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Online Bookshelf

Effective Economic Decision-Making by Nonprofit Organizations

edited by Dennis R. Young

What follows is a slightly abridged version of chapter 10: "The Seven Insights of Effective Nonprofit Economic Decision-Making." For a full listing of chapters in the print edition, see Contents.

There is a very wide spectrum of business and economic decision-making issues facing leaders of nonprofit organizations. The components in this spectrum are highly diverse, involving such varied concerns as motivating workers, ensuring access to services by people of limited income, ensuring that the quality of service is not sacrificed to economies of contracting out, ensuring the profitability of fundraising activity, accounting for risk in investments, determining the appropriate mix of profitability and loss-making in new ventures, finding compatibility with institutional partners, and positioning nonprofit initiatives on the Internet. All of these issues are of substantial interest in themselves. Indeed, books could be written (and in some cases have been written) on any one of them alone. But these separate issues also reflect a number of common themes.

One common theme is that each issue involves the allocation of valuable economic resources. That is, each of the forgoing issues relates to the larger question facing nonprofit leaders: How can I make my organization as efficient and effective as possible, given the limited resources at my command? Second, and relatedly, each of the issues is subject to analysis through a common set of tools and ideas of economic analysis and business decision-making. Notions of opportunity and transactions costs, cost-benefit analysis, analysis at the margin, risk analysis, and the interaction of supply and demand in markets, pepper the discussions throughout and help identify solutions for nonprofits to address their economic concerns. Third, the application of these ideas, while common to those used in the business world, often leads to different solutions for nonprofits because of the special goals, mission orientation, constraints, cultures, and traditions of nonprofit institutions. In large part, this latter focus is the raison d'être for this volume, because we recognize that nonprofit organizations are serious economic enterprises that require their own special applications of economic and business logic.

Here, however, we want to go beyond these initial motivating themes to explore further insights and observations that emerge when the economic analyses of nonprofit decision-making in its various facets are compared one to another. Ultimately, this approach offers some cautionary but helpful perspectives with which to approach nonprofit economic decision-making in general, no matter what the particular issue. Below, we undertake this discussion in an inductive fashion, by overlaying the patterns and determining where they seem to converge. The result is a mix of obvious and not so obvious insights. Here, in a sequence that facilitates their discussion but implies no particular priority ordering, are what might be called, with apologies to Stephen Covey, the Seven Insights of Effective Economic Decision-making:

1. Mission is a primary concern, central to making all wise economic choices in nonprofit organizations.

This is probably the most obvious and unsurprising common theme. Nonetheless, its importance and pervasiveness compel emphasis and elaboration. For one thing, this is what really separates nonprofit economic decision-making from business decision-making. In business, the pursuit of a mission may serve the overriding goal of profit-making. In nonprofits, the bottom line is mission achievement, with profit-making sometimes instrumental to the pursuit of that mission. As a result, decisions appropriate for nonprofits often depart from business practice because nonprofits must be willing to sacrifice profits, or consider them of secondary importance, in order to better serve mission.

The primacy of mission shines through economic decisions. Prices are set, or even avoided, in order to accommodate clients' ability to pay or to encourage mission-related behaviors, not to maximize profits. Wages are set, or even foregone, and nonpecuniary benefits cultivated, in order to attract and retain workers devoted to mission. Outsourcing of core functions is avoided where it threatens to undermine mission, even if financial savings are sacrificed. Recommended fundraising practices do emulate profit-maximizing, but only within limits that avoid damage to mission achievement and account for social (community-wide) as well as organizational efficiencies. Investment decisions consider direct mission-relevant benefits of program-related and internal infrastructure expenditures as alternatives to conventional financial returns on marketable securities.

Similarly, new nonprofit ventures may be considered worthwhile even if they generate financial losses, so long as they produce mission-related benefits and can be supported by some viable combination of income streams. Institutional collaborations are considered for their direct mission-related effects, such as wider exposure of a nonprofit's social message, their possible detrimental impacts on mission such as fall-out from association with partners that prove disreputable, as well as for any financial benefits. And Internet initiatives involve the full set of mission-related considerations associated with decisions to outsource, engage institutional partners, price services, and undertake new ventures. It is no exaggeration to state that the bottom-line question of any nonprofit economic or business decision should be: What are the impacts (positive and negative) of the various alternatives on achievement of the organization's mission.

2. As a practical matter, mission-related effects are often difficult to codify and quantify, but they should be made as precise as possible.

Having establishing the primacy of mission in nonprofit economic decision-making, one is left with a large and bothersome problem: the difficulty of implementing this principle in practice. At the very least, mission-related effects often cannot easily be quantified in order for mission impacts to be readily balanced with financial performance. In some cases, the concern goes further-that mission-related impacts may not even be clearly defined or easily anticipated. In all areas, however, mission-related effects must be anticipated where possible, articulated as precisely as they can be, appropriately documented, and quantified where feasible. Underlying all of this is the implicit assumption that mission itself is clearly conceived and defined. However, as Weisbrod (1998) and others have observed, nonprofits often state their missions in very broad and vague terms that sometimes seem to defy operational precision. However, without a precise idea of mission, nonprofits are hampered in properly integrating mission impacts into their economic and business decisions.

Again, this concern crosses all facets of nonprofit economic decision-making. For example, in order to develop a price schedule that accommodates some groups of clients even if they have limited ability to pay, one must know how the mission of the organization translates into helping specific groups of beneficiaries. How important is it for a nonprofit preschool program, for example, to maintain an economically and ethnically diverse student body and what should the proportions of different groups of children be? Such a question can only be addressed by clarifying the mission into specific terms, e.g., goals, before trying to design the price schedule to address those goals.

Similarly, in the realm of worker compensation, how important is it for an organization such as a neighborhood YMCA or a church to address local community goals versus a broader social goal such as youth development? If local community building is a priority, it may be important to cultivate local volunteers rather than recruit professional workers, or to seek out paid workers from the neighborhood rather than the broader labor market. Alternatively, if the broader goal of youth development is more important, then offering professional wages and benefits may be in order. The appropriate wages and nonpecuniary benefits offered to workers cannot be determined without clarifying and giving more precision to how these goals follow from the organization's mission.

Outsourcing decisions require mission precision as well. One must ask, what aspects of a nonprofit organization's activities are truly central to the mission and which others can be safely outsourced without jeopardizing mission? Is part of the core mission of an art museum to encourage local artists, and if so, how would one judge success along these lines? Can this function be outsourced through a contract with a local art gallery or must it remain a function subject to the judgments of the museum's professional curators? If the latter, what criteria should those curators use to determine which artists are to be given exhibition space, and indeed how much exhibition space should be allocated to this activity? If the former, can the contract with the gallery be properly implemented by specifying the numbers and describing the characteristics of artists whose paintings are brought in for display?

Decisions to spend on fundraising also raise questions about the precision of mission. Is it the function of a social service organization to pursue its own mission as vigorously as possible, garnering whatever charitable resources can be commanded through aggressive (profit-maximizing) fundraising activity, or is the organization's mission tied to an overall social mission to improve the quality of life for less fortunate people in the community? If the latter, organizational decisions about fundraising must reflect collaboration in a wider fundraising campaign, with possible sacrifices of net revenue potential for the organization itself.

Investment and expenditure decisions reflect some of the most cogent issues around mission precision. Does the mission of the organization require that the organization survive indefinitely or does it imply that the organization should concentrate its efforts over a certain period of time in order to solve a problem in the most effective way? Almost everyone is familiar with the March of Dimes, which helped achieve the mission of curing polio, and then, after much soul-searching, turned itself to addressing birth defects. A relevant question here, with implications for contemporary nonprofits, is how resources were allocated before the cure was found (mission achieved): Were all efforts focused on that mission or did the organization try to preserve itself for other, unnamed endeavors thereafter? The same question is implicit in contemporary foundations' payout policies, as well as in the kinds of long- and short-term investments they decide to undertake. Are these foundations planning to exist indefinitely, and if so, how do their missions, precisely codified, justify investment and expenditure policies to support that decision?

New venture decisions require mission precision along multiple lines. New nonprofit ventures are intended either to make financial profits that can support the organization in its pursuit of mission, to contribute directly and positively to the achievement of mission, or both. This means that every conceivable new venture must be classifiable into one of these categories. Should a social service agency undertake to start a restaurant that would train and employ handicapped workers? One must know how much the venture is expected to contribute to the net financial support of the organization (positive or negative) and how much it is expected to contribute to mission achievement (positive or negative), before one can determine if it is a worthwhile undertaking compared to other uses of the resources it would employ. Thus, statement of the organization's mission must be precise enough to apply to any proposed venture, at least to the point of classifying the venture into an appropriate category.

Institutional collaborations make similar demands on the precision with which a nonprofit organization must codify its mission. What does "win-win" mean in such a collaboration? If a nonprofit receives a grant to pursue its work, and a corporation licenses the nonprofit logo to display next to its own, is this "win-win"? For the corporate business partner, the "win" is fairly clear—it is reflected in whether the profitability of the corporation is increased by virtue of its public association with the charity. For the nonprofit partner, "win" may mean a net contribution to mission and/or a net financial contribution, which can be used to advance the mission. Determining the former requires knowing when and how much the nonprofit's mission is impacted by the collaboration. The collaboration could result in much wider dissemination of the nonprofit's social message, or it might result in mission damage if the corporation's work is at odds with the nonprofit's mission. Associating the American Lung Association with a company that makes a smoking patch is one thing; associating it with a company famous for polluting the air would be quite another. Neither positive benefits nor negative impacts can be assessed without a precise concept of the mission to begin with, and how the achievement of that mission is to be measured. For example, if a youth organization gives an exclusive contract to a soft drink company to provide vending machines in its facilities, is this likely to have a positive or negative impact on mission? In part this may depend on how the mission itself is framed and measured, and where the encouragement of good nutritional habits fits into that mission.

All this is not to be discouraging of nonprofit-business collaborations, or indeed to argue that assessment of such collaborations is necessarily easier for business partners than for their nonprofit counterparts. (Indeed, businesses too face challenges in assessing the impacts of collaborations since such initiatives constitute only one of many factors influencing profitability.) There are many different types of institutional collaborations with a wide variety of potentially positive impacts on mission. However, the success of all collaborations requires clear-eyed and precise framing of mission so that collaborative benefits and costs can be properly assessed.

Again, Internet initiatives reflect the same variety of concerns about the precision of mission that is associated with various other decisions to outsource, undertake new ventures, raise funds, price services, and engage in institutional partnerships. In particular, an Internet initiative should reflect an organization's fundamental understanding of its own purpose and how this translates into practical terms. To what extent, for example, should a nonprofit's informational Web site confine its access to members who pay fees, as opposed to providing open access to Web users? This is a question that cannot be answered in the abstract, but only in reference to a precise concept of mission. If the nonprofit's purpose is to serve a particular set of individuals or organizations that have invested in its services, then a "members only" type of venture may be appropriate. If the mission is to disseminate a social message as widely as possible, so as to achieve a certain social impact, such as the prevention of child abuse, open access to the organization's Web site and informational resources may be in order.

In summary, the primacy of mission in nonprofit organizational decision-making requires a level of precision in the codification of mission, so that mission impacts can be calculated or at least classified, and ultimately used to evaluate alternative options and choices.

To a certain extent, this concept rubs against other tenets of conventional management wisdom. Pragmatically, managers of nonprofits, as managers of all organizations, like to preserve their flexibility and "wiggle room" in the face of difficult environmental and internal challenges, often with good reason. Leaving mission vague gives them more options. Courses of action can always be justified retrospectively, even where they may not be the wisest of choices. Moreover, less precise mission statements are likely to become obsolete less quickly, perhaps helping to avoid organizational stagnation or the need to undertake the arduous and sometimes contentious exercise of mission statement revision. Certainly, efficient economic decision-making practices can recognize the benefits of flexibility but they also require internal honesty and candor, even if that information is held close to the vest. Determining the best course of action, and the allocation of resources to support such action, requires knowing what one is intending to accomplish, and then knowing how one knows if that accomplishment has been manifested. That is the reason that nonprofits must attend to the precision with which they codify their missions, if they are to use their resources effectively.

3. Qualitative as well as quantitative benefits and costs must be acknowledged.

This insight is an extension of Insight 2 above, and it highlights another very important difference between nonprofit and for-profit economic decision-making. For profit-making businesses, all that really matters ultimately becomes quantified, usually in dollar terms. For nonprofits, full quantification of (mission-related) benefits and costs is rarely if ever possible. As a result, nonprofit managers must be prepared to make judgments that balance quantitative and qualitative measures in conscious and sensible ways.

Consider again how this understanding cuts across the spectrum of nonprofit economic decisions. The impacts of pricing decisions manifest themselves not just in terms of dollar revenues but also in participation, consumption, or attendance figures that have value independent of the payments they generate. What are the benefits of ensuring that children from low-income families can attend a quality day care program, even if they can pay only a nominal fee? With effort, some of the benefits might be quantified in terms of enhanced future earnings, savings from crime avoidance, and so on. Other beneficial effects such as improved race relations, or the broadening of the social experiences of middle-class children, would be more difficult. But all of these effects may be important if the mission of the nonprofit preschool is to contribute to the health and well-being of the community and to children from all walks of life. Any analysis of the day care program's pricing policies would be incomplete without acknowledging these potential effects, quantifying them where possible, and taking them into account, at least in a qualitative way, in making choices about price schedules.

Similar observations apply to compensation decisions. Nonprofits cannot consider these decisions solely on the basis of easily measurable productivity effects, narrowly defined. In pure market terms, workers in a for-profit business would be paid a competitive wage according to what they contribute to the productivity and profitability of the corporation-the so-called value of their marginal products. Nonprofits too must pay attention to the prevailing market wage and to the productivity that particular workers bring to the organization. But nonprofits need also to account for more complex mission-related effects. For example, what are the impacts on the productivity of other workers if certain subgroups of individuals receive vastly richer compensation packages because of their market value? If achieving the nonprofit mission depends on high, public-spirited morale, and if morale depends on preserving a culture of equality and collegiality, as appears to be more often the case in the nonprofit setting, then wage policies need to be modified accordingly. These more subtle collective productivity impacts of wage decisions may not be easily quantified but they can nonetheless be trenchant in the nonprofit environment and need to be accounted for.

Outsourcing too requires tabulation of quantitative and qualitative effects. The relatively easy part of this decision is determining whether a given activity or function can be more cheaply produced in-house or by an appropriately specialized outside contractor. Bids can be compared with an accounting of costs of in-house operations. However, it is the more subtle benefits and costs that can be most important. The transactions costs required to effectively monitor an outside supplier may be difficult to estimate because it is hard to anticipate how much supervision a given contractor will require. Moreover, the losses that can be incurred from a contractor gone astray, or indeed from poor performance of in-house staff, may be very subtle. How does one value the loss of a donor's confidence or a consumer's trust if a function close to the heart of an organization's mission is handled poorly? Nonetheless, it is important for the nonprofit to acknowledge these possible contingencies even if it goes no further than listing them in a table of anticipated qualitative effects.

Fundraising is probably the most easily quantified of nonprofit economic decisions. However, while both the direct expenditures for fundraising and the results of fundraising are denominated largely in dollar terms, there are still several difficult-to-measure dimensions including the value of volunteer time spent on fundraising and motivational benefits of stakeholder participation associated with fundraising events. Moreover, nonprofits may need to take into account community effects outside the direct purview of the organization. Should a nonprofit forego some of its profit potential if collaboration or coordination with other charities leads to a more successful community campaign overall? And if so, what trade-offs should the nonprofit be willing to make between organizational and community benefits?

Nonprofits have been somewhat remiss in recognizing that the business logic of profit-maximizing can take them a long way towards reaching efficient decisions in the realm of fundraising activity by balancing estimated dollar costs and revenues at the margin. In fairness, however, even the measurement of dollar-denominated marginal benefits and costs presents challenges. For example, to what extent should so-called "joint costs" of administrative infrastructure be attributed to fundraising, and how do these costs vary with increases in fundraising activity? And on the benefit side, how does one determine the appropriate linking across time between fundraising expenditures at time x and funds received at a later time y? These are matters that can benefit from further research that could result in practical guidelines to help nonprofit managers properly account for returns to fundraising expenditure.

Investment and expenditures from nonprofit funds is another area where conventional business logic directly applies. In particular, managers of nonprofit fund portfolios are generally obligated to be prudent investors, choosing their portfolios to maximize investment returns within specified parameters for risk and liquidity. But again, strict attention to easily quantified financial returns on investment is often too limited a view in the nonprofit context. For example, program-related investments or investments in organizational infrastructure generate mission-related benefits that can be as or more valuable than financial returns. At the same time, these alternative returns on investment may be difficult to gauge in quantitative, much less dollar-denominated terms. For instance, the return on a commercial venture designed to employ mentally challenged clientele is more than just the financial profits it may generate. It must include an accounting of the direct programmatic benefits to these workers-benefits which may be difficult to measure with great precision. Alternatively, the returns to investing in a new building where staff can work more productively are also hard to gauge. How much more productive will workers be in the new space and how will the productivity gain be assessed in terms of mission-related benefits? The measurements that nonprofits require to assess their returns on such investments go beyond financial gains, and they must be acknowledged in whatever measurement units or qualitative indicators are feasible.

Similar observations apply to decisions about new nonprofit ventures, both from the point of view of nonprofits undertaking them and the funders underwriting them. New ventures are initiated for combinations of reasons, relating to both financial returns and mission-related benefits. The latter is where measurement issues are most likely to arise. Mission-related benefits can vary as widely as missions themselves. A new arboretum can generate ticket and gift sales, educate visitors, and beautify a community. Some of these benefits are more easily quantified than others, but all are important. Nonprofit managers and "venture philanthropists" therefore face essentially the same situation as that described above for those entrusted with investing nonprofit funds: they need to quantify what they can, but acknowledge and account for all such important effects whether or not they can be reduced to numerical or dollar terms.

Institutional collaborations are another case in point. For example, nonprofits often derive financial benefits from these arrangements, such as direct grants or payments generated from sales using sponsored bank credit cards. Such financial benefits are clear and quantified. Other benefits and costs are not as easily measurable. For example, the additional visibility and exposure that a charity receives by having its name and logo included in corporate advertising may generate significant additional financial and mission-related benefits. Alternatively, the reputational damage that a charity may incur by association with a corporation that has run afoul of the law, or by causing people to think it has somehow lost its integrity and become a corporate marketing tool, may generate significant but hard-to-measure costs. But no nonprofit should enter a collaborative arrangement with a corporation without carefully assessing these more subtle benefits and costs as well as the more straightforward financial impacts. Again, this is not an argument against collaborations per se, but rather a cautionary lesson about the manner in which nonprofits should approach these arrangements.

Prospects for commerce and fundraising on the Internet magnify the foregoing considerations by expanding the range of possibilities for nonprofits to engage in new ventures and invest their resources, and by raising some additional concerns about hard to measure benefits and costs. Internet participation introduces new risks associated with computer viruses and worms, and security of the organization's proprietary information. It introduces the possibility that an organization's intellectual property could be criminally appropriated on the Internet, with possible damages to reputation and value of assets. Corporate businesses and government agencies are subject to the same kinds of risks, but they may be better prepared to handle issues of electronic security. Nonprofits have not established themselves generally as sophisticated users of technology and may be more vulnerable to these potential hidden costs.

Overall, the pervasiveness of difficult-to-measure benefits and costs of economic decisions suggests that nonprofits need to put more effort into measurement systems that can help them take all relevant impacts of their decisions into account. The danger in developing measurement systems is that they can omit as much as they manage to account for, hence inadvertently distorting decisions in inappropriate ways. One always worries that managers will focus their efforts on a few performance indicators on which they think they will be judged, just as the introduction of standardized tests in schools sometimes leads to "teaching to the test." Still, carrying forward without progress in measurement is not likely to lead to bliss from ignorance. Measurement systems must be developed that acknowledge both quantitative and qualitative effects and bring them both into the decision-making process.

In this connection, it is worth commenting on the calculus and language of cost/benefit analysis (CBA). CBA was developed in the context of federal government decision-making, beginning in the 1930s, precisely because the narrower private sector calculus of profit and loss was inappropriate for public sector decisions and projects (for example, see Dasgupta and Pearce 1972). Since its inception, CBA has occasionally been maligned and misused because narrowly focused analysts have sometimes put too much faith in dollar estimates and ratios, and not enough into describing the full array and distribution of benefits and costs. Nonetheless, CBA continues, especially with recent refinements, to provide a useful language and set of tools for public sector decision-makers. Given that nonprofit organizations also toil to produce collective benefits, and incur social as well as private costs in the course of addressing their missions, it is somewhat surprising that, with few exceptions, there has been little adaptation of the benefit/cost calculus to the nonprofit context (but see Young and Steinberg 1995; and Quarter, Mook, and Richmond 2002). There may be various reasons for this, including a cultural resistance to analytical and quantitative methodology in the nonprofit realm. Some "venture philanthropy" advocates are now framing their discussions in terms of "social returns to investment" although their progress has been slow to recognize the historical literature on cost/benefit analysis (for example, see Emerson, Wachowicz, and Chun 1999). Despite its limitations, adaptation of the cost/benefit rationale, framework, and methodology might go a long way towards helping nonprofits account for the varied mix of quantitative and qualitative effects that they encounter over time and across the full array of their economic decisions, and to put these effects into a common framework for allocating economic resources.

4. The tensions between mission and market must be understood and appropriately managed.

One of the early concerns about the "enterprise" movement in the nonprofit sector that emerged with some force in the early 1980s is that some advocates seem to put too much emphasis on commercial activity as a panacea for nonprofit financial stability and growth, and not enough stress on the potential risks associated with commercializing nonprofit organizations. Since that time, the voices of both advocates and critics have grown stronger, but with little convergence (see Shore 1995 and Weisbrod 1998 for contrasting views). It is not our purpose here to contribute to this debate except to observe that the integration of nonprofits into the market environment is a reality that will not soon reverse itself, and that the tensions between market opportunities and pressures on the one hand, and pursuit of social mission on the other, pervade the entire spectrum of nonprofit economic decision-making, not just decisions to undertake new ventures. As such, these tensions must be recognized and appropriately managed.

The tensions surrounding pricing are obvious. One prices one way if one's objective is to respond to market opportunities for revenue enhancement and profit generation, but often quite another way if the objective is to ensure access and a desirable mix of clientele from different rungs of the economic ladder. Similarly, with compensation decisions, one responds to the prevailing market wage if one wants to compete aggressively for the best possible talent, at least in some specialties such as technology support or financial management, but one may stress nonpecuniary benefits with a below-market wage if the objective is to attract public-spirited employees who strongly value the mission or equality and collegiality in the workplace. In the realm of outsourcing, markets offer the temptation to contract out any function for which the market offers greater cost efficiency or expertise than what can be found in-house. However, the risks of contracting out activities that are close to the heart of the nonprofit's mission are not reflected in the marketplace and require a mission awareness and valuation that must be established and guarded from within.

Fundraising is potentially one of the latter functions. There is often a direct economic temptation to contract fundraising activity to for-profit, professional fundraising firms, even if those firms sometimes keep the overwhelming proportion of the returns for themselves. If nonprofits are promised 10 percent of the gross revenue without having to spend a dime, this still looks like a good financial proposition in isolation. It takes a more subtle analysis of potential mission-damaging effects, such as possible loss of long-term donor support or reputational damage to the organization, to resist such a market-based temptation.

Investment of nonprofit funds takes place overwhelmingly in the market context and is very hard to integrate with mission-related concerns. Questions must be asked about investments that have little to do with their potential financial success, but which may have much to do with their compatibility with the nonprofit's mission. Nonprofits obviously need to resist investments that would sully their missions, even if those investments are financially superior. It would be inappropriate for a nonprofit health care organization to have an inordinate stake in a particular pharmaceutical company if the organization's mission is to objectively evaluate alternative remedies for certain diseases. Similarly, it is sometimes difficult for nonprofits to invest their funds internally when (legitimate) financial returns beckon in the marketplace. When Henry Hansmann (1990) wrote his paper on university endowments, he wondered aloud why Yale maintained such large corpuses of funds when the roof of the library in which he was working was leaking!

The various manifestations of new ventures obviously reflect the same kinds of tensions that we have already noted. Nonprofits have learned that they must be particularly wary of institutional partnerships with corporations whose propositions are heavily driven by market considerations. Corporations can offer very generous benefits, in cash or other resources, if it is worth their while in market terms. Nonprofits must ask what the real costs are to themselves and their achievement of mission. Is it worth the risk to reputation if the corporation's behavior is questionable in some way? Is it worth the cost if the corporation requests the nonprofit's association with a product that is at odds with its mission? Should a school encourage fast food in its cafeteria, for example, or a particular brand of shoe for its athletes? Is it conscionable for a nonprofit health provider to associate with the producer of a particular health care product when that of another producer might be of better quality? Should a nonprofit museum accept a large grant from a fashion designer if the implication is that the museum must favor the designer's work in its programming? Should a university accept research grants from a corporation if the corporation insists on keeping information secret until it can obtain exclusive patents? All these situations have arisen in recent years, and, although not necessarily typical, each illustrates instances where the tension between mission and market in nonprofit ventures involving corporate partners became especially troublesome.

Clearly, mission-market tensions extend to ventures and fundraising on the Internet. Indeed, technology has strongly facilitated the interaction of corporate and nonprofit interests by making their mutual transactions so much easier and faster, thus accelerating the dangers. But it is in this realm that nonprofits also have the best chance of ameliorating some of the tensions between mission and market. By recognizing the problems that are generated by informational deficits that might induce nonprofits (and other consumers) to enter into ill-advised deals, nonprofits can contribute by creating trustworthy information intermediary services (Te'eni and Young 2003). The value of nonprofit information intermediaries lies in the fact that they can be trusted in a bewildering world of commercially generated information. That can be their mission. They need to avoid market temptations to buy their favor, but this is where they can excel.

In sum, almost every nonprofit economic decision is likely to reflect the tension between mission and market. This is not to argue, however, that nonprofits should shun the marketplace in order to protect their missions. To the contrary, nonprofits must understand and adapt to the marketplaces in which they are embedded, so as to maximize their chances of mission-focused success. In all of the areas discussed above, mission-market tension is properly managed by recognizing the relationship between the particular choices at hand and the impacts of those choices on mission achievement, and then responding appropriately within the set of opportunities and constraints established by the market. For nonprofits, mission comes first but it is often hard to maintain that stance in the face of strong market pressures. Hence, this is a key dimension along which nonprofits must develop their own strong self-discipline, codes of practice, and ways of thinking about market-related choices. Properly managed, however, nonprofits can become effective players in the marketplace, drawing the resources they need from the market and putting them to service in their charitable and public service missions.

5. Diversify to manage risk.

Diversification is a well-known strategy to manage risks in an investment portfolio. So it is not surprising that the principle of diversification is prominent in our discussion of investment decisions for nonprofit funds. What is somewhat surprising is the frequency with which this theme appears, and the alternative ways in which the principle of diversification is adapted to different dimensions of nonprofit economic decision-making.

First, an overview of nonprofit investments is in order. The managers of nonprofit funds are required to be prudent investors, balancing risks against returns, much as any other responsible investors. However, nonprofit fund managers face some difficult challenges not usually associated with private investment. First, they are sometimes explicitly constrained from diversifying—often by corporate donors who do not want to see the donated stock in their companies sold in large quantities in the stock market. This is a situation that characterizes some of the largest and best known grant-giving foundations, with important consequences. In particular, the agendas and commitments of these foundations are jeopardized when their company stock takes a severe downturn, as many do from time to time. Alternatively, these same foundations are forced to make rushed, if not hasty, decisions to give grants when their rising stock rapidly inflates the value of their portfolios. Without the option of diversification, nonprofit organizations with undiversified endowments have a difficult time smoothing out the hills and valleys of prosperity and recession, and they cannot easily follow the biblical injunction of saving in fat years in order to cover the exigencies of lean ones.

Diversification of nonprofit funds is a moral and political issue in these situations, e.g., it requires judging if donors' preferences take precedence over mission-related interests. But there is also an economic dimension to this issue. On the one hand, the economic principle is quite clear—in order to best pursue their missions, nonprofits need the flexibility of investment diversification. On the other hand, if nonprofits maintained complete flexibility to diversify their assets, this might have a chilling effect on the generosity of large corporate donors. These are the two factors that nonprofit leaders need to balance in applying the principle of asset diversification to the management of their particular financial portfolios.

A second issue for investment managers is the question of risk itself. How much risk is it prudent for a nonprofit organization to tolerate in its portfolio, and how should its risk profile be determined? And should it tolerate greater financial risks in the parts of its portfolio that reflect program-related investments directly contributing to mission, compared to risks it would tolerate from pure financial investments? These are questions that need further scrutiny and research. If nonprofit managers and trustees are agents of society at large, they should not be applying their personal risk preferences so much as reflecting society's tolerance of risk or the risk tolerance of its key stakeholder groups. At the very least, nonprofit trustees need to formulate consistent risk profiles for their organizations, rather than leave this policy to the whim of particular investment managers or investment committees.

The principle of diversification arises in discussions of outsourcing, new ventures, and institutional collaborations. In one respect, diversification as applied to new ventures very much reflects the same considerations as the investment decision. From the viewpoint of funders, support of new ventures can be viewed in much the same way as an investment portfolio. Diversification makes sense because some ventures will work out and others will not, though it is impossible to determine with certainty at the outset which ones will fall either way. Some ventures will promise potential high (social) returns but with a high risk of failure and others will seem more likely to succeed but with lower upside potential. Funders are likely to want both types of projects in their portfolios, with mixes depending on their attitudes toward risk.

Similarly, nonprofits themselves can usefully view the decision to enter new ventures in terms of a portfolio of initiatives, along both financial and mission-related lines. In terms of financial returns, they will want to have a portfolio of strategies for generating revenues, some of which can provide modest returns at lower risk, and the more risky of which can have larger upside revenue potentials. Similarly, in terms of mission impact, some programs can have fairly predictable if modest mission-related benefits while others are more likely to fail but also more likely to have large impacts if they succeed. In sum, the nonprofit manager faces a two-fold diversification challenge in connection with new ventures, to find a portfolio of programs appropriately varied along both mission-related and financial dimensions.

Outsourcing and institutional collaboration present nonprofit managers with still other risk and diversification challenges. In both these cases, the benefits of not putting all of one's eggs in one basket must be balanced against the costs of overseeing multiple relationships and the benefits of cultivating some relationships in depth. Outsourcing contracts and institutional partnerships are not passive elements in an investment portfolio. They require active, costly oversight and development. Thus, transactions costs play a large part in determining the degree to which it is worthwhile diversifying the number of alternative suppliers or external partners. At the very least, for non-core functions, the nonprofit manager would be wise to maintain both in-house and external options, but the degree to which multiple external suppliers should be maintained depends on the costs of overseeing them as well as the nature of risks and benefits associated with each.

Discussions of institutional collaborations suggest that the more one concentrates on developing in depth, long-term collaborations, the more one is likely to obtain substantial benefits, and the more trust is likely to build between institutional partners. In other words, there is a paradox in the fact that risk itself can be reduced by in-depth cultivation of particular relationships as well as by diversifying the number of those relationships. This is a balancing problem that appears to require substantially more research and analysis. Meanwhile, it behooves nonprofit managers to consider the changes in risk and return that result from both strategies in tandem: diversifying the portfolio of institutional collaborations to some prudent extent, while developing these relationships in greater depth.

It is worth observing also that most nonprofits do have de facto collaboration portfolios, since they deal with many other institutions in various ways in the course of carrying out their work—suppliers, service contractors, partners in communitywide initiatives, professional and trade associations, and so on. But they don't necessarily recognize these sets of working relationships as portfolios, nor do they manage them strategically—appropriately balancing the risks as well as the benefits and costs of each relationship. Hence, simply conceptualizing their sets of working relationships as portfolios that need to be managed, would be a step for nonprofits towards more effective economic decision-making.

No doubt, applications of diversification can be found in other areas of nonprofit economic decision-making as well. Fundraising, as noted above, can be viewed as a multifaceted endeavor involving a portfolio of different strategies with alternative risk and return profiles. Internet ventures are a subset of the larger scope of possibilities for new ventures and fundraising strategies. Compensation decisions encompass the issue of diversification along several lines, including finding the appropriate mixes of volunteers and paid workers, and the appropriate mixes of regular staff versus contractors or consultants. Pricing decisions too reflect diversification issues. It may be wise to maintain selected combinations of pricing policies so as to balance the risks and benefits of alternative approaches. Services can be priced at certain times during the week and offered free at others; services can be sold in bundles as well as á la carte. The reasoning that nonprofit managers can use to balance risk and return is much the same, for each of these dimensions of nonprofit economic decision-making.

6. Nonprofit organizations are pushed and pulled in different directions by multiple, diverse stakeholders. The challenge is to retain a clear focus on mission and core capabilities in light of these pushes and pulls.

In some sense, arguing that nonprofit managers must focus on mission as the bottom line for nonprofit economic decision-making is a glib, oversimplified prescription. In point of fact, nonprofit organizations are influenced constantly by multiple stakeholder groups, most which have a particular interest in, or interpretation of, the mission. As such each stakeholder group puts pressure on nonprofit leadership to orient programs or policies in the particular directions it sees as appropriate. This means that nonprofit economic decisions are laden with considerable tensions reflecting the interests of alternative stakeholders, many of whom can hold the organization to account in various ways. Perhaps the ironic solution to these tensions is to continue to sharpen, clarify, and try to achieve consensus about mission, and to clearly identify and emphasize core capabilities, so that the leadership of the organization can resist inappropriate diversions of attention and resources, and maintain an effective economic course of action.

The challenge of multiple stakeholders raises itself throughout the spectrum of nonprofit economic decisions. In the arena of pricing, for example, one is faced with the need to accommodate alternative groups of potential beneficiaries, some that can't pay much, and others that can. As a result, price schedules are likely to pit the interests of one group against another unless a consensus is reached to which both groups can subscribe. Such consensus is possible but often difficult. Well-off parents who wish to have their children go to school with a diverse mix of other children may willingly pay more tuition to enable that possibility. Parents of college students who are asked to pay the full price because of their higher income can buy into arguments that the resulting mix of students makes for better education for everyone, and that in any case all students are subsidized to some extent from other sources of university funds. Nonetheless, the setting of tuition schedules in such cases, requires not only agreements in principle about how the mission plays itself out in the pricing arena, but finding precisely the right price schedules that satisfactorily address mission in the minds of alternative stakeholders.

In the area of compensation, a number of stakeholder pressures come into play. Paid staff have different interests than volunteers, bringing alternative pressures to bear on the labor mix utilized by a nonprofit organization. Professional workers may stress the importance of professional standards of work and the reliability and dedication of full-time workers. Advocates for volunteers may stress the motivational benefits and spirit brought to the organization by volunteers, the cost effectiveness of this resource, and a special mix of skills that volunteers can bring (through pro bono work, for example) which might be unattainable through paid employment. The nonprofit executive must find the right mix by balancing these arguments and concomitant pressures through an assessment of how different mixes contribute to the effectiveness of the organization in achieving its mission.

Similarly, internal stakeholder pressures may manifest themselves around the issue of wage differentials among different groups of paid workers. Those with widely marketable skills will pressure for differentials to recognize their greater market value. Those with skills that are less widely marketable will emphasize the importance of fairness and collegiality, as well as their particular contributions to achieving the organization's mission. Again, the responsibility of nonprofit organizational leaders is to find the right mix that mediates these pressures through a common understanding around mission and effectiveness.

Outsourcing highlights similar stakeholder divisions. Internal staff may wish to keep work for themselves and resist policies that favor external consultants over regular employees. External providers of other inputs, including supplies, equipment, travel services, insurance, real estate, and the like, who may or may not be donors, volunteers, or even board members of a nonprofit, may pressure the nonprofit to make greater uses of their services. Conflicts of interest obviously should be avoided, but sometimes the pressures are more subtle than blatant self-dealing. Board members are often recruited because they can help a nonprofit with expertise or other resources, and usually the help provided reflects genuine generosity and confers real benefits. Still, this is an area that requires vigilance, to ensure that the organization is really getting the best deal and that the outsourcing arrangement is the most cost-effective alternative in addressing the organization's mission.

Fundraising too involves its own multi-stakeholder pressures. Fundraising often engages volunteers and is built around targeted goals. Both development staff and volunteers develop proprietary interests in those goals, and in increasing those goals over time, irrespective of whether the resources devoted to reach those goals are justified in terms of net returns. It remains for organizational leadership to modulate the development function so that it produces the largest return for the resources devoted to it.

Similarly, we have observed that nonprofits operate in a social context where competition and collaboration in fundraising may be an issue. Nonprofits may have to respond to community pressures to collaborate even where this means that a degree of success at the organizational level is sacrificed.

Investment and expenditure decisions are also lightning rods for potential conflicts among multiple stakeholders. For one thing, there may be competition for investment funds between those with responsibility for particular programs or organizational functions, and those who favor maximizing financial returns overall. Facilities managers may argue for investments to replace outmoded infrastructure as a means to increase organizational productivity. Human resource managers may argue the same for staff education and training. Program managers may seek program-related investments through commercial ventures that employ people from the organization's target clientele group. Members of the board may even argue for placing funds into particular securities or financial institutions because they believe in the integrity or competency of those investment vehicles. Potential conflicts of interest aside, it behooves nonprofit leaders in these various cases to measure alternatives by a common standard of mission-related returns to investment.

Again, new ventures reflect much the same pressures as investment and expenditure decisions. Financial managers in the organization may press for ventures that promise a strong financial return while program managers may seek ventures that contribute more directly to mission. Institutional funders may favor ventures that can promise financial self-sustenance after some period of time, so that they can set a clear "exit strategy," over other ventures that may contribute more strongly to mission but are likely to require ongoing support. Foundations or other donors with particular missions of their own will favor ventures reflecting their own philosophies and approaches. Staff involved in current programs may object to diverting resources to new initiatives that might undermine their current efforts. Consumer or client groups that feel poorly served may advocate for new programs at the expense of current ones, and so on. Again, nonprofit leaders need a compass to navigate the turbulence of these diverse pressures for action and accountability. That compass must be a sense of mission combined with a solid understanding of the organization's core competencies, so that organizational leadership can demonstrate that its favored combination of new venture possibilities is the best use of organizational resources.

Institutional collaborations offer another interesting cut to the issue of multiple stakeholders and accountability. In particular, one of the dangers of cultivating a few deep, collaborative relationships rather than a wider network of relationships is that it gives collaborators more leverage. This is the downside of decreasing risk and increasing trust through intensive, long-term partnerships-one can become dependent on collaborating partners because the stakes of breaking up can grow so much higher. As a result, the nonprofit must be careful not to have its goals displaced by its partners' priorities. If a museum finds itself excluding certain art because it would offend the top executives of its sponsoring corporation, or if a clinic avoids offering a certain drug for its patients because it is sponsored by an alternative pharmaceutical company, then one must ask if the decisions to collaborate have caused the organization to stray from a path that maximally contributes to its organizational mission.

These problematic instances, however, should not obscure the positive potentials in these accountability relationships. Partners in a strong alliance often seek ways to assist rather than constrain one another. Corporations, for example, have been known to help their nonprofit counterparts to recruit additional corporate sponsors to support their causes.

Internet commerce and fundraising also generate interesting issues stemming from stakeholder interests and pressures. The Internet is a diffuse medium that dilutes and decentralizes stakeholder communities. Benefits and revenues of Internet initiatives are spread over very large arenas, perhaps worldwide, rather than necessarily confined to local communities. Such dispersion raises questions about how a nonprofit organization should allocate its own resources, e.g., to what extent it should expand its view to a wider market versus continuing to serve, and raise resources from, the local community in which it may be historically associated or physically located. Nonprofit managers are likely to feel pressures from both those with local loyalties and others who see opportunity in the wider world. Again, mission as well as core competency in the form of knowledge of the culture and character of particular communities need to be the touchstones from which these kinds of economic decisions are made.

7. Economic conditions change. Nonprofit economic decisions need constantly to be revisited.

Nonprofits operate in a dynamic economic environment that has changed dramatically and sometimes suddenly over the past forty years. While the principles of economic analysis are timeless, their application to nonprofit economic decision-making yields different answers in different circumstances. Thus, nonprofits must adopt their policies and practices over time in order to remain effective. This lesson carries across the full spectrum of nonprofit economic decision-making.

For example, nonprofit organizations have become much more embedded in a market environment, facing greater competition for their services than ever before. This affects how they price their services—specifically, it may require them to price more competitively and to limit below-market discounts. A nonprofit health care service, for example, which might formerly have priced its cosmetic surgery program at a premium in order to make a profit that could subsidize its emergency clinic, may no longer be able to do so if faced with a for-profit competitor down the street. It may need to price its cosmetic surgery competitively and reduce or eliminate its charity emergency care or fund it in another way.

Similarly, in the more competitive contemporary environment, nonprofits now need to choose their new ventures differently. No longer is it sufficient to focus on mission impact alone, relying on charitable contributions and other sources to cover costs. New ventures need to be scrutinized for both their income-generating and mission-impacting potentials, and they need to be undertaken in combinations that are financially feasible. Moreover, in an environment of greater competition, nonprofits must scrutinize their potentially profitable ventures very carefully to determine if they are likely to fall to competition from the business sector in the future. Finding that special "niche" in which a nonprofit may have a comparative advantage relative to a for-profit competitor becomes very important. That niche might involve selling products featuring the exclusive logo of a prestigious art museum, or offering training programs that promise participation of the distinguished faculty of a university. It does no good for a nonprofit to offer a commercial service whose profits will ultimately be competed away unless this is part of a plan to exploit "first mover advantage" and then withdraw. The latter might be the case with an invention whose patent will expire or whose design will take some time for competitors to copy.

Certainly the changing economic environment strongly influences how nonprofits must now compete in the labor market for staff and volunteers. Here too the competition has become much more intense. Women in particular have more options and can no longer be counted on to volunteer for large blocks of hours or to work for low pay in stereotypical "female" jobs such a teacher, social worker, or nurse. Nonprofits are having to become more competitive in the wider labor market, offering wages closer to market and, at the same time, exploiting the special character of their organizations and the work that they do, in order to offer important nonpecuniary benefits that can help offset necessary wage differentials. Again, nonprofits need to continually reexamine the comparative advantages that they embody in order to compete more effectively for the human resources they require in the context of a changing labor market.

Outsourcing is another area of nonprofit economic practice that must evolve with changing economic conditions. One consideration again is the increasing competition which drives nonprofits to become as efficient as they can be. In part, this requires nonprofits to concentrate on, and keep in-house, those functions they do well, while contracting out those functions that can be purchased more economically in the market place. In addition, the changing technological environment encourages nonprofits to outsource their activities more heavily than they might have otherwise. Information technology makes it easier to shop for services and to maintain communications and oversight with suppliers, reducing the need for in-house capacity. Indeed, nonprofits, like other kinds of organizations, are becoming more like networks themselves, engaging consultants and service suppliers over wide geographic regions in order to get their work done in the most effective way possible.

Fundraising is yet another area in which economic practices are evolving in conjunction with changing economic conditions. Certainly competition for charitable funding has become much fiercer in recent years. This competition manifests itself along several dimensions: in the labor market for development professionals, in the head-to-head rivalry among charities for the generosity of particular donor groups and grant-giving organizations, in the engagement of for-profit fundraising firms, in the development of institutional partnerships tied to charitable gifts or other revenue streams, and so on. If anything, the greater competition for charitable funding is pushing nonprofits to learn the rules of profit-making, so as to design their development strategies to maximize net revenues. In the process, however, nonprofits are also having to learn how to modify the strategies of profit-making in order to take account of special concerns in the nonprofit sector, including donor backlash from aggressive solicitation by telemarketers or from revelations of high fundraising costs. In addition, nonprofits are having to modify institutional arrangements for community fundraising once taken for granted, especially in light of the increasing assertiveness of donor groups. The monopoly of United Ways has given way to multiple federated campaigns within particular communities, and indeed the market share of community-wide fundraising has declined over all. Moreover, community foundations are now having to compete with for-profit securities firms for the investment of donor-advised funds intended to give donors control over how they distribute their savings to selected charitable causes.

Clearly technological change is affecting economic decision-making in relation to fundraising as well. The Internet facilitates multiple schemes for tying the purchase of goods and services from corporations with donations to charitable causes, for advertising nonprofits on for-profit Web sites and vice versa, and for allowing nonprofits to reach out more directly and extensively to the donor public. All this has changed both the cost and the revenue structures of nonprofit fundraising operations. Nonprofits must still ask the same basic question—will expenditure of an additional dollar on fundraising initiatives continue to yield more than a dollar in return—but both the level and types of expenditure are changing with the expanding options offered in the present network environment.

Nowhere is change more evident than in the evolving institutional collaborations in which nonprofits increasingly engage with business and government. Again, we can attribute the changes to underlying shifts in the competitive and technological environments, as well as to changes in the public policy arena. In a fundamental sense, the proliferation of collaborations is one strategy that allows nonprofits to become more competitive. As noted above, some collaborations allow nonprofits to outsource functions which can be executed better by others, so as to concentrate on functions in which they excel. In part, collaborations also reflect the more competitive environment of charitable fundraising, driving nonprofits to seek arrangements with corporations or government that promise new or increased revenue streams. Interestingly, the more stringent public sector and business environments drive nonprofit institutional collaborations from the other side of the market. Reduced budgets and privatization policies have led government organizations to contract out more of their services, frequently seeking nonprofits as reliable and trustworthy partners for doing so. Similarly, corporations faced with increased, often global, competition have sought a new competitive edge, and have learned that nonprofit organizations can add to their marketing luster, help motivate their employees, or bring other competitive benefits. While the fundamental considerations haven't changed, multiple changes in the economic environment, including reduced public sector commitments, global competition in the business world, new technological possibilities, and more intensive competition for resources within the nonprofit world, have converged to encourage nonprofits and their counterparts to explore and cultivate a variety of new arrangements for collaboration.

Finally, perhaps the most significant change has taken place within the nonprofit world itself, having to do as much with a shift in attitudes as with changes in the resource environment. While they were always implicitly entrepreneurial, nonprofits have now come out of the closet as an entrepreneurial sector, and no longer shun a businesslike image. No longer are words like entrepreneurship, marketing, competition, strategy, venture, returns to investment, and commercial revenue foreign to the nonprofit vocabulary as they were just twenty-five years ago. These concepts have virtually lost their negative connotations as icons of an inappropriate business mentality. And certainly they have lost their obscurity in the nonprofit world. Indeed, in some quarters they have become mantras. Therein lies both the potential of the nonprofit sector as well as the dangers it will face in the years ahead.

Clearly the nonprofit sector is served well by the view that its leaders and managers must be energetically engaged in finding new and better ways of doing things, and in using the resources at their disposal more creatively and effectively. An entrepreneurial orientation driven by mission and engaging a variety of personal, organizational, and social motivations has injected energy and realism into the sector. This view recognizes that nonprofits are serious economic enterprises with certain comparative economic advantages that serve important societal objectives, and that it is just as important for these enterprises to use their resources effectively as it is for business or government to do so. Indeed, it may be even more important for nonprofits to be responsible and aggressive economic stewards because they serve vulnerable groups and because they are peculiarly entrusted with resources by the general public and by those who have been personally generous with their time and money. This responsibility is by no means inconsistent with the notion of an entrepreneurial nonprofit organization. Research on entrepreneurship and its history in the nonprofit sector shows that entrepreneurship is a generic process driven by multiple personal and organizational motivations; it is by no means confined to personal wealth enhancement by self-serving venturers (Young 1983).

However, danger lies in the mistaken but common notion that becoming an entrepreneurial nonprofit economic enterprise means becoming just like an aggressive, corporate business enterprise. Certainly at this point in the early 21st century, one cannot say that corporate business is serving well as a model for nonprofit emulation. If anything, the recent accounting scandals serve as cautionary tales of what can happen when institutions entrusted with public confidence betray that faith. The nonprofit sector is built on trust. Trust lies at the core of why these institutions are granted their special status in public policy. Accordingly, nonprofits must responsibly demonstrate their trustworthiness by applying sound economic principles to their business decision-making—in the service of achieving their social missions rather than selfish or self-serving ends. This is a constant that transcends whatever changes take place in the environment of nonprofit organizations over time.

Concluding Comments

Principles of economic and business decision-making are generic. They can be employed in the service of profit-making and private gain, as they usually are in the wider world of commerce, or they can be employed in service of the more nuanced missions of nonprofit organizations. Sometimes economic practices carry over from business to the nonprofit world in a fairly straightforward way. For example, while fundraising does entail some intangible benefits and costs, it is fundamentally an exercise in profit-making that can benefit substantially from a business approach. Investments should examine financial returns within an appropriate risk profile. Outsourcing decisions must consider fundamental cost parameters and comparative advantages, whether those decisions are made by a nonprofit or a business. Within certain boundaries, nonprofits must compete in the same labor markets as businesses do, bearing in mind the prevailing market wage. And so on.

But nonprofits require a much more sophisticated set of guidelines for practice that take into account both their unique social missions, goals and constraints, and also the peculiar factors and conditions that affect the market venues in which they do their special work. Not least among these are the difficulties of interpreting and measuring mission impacts, including the various qualitative and as well as quantitative benefits and costs associated with mission, the multiple stakeholders to whom nonprofits must respond, the special trust placed in nonprofits to uphold their missions, and the challenges of adapting basic economic reasoning to a moving target—the nonprofit organization in the highly dynamic economic and social environment of the early twenty-first century. Nonprofits will succeed by becoming competent economic enterprises but only if they also maintain their special character and identities and shape the rules of enterprise to fit them appropriately. We trust that we have begun to demonstrate how this can be done.

In the eighteenth century, Edmund Burke said: "Government is a contrivance of human wisdom to provide for human wants. Men have a right that these wants should be provided for by this wisdom" (Oxford, 1979, p. 111). A similar observation could be made for contemporary nonprofit organizations—they are clearly a creation of men and women to address worthy social objectives, established with the clear expectation that those entrusted with the resources of these organizations will employ them to best possible effect. While they are indeed human contrivances, nonprofit organizations do also reflect an underlying wisdom—that the energies of economic enterprise can be channeled in such a way, through economic incentives, legal constraints, and noble human aspirations and motives, so that they can effectively serve important social causes and interests rather than private gain. The rules for engaging economic strategy in support of this wisdom are still evolving, but they have a clear basis in economic and business principles mobilized in service of social welfare.


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Effective Economic Decision-Making by Nonprofit Organizations

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