- December 12, 2021
- Posted by: Robert Brown
- Category: Investing
When we look beyond an organization’s Internal Revenue Service (IRS) non-profit status as reported on their IRS 990 Form, many of the distinctions between For-Profit and Non-Profit corporations become operationally meaningless. As Peter Drucker states, “The differences between managing a chain of retail stores and managing a Roman Catholic Diocese are amazingly fewer than retail executives or bishops realize. The differences are mainly in the application rather than the principles.” Many of the timeless principles that produce sustained financial and non-financial performance in high-performing For-Profit companies can also be applied to Non-Profit corporations, as described by Collins in his monograph, Good to Great and the Social Sectors. In fact, contrary to the view taught in many business schools, recent studies such as Collins and Porras’ Good to Great have shown that profit and wealth are not the driving force or primary objective of truly visionary For-Profit companies. Rather, For-Profit companies have a larger purpose in life, and this purpose becomes the focal point on the business horizon, guiding every decision they make. Generating revenue becomes a means to an end for truly visionary For-Profit companies, not an end in itself.
There are two kinds of Non-Profit organizations that powerfully shape and define an organization’s culture based on how they generate the majority of their revenue. This includes:
- Type 1 Non-Profits
- Type 2 Non-Profits.
While Type 1 Non-Profits may generate some of their financial resources through endowments, fund-raising, membership dues, and gifts from donors, most of their revenue comes from providing products and services to customers and work performed for funding agencies and grantee organizations; e.g., the results of clinical trials, applied R&D, basic research, or the development of new technologies. Operationally, they function much like their For-Profit counterparts – they have standard business and work processes, proposal writing functions, marketing and sales goals, suppliers, inventory, customers or clients to satisfy, and competitors in both the Non-Profit and For-Profit arenas. Examples of Type 1 Non-Profit organizations include: hospitals, medical clinics, convalescent care facilities, agricultural organizations, retail operations (Goodwill has over 1,900 stores), some contract research organizations, research institutes that do applied R&D, and educational organizations.
While Type 2 Non-Profits may generate some of their financial resources by providing products and services to those outside of their organization, most of their revenue comes from grants, awards, funding agencies, endowments, fund-raising, membership dues, and gifts from donors. Operationally and culturally, these organizations are more complex than their For-Profit counterparts and function very differently. For example, rather than customers or clients in the traditional sense of the words, Type 2 Non-Profits serve two major constituencies: a) the needs of the public and society at large, academia and furthering the arts and sciences as a legacy for future generations, and b) the demands of funding agencies, grantors, sponsors, members, and donors for fiscal and programmatic responsibility. Ultimate responsibility for compliance with federal, state, and local requirements, public relations, fund-raising, and overall fiscal and programmatic effectiveness and stewardship lies with the Type 2 institution and/or with a Board of Directors. The institution’s administrative staff uses standard business and work processes to support a scientific, technical, or artisan staff that often has joint appointments with other institutes or collaborating universities, so the people who produce the core contribution to the Type 2 organization’s purpose and strategic objectives may not be full-time employees of that institution. Examples of Type 2 Non-Profit organizations include: a) institutes and universities that conduct research in the physical, biological, ecological, political, social, and computing sciences, b) organizations that distribute food and medical care to the needy, and c) museums, art institutes, and schools of music that create and sustain artistic expression and culture.
The revenue for most government organizations at the federal, state, county, and municipal levels comes from appropriations granted by legislative bodies (like the U.S. Congress), and this appropriated revenue stream powerfully shapes and defines the culture of government organizations. This is because the basis for increasing or decreasing revenue from appropriated funds is driven largely by political issues, not the actual performance of the government organization. One of the best ways to characterize these differences is to compare the key elements that drive For-Profit companies in industry, with government entities. More specifically, there are four drivers in For-Profit organizations: a) business results, b) customer satisfaction, c) consequences for performance (good and bad), and d) the leadership and management needed to enact and energize the first three. Like the wind in the sails of a boat, business results and customer satisfaction are the driving forces that link For-Profit companies to the business environment outside the organization. Consequences for performance are the indispensable drivers that enable managers to oversee day-to-day operations within the context of the organization’s structures, systems, and culture. Consequences are the equivalent to accountability and authority.
Field experience of working with government organizations up to the Under Secretary level has shown that there are no real equivalents to business results, customer satisfaction, and consequences for performance (good or bad) in most government agencies. The notable exception is “hybrid” organizations that receive a portion of their revenue from providing products and services to customers. For example, in industry, if a company is not profitable it goes out of business. In government agencies, organizations and projects sometimes continue to exist long after their purpose is questionable, often for political reasons. In industry, customer satisfaction is a bulwark of business results and process improvement. If customers are not satisfied, they buy elsewhere, the company’s profits decline, and eventually the company goes out of business. In many government agencies, managers and staff members have endless debates about whether they even have customers other than the ephemeral “taxpayer” or “future unborn generations.” In industry, if a worker’s performance is exemplary they are rewarded, and if performance is inadequate, the company can fire them. There are consequences for performance – good and bad. In most government agencies, the difference between the raises and rewards given to high-performers and those given to low-performers is often a few dollars a month. An unwritten cultural norm in many government agencies is that it’s not appropriate for managers to give marginal ratings for fear that even the most incompetent workers will take retribution by filing grievances against a manager who dares to tell the truth about their level of performance. More importantly, even the remaining industry-type driver of leadership and management is undermined when top managers cannot openly demonstrate that there are consequences for performance because the system within which they are embedded does not provide them with accountability and authority.
Assessors should note that in the absence of revenue streams that are linked to an organization’s actual performance, the currency that “trades” in government organizations is power-through-visibility. In other words, if a government organization or a manager is involved with an “initiative” or “program” that is well received by the agency leaders, the media, or the public; this creates the currency of positive visibility. If the organization or manager is associated with actions and interactions that are frowned on by agency leaders, the media, or the public; this creates the currency of negative visibility. As a general rule, all sectors of government are increasingly under pressure to demonstrate the applicability and value-added results of their services to meet public needs and this scrutiny generates either positive or negative currency in visibility. But when an organizational unit within a government entity is responsible for the active enforcement of laws and regulations, their purpose, strategic objectives, goals and day-to-day interaction with the public are often subject to more intense scrutiny by the public and the media so the issues associated with power-through-visibility are more intense because these constituencies function more like actual customers. Government entities are also under constant pressure to demonstrate that their operations are efficient and that they are using publicly generated funds responsibly, despite the absence of the four drivers mentioned above, which increases the importance of creating the currency of positive visibility. The tacit, unexamined, taken-for-granted currency of power-through-visibility is one of the most powerful forces in the world of government entities, and it’s important to recognize this reality and actively manage it through key performance indicators.
The bottom line when trying to create an Intended Culture™ in for-profit, non-profit, and/or government organizations is to focus on its revenue streams and governance structures. Gaining a clear understanding of: a) the nature, viability, and sustainability of an organization’s revenue and funding streams; b) the expectations and pressures that are exerted on the organization by customers, competitors, suppliers, regulators, taxpayers, and other forces in the external environment; and c) the nature of its governance structure are the key elements of creating an Intended Culture™.