Wednesday, March 2, 2011

Lean, Mean, Aid-Giving Machine

Non-profits seem to have a bad reputation when it comes to their organizational efficiency and bureaucratic vigor. Obviously many non-profit organizations are extremely well-run, but it's no surprise that this institutional model has a set of structural obstacles that hinder efficiency more than the average business.

Firstly, most non-profits are constantly crunched for money. What's worse, non-profit funding is often less reliable and quicker to dry up than income acquired through selling goods to consumers. When economic conditions degrade, donations to non-profits usually fall more than consumer spending because people cut out non-essential activity from their budgets.

Non-profits also have a built-in information problem: it's very difficult to measure success. Businesses have an inherent feedback mechanism in the form of revenue/sales that constantly provides information about the organizational health.

Competition and cooperation among related organizations is also different. All businesses differentiate themselves to minimize competition and to enjoy synergy with similar firms. Additionally, businesses integrate vertically through commercial relationships. Non-profits, which are often defined by an issue (environmental justice, access to education, etc.), find it much harder to differentiate. This means that the set of competitors (for funding, talent, etc.) is much larger. Two organizations both working on the same broad issue, but providing solutions on totally different levels, may still compete directly with each other in a way that businesses do not.

Finally on a systemic level, non-profits lack a critical mechanism that exists in the business world for enhancing organizational efficiency: the market for corporate control. Mergers, acquisitions, buy-outs, sell-offs, spin-offs, split-ups--all of these processes impose constraints on poorly-performing businesses. Good bits of an organization will grow, while bad bits will be eliminated. Granted, some Darwinian selection occurs with non-profits, but not much, and in a much less structured way.

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