Brady Josephson - Competition in the NFP Sector

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Running head: Competition in the Nonprofit Sector

Competition in the Nonprofit Sector

Ingredients for Adaptability and Sustainability

Brady Josephson

SBNM 5980

Professor Farruggia

May 7, 2008



Competition in the Nonprofit Sector iiTABLE OF CONTENTS

EXECUTIVE SUMMARY ............................................................................................................ 1INTRODUCTION .......................................................................................................................... 5

COMPETITION AND ITS INTERCONNECTED INGREDIENTS .......................................... 10THE JOSEPHSON COMPETIVE MODEL FOR NONPROFIT MANAGEMENT ............... 11OPPORTUNITY INTERNATIONAL: A BRIEF OVERVIEW .............................................. 12LEADERSHIP ........................................................................................................................... 13INNOVATION .......................................................................................................................... 14FINANCIAL MANGEMENT ................................................................................................... 14

GUIDESTAR DATA, RESEARCH, AND ANALYSIS ON SUSTAINABILITY ..................... 17DATA COLLECTION PROCEDURE ..................................................................................... 17

LEVERAGE ................................................................................................................................. 20LEVERAGE AND RISK .......................................................................................................... 21LEVERAGE DATA .................................................................................................................. 22

SURPLUS ..................................................................................................................................... 24SURPLUS FOR GROWTH, CURRENT NEEDS, AND SECURITY..................................... 25SURPLUS DATA...................................................................................................................... 27

CONVERSATION WITH STEVE NELSON .............................................................................. 29OPPORTUNITY INTERNATIONAL AND COMPETITION ................................................ 29OPPORTUNITY‟S ADAPTABILITY AND COMPETITIVE APPROACH .......................... 31LEADERSHIP ........................................................................................................................... 32INNOVATION .......................................................................................................................... 32FINANCIAL MANGEMENT ................................................................................................... 33

SUMMARY AND FUTURE HOPE ............................................................................................ 35ACADEMMIC APPLICATION .................................................................................................. 37REFERENCES ............................................................................................................................. 42



Competition in the Nonprofit Sector 1

EXECUTIVE SUMMARY

“With the apparent triumph of capitalism worldwide, market forces are being widely

celebrated. And with growing confidence in the power of competition and the profit motive to

promote efficiency and innovation, many observers are suggesting that market discipline should

exert more influence in the social sector- especially when those observers have fundamental

doubts about the performance of social enterprises” (Herzlinger et al., 1999, p.139). I do have my

doubts about the performance of the social sector and suggest that the market principle of

competition is an effective measure to alleviate those doubts. With an increasing focus on

competition and market-based initiatives within the nonprofit sector it is necessary to begin to

think, discuss, and debate how nonprofit organizations currently compete and how they should

compete.

As a fiercely competitive person attracted to competitive environments, the draw to the

world of business was natural and the shift from profit motive to social change focus was

inevitable. Throughout my three years studying the nonprofit sector its management practices at

the undergraduate level and graduate level at North Park University I was surprised and

somewhat disappointed at the lack of focus on competition. While this was somewhat

disappointing it was also somewhat exciting as it allowed for my own personal ideas, thoughts,

and dreams to be integrated to what has been said and what should be said. The result, to this

date, is essentially this paper and an attempt to develop a competitive model for the nonprofit

sector.

Incorporating my years of studies, textbooks, other books, conversations, personal

experiences, readings and writings I have developed the Josephson Competitive Model for

Nonprofit Management. All nonprofit organizations seek to provide a service, fulfill a mission,



Competition in the Nonprofit Sector 2or “do good” in some way. Inherent in being able to provide that service, fulfill that mission, or

“do” that “good” is the fact that an organization must be operational or alive. Closed doors can

serve no good, and therefore the very first priority of a nonprofit manager must be that of

sustainability. To be sustainable is easier said than done however and there are many different

factors that lead to sustainability as it pertains to nonprofit management but the most preeminent

factor is the ability to adapt or adaptability. Henry Ford‟s cars were fantastic for their time, but

they are completely obsolete by today‟s standards. Just because the doors of an organization are

open it does not mean that they can and will always stay open. Therefore the second priority of

an organization is to place itself in a position to adapt in order to fulfill its first priority to be

sustainable.

I suggest that for an organization to be sustainable financially, it must plan for both

current danger, in the form of financial security, and for future development, in the form of asset

management. This can be done with the proper use of leverage and surplus, the two main

functions of financial management for nonprofit organizations. Financial management is only

one of the three key competitive ingredients necessary for sustainability. The other two are

leadership and innovation. While all three of the ingredients are interconnected, the leadership

and innovation of an organization have a profound impact on the second priority of a nonprofit

organization as it relates to management and that is its ability to adapt. The end result was the

Josephson Competitive Model for Nonprofit Management (seen below).




Adaptability

Sustainability

Financial Management

Innovation

Current NeedsGrowth Security Asset Management

Leadership

COMPETITION

LeverageSurplus

Like any model, theory, or hypothesis, they are only applicable or useful if they can be

substantiated in any way. In attempt to prove the validity of the model as well as gain a deeper

understanding of the nonprofit sector itself, I collected data and analyzed that data from over 990

similar nonprofit organizations to find patterns, trends, and correlations as it relates to financial

management. Unfortunately the data sample was incredibly unreliable and therefore was not a

proper assessment tool of financial management strategies and approaches currently being



Competition in the Nonprofit Sector 4incorporated in the nonprofit sector. The wide distribution among the data and huge ranges does

show a need for increasing focus on financial management and appropriate benchmarks and

standardization.

I also wanted to get some firsthand experience, which I personally do not possess, and

had the privilege to interview a senior executive at Opportunity International, a 501(c)3 nonprofit

organization in Oak Brook, Illinois dedicated to empower those in poverty to change their lives

through microenterprise. I was able to gain a firsthand glance of what it takes for a nonprofit

organization to compete, adapt, and be sustainable in the world today through personal interview,

via the telephone, with Steve Nelson, the Vice-President of Strategic Initiatives at Opportunity

International who was my manager when I was a Research Associate Intern in the fall of 2007.

Overall, the validity of the Josephson Competitive Model for Nonprofit Management is

yet to be determined but it is an initial attempt to infuse market and competitive principles into

the nonprofit sector in order to positively impact the leadership, innovation and financial

management of nonprofit organizations leading to greater adaptability and in turn sustainability.



Competition in the Nonprofit Sector 5INTRODUCTION

“Non-profit institutions tend not to give priority to performance and results. Yet

performance and results are far more important-and far more difficult to measure and control- in

the nonprofit institution than in business” (Drucker, 1990, p.107). In the business world “Cash is

King”, “the bottom line is the bottom line”, and the competitive pressure for profit performance

acts as a double-edged sword driving efficiency and volatility. In the nonprofit world,

Constituents are “kings and queens”, mission is the bottom line, and the pressure for, or lack

thereof, surplus performance with competition drives stagnancy and stability. Jim Collins in his

book Good to Great and The Social Sectors (2005) states, “The whole purpose of the social

sectors is to meet social objectives, human needs and national priorities that cannot be priced at a

profit” (p. 19). Without an easy to see performance and management indicator, such as profit in

the business sector, often times poor performance and mismanagement are accepted simply

because they cannot be easily detected (Drucker, 1990, p. 139). A nonprofit drug rehabilitation

center for example can lose money, or be unprofitable, but if they positively affect the lives of

hundreds of addicts and their families can one say that it is actually mismanagement? The

answer is not that simple to tell. Perhaps, with the same resources, they should‟ve been able to

positively affect the lives of thousands of addicts and their families. The point is, performance

and management are very difficult to gauge without hard metrics that accurately reflect the

mission of the organization.

Hard metrics to show performance and management results are not the answer either

however and as Collins points out, “I recently opened the pages of a business magazine that rated

charities based in part on the percentage of budget spent on management, overhead and

fundraising. It‟s a well intentioned idea, but reflects profound confusion between inputs (money)



Competition in the Nonprofit Sector 6and outputs (social good)” (Collins, 2005, p.4). The tension arises, as great financial performance

for nonprofit organizations, inputs, does not directly equal great social good performance,

outputs. While a direct connection may or may not be made from financial management and

social good, there can be a definite connection between proper financial management and

longevity. Shim and Siegel in their book, Financial Management for Nonprofits (1997) list

“stability” as one of the four main differentiators between for -profit and nonprofit financial

management (p. 4). Stable here is defined as, “able or likely to continue or last; firmly

established; enduring or permanent” (dictionary.com). Most organizations cannot last with poor

financial management as they simply lack the resources and assets. It should be noted that some

organizations have been blessed with founders and donors possessing deep passion for a cause,

and deeper pockets, allowing the organization to remain functioning even with poor financial

management but this scenario is more the exception than the norm. Self-sustenance should be

motivation enough for nonprofit organizations to take seriously their financial management

practices. If that is not enough, increasing competition in the sector promises to bring more

scrutiny as it relates to performance and management that will force nonprofit organizations to

be motivated to adapt.

“If a business wastes its resources on non-results, by and large it loses its own money. In

a nonprofit institution, though, it‟s somebody else‟s money- the donor‟s money. Service

organizations are accountable to donors, accountable for putting money where the results are,

and for performance” (Drucker, 1990, p. 140). There is increasing competition for the over $295

billion1

that was given to the nonprofit sector by the roughly 1.7 million2

nonprofit organizations

that comprise the nonprofit sector. The increased competition coupled with the necessity to be

1 In 2006 according to GivingUSA (http://www.aafrc.org/press_releases/gusa/20070625.pdf) 2 According to Guidestar (http://www.guidestar.org/using/nonprofits.jsp?source=hpnpo)



Competition in the Nonprofit Sector 7accountable to donors has fueled a change in how both donors and organizations operate and

compete as pointed out by Robert D. Herman in The Jossey-Bass Handbook of Nonprofit

Leadership & Management (2005), “Many foundations and other funders and donors are actively

encouraging public service nonprofit organizations to become more commercial and more

businesslike. „Venture philanthropists‟ are promoting a „business model‟ for nonprofit

organizations. No doubt the increasingly popular view that business and market values are

appropriate for nonprofit organizations in part represents the triumphalism of U.S.-style

capitalism at the turn of the twenty-first century” (p. 732). Venture philanthropists can be defined

as, “philanthropists (individuals or groups) who apply the practices of the venture capital world

to the nonprofit community. These philanthropists measure the value of their nonprofit

investment in „social return on investment‟ or SROI. The goal is social change versus

profitability” (Wason, 2004, p. 35). SROI is an attempt to properly measure inputs, investment or

money, compared to the outputs, social change or social good, to maximize efficiency and

effectiveness. Muhammad Yunus, the Nobel Prize winner, renowned economist and bestselling

author believes that venture philanthropy, or as he calls it “social entrepreneurship”, is “one of

the best ways forward” to tackle some of the world‟s most pressing needs such as poverty

(Yunus, 2003, p. 251). He goes on to describe the social entrepreneur in his book Banker to the

Poor (2003) as one who, “competes in the marketplace with all other competitors but is inspired

by a set of social objectives”. He suggests that social entrepreneurs should be able to earn

personal profit, and “the higher the social impact per dollar [the same as SROI], the higher the

market rating of the social entrepreneur… Social investment will move from low social impact

enterprises to higher impact enterprises, from general impact enterprises to specific and visible

enterprises, from traditional social enterprises to highly innovative and efficient enterprises” (p.



Competition in the Nonprofit Sector 8251). Yunus recognizes the driving power of competition and the free market and attempts to

apply those concepts to the nonprofit world to form a sort of hybrid sector. His idea may not

seem like a reality for the moment but his idea of infusing the social sector with competition by

using donors, as the catalyst is an intriguing one. With such a plethora of nonprofits it is

becoming increasingly tough for donors to determine where their money should go and where it

can best be used. SROI and financial management analysis are two of the most prevalent ways

donors are beginning to do differentiate organizations, creating and environment where

organizations are competing in these areas to secure greater capital. This increased focus is

forcing the nonprofit sector to act more like a competitive marketplace, focusing on how they use

their resources compared to others to fulfill their mission.

Michael Porter, author of Competitive Strategy (1980), states that an organization must

choose one of the three following strategies to be successful in a competitive market; Cost

Leadership – the lowest cost producer in the market; Differentiation – offering something

unique, special, different, or special; or Focus – achieving dominance in a niche market. These

same strategies can be applied to nonprofit organizations competing for funding. Cost

Leadership attempts to provide the greatest SROI by focusing on expenses or more on the input

aspects. Differentiation attempts to be unique in relation to other organizations in some manner

to appeal to donors and focuses more on the output aspects. Finally, Focus attempts to offer a

service or possess a mission that not many other organizations have or do it much better then

similar organizations and again focuses on the output aspects.

Competition among nonprofit organizations is strong due to the rapid expansion of the

number of existing organizations as well as a shift in how donors are giving their money in the

form of venture philanthropy. These new donors are leading and focusing more on the



Competition in the Nonprofit Sector 9performance and management of these organizations to differentiate them and asking the

nonprofit sector to act more like the business world. Measuring the performance and

management of nonprofit organizations can be difficult however as there is no absolute bottom

line and the input-output equation using money do not necessarily apply. The Social Return on

Investment or SROI is one attempt to reconcile the two worlds while providing an accurate

measure of inputs and outputs as they relate to the nonprofit sector. Organizations now are in

much tighter competition and are forced to compete much like a free market economy and must

choose a strategy to gain a competitive advantage on one another in order to secure funding and

become financially stable. A competitive advantage can be achieved by focusing on either the

input or output part of the SROI equation. Focusing on inputs deals with financial management

and lowering costs, a “Cost Leadership” strategy, while focusing on the output aspect deals with

being special, “Differentiation”, or offering a service that no one else does, “Focus”. Through

increased focus on SROI, inputs, and outputs by funders, organizations are also forced to focus

on their inputs and outputs increasing efficiency and effectiveness leading to greater social

change, which, in the end, is the reason for the sector‟s existence.



Competition in the Nonprofit Sector 10COMPETITION AND ITS INTERCONNECTED INGREDIENTS

In his book Managing A Nonprofit Organization in the Twenty-First Century (1999),

Thomas Wolf remarks on the troubles facing the nonprofit organization, “The issues are many

and complex, but taken together they might be characterized by two superordinate and related

challenges – sustainability and the ability to adapt to a rapidly changing world . Nonprofit

organizations must cope with increased competition, more diversity among constituents, higher

expectations from the public and from funders, increasing costs, declining support, rapidly

changing technology, and substantially different ways of conducting business. Surviving in such

an environment (sustainability) depends upon the ability to adapt” (p. 314).

Leadership author Tom Brown‟s article Management in the 21st Century from Business:

The Ultimate Resource (Goleman, 2002) states, “But [Robert] Owen [a 19thcentury textile

manufacturer], even though he knew that management had always operated in the context of

economic variables, social norms, and politics, set the essential challenge for all managers

thereafter with his elevation of three distinct issues: technology, people, and profits (Brown,

2002, p. 5). These three essential challenges to management are the foundation from where I

derived the three key ingredients to be able to adapt and compete in today‟s nonprofit

environment, which will lead to sustainability. The three key ingredients as they relate to

competition in the nonprofit are leadership (people), innovation (technology), and financial

management (surplus). These three ingredients are not only needed to sustain an organization but

are also brought to the forefront when competition is present and in themselves stimulate

competition. Therefore competition is a driving force, pushing nonprofit organizations to adapt

to their environment eventually leading to sustainability. Below is the end model showing the




Adaptability

Sustainability


Innovation


Leadership

COMPETITION

LeverageSurplus

relationship between competition and the three key ingredients and how they relate to an

organization‟s ability to adapt and therefore be sustainable, which in this model is the end goal.

THE JOSEPHSON COMPETIVE MODEL FOR NONPROFIT MANAGEMENT



Competition in the Nonprofit Sector 12OPPORTUNITY INTERNATIONAL: A BRIEF OVERVIEW

Opportunity International (Opportunity) is an organization that exemplifies the

interconnected relationship between competition and the four aforementioned ingredients leading

to adaptation and thusly sustainability. Opportunity International is an international nonprofit

organization dedicated to “providing opportunities for those in chronic poverty to change their

lives3”. The Christian based organization attempts to achieve their mission largely through a

micro-enterprise development, which includes microfinance or micro-credit, made well known

by economist Mohammad Yunus. This process is, “the lending of very small amounts of money

at low interest, especially to a start-up company or self-employed person” (dictionary.com).

Opportunity International has since developed other “micro” offerings such as life

insurance and savings, which, along with microfinance, fall under the umbrella of micro-

enterprise. Opportunity International was an early entrant into the micro-enterprise field, started

in 1971, and only recently began feeling the competitive pressure of other organizations. Micro-

enterprise was largely focused on metropolitan areas, as was Opportunity International, and dealt

only through microfinance institutions. However, innovations such as cellular phone banking,

wireless banking centers and satellite bank branches along with the development of formalized

microfinance banks forced Opportunity International to re-evaluate how they compete, how they

adapt and how they can be sustainable in the future through leadership, innovation, quality and

financial management.

The following is a real life, case study style description of the three key ingredients

needed for an organization to adapt and compete in today‟s environment using Opportunity

International and their history as the illustration framework.

3 opportunity.org (“Who We Are”)



Competition in the Nonprofit Sector 13LEADERSHIP

Jim Collins in his research of what makes a great leaders for social sector organizations

writes, “In the social sectors, Level 5‟s ([the best level of leadership according to his findings]

compelling combination of personal humility and professional will is a key factor in creating

legitimacy and influence” (2005, p.11). In Ethical Leadership: Theory and practice (2007),

Northouse suggests that, “transformational leadership fits the needs of today‟s work groups, who

want to be inspired and empowered to succeed in time of uncertainty” (p. 175). Transformational

leadership focuses on changing the followers while caring for their emotions, thoughts, ideas,

etc. and by doing so pushes them and the organization as a whole to greater heights than

previously imagined (p.176). Kouzes and Posner (1987, 2002) formulated a model of

transformational leadership and one of the five fundamental practices developed was that leaders

challenge the process (p. 188). “Challenging the process means being willing to change the status

quo and step into the unknown. It includes being willing to innovate [italics added for emphasis],

grow, and improve” (p. 188).

Opportunity International CEO Chris Crane is willing to challenge the process of his

organization and even the normal mould of executive directors as he is not your typical leader of

a nonprofit organization but fits Collins‟ description of humility and professionalism perfectly. A

Harvard educated entrepreneur and a millionaire before he was 50; Mr. Crane sold COMPS

InfoSystems, Inc. in 2000 before taking over Opportunity International in 2002. His aggressive

business savvy, desire to innovate, as well as heart for the poor has proved to be an effective

leadership style as revenues have grown at a 30% annual rate as well as constituents served at

31% (opportunity.org). Crane‟s ability to engage the business community and his credibility as a

business man himself has allowed Opportunity International to increase their donor base and



Competition in the Nonprofit Sector 14finances allowing them to expand their operations and take more risks. Mr. Crane is a great

example of how an appropriate level of business minded strategy and professionalism mixed

with humility and mission motivation can provide the necessary leadership for an organization to

be successful in a competitive environment.

INNOVATION

“Non- profit institutions need innovation as much as businesses or governments”

(Drucker, 1990, p. 11). There is an old expression, “If it ain‟t broke, don‟t fix it”. Dr. Michael

Hammer, the man claiming to develop the term “business process reengineering”, states that

when it comes to technology and innovation the expression should be, “If it ain‟t broke, you‟ve

still got time to fix it” (Long, 1997, p. 5). In this manner innovation is essential to change or

adapt, keep up or push ahead of the competition in order to be sustainable.

The poorest of the poor are located not in the heavily populated metropolitan areas but in

the rural areas of third world countries. From my time at Opportunity International, I discovered

that this poses a great threat to the micro-enterprise model, as operational margins are available

through the economies of scale that can be gained in heavily populated areas. In response to

these challenges Opportunity International developed similar technologies as well as a “Mobile

ATM” to travel around and actually go to the people instead of waiting for the people to come to

them. The end result is that more people who need access to funds are receiving them thanks in

large part to the innovation of Opportunity International that was needed due to competitive

forces.

FINANCIAL MANGEMENT



Competition in the Nonprofit Sector 15“To be well positioned for long-term growth, nonprofit organizations need to become

more fiscally focused, as those companies with the strongest balance sheets are the most likely to

succeed in the years ahead” (Shim & Siegel, 1997, p. 5). Financial management perhaps the most

interconnected of the three key ingredients as it is constant view of the leadership and is a

necessity for innovation. Even the best leadership and the greatest innovation cannot lead to

long-term success if there is not proper financial management within an organization. Financial

management even has an impact on itself for nonprofits. Many donors are now looking to see

how well an organization manages their finances before giving their donations, which are

revenues for that organization. With increased competition comes increased focus on the

financial practices and management of nonprofit organizations.

Microfinance institutions (MFI‟s) are nonprofit “branches” of sorts that distribute the

small loans to clients. With the innovation of micro-insurance and micro-savings a new system

was needed to make micro-enterprise possible. The new system is for-profit micro-enterprise

banks. There are many more capabilities of these banks compared to MFI‟s such as being able to

invest and gain interest on funds leading to greater financial stability. To change from a MFI to a

bank is not an easy one or to start up a microfinance bank is not cheap, but Opportunity

International saw the need and with an aggressive financial management approach were able

place themselves in a position to further beat the competition and continue to meet the needs of

the poor.

The competitive environment faced by Opportunity International was in part created by

themselves, due to their early entrance, innovation and success within the microfinance field, and

were forced to adapt because of it. Chris Crane‟s leadership, the innovative development of

technologies to reach the rural poor, and the increased quality micro-insurance and micro-



Competition in the Nonprofit Sector 16savings offered constituents made possible by the financial management decisions are just

examples of how Opportunity International was able to adapt to a changing environment to

continue fulfilling their mission both today and in the foreseeable future.



Competition in the Nonprofit Sector 17GUIDESTAR DATA, RESEARCH, AND ANALYSIS ON SUSTAINABILITY

Financial management is one way that nonprofit organizations compete with one another

and is one of the three aforementioned ingredients that lead to an organization‟s ability to adapt

and therefore be sustainable. Financial management can be analyzed in a variety of ways,

especially for nonprofit organizations due to their lack of a true bottom line, but according to

Anthony and Young there are essentially two fundamental financial management issues:

leverage and surplus (2005, p. 491). Simply put, leverage is the amount of debt or liabilities an

organization has and surplus is the excess of income over expenses or “profit” or change in net

assets. In the following sections, I will briefly describe my research and data collection

procedure before looking at leverage and surplus, from a theoretical perspective, competitive

perspective and data and research perspective. I will conclude with a discussion of the findings

and overall implications of financial management for nonprofit organizations in competitive

environments.

DATA COLLECTION PROCEDURE

Using Guidestar.org and their database of over 1.7 million nonprofit organizations, I

selected 1000 organizations at random that fit the following criteria:

Classified under “Human Services”

A certified 501(c)3 Public Charity

Annual income greater than $1 million but less than $10 million

I chose these particular criteria as human services are of particular interest to me, Private

operating foundations and private non-operating foundations were eliminated from the 501(c)3



Competition in the Nonprofit Sector 18subsection for simplicity and for comparison purposes. Finally, I chose the income size based on

the following assumptions:

Larger income generating nonprofit organizations are more intentionally involved in

competition than either small nonprofit organizations or mega-nonprofits (greater than

$10 million)

The large, but not mega size, category of organizations are more financially stable than

smaller nonprofits yielding more consistent data to analyze but not as stagnant as mega-

nonprofits opening up the possibility to see some trends and variations

After the organizations were selected they were downloaded with the following fields:

Organization Name Address 1 Income Total, EIN

Address 2 Program Expenses Year

City Administrative Expenses State

Funding Expenses Zip Code, Total Expenses IRS Subsection

Total End of Year Assets, NTEE Code Total End of Year Liabilities

I then converted the list to an excel spreadsheet to further analyze the data. During the analysis

step, if any organization did not have the full information necessary (program expenses, total

income, or other component) that particular organization was eliminated in the interest of time.

The end result was 992 organizations with their most recent filing with Guidestar ranging from

as old as 2003 and as recent as 2007 with the most common year being 2006. I then performed

the following calculations:

Program Expense Ratio = Program Expense/Total Expense

Surplus (Net Income) = Total Income – Total Expenses

Net Assets (Equity) = Total Assets – Total Liabilities




Profit (Surplus) Margin = Surplus/Income

Asset Turnover = Income/Assets

Return on Assets = Profit Margin x Asset Turnover (Surplus/Assets)

Leverage = Total Assets/Net Assets

After the above calculations were made, I then attempted to discover any important correlations

in the data set. I performed correlation tests for the following:

ROA and Net Assets

Surplus and Net Assets

Program Expense and Net Assets

Profit Margin and Net Assets

Leverage and Net Assets

I wanted to see if there was any correlation with net assets as net assets are the net worth of a

nonprofit organization and an organization with a high net worth should be able to sustain itself

better than an organization with a smaller net worth (Shim & Siegel, 1997, p. 25). If

sustainability is the end goal of a nonprofit organization as it relates to competition and net assets

are an indication of sustainability, any correlation linked to net assets can be very valuable in

how organizations approach their financial management practices.



Competition in the Nonprofit Sector 20LEVERAGE

Leverage can be defined as, “1. The use of various financial instruments or borrowed

capital, such as margin, to increase the potential return of an investment. 2. The amount of debt

used to finance a firm's assets. A firm with significantly more debt than equity is considered to

be highly leveraged” (ivestopedia.com).

Anthony and Young (2005, p. 492) provide a great and simple example of how leverage

works: “One measure of leverage is the ratio of assets to equity. Therefore, according to the basic

accounting equation (Assets = Liabilities + Equity [Net Assets]) if an organization had no debt

whatsoever, its assets and equity would be equal. Its leverage ratio would therefore be 1. As an

organization begins to rely on debt to finance its assets, the ratio increases. [The table below]

illustrates this phenomenon with a simple example, beginning with a balance sheet in which

assets and equity are equal and moving to a situation in which total debt and equity are equal. As

can be see, the ratio increases to a level of 2.0 under these circumstances.”

Assets Liabilities Equity Leverage Ratio(Assets/Equity)

Situation 1 No Debt

$1,000 $0 $1,000 1.0

Situation 2 Debt of $500

$1,500 $500 $1,000 1.5

Situation 3 Debt of $1,000

$2,000 $1,000 $1,000 2.0

The use of debt can allow and organization to finance even more assets then normally

they would have been able to if it only used its net assets. The equity in the example has not

changed from Situation 1 to Situation 3 above but the assets have doubled. The equity here

functions just like a lever to increase the total assets, which can then help the organization



Competition in the Nonprofit Sector 21deliver more services and meet the needs of their constituents better thereby fulfilling the

mission (Anthony & Young, 2005, p. 492).

There are some drawbacks to using leverage however and is not always a suitable option

for all organizations. The money that is borrowed must be paid back and usually with some sort

of interest attached to it, which can take great amounts of time and effort to properly manage and

monitor (Anthony & Young, 2005, p. 493). Drucker (1990, p. 109) notes that, “Performance in

the non-profit institution must be planned . And this starts with the mission. Non-profits fail to

perform unless they start out with their mission. For the mission defines what results are in this

particular nonprofit institution”. Drucker brings up two vary valuable points that relate to the

usage of debt or leverage. First, it must start with the mission. Due to the possible complications

and negative impact that debt can incur, the need must be prominently made and the need must

be mission motivated. Second, there must be proper planning. It is easy to become highly

leveraged with a short-term view and simply borrow now and pay later. To use debt properly

there must be a repayment plan with a foreseeable means to repay what is owed on time or else

the results can be crippling.

LEVERAGE AND RISK

The potential adverse affects attached to leverage can be called risk, which is, “the

possibility of suffering damage or loss in the face of uncertainty about the outcome of actions,

future events, or circumstances” (Goleman, 2002, p. 1327). Anthony & Young (2005) then

divide risk into two categories of risk: financial risk and business risk (p. 493). Financial risk is

equal to the leverage of the organization whereas business risk involves other aspects of the

business that lead to uncertainty (p. 493). As it relates to Drucker‟s two points (mentioned

above) financial risk is the leverage and planning portion and the business risk is more concerned



Competition in the Nonprofit Sector 22with the mission. A disaster relief organization for example can face large amounts of business

risk as their mission, and in turn funding, is most applicable when there are disasters to relieve.

To limit some of this business risk they may choose to expand their mission to not be so reliant

upon random disasters but this brings up the issue of mission drift (organizational distancing

from the original mission for financial or other reasons) which in the nonprofit world is also a

“risky” venture as Drucker has stated, performance starts with the mission. If an organization can

properly plan for the use of debt and incorporate it into the organizational mission, or manage the

financial and business risk attached to leverage, it can be a very beneficial tool in influencing an

organization‟s competitive position.

LEVERAGE DATA

Analyzing the 993 sample organizations‟ latest 990 forms, provided by Guidestar, I found

the following:

Mean: 1.88

Median: 1.23

Standard Deviation: 7.08

Range: 209.4 (Max: 139.4 and Min: -70.1)

Correlation (Leverage and Net Assets): -0.037

These results are encouraging, discouraging and difficult to trust. Firstly, it is encouraging as the

mean leverage ratio was 1.88 meaning that, on average, organizations are neither highly

leveraged nor are they refusing to take on debt. This shows a good balance in how organizations

are taking on debt. Secondly, it is discouraging as the high standard deviation and range numbers

imply that there is still great variance in how organizations use leverage. According to my data,



Competition in the Nonprofit Sector 2395% of the organizations, or about 943 of the organizations, have leverage ratios between -12.28

and 16.04 which is a very large gap when attempting to find a benchmark or best practice figure.

68%, or 675, organizations are within -5.2 and 8.96 for their leverage ratios, which again is a

very large distribution showing the great variance of debt levels. Finally, these results are

difficult to trust, as the range, the difference between the maximum value and minimum value in

a data set, is extremely large for ratio analysis leading to potentially untrustworthy information.

For example, the United Methodist Home of Sharon Inc., a human service nonprofit in Shelton,

Connecticut, had a leverage ratio of 139.35, which is roughly 74 times the average ratio. When

just this one figure is removed from the data set of 993, the mean is dropped from 1.88 to 1.74 or

decreases by 7.4%. This one example displays the volatile and untrustworthy nature of the data

set as it pertains to the use of leverage amongst similar nonprofit organizations.

The correlation of -0.037 implies absolutely no correlation between leverage and net

assets and therefore no statistically proven, direct link exists between leverage and the

sustainability of an organization. The huge variance and unreliability of the data again played a

role. Some possible suggestions for repeating the data are to select a smaller sample size, use

three year average leverages of each organization to attempt to remove some of the volatility,

and to narrow the organization focus (only human services organizations, in the state of Illinois

with 2007 data and yearly income greater than $1 million but smaller than $5 million).




SURPLUS

“It is excess profits [surplus for nonprofits] that provide an impetus for new organizations

to enter a market. In the purely competitive model, excess profits entice new organization to

enter a market and increase the supply of goods and services. This goes on until l prices fall to a

level at which all organizations can earn a normal profit. At that point the market is in

equilibrium” (Anthony & Young, 2003, p. 160). The nonprofit sector is currently mission based

and not market based, meaning organizations come to be and exist to meet a need or provide a

service. Profit, or surplus, is not what attracts organizations to certain “markets” but is rather a

necessity to be successful within that market. Surplus is usually defined as, “the extent by which

revenue exceeds expenditure” (Goleman, 2002, p. 1194). Anthony and Young use the word

“profit” and “surplus” synonymously, which can cause great confusion as the very term

“nonprofit” infers profit is not involved (Anthony & Young, 2003, p. 161). Profit is usually

defined as, “a financial benefit that is realized when the amount of revenue gained from a

business activity exceeds the expenses, costs and taxes needed to sustain the activity”

(investopedia.com). For the purpose of ease of discussion surplus and profit as well as deficit and

loss will be used with the same voice and can be defined as the extent by which the total income

of a nonprofit organization exceeds their total expenses (surplus/profit) or the extent by which

the total expenses of a nonprofit organization exceeds their total income (deficit/loss).

The attainment and usage of surplus for a nonprofit organization is crucial to its financial

management as Shim and Siegel (1997) note, “A surplus indicates better financial health than a

deficit. An increasing trend in the surplus is a favorable sign. Surpluses provide savings for

financing the future and the ability to pay off debt” (p.71). Anthony and Young (2003) suggest



Competition in the Nonprofit Sector 25that surplus has two main uses: asset replacement and growth (p. 161). These two uses fulfill

three main needs: expansion, replacement of fixed assets, and security (p. 60). Shim and Sigel as

well as Anthony and Young touched on the two roles of surplus: the long-term survival of the

organization through its asset management, and the ability to meet current needs to fuel growth.

Asset management is closely tied to the steady nature and sustainability of an organization

(Anthony & Young, 2005, p. 494) and the ability to meet to meet current needs and fuel growth

are associated with an organizations capacity to change according to their present financial

situation or adapt (p. 496). The role of surplus therefore can be used for two purposes:

adaptability and sustainability. These are the same two purposes needed in to succeed in today‟s

competitive nonprofit environment. The following financial management model for competitive

success in the nonprofit world can then be made:

SURPLUS FOR GROWTH, CURRENT NEEDS, AND SECURITY

We have identified that surplus can be used to fuel growth, fulfill current needs, and

provide some financial security for an organization. A surplus fuels growth by providing cash to

fulfill the current needs of the organization, thereby not forcing that organization to take on more

debt, which would otherwise slow growth (Anthony & Young, 2003, p. 163). For example, a


Sustainability (Long Term)

Adaptability (Short Term)


Surplus Leverage



Competition in the Nonprofit Sector 26rapidly growing homeless shelter needs to add new 10 new beds at a cost of $2,000 to keep up

with current demand. If a surplus is being generated, by definition there is an excess of income

over expenses, that excess is available to meet that current need (note the interconnected nature

of growth and current needs). If there were no surplus and the organization still wanted to grow

or meet the new demand they would be forced to use debt, and with it the risk, and the debt

would have to be paid back at some point with the cash generated from the new beds. Eventually

the debt repayment would tax the cash flows to the point that the growth would have to stop and

there would still be debt (not the connection between surplus and leverage). As you can see,

surplus can more adequately address the current needs of organizations without the added risk

allowing the organization to grow not just in the present but also in the future, as they are not

highly leveraged. Surplus can also fuel growth by aiding in innovation development and

implementation. “Usually there is no lack of ideas in nonprofit organizations. What‟s more

often lacking is the willingness and the ability to convert those ideas into effective results”

(Drucker, 1990, p. 66). Surplus can help organizations with both their willingness and ability to

innovate leading to greater organization adaptability and sustainability. If an organization is not

producing a surplus or currently being financially “successfully” or possess large amounts of

debt, common sense says it is not a time to try something new. A surplus can alleviate some debt

stress and provide management with the confidence needed for innovation.

“They [nonprofit organizations] serve the public, and so any [surplus] must ultimately be

used for a charitable purpose. The word ultimately is important here. The money does not have

to be spent right away. It can be put away in some kind of reserve fund or into an endowment

(which simply is a reserve fund that has specific restrictions on when and how the assets are to

be used). This putting away process is highly desirable and all organizations should strive to put



Competition in the Nonprofit Sector 27some money away each year” (Wolf, 1999, p. 183). This building of the endowment or putting

away practice, only possible with a surplus, provides security in the form of assets, which adds to

the long-term sustainability of the organization.

SURPLUS DATA

Surplus is an instrumental tool in fueling growth, meeting current needs and providing

organizational security all leading to greater innovation, adaptability and sustainability. So how

do real organizations do with surplus and are there any correlation to surplus generation and

sustainability? Below is a summary chart of my findings of the 993 501(c)3 organizations used

as part of my data collection process (described earlier).

Category/Statistic ROA Surplus Program

Expense Ratio

Profit Margin

Mean .0599 $593,730.51 .8242 .0946

Median .0299 $332,859 .8420 .0545

Standard Deviation .1301 $1,528,122.74 .1056 .2480

Range 1.2941 $21,832,404 .9732 3.3827

Correlation -.0562 .0386 -.0764 .0317

I would like to reiterate the unreliable and erratic nature of my data and findings before

discussing the use of surplus in nonprofit organizations. While any insight into the usage of

surplus is valuable both for this paper and for the financial management of nonprofit

organizations, there is absolutely no correlation found and more testing is needed to properly

substantiate any claims. That being said there are some expected and unexpected results from the

data results. Firstly, the mean return on assets (ROA) of 6% is respectable but the median or

middle ROA of 3%, quite low, shows that there are some high returning organizations

substantially pulling the average (or mean) number up. On average, the analyzed organizations

do produce a surplus, which is a positive for the aforementioned reasons. There were also some



Competition in the Nonprofit Sector 28enormous losses as the standard deviation for surplus was over $1.5 million that 68% of the

organizations either lost roughly $1 million or gained $2 million. Again, this is a highly volatile

and widespread data sample.

Perhaps the most interesting findings were the somewhat reliable nature of the program

expense ratio. In my financial management classes with Professor Timothy O‟Brien at North

Park University, I learned that the program expense ratio has traditionally been used to gauge

management efficiencies. As the class went on however, I discovered the unreliable nature of the

ratio as clever accounting can greatly misrepresent actual costs and that the program expense

ratio measurement is on the way out as a cornerstone performance measure (O‟Brien, 2007). The

program expense ratio was the least volatile of all the calculations performed perhaps indicating

that organizations pay closer attention to this ratio, knowing that donors and other watch groups

are also looking at this number. This is a key point as it gives hope. Hope that with increased

stress of other measurements such as SROI, profit margin, leverage, etc. organizations will, over

time, also begin to stress these measurements leading to, in my opinion, greater and more

efficient financial management.




CONVERSATION WITH STEVE NELSON

Steve Nelson is currently Vice-President of Strategic Initiatives at Opportunity

International located in Oak Brook, Illinois. Mr. Nelson is a graduate of Wheaton College in

Wheaton, Illinois and has spent 13 years at Opportunity. Mr. Nelson manages team of 8 in

Resource Develop Services. Before arriving at Opportunity International, he worked for

Investment Banking firm Van Kampen Merritt. On April 16, 2008 I conducted a phone interview

with Mr. Nelson, which lasted about forty minutes, to get a firsthand perspective on competition

and the competitive model for success that I have presented. “Opportunity International

empowers people in chronic poverty to transform their lives by providing small business loans,

training, and counsel. In addition, Opportunity provides a safe place for the poor to save their

money by offering regulated banks for deposits as well as microinsurance (life insurance and

crop insurance)” (guidestar.org). Opportunity International is a very interesting organization to

study and gain insight from as they are competing with other similar nonprofit organizations for

grants and donor dollars as well as with commercial banks for loan clients. The following is a

summary of the conversation with Mr. Nelson‟s insights and ideas about competition in the

nonprofit world.

OPPORTUNITY INTERNATIONAL AND COMPETITION

Opportunity competes in two main arenas: fundraising and implementation (Nelson,

personal communication, April 16, 2008). As Director of Strategic Initiatives, Mr. Nelson is

more concerned with how Opportunity competes with other nonprofit organizations for grants

and donor dollars to further their mission than with how Opportunity actually fulfills their



Competition in the Nonprofit Sector 30mission. That being said, it is critical for the implementation of programs and services to be

successful for Mr. Nelson and his team to have success in raising funds, as funders want to know

that their money is being put to adequate use. On the implementation side of the equation, the

competition is to determine who has the better model. In the case of microfinance there are

essentially two focuses that an organization can take and are in competition with each other:

profit focus and transformation focus. Opportunity International is the “leader” among the

transformation focused microfinance organizations seeking to aid the poorest of the poor at the

smallest level as opposed to an organization like Unitus a, “hybrid nonprofit organization: part

venture capital firm, part strategy consulting firm and part investment bank” (unitus.com). Both

organizations use microfinance to help alleviate poverty and their focus is what separates them.

Mr. Nelson notes that many donors appreciate the business minded approach of Unitus while

others do not like the income and profits being generated off of the poor. RuralPovertyPortal.org,

a website powered by the International Fund for Agricultural Development (IFAD) dedicated to

providing economic solutions for the poor, estimates that the microfinance sector has grown an

average of 25 to 30% over the last five years (ruralpovertyportal.org). With such a proliferation

of microfinance options, Mr. Nelson commented that MFI‟s are actually competing with one

another for clients. In many cases, poor entrepreneurs get their fist loan from Opportunity and

enjoy the transformational focus and go on to receive larger loans from Opportunity until their

credit, business savvy, or financial status improves to the point that they can receive larger, more

commercialized loans from other organizations. Opportunity now needs to find a way to not only

recruit clients but not must also retain those clients or they will lose them to other microcredit

providers (Nelson, personal communication, April 16, 2008).



Competition in the Nonprofit Sector 31OPPORTUNITY‟S ADAPTABILITY AND COMPETITIVE APPROACH

Opportunity is able to compete with profit maximizers today, compared to many other

microfinance nonprofit organizations that cannot, as they were able to recognize the trend away

from nongovernmental (NGO) and nonprofit organization aid and towards commercialization

and adapt to it. Mr. Nelson said that they saw the NGO and nonprofit model becoming

“obsolete” and knew they, as an organization, had to respond. Once they understood they needed

to change, the question then was how? Mr. Nelson immediately pointed to Opportunity‟s

leadership as the key factor in propelling Opportunity into a state of necessary change. He

recalled how the CEO at the time initiated an international email discussion in 1998 and

circulated a memo that read, “Change or DIE”. Mr. Nelson also remembered how the CEO at the

time, originally from Maine, described the necessary change that was facing Opportunity if they

were to adapt and be sustainable. The CEO compared the situation to a lobster that must leave its

shell once it reaches a certain age and then survive a period where the old shell is gone and the

new shell has not yet appeared. It is that vulnerable period for Opportunity, when they were

transitioning away from the NGO and nonprofit model to a more commercialized, hybrid

microfinance model but they were not quite there yet, where the leadership was brought into

focus. The financial status of Opportunity was stable enough to allow them to attempt such a

bold transition but the finances were secondary, in Mr. Nelson‟s opinion, to the leaderships

ability to get organizational buy in to the idea and be willing to take the risk. It was not easy, as

some concessions and tough decisions were made. For example, having indigenous leaders was

apart of the ideology of Opportunity International under the old structure but was much too risky

with the shift to commercialization. What allowed such concessions to be made was that all

decisions stayed true to the mission of serving the poor and the question, “How can we best serve



Competition in the Nonprofit Sector 32the poorest of the poor” was continually asked. With this constant reflection of the mission and

goal of the organization, necessary adjustments, compromises, and sacrifices could be made

increasing the pliability of Opportunity (Nelson, personal communication, April 16, 2008).

LEADERSHIP

The two “critical success factors” noted by Mr. Nelson of a successful leader of a

nonprofit organization in a competitive environment were visionary leadership and management

to execute. The ability of the CEO (in 1998) and his management team to see the trend coming

and know where they needed to go was the visionary leadership characteristic described by Mr.

Nelson (Nelson, personal communication, April 16, 2008). From 1998 up until present day has

been the ongoing process of management attempting to execute. Each independent of one

another are not of much use but combined they provide the culture of change and success needed

to adapt and be successful. Mr. Nelson, a proponent of Jim Collins and his book Good to Great

and the Social Sectors (2005), believes that one of the key reasons management has been able to

execute is that the organization follows the belief that one must get the right people firstly and

then worry about fitting them in their proper roles secondly. Collins refers to this as the “First

who-then what” approach and uses the metaphor of getting the right people on the bus and then

getting them in the right seats. Collins goes on to say, “The right people can often attract money,

but money by itself can never attract the right people. Money is a commodity; talent is not. Time

and talent can often compensate for a lack of money, but money cannot ever compensate for a

lack of the right people” (p.17).

INNOVATION



Competition in the Nonprofit Sector 33Innovation has three main purposes for an organization: reduce costs, increase quality,

and gain a competitive advantage (Nelson, personal communication, April 16, 2008).

Opportunity International is a leader in innovation within the microfinance field and has invest

millions of dollars to serve these three purposes. For example, in some Opportunity

implementing partners or microfinance branches they offer biometric solutions for banking. The

biometrics allows clients to sign up and access their bank with only a thumbprint. Many of the

poor that Opportunity seeks to serve do not possess any from of identification such as a passport,

drivers license, or even birth certificate therefore the biometrics enable Opportunity to serve

clients who would be turned down elsewhere (competitive advantage), ensure easy account

access and protect against identity fraud (increase quality), and limits paper work and multiple

systems reducing costs in the long run (reducing costs). I found it interesting that Mr. Nelson

mentioned two financial ramifications attached with the use of innovation and they are the appeal

to donors (equity) and the ability to leverage funds4. Donors provide extremely valuable assets

that can be used as part of the financial management strategy (discussed later in this section),

therefore anything that is appealing to this potential source can be a benefit. Innovative measures

are very exciting and enticing to donors and an easier “sell” for development officers. Funds can

be leveraged with innovation as a investment, such as biometrics, has a large cost upfront but can

actually produce returns not only in the form of greater equity, in the form of grants and

donations, but increase in revenue from constituents as well as reduced expenses leading to

greater surplus.

FINANCIAL MANGEMENT

4 Leverage, in this context, is not the use of debt to increase accessible assets but it is a reference to the concept of

leverage or using something to positively propel another.



Competition in the Nonprofit Sector 34The microfinance model is built upon generating greater revenues than expenses (Nelson,

personal communication, April 16, 2008). If done properly, the surplus that is generated is then

used to fuel growth of the organization and the increasing costs associated with growth.

Opportunity International believes that an organization‟s financial management strategy must be

concerned with generating a surplus or being profitable first and foremost. Only after an

organization can produce a steady income stream should they use the benefits of leverage

(Nelson, personal communication, April 16, 2008). This is a means of reducing the financial risk

associated with leverage as if an organization can consistently produce a surplus that

organization will, most likely, be able to meet its obligations when they are due and not incur the

damaging effects that leverage can bring. Where the Opportunity financial management model

may differ from some other organizations is their aggressive use of donor funds. The majority of

fixed assets are funded exclusively with equity and income as opposed to the generally

recommended approach of a mix of long-term debt and equity (Shim and Siegel, 1997, p. 71).

This again is a means of reducing the financial risk that is taken on by Opportunity International

reducing their leverage (or increasing their liquidity) as they have little debt which then enables

them to adapt to trends, market shifts, constituent needs, and invest in innovation and in turn

increases their overall competitiveness.




Adaptability

Sustainability


Innovation


Leadership

COMPETITION

LeverageSurplus

SUMMARY AND FUTURE HOPE

There is increasing competition within the nonprofit sector and organizations would be

wise to begin to consider how they currently compete and how they will compete in the future.

The end goal of all organizations is to fulfill their mission for the benefit of their stakeholders

and to do that the organization must be active and remain active. To remain “open” organizations

must be willing and able to adapt in response to changes or to prepare for changes. Leadership,

innovation, and financial management, through the use of surplus and leverage, are three key

ingredients present in a competitive model that allow adaptability and lead to sustainability.

The Josephson Competitive Model for Nonprofit Management [seen below] is the



Competition in the Nonprofit Sector 36summation of thoughts, readings, classes, ideas and personal experiences and is a visual

representation of competition and the key ingredients needed for sustainability.

Organizations such as Opportunity International possess tremendous leadership, dedicate

themselves to excellent financial management, and pride themselves on their innovation seem to

be more of the exception than the norm currently. As more nonprofit entities compete with

businesses and more businesses begin to compete in traditional social sectors, organizations like

Opportunity are going to have to become more common in order to be successful. Steve Nelson,

Vice-President of Strategic Initiatives at Opportunity International, noted the definite impact that

the aforementioned model [above] has had in the real world. He also pointed out a few faults and

added to the complexity and validity of the model.

It is my hope that others like Mr. Nelson will join the discussion of competition and bring

their own thoughts, ideas, and experiences leading to a greater understanding of what is best for

the sector as a whole going forward. I hope that organizations begin to understand the

competitive nature of business and the usefulness of it and respond as Opportunity has, by facing

challenges head on. With powerful and brilliant individuals like Mohammad Yunus proposing a

complete restructuring of how business, government, and the nonprofit sector interact with one

another in the name of increasing the social impact that can be made using market and

competitive principles, we, the nonprofit sector, must begin to also look at new ideas. I hope that

this paper presents some of those new ideas.




ACADEMMIC APPLICATION

I studied as an undergraduate at North Park University and majored in Business and

Economics with a concentration in nonprofit management before going on towards a Master‟s of

Management in Nonprofit Administration again at North Park University. This paper

incorporates many of the lessons, thoughts, and ideas I have learned from my four years at North

Park. I chose to study nonprofit management as an undergraduate as the world of business was

very intriguing and exciting to me, but the profit motive and focus on bottom line was a turn off.

Nonprofit management seemed to be a great marriage of business principles and my personal

goals and views on life. One of the main attractions to business was its competitive nature. I have

been into sports all my life and consider myself to be the most competitive person I know

therefore there was a natural allure to the business world. I took a Strategic Management class

my senior year at North Park University and one of the main components of the class was a

“Glo-Bus” exercise. In teams, we were to conduct a global camera business and compete against

the other teams in our class. Results were measured based on certain financial figures, such as

return on equity (ROE) and stock price, and other factors such as market share, camera quality,

and distribution. While my team was not as into it as I was and our fast start, we were in first

place for the first four weeks I believe, went to waste I really came alive when I had the



Competition in the Nonprofit Sector 38opportunity to make many decisions in a competitive environment. As I began to take more

nonprofit classes at the graduate level, I noticed less and less discussion in terms of competition,

strategy, and innovation. This was both disturbing and exciting however. It was disturbing as one

of my passions, competition, was not being discussed and it made me wonder if competition

even had a place in the nonprofit sector. It was also exciting as since there was very little

discussion on the subject of competition, perhaps the idea of integrating and focusing on

competitive approaches within the nonprofit sector was a “cutting edge” type view. A view that,

right or wrong, can only add to the discussion as it pertains to nonprofit management. I have

been carrying on that discussion, competition in the nonprofit sector, both externally with

classmates, projects and professors as well as internally with thoughts, ideas, and dreams. It is

safe to say that my classes in the Master‟s of Management in Nonprofit Administration program

have been the framework and the fuel for my ideas.

Two such classes were School of Business and Nonprofit Management (SBNM) 5320-

Investment Management, taught by Professor Al Kamienski, and SBNM 5773-Grant Writing for

Foundations, taught by Professor Sarah Fodor. I took both of these classes in the first quad of the

winter or second semester in 2008. It was interesting to take a class completely geared toward

the nonprofit students, Grant Writing for Foundations, alongside one geared mostly toward the

Master‟s of Business Administration (MBA) students as the similarities and contrasts were much

easier to make. In each case, interestingly enough, the end goal was how to maximize money

intake in the form of investments for individuals or grant dollars (specifically foundation and

corporate grants) for organizations. Grant writing involves great amounts of research in the

foundation, their history, their mission, etc. as well as the organization‟s history, mission, and

need while proper investing also involves great amounts of research. Research for investments



Competition in the Nonprofit Sector 39tend to be a bit more quantitative as stock price, dividends, return on equity, price/earnings ratio,

etc. are all vary valuable. The research for adequate grant writing tends to be much more

qualitative in terms of mission match, would they give, who did they give to last year, who do

we know over there, etc. This contrast got me thinking about one of the main differences

between the profit sector and nonprofit sector and that is that the nonprofit sector is much more

difficult to measure and analyze. This lack of accessible metrics is directly linked to less

competition as it is much harder to compare one organization to another and there is much less

standardization and accountability across industries. In sports it is very difficult to judge the

value of a pitcher in baseball compared to a quarterback in football, as they are two completely

different positions in completely different sports with completely different statistical categories.

That is somewhat what it is like in the nonprofit world with different organizations having

different missions and focuses as well as varying reporting procedures. All of this is to say, my

discussion on SROI and financial management and their impact on the nonprofit sector is an

attempt to bring some financial measurements that are specific to it to the forefront to allow

comparability. Once comparability can be established, competition can more easily be

established.

A fair amount of my paper has used Opportunity International as an example and a

framework for different concepts, theories, and examples. My experience at Opportunity was

invaluable for this paper but also worked hand-in-hand with SBNM 5771-Annual and Major

Gifts Fundraising taught by Professor Lisa Dietlin. For all of the assignments in the class, I used

Opportunity as my example and created plans, charts, and papers all as if I worked for

Opportunity. In order to do this, I needed to gain a deeper understanding of Opportunity

International, the microenterprise industry, and fundraising in general. All of three of these areas



Competition in the Nonprofit Sector 40are heavily involved in competition. Opportunity for donor and grant dollars, the microfinance

industry and its recent explosion and rapid attempts to reach more and more people, and

fundraising in general attempting to secure the billions of dollars given away each year. Through

the Annual and Major Gifts class, I was able to see more accurately how nonprofits are in

competition with each other, especially as it relates to the fundraising. Competitive strategies,

business plans, and marketing attempts, among other aspects, are all very much present in proper

annual and major gifts programs. This was very exciting to me and is one of the reasons I chose

to pursue a Certificate of Fundraising Management from North Park University as it, the field of

development, is a very competitive field. SBNM 5771 not only piqued my interest in fundraising

and gave me a better view of competition within the nonprofit sector, but it also displayed

important factors, such as financial management, that are essential to enable development

professionals to implement their competitive ideas.

Speaking of financial management, SBNM 5350-Nonprofit Financial Management and

SBNM 5351- Nonprofit Financial Decision Making, both taught by Professor Timothy O‟Brien,

were foundational and critical to my discussion on financial management. I had taken some

business classes as an undergraduate that dealt with very basic business principles such as

revenue generation, cost allocation, etc. but both SBNM 5350 and SBNM 5351 built upon the

knowledge base and then expanded it in terms of nonprofit financial management. Authors

Anthony and Young as well as Shim and Siegel, whom I have cited very often especially in the

financial management discussion sections, were the authors of the textbooks used for those

classes and proved to be great resources for my paper. Professor O‟Brien‟s life experience as the

comptroller of many nonprofit organizations also proved to be a great resource. His first hand

account of poor financial management of nonprofits, particularly the lack of surplus generation



Competition in the Nonprofit Sector 41and adequate planning, was very impacting as I thought more about the management of nonprofit

organizations. I also took these classes while I was an intern at Opportunity International, which

enabled me to compare and contrast what I personally saw and what the textbooks, other

students, and Professor O‟Brien were saying.

I could go on and point out particular parts of classes that played a role in the

development of this paper as every class I have taken has, in some way or another, impacted my

thoughts as it relates to competition in the nonprofit sector. SBNM 5011-Ethical Leadership

unexpectedly had a profound impact as I ended up arguing for market principles and the power

of competition on multiple occasions in our debates and the discussion of certain leadership

styles and theories also proved useful. Since every class has in some way impacted the

development of this paper, perhaps my earlier statement that competition in the nonprofit world

is not heavily discussed is false. Perhaps it is just not as easy to see or it is not labeled as simply

“competition” as we use it in the market sense. I hope that in the future, the discussion of

competition will be more evident. Furthermore, I hope that financial management, innovation,

and leadership as they relate to innovation and in turn sustainability will be included in that

conversation.




REFERENCES

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Organizations. New York: McGraw-Hill Higher Education.

Anthony, Robert N., & Young, David W. (2005). Financial Accounting and Financial

Management. In Herman, Robert D. (Ed), Jossey-Bass Handbook of Nonprofit Leadership

and Management (466 – 512). San Francisco: Jossey-Bass.

Collins, Jim. (2005). Good to Great and the Social Sectors. Boulder, CO: Jim Collins.

Dictionary.com

Drucker, Peter F. (1990). Managing the Nonprofit Organization: Principles and practices. New

York: HarperCollins Publishers.

GivingInstitute.org

Goleman, Daniel (Ed.). (2002). Business: The ultimate resource. Cambridge, MA: Bloomsbury

Publishing Plc.

Guidestar.org

Herman, Robert D., & Associates. (2005). The Jossey-Bass Handbook of Nonprofit Leadership

Management (2nd

ed.). San Francisco: Jossey-Bass.



Competition in the Nonprofit Sector 43Herzlinger, Regina E., Taylor, Barbara E., Chait, Richard P., Holland, Thomas P., Bowen,

William G., Letts, Christine W., et al. (1999). Harvard Business Review on Nonprofits.

Boston: Harvard Business School Publishing.

Investopedia.org

Long, Dale Major. (1997). Process vs. Technology: What drives your business? 4/17/2008 from

http://www.chips.navy.mil/archives/97_apr/file1.htm

Northouse, Peter G. (2007). Ethical Leadership: Theory and practice (4th ed.). Thousand Oaks,

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Brady Josephson - Competition in the NFP Sector

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