Blurring Boundaries.

Evolving economy changes nonprofits

The past 40 years have shown a marked rise in the prevalence and reach of nonprofit organizations. The growth of the third sector was particularly evident and rapid during the mid-1980s to mid-1990s, with the privatization of government services and a general increase in market demand for service-related industries where nonprofits tend to thrive.

The question is, will these trends continue in the new economy or will the nonprofit sector undergo forced change in order to adapt to a changing world economic order?

Though just embarking on the first decade of new millennium, we are already witnessing major shifts in the way business is conducted and income is generated.

The microchip and the subsequent information technology explosion revolutionized the way that information is generated, stored, retrieved and disseminated. Tools, such as the Internet, granted unprecedented broad consumer access to information and services, regardless of the consumer's geographical location, and in many cases, socio-economic status.

Indeed, the globalization of business has increased the size and scope of markets that were at one time confined by constraints such as locale and affiliation. The end result of these changes may be an erosion of the relative advantages that the nonprofit sector enjoys over the for-profit sector, and/or a blurring of the boundaries that now differentiate the sectors from one another.

The growth of the nonprofit sector in the latter half of the 20th century was spurred in part by certain advantages that nonprofit organizations have compared to for-profits. These comparative advantages include: (1) a greater degree of trustworthiness, which in some cases, affords nonprofits the ability to command higher prices for comparable products and services, and (2) a broader consumer base because of nonprofits' ability to provide certain products and services at nominal charges, enabled by charitable donations and/or government subsidies.

It is well understood that nonprofit organizations command a higher degree of consumer trust than do for-profits. When seeking reliable information about a product or service, a consumer is far more likely to trust a nonprofit organization because it has no apparent economic incentive for deceit, even in cases of asymmetric information, in which the seller holds more information than the buyer.

Furthermore, consumers are often willing to donate money to nonprofits because they trust that their donations will be used for the organization's stated purposes, or at least funneled back through the organization as opposed to padding the pockets of a for-profit executive.

Similarly, some consumers happily pay higher prices to nonprofits for the same products and services that they could purchase at lower costs from for-profits simply because they prefer to patronize nonprofit organizations, for altruistic reasons.

Finally, nonprofit organizations are able to reach a broader consumer base because the trust and patronage that motivates charitable donations, coupled with government subsidies, sometimes enables nonprofits to provide products and services at nominal fees to those who cannot afford to pay full prices. In many cases, for-profits cannot employ differential pricing because they are sustained by the market alone and therefore must incur a profit on nearly every sale..

Before exploring the ways in which current and future economic shifts might reduce the comparative advantages nonprofits hold over for-profits, it is worthwhile to first note the inherent disadvantages that often plague nonprofit organizations.

Nonprofits tend to have more difficulty raising capital, they often suffer from lack of entrepreneurship and they frequently have no stakeholder control over management, a handicap that can lead to inefficient and unproductive operations.

Furthermore, nonprofit organizations are predominantly service organizations that typically have a greater reliance on labor, the cost of which tends to rise faster than the profit generated. For nonprofits to succeed, their ability to produce and deliver public services and products, especially those with a high degree of asymmetric information, must exceed their inherent disadvantages.

The current and future shifts in the world economic order may serve to magnify the nonprofit sector's inherent disadvantages, as well as weaken its comparative advantages over the for-profit sector.

Although the information technology boom, and specifically, the Internet, has been a boon to the economy and to many nonprofit organizations, the effects on the comparative standing of the nonprofit sector are likely to be mostly negative.

The IT and Internet revolution:

1. Help consumers gain information about matters of interest and therefore reduce asymmetric information;

2. Expand the scope of economic interactions beyond specific locales or even countries and therefore increase the size of markets; and

3. Allow interested parties to access information about consumers' characteristics, such as past economic behavior, income, demographics, and consumption patterns to aid companies in their desire to price differentially. The globalization of economic activity has similar effects, especially with respect to the size of markets.

Not all nonprofits will be affected in identical ways, and some of these trends will take time to mature. But here are some examples that do not seem too far-fetched or too much into the distant future and that suggest the possible weakening of demand for nonprofit services.

* Nonprofit daycare centers, if they had an advantage compared to for-profits because some parents did not trust the treatment their children might receive, may lose some of this advantage to technology such as nanny cams and to centers which have ratings on the Web complete with parental comments.

* Local, small niche newspapers, weeklies, and radio stations that serve small special-interest communities on a voluntary or at least nonprofit basis will lose ground to Web-based services that charge a fee smaller than the cost of volunteering in a local organization. And nonprofit radio stations, because they are able to use donations to differentiate their prices according to individual demand, will be threatened by for-profit stations.

They will stream their signals through portable radio-like devices that charge according to use and perhaps will even charge (as do some Web-based bookstores) different prices for the same service according to past usage. The increasing ability to charge for specific use as well as to add additional demand information to create personal prices will likely undermine nonprofitr organizations as well as government agencies (e.g., those that provide toll roads).

Some of the disadvantages of nonprofit organizations, are also likely to grow with the decline of local communities. Local community is often the cornerstone of nonprofit organizations because it provides a financial base, plus the control and oversight that are needed for viability.

More permeable geographical boundaries obviously strengthen organizations that are supralocal, and, sadly, may weaken the multitude of local nonprofits. There will be some types of nonprofit organizations that may thrive in this new environment.

Organizations that have a broad national or international base will be able to access their constituencies faster and build stronger communities in support of their causes. Nonprofit hospitals and radio stations will look more like for-profits and some will even disappear, whereas national and international environmental organizations will prosper.

Organizations that can articulate their nonprofit uniqueness and distinguish themselves from for-profit firms will energize their supporters into continued participation and will thus prosper in the new economy.

There are two related means to achieve nonprofit prosperity. The first is to don a cloak of trustworthiness unique to nonprofit organizations, which is key to success in the Internet economy. It is achieved by establishing in the minds of consumers and donors the belief that an organization will have no reason to take advantage of information obtained through transactions, nor will it misuse resources that are given to it.

The second, and much related means, is to institute accountability measures that assure those who transact with nonprofit organizations that they will be dealt with fairly and that the organization is run effectively. This can be achieved through participation by donors, consumers and other stakeholders in organization's governance, and through openness in decision-making and financial practices.

Avner Ben-Ner is a professor at the University of Minnesota, and Lisa Tradewell is a writer. Both are consultants to nonprofit organizations. Ben-Ner is a member of the Academic Council of National Center on Non-profit Enterprise. The National Center on Nonprofit Enterprise