In Non-Profits, Who Is The Customer?

For-profit organizations (better known as businesses) are in many ways much more simple than non-profit organizations. When it comes to a pizza place, their goal is to sell me a delicious cheese pizza for $12.95 and my goal is to find the most delicious cheese pizza I can with my $12.95. When our goals overlap, I give them my money and they give me their pizza.

For businesses, knowing you are successful is also easy – the critical metric of profit is hitting the business in the face every time the cash register opens, and it’s easy to document whether it’s going up or down. We can tell if a business is successful just by looking at these numbers, and we have no need for randomized controlled trials to see if making pizza is really the cause of profit, or if a pizza place could remain profitable without selling anything.

Also for businesses, you are automatically accountable for failure. In bigger companies, you get fired by your shareholders. Or, you simply stop finding yourself having enough money to pay salaries and keep the place open. If your product isn’t serving it’s customers, you quickly go out of business. You don’t have to notice if you’re doing bad, because doing badly will just catch up with you.

Non-Profits Are Not Businesses

Very little of this is true in non-profit organizations. David Damberger is an engineer in Engineers Without Borders. He was tired of working on engineering printers to print at an extra two pages per minute, and instead wanted to work on projects that mattered, like ensuring that everyone had access to clean water.

However, Damberger explains in his TEDTalk entitled “What Happens When An NGO Admits Failure”, that this mission of clean water has not been successful. It’s sad to hear that many water projects were developed to bring water, but then broke down barely two years later due to no-one to maintain them. Then, instead of coming to fix these old water projects, organizations would just build entirely new projects from scratch, and these would also break down just two years later.

But why do non-profits regularly fail? In short, its because they aren’t businesses:

In non-profits, unlike business, knowing you are successful is hard. It’s easy to see if you’re making a pizza people will buy, but it’s hard to see if you’re closing the achievement gap, or lowering poverty. Things like these are impacted by many different factors, impact takes awhile to show up, and if it does, it’s hard to know if it was your particular program – or even any program, and not just statistical noise. If you’re succeeding or failing, these problems are so complex and poorly understood that it’s hard (but not impossible) to know.

Likewise, non-profits are not automatically accountable to failure. Businesses get money from those who use their services, but non-profits get money from people who do not use their services. Money comes from donors, but products are given to others, such as the disadvantaged students or the extremely poor – and these people may lack the knowledge or resources to communicate how things are doing. Furthermore, donors don’t get the first-hand experience of whether things are going better, but have to rely on communications from non-profits in the form of mailings.

Non-profits have trouble being accountable because their success is hard to measure, and they don’t get money from the people who they provide for. The customer for a for-profit business is clear – it’s the buyer. I give them the $12.95 they want, and they give me the pizza I want.

In the non-profit world, there are two different pools of customers – the people in need (beneficiaries) who receive help from the non-profit organization, and the donors who fund the non-profit activities. These two customer pools don’t overlap, it’s the beneficiaries who are in the best position to know what they need, but the donors who keep the organizations accountable through funding.

Non-Profits Cannot Be Businesses

The obvious solution to this problem would be to turn non-profits into businesses. But this would be a case where the obvious is wrong, because non-profits cannot be businesses. While businesses can do much to contribute to social causes related to their field, nearly every charitable goal is long-term and not something from which any profit can be made. Instead, one would expect to spend trillions of dollars without getting any monetary return for centuries. That’s why charitable causes are for charities that are motivated by social returns, not those looking to make a quick buck.

But there are a couple solutions that could bring more accountability to the non-profit world and break out of the cycle of development failure.

Be A Savvier Donor

Damberger points to non-profits who focus on having little overhead costs. This creates the attractive message that every dollar donated goes directly to helping those in need, but it means that critical things aren’t being funded, like maintenance. Why focus on having little overhead instead of funding what is needed to actually help in a sustainable way? Well, because donors currently don’t want that, and the only things that go forward are what people are willing to fund.

Non-profits are directly accountable to their donors – and it is only the donors who can ensure money is put to effective programs. Thus, donors have to use this responsibility wisely, and not fall into common traps like “little overhead” that perpetuate unsustainability and waste.

Engineers Without Borders has taken this and pushed back against this with a motto “It’s not sexy, but it works”. The most effective organizations aren’t always the ones with the most compelling, heart-wrenching stories. Instead, the charitable causes are often won by boring things, like statistics. No one said giving effectively would be easy. But, with organizations like Engineers Without Borders, there is help.

Failure: Admit, Embrace, and Learn

Demberger talks about a lack of coordination within the development community, and a failure to learn from failure. Hiding failure (because it might upset donors) results in these failures being unknowingly repeated again and again, potentially harming rather than helping. At the same time, the scariness of failure makes non-profits risk-adverse, and thus puts pressure to maintain the status quo, potentially reinforcing already failed methods.

Demberger and others set up in order to document failures in the development world, and ensure “that we learn from failures instead of repeat them — that we are failing forward”. The website allows people to publish and discuss stories about failures, and then embrace them and learn from them.

As the website puts it:

By admitting our failures, we end failure cycles and begin a linear progression of failing forward. It’s why this site exists. We’re on the same side, if not the same team. We’re working towards a common goal. By sharing what doesn’t work, we collectively accelerate the process of finding what does.

Social Impact Bonds

Lastly, another interesting way to bring more accountability to non-profits is a pay-for-success model known as “Social Impact Bonds”. Tina Rosenberg, writing for the Fixes Column article “The Promise of Social Impact Bonds”.

Here’s the model. First, raise a couple million dollars from investors to fund a social program. If the social program does not meet its target, the investors don’t get any money back. But if the social program meets its target, the state government pays the investors back all their funds plus interest, with more interest depending on how much the program beats its target.

Best yet, the targets for success will be tied to hard-to-measure numbers that actually matter (in this example, recidivism rates of prisoners who receive councilling, nut just the number of people who enter the program), and control for common biases (like sampling effects).

By getting these measures out there in front of the non-profits, and making sure that the non-profits only get funded if they succeed on these metrics, the accountability is greatly increased…

…kind of like a business. Except, with savvy donors who embrace failure and focus on long-term social change. Perhaps while they eat a pizza.