FOR-PROFIT VERSUS NOT – FOR – PROFIT How to Measure Success
by Dr. Ichak Adizes
One of the distinctions typically made between profit and non-profit organizations is that the latter are at a disadvantage because they lack profit as a metric for success. As such, non-profit organizations purportedly are unable to take advantage of the tools and tautologies routinely utilized by profit organizations.
I take issue with this reasoning. In fact, I regard it as a total misunderstanding of the process of management of the dynamics of organizations. I believe that, as far as the processes of management and the leadership that need to be provided, there are many similarities to be found between the two entities, provided we understand what constitutes a healthy managerial process.
A well-managed organization, whether it is for profit or non-profit, must be effective and efficient in both the short and long run. This holds true even for a family or society. We know from the Adizes Methodology that there are four roles that need to be performed for organizations to be effective and efficient in the short and long run:
First, let’s analyze the (P) role. When you ask leaders of profit organizations why they exist, the typical response is “profit.” But we should all know that profit is not the correct answer. There are profit-oriented organizations that are going bankrupt. Profit is like the scoreboard in a tennis match. You can’t win the game by watching the scoreboard instead of the ball. What is the ball? The ball is satisfying your client’s needs. If you satisfy your client’s needs repeatedly, you are effective. If the organization satisfies its client’s needs in an efficient manner by being well administered, which is the A role, then the organization will be profitable in the short run as well.
In other words, profit is nothing more than added value. People are willing to pay a certain price to have their needs satisfied. When those needs are satisfied efficiently, that is, at a cost which is lower than the price people are willing to pay commensurate with the market place, then the difference between that price and the cost is profit, i.e., the organization has added value to society.
How does this apply to non-profit organizations? Well, non-profits also have a client base, in this case the community for whom they provide services, and they also need to satisfy their needs. The question is, what is the price that people are willing to pay to have those needs satisfied? In a non-profit, the price may be more difficult to discern, but there is a price for everything. For example, how long are people willing to wait in line at a hospital to be treated?
When I did the health planning for Ghana , I looked at how many miles people were willing to walk in order to be treated at a clinic because that was the price they were willing to pay.
All non-profit organizations should ask themselves: What community do we serve and what price are people in it willing to pay to satisfy their needs? It could be the length of time they have to wait for an application for funding approval. Price does not necessarily mean money. It can be cash equivalents, such as time, effort, hardship, or pain. Rather than say, “We don’t have profitably as a metric,” non-profits should ask themselves, “Are we adding value? Is the cost of our satisfying community needs less than the cost of the community satisfying its own needs?”
The bottom line questions every non-profit executive should be asking are:
Whom do we serve?
What is the “price” our clients are paying to be served?
Are we assisting them in the most efficient manner (i.e., are we effective and efficient)?
The for-profit business measures itself with short-term profitability, a measure of added value. The non-profit organization should measure itself against something more intangible, yet still real, by asking if it is adding value in the best possible manner. It requires more self-discipline, honesty, and integrity to measure price equivalents than it does to measure profit, but these are hard questions that need answering. Does the non-profit organization truly understand the needs of the community it serves? Does it recognize what the people in the community must endure in order to be helped? Is the organization doing its best to satisfy those needs in the most efficient manner?
These are questions deal with the short run.
In order to be effective and efficient in the long run, a for-profit organization has to identify the future needs of its clients, and it has to be structured in an organic manner so no one is indispensable, and the organization is not harmed if part of it encounters difficulties. This applies to non-profit organizations as well. Non-profits must address long-term issues: Can we identify the future needs of our community? Are we proactive or stuck in historical patterns? Are we organized organically so if the organization’s founding executive director leaves, we are capable of surviving in the long run?
s you can see, there are significant similarities between profit and non-profit organizations. The primary difference is in the interpretation of the various roles required for the organization to be effective and efficient in the short and the long run.