In the trainings I do for CEOs, we get a surprising number of nonprofit CEOs.
We find that 90% of our CEO operating system applies to what the nonprofit CEO (or executive director or whatever their title is) does.
These nonprofit CEOs have the same ultimate responsibility for the functioning of a large organization, the same balancing act of delivering value to distinct stakeholders, the same basic tools of management, leadership, and coaching, on and on.
But there are key differences. To me, the biggest has to do with efficiencies driven by the market.
When a for-profit business is doing something that doesn’t work, its interaction with the market often forces it to quit doing that thing. Sometimes it takes a while, but if people aren’t buying our product or we’re losing money on it, we’re going to eventually stop or change the product.
But nonprofits, because they don’t get that same direct market feedback, don’t feel the same pressure. The people who pay for nonprofit services (donors) aren’t the same people who receive them (beneficiaries). There’s therefore no price mechanism connecting value delivered to resources received, and no feedback loop forcing hard choices.
Without this pressure, nonprofits fall into a pattern of accumulation.
Every new need becomes a new program.
Every grant opportunity becomes a new initiative.
Every board member’s pet cause gets added to the mission.
Meanwhile red tape, processes, and bureaucracy build up.
I was sitting in a nonprofit board meeting recently that was a great example of this. For much of the time we were sitting there talking about new ways to generate revenue and almost no critical discussion of what the organization was currently doing. Is it valuable? Is it having the effects we intend?
While the for-profit asks these questions naturally, the mandate for the nonprofit is essentially “Raise more money and do more stuff!”
Positive Pressure
Research in the Journal of Governmental & Nonprofit Accounting shows that even when nonprofits do raise more money, they don’t think strategically about how to apply it. Instead of asking “What’s the highest-return use of this additional dollar?” like a business would, they just spend more on everything proportionally.
The paper I’m referring to says that:
Average spending patterns do not change when budgets increase. That is, average program ratios do not change when budgets grow.
They’re not doing the marginal analysis that would optimize impact. They’re just scaling up what they were already doing, whether it was working or not.
Businesses get forced into these decisions constantly. “We don’t need these people anymore because AI can do this,” or “This product’s not selling,” or “This warehouse doesn’t work.” The market makes the choice for them.
Now, market signals don’t always work perfectly for businesses either. Companies can get lazy when they have monopoly positions or guaranteed revenue streams.
But the pressure is still there, lurking.
Creating Your Own Market Discipline
If you’re running a nonprofit, here are ways to create your own market signals. (For-profit CEOs should pay attention too. Just because the market signals are there doesn’t mean all CEOs listen to them.)
1. The Subtraction Audit
Before launching anything new, conduct a formal review of existing programs with an eye toward outdated, obsolete, wasteful activities, programs, processes. In the companies I’ve taken over as CEO, this is always one of my first steps - and trust me, employees will tell you if you ask them.
Good questions to use in this process are:
What would we start if we were founding this organization today?
Which programs would our beneficiaries miss most if we eliminated them tomorrow?
What’s our cost per unit of impact for each major initiative?
What percentage of our activities existed five years ago and haven’t evolved?
2. Beneficiary-as-Consumer
Even though the beneficiary of the nonprofit’s services isn’t the true customer, you can think about them more like consumers. For each program, ask: “If the people receiving this service had to pay for it themselves, would they choose to buy it?”
If the answer is no, you might be providing something that makes donors feel good but doesn’t actually create value for the people you’re trying to help.
I have a son with a disability, and when he was much younger I vividly remember the day a nonprofit showed up at our house with a bike for him. It was a nice thought, but he wasn’t at all interested in a bike at the time, and even if he had been, our family had the resources to provide him with one. That nonprofit, well intentioned as they were, wasn’t at all thinking about the beneficiary as a consumer.
3. Artificial Market Pressure
Almost any nonprofit can create systems that force the same hard choices market signals would impose. Being artificially imposed, they may not operate as naturally as a market/consumers would but they can nevertheless bring some of that insight.
Thinking of the beneficiary as the consumer is one of those systems, but some others to consider include:
Sunset clauses on all programs (they expire unless actively renewed)
Regular zero-based budgeting exercises
Board committees explicitly prompted by the CEO to look for efficiency and streamlining opportunities
When Nonprofits Get It Right
Some nonprofits do figure out how to harness market-like forces. Mobile Loaves & Fishes in Austin, founded by my friend Alan Graham, is a good example. Instead of just giving handouts to homeless people, founder Alan Graham created Community First! Village where residents pay rent for their homes, often earned through on-site jobs.
Because residents exchange money for housing, they have skin in the game. (As recommended above, these beneficiaries look more like consumers.) They take better care of their homes. The organization gets direct feedback about what’s working because people vote with their wallets, even if those wallets aren’t usually very padded.
The model works. Nearly 400 people now live off the streets in dedicated communities. Other cities are copying the approach.
Every nonprofit leader I’ve met complains about being resource-constrained. But most respond to scarcity by trying to find more resources rather than using existing resources more effectively.
The insight isn’t that nonprofits are inefficient but that they operate in an environment that naturally encourages accumulation over optimization. Recognizing this is the first step toward building better systems and realizing that sometimes subtraction gets you more than addition.