Strategic Positioning and the Financing of Nonprofit Organizations: Is Efficiency Rewarded in the Contributions Marketplace?

Article excerpt

Today, the nonprofit sector plays an increasingly important role in the provision of vital services in fields such as health, social services, and education. The size of the nonprofit sector has increased rapidly over the past 60 years from a little more than 12,000 organizations in 1940 to over 1.5 million organizations today (Boris 1999). This sector includes 501(c)(3) public-serving nonprofits that are organized for religious, educational, charitable, and scientific purposes, as well as a host of member-serving nonprofits, such as business leagues, social clubs, and labor associations (Bowen et al. 1994). While the sector has grown quickly, serious questions have arisen in recent years about the funding and management of these organizations, particularly the public-serving nonprofits whose supporters are entitled to a tax deduction for their contributions. In response to contributors' concerns following a series of highly publicized financial scandals at nationally prominent charities, the field of nonprofit management has quietly undergone a period of self-examination aimed at bringing greater financial controls and tighter operations to the sector (Bryson 1995; Kearns 1996; Letts, Ryan, and Grossman 1999; Pappas 1995).(1) Reforms in the way nonprofit organizations operate have been aimed at reassuring the public that contributions are being wisely applied to the core charitable missions of these organizations.

The rapid rise in the number of nonprofits seeking a piece of the limited amount of charitable contributions has increased competition within the sector and made it harder for many of these organizations to achieve long term financial stability. Charitable nonprofits raise funds through two principal means (Hansmann 1980). The first is through the charging of fees for the delivery of services or the creation of commercial ventures designed to generate a stream of earned income. Over the past two decades, these commercial forms of revenue represent a critical source of operating funds that has given nonprofits the ability to launch and sustain initiatives by having clients and consumers pay for part or all of the cost of delivering services (Weisbrod 1999). The second way nonprofits support their operation is through donations and grants. By emphasizing the public-serving nature of their work, many donative nonprofit service providers are able to elicit a stream of contributions that provides critical revenue for operations (Gronbjerg 1993). For organizations that work with disadvantaged populations or that seek to provide a service for free or at a subsidized price, contributed income is often a critical ingredient in their financial strategy. Today, there are few entirely donative or entirely commercial nonprofit organizations. In the face of a tight market for contributions, many nonprofits attempt to alter and diversify their funding bases from a predominant reliance on contributions toward a more balanced approach that includes earned income. All the while, there remains a significant ongoing need for contributed income to fund those activities that are part of the mission of a nonprofit organization but not easily supported by client payments.

Against the backdrop of these financial pressures, we examine the factors that drive charitable contributions to nonprofit organizations. Because nonprofits have received a great deal of advice on how to manage their operations efficiently, we are interested in the question of whether strategic positioning around efficiency, defined as the reporting of a below average administrative to total expense ratio, increases the contributed income that a nonprofit organization is able to raise over time. Beyond the need to build legitimacy and donor confidence, which may underlie the new bottom-line movement in the nonprofit sector, there has been much talk about the growing sophistication of philanthropy as evidenced in the expectation of donors that their contributions be well-spent. …