Giving Compass' Take:

• Phil Buchanan, founder and president of the Center for Effective Philanthropy (CEP), sheds light on how donors can derail nonprofit progress when they assume these organizations should operate "like a business."

• Buchanan maintains that impact measurement needs to be tailored to the strategy of the nonprofit. How can nonprofit organizations better explain to donors the concept of individualized impact measurement?

•  Read an alternative perspective on why nonprofits should run like a business. 

In the United States, 1 in 3 people don’t trust nonprofits to spend their donations wisely. At the same time, both individuals and institutions are reluctant to contribute to basic costs like overhead, which limits groups’ ability to grow more sustainable and impactful. Both issues stem from the same major misperception.

“Saying that nonprofits should operate ‘like a business’ is a meaningless phrase, but it’s one people use all the time,” says Phil Buchanan, the founder and president of the nonprofit Center for Effective Philanthropy (CEP). “They’re thinking of giving as analogous to investing when it isn’t, which leads to related mistakes like utilizing the wrong metrics [to grade success].”

At CEP, Buchanan’s team researches the performance of major funders, and advises some of the country’s top foundations how to make impactful change. But he believes many of the lessons they’ve learned are applicable to everyone–including the fact that nonprofits deserve to be treated differently than corporations.

“Measurement is really important, but it’s got to be tailored to the particular strategy of the nonprofit,” he says. “In all kinds of different companies in different industries, we can ultimately judge them . . . by profits. Obviously there is no universal metric to compare the results of the nonprofit working on climate change to the nonprofit working on increasing graduation rates through mentoring at-risk kids.”

Another issue is that donors often want groups to scale what’s working quickly without accounting for whether it would be as effective if it expanded.

Overall, he believes that a business-first mind-set can also devalue the contributions of nonprofit employees. Individual and institutional contributors remain reluctant to fund things like general administrative support, the bucket that organizations use to pay employees fair salaries.  Ultimately, that’s hurts your most valuable asset. “It’s these nonprofit leaders and staff–who are doing tremendous work often on the very toughest challenges–who are the ones that have defied market solutions or government intervention.”

Read the full article about treating nonprofits like a business by Ben Paynter at Fast Company.