, influence naturally tends to increase for the beneficiary—but it also may be that only certain beneficiaries will be able to afford the cost of an increasingly profitable service.
The simplest way to enhance the relative influence of service beneficiaries might well be to concentrate on putting buyer and beneficiary “power” with the same entity. However, for the non-profitable reasons explained earlier, this usually is not a viable strategy for many nonprofit agencies. These nonprofits need the subsidy of payment from a third party. So, the question is how to structure this funding scenario. Important implications must be weighed as you make choices about the mix of funding and how this affects the balance of influence in your organization.
Further, not all third party financing sources are the same in terms of the impact of their influence on your program. Most government contracts, for instance, are very dominant, as they bring with them a constricting tangle of regulatory and reporting demands. Many foundations will exert their own ideological influence over how you approach a social problem when they fund you. It is important to recognize that concentrated blocs of funding often threaten to undermine “client” influence. Ironically, as Owen Heiserman details in his excellent article on page 58, this danger exists even when funders put requirements in place (such as consumer seats on the board) to ensure beneficiary influence.
However, building a broad and diffuse base of donors also can be a two-edged sword that can undermine the influence of and responsiveness to beneficiaries while simultaneously inviting undue donor influence. In fact, some organizations with large donor bases end up developing their programs around the interests of these “checkbook members,” and the result merely reflects the preferences of yet another non-beneficiary group. Building a broad base of individual givers, in other words, can help an organization gain the independence to address beneficiary interests and needs more directly without having to find the balance with funder interests. However, it still can have the tendency to interfere with accountability to the intended beneficiaries because it will not provide the accountability mechanism that exists when the buyer and beneficiary are one and the same.
How does a wise nonprofit manage the potential for some funding sources to exert undue influence? There is no one answer, but we have seen some interesting efforts at achieving a balance that ensures client/constituent voice. One example is that of Alcoholics Anonymous (AA). One of AA’s fundamental tenets, adopted for the purpose of maintaining mission-based client control, is that it does not accept funding from any except the program’s actual beneficiaries (collected primarily through collections at meetings and through the sale of mission-relevant books and materials). This is a very direct model.
Another more complex model is the approach of La Raza Centro Legal, described on page 46 of this issue. Their board members sign a commitment to invest a preponderance of influence in the beneficiaries of the program. This, of course, requires that the organization have a strong working relationship with its clients—turning that interaction into something more akin to a true “constituent” relationship that provides appropriate mechanisms for accountability and transparency.
David O. Renz, Ph.D., is the director of the Midwest Center for Nonprofit Leadership in the Henry W. Bloch School of Business & Public Administration at the University of Missouri-Kansas City, and is past-president of the Nonprofit Academic Centers Council (NACC).