Better Understanding Business Models in the Nonprofit Sector

Friday, September 8, 2017

Better Understanding Business Models in the Nonprofit Sector

In talking with the leaders of nonprofit organizations across the sector, there is a single truism that undergirds all of our conversations: limits on overhead create a pressure that deeply impacts the choices and tradeoffs leaders wrestle with every day. 

2016 research from Bridgespan sought to understand: what really are the true indirect costs (or “overhead”) of nonprofit organizations? We examined the financials of 20 well-known, well-funded nonprofits to understand their true overhead costs, and we came to what should have been an unsurprising conclusion. Indirect costs varied significantly across organizations (between 21% and 89% of direct costs), and much of that variation in cost structures seems to be driven by the organizations’ business models. Advocacy organizations, for example, had very different overhead requirements than direct service providers.

This type of insight is intuitive, when you reflect on it. We don’t expect companies in the private sector to behave similarly or have similar cost structures. We don’t expect pharmaceutical companies to invest in their capabilities in the same way that retail businesses do. So, why do we treat nonprofit organizations as if they are all the same?

It’s time, as a nonprofit sector, to recognize the complexity that makes us unique. All nonprofits are not the same; the sector is actually a set of many unique business models, each of which offers different strategic choices and opportunities for organizations to differentially achieve the impact they seek. ...

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