Social Enterprises: How Nonprofits Are Operating More Like Businesses

When most people think of concepts like return on investment, talent acquisition, and scaling, for-profit businesses immediately come to mind. But we often have different expectations for nonprofits – many expect to see low overhead, employees taking lower salaries, and so on. After all, they’re called nonprofits for a reason, right? 

The most common misconception about nonprofits is that they’re fundamentally different from businesses, which couldn’t be further from the truth. Sound workforce management practices, financial responsibility and accountability, and the ability to scale effectively are all principles that apply to any organization that has limited resources and wants to operate sustainably. The fact that nonprofits are primarily motivated by their positive impact on communities around the country is all the more reason why they should be run as efficiently as possible. 

The nonprofit sector employs millions of Americans and has a pivotal role in providing essential services in every corner of the United States. Nonprofits work with companies, governments, foundations, and other grantors on a vast range of projects every day – from maintaining neighborhood gardens to managing large-scale infrastructure projects. In other words, they keep the country running, so they need to be every bit as scrupulous about how their programs are administered, tracked, and funded as companies are about earning profits. 

Nonprofits should be built around accountability

For a nonprofit, there’s nothing more important than the ability to identify specific goals and measure progress toward achieving them. This begins with open engagement between nonprofits and grantors – when an individual or organization is making an investment in a nonprofit, there should be a candid discussion about what can feasibly be achieved in a set timeframe, what resources will be required to complete a project, and how progress will be reported. 

Just as a publicly traded company has a fiduciary responsibility to its shareholders, nonprofits have a responsibility to their grantors, their constituents and other stakeholders, and especially the communities they serve. This is why we’re seeing the emergence of programs such as the Urban Institute’s Outcome Indicators Project, which gives nonprofits a set of resources to help them analyze their effectiveness across a broad range of program areas, including literacy, public health, and youth mentoring. There’s also increased emphasis on the most rigorous forms of evaluation available, such as randomized control trials, which are being used by organizations like GiveWell to assess the effectiveness of nonprofits. And beyond the external importance of reporting outcomes, building  a culture of evaluation helps nonprofits thrive, surpass their goals, and deliver improved services to their communities.

While every nonprofit has different needs when it comes to tracking and reporting outcomes, it’s clear that doing so is a core responsibility. Nonprofits that can demonstrate their performance with hard data won’t just give grantors a powerful incentive to invest in their programs  – they’ll also generate buy-in from other partners and volunteers in the community. 

Finding and hiring the right people

Nonprofit employees are among the most talented and well-trained people in the U.S. workforce, and recruitment and retention practices should reflect this fact. While it’s true that nonprofits often face unique financial constraints (such as tight operating budgets and reliance on grantors that could withdraw funding for reasons outside of their control), they also have to prioritize the well-being of their employees, even if that sometimes means increasing overhead to make greater investments in them. 

When many nonprofits saw their funding slashed after the Great Recession, their first move was often to cut employee salaries and lay people off; sadly, the pandemic has triggered a similar response. Almost 44% of recently surveyed nonprofits indicated that the coronavirus was forcing them to cut staff.  When the Obama administration implemented new overtime and minimum salary rules, many nonprofits protested that they would have to reduce their staffs. According to a 2019 survey of more than 350 organizations by Nonprofit HR, the turnover rate among nonprofits is more than 20 percent, and the second-most-cited reason for leaving is “compensation / benefits. 

It’s clear that nonprofits need to think carefully about how they can maintain their programs while simultaneously recognizing and rewarding their employees’ hard work. Meanwhile, they have to provide employees with professional support to help them develop new skills and advance their careers: the top reason cited for turnover is a “lack of opportunity for upward mobility and career growth.” 

As with a business, a nonprofit’s workforce is its most valuable asset. Although nonprofit employees are often deeply committed to the work they do, they shouldn’t have to struggle financially because they dedicated their careers to public service.

Scale in a sustainable way

One of the reasons nonprofits are often under immense financial pressure is the fact that many grantors and other supporters can misunderstand the overhead necessary to plan, implement, and maintain programs. There’s an antiquated idea that nonprofits should operate on razor-thin margins because they have a responsibility to make the gap between resources dedicated to covering their expenses and resources spent directly on programs as large as possible. 

This is one of the most harmful myths about nonprofits – that well-run organizations invariably have extremely low overhead. Just imagine if we made the same assumption about companies: the investments Apple and Google make in research and development, the money Delta and American Airlines spend on maintaining and purchasing aircraft, and any other perfectly justified (indeed necessary) expenditures in the private sector would be seen as signs of poor financial management. 

What should matter to grantors and other stakeholders isn’t some magical balance between administrative overhead and program costs – it’s the outcomes a nonprofit is capable of achieving. From data collection and analysis tools to formal employee retention strategies (which 81 percent of nonprofits lack), many investments are necessary for helping a nonprofit grow in a healthy and sustainable way. However, scaling isn’t just a one-dimensional measure of growth for a nonprofit – many organizations also focus on how they can scale impact, which means making existing programs more effective. 

It’s crucial for grantors to understand what resources are necessary for nonprofits to scale. For example, increased salaries could lead to a better talent pool to hire from and thus increase favorable outcomes for the overall organization. But this also  means there should be transparency right from the beginning – grantors and grantees should have an open discussion about expectations and constraints, and this engagement should be maintained over time. Whether a nonprofit is accepting a contract for a major new project or trying to scale impact on a project that’s already underway, transparency about necessary investments in personnel, equipment, and any other expenses is vital.

Nonprofits should embrace what sets them apart from businesses – they’re mission-driven organizations that exist to make communities healthier and more prosperous. But the principles observed by the most successful businesses in the world can help nonprofits enact even greater change and continue doing so for years to come.