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...ratio costs to revenues can appear unfavorable. Second, nonprofits cannot distribute profits to firm owners under American tax law, which eliminates stakeholders with the most obvious stake in organizational efficiency. Finally, as many authors have noted, metrics for nonprofit efficiency are notoriously porous and imprecise, making it difficult to enforce organizational accountability (Keating Frumkin, 2003).
Under traditional accounting measures, nonprofits in the United States might appear quite inefficient. For example, consider the data on the simple return on investment (ROI) for total spending by nonprofits in various subsectors from 2001. This measure, which is fairly standard to judge for-profit business practices, is calculated as revenues (TR) less expenditures (TC), as a percentage of net firm assets (A). That is,
ROI - TR - TC/A (1)
Table 1 summarizes this calculation for the nonprofits in the United States in 2001 that filed an IRS Form 990, and which recorded positive expenditures. (1) These data show that nonprofit subsectors tend to see an ROI that is under three percent--and potentially even negative.
Compared to the ROI generated by for-profits, the figures in Table 1 are very low. Desai (2001) shows that the ROI enjoyed by American multinational forprofits tends to be about 17 percent, on average. For example, over the period 1982 to 1995, the annual ROI was 19 percent for chemical firms, 21 percent for food companies, 18 percent for machinery producers, and 23 percent for transport firms.
This discrepancy between for-profits and nonprofits might lead to the intuitive conclusion for many people that nonprofits are somehow "inefficient": If they would just tighten up their operations, make smarter spending decisions, and be held more accountable to stakeholders, the reasoning goes, then they would achieve higher ROI levels, indicating a more "businesslike" stewardship of funds. Indeed, even some nonprofit insiders seem to share this view. For example, OpenConsult, a nonprofit e-commerce consulting firm, pitches its services with this statement: "Facing market pressure to become more efficient and less dependent on the government, nonprofit organizations today must find new ways to achieve a leaner, more businesslike operation." (2)
Given this viewpoint, it is especially striking to find a number of scholars on the nonprofit sector who appear to assert that, on the contrary, nonprofits do not need to become more businesslike. Light (2001), for example, writes that
[j]ust because the nonprofit sector needs to improve its performance does not necessarily mean it has to become more businesslike. Unfortunately, absent a compelling vision of what being nonprofit-like means, it is hard to imagine that individual organizations will be able to resist the pressure to become less like nonprofits.
Similarly, Frumkin (2004) states that
[while] nonprofit and voluntary organizations appear weak, inefficient, and directionless,... nothing could be further from the truth. In reality, [nonprofits have] a set of unique advantages that position them to perform important societal functions neither government nor the market is able to match.
Are nonprofits inefficient, or are they not? Clearly, there is substantial ambiguity in the way we measure efficiency, the way we understand it intuitively for nonprofits, or both. Two major trends in public administration and nonprofit management make this fact a significant...
NOTE: All illustrations and photos
have been removed from this article.
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