Financing

The typical human service organization is financed by a combination of individual donations, foundation grants, government grants and contracts, and client fees. The most current information from The Nonprofit Almanac (Roeger et al., 2012) reports that, in 2010, 28% of human services’ revenue came from privately paid fees for services and goods (including private insurance) and 25% from government payment of fees (including Medicaid). Government grants accounted for 23% of revenue, private contributions accounted for 20%, and the remaining 4% came from investment and other income. Altogether, the human services reported $196.4 billion in revenue in 2010.

This funding arrangement can be difficult for organizations to manage. For example, some, government grants and contracts are fraught with time-consuming difficulties, including the need to meet extensive reporting requirements, which can drain staff time. Partly for this reason, government funding tends to go to larger organizations with greater capacity and organizational resources. Foundation funding generally comes in smaller amounts and is limited to specific programs. Most foundations see themselves as innovators and incubators, giving organizations funds to start new programs. They then expect the organization to find additional funding after the program has completed its grant. Foundations tend not to support the same programs for years on end, and the provision of grants for general operating expenses is rare. Grants for general operating expenses are highly coveted, however, as they allow the most freedom and flexibility for organizations to spend the money how they best see fit.

Private donations are often small for the amount of effort that is spent recruiting them. Many private donors, worried about funding “overhead,” also place restrictions on how donations may be spent. Communicating to donors that services cannot be provided if the organization cannot sustain itself is a difficult task for many nonprofits. Revenue from donations can also fluctuate greatly from year to year, making it a fairly undependable source of income for many organizations.

Finally, increasing revenue by charging fees to clients is complicated for many human service nonprofits. Fees are an attractive source of revenue because they are fairly predictable and can be spent in flexible ways. However, many clients do not have the resources to pay for the full cost of their services, making an increase in the fees they pay an untenable solution. In addition, many human service nonprofits believe they must keep fees down in order to keep providing services to those who need them most. Nonprofits that are forced to rely more on fees may inadvertently exclude low-income people who depend on their services. Despite this, some studies indicate that reliance on fees is growing. Salamon (2002) reports that, from 1977, income from fees rose over 500% in the nonprofit social service sector, the largest increase among the different funding types.

Accountability

Nonprofits are often called to be accountable—this means they are expected to give accounts for their actions while another party inspects and assesses these accounts. In terms of internal oversight, in the United States, nonprofits are generally governed by volunteer boards of directors. Nonprofits must have at least one board member to qualify for tax-exempt status (Blackwood et al., 2014). Typically, the board oversees a paid executive director, who manages the day-to-day operations of the organization. Board members are responsible for providing financial oversight, selecting the management team for the organization, helping to determine the mission and ongoing strategy of the organization, and monitoring performance, among other tasks. The board is legally, fiscally, and publicly accountable to external stakeholders of the organization, such as donors, consumers, and the community at large. Ensuring accountability requires maintenance of clear written policies, careful communication about expectations and priorities, and efforts to maintain transparency in operations. These accountability practices aim to safeguard nonprofits’ position of trust in society and minimize nonprofits’ opportunities for fraud and mismanagement. Concerns about accountability also reflect prevailing politics and ideologies. The political shift to neoliberalism, for example, has heightened the degree to which funders are able demand a specific level of performance and, in some cases, value for money (Munro, 2004). Likewise, the growth of New Public Management theories in public administration has led to increased demands for the public sector to adopt practices from the for-profit sector in an attempt to improve its efficiency and performance. This has included adopting business practices that improve accountability for nonprofit contractees, such as devising standards and targets for performance and then measuring them. Concerns about accountability also reflect a society that is preoccupied with risk, as accountability is seen as one way to control and minimize risk (Munro, 2004). Accountability is an important issue in the nonprofit sector because of the numerous and sometimes conflicting accountability demands made on nonprofits. Ebrahim (2010) summarizes these demands by enumerating the various parties nonprofits are accountable to (upward to funders, downwards to clients, and internally to self), the objects nonprofits are accountable for (finances, governance, performance, and mission), the accountability rationale (compliance or strategy), and the different mechanisms that enforce accountability (report and disclosure statements, evaluation and performance assessments, industry self-regulation, participation of stakeholders, and adaptive learning). According to Ebrahim (2010), the challenge for nonprofits is to balance the various accountability demands with the mission of the organization.

The ubiquity of accountability demands is reflected in U.S social policy and practices.

The legislative trend towards more restrictive accounting and activities emerged at the federal level with the passage of the Sarbanes–Oxley Act in 2002. Although this law was primarily brought about in response to corporate corruption, the law nonetheless recommends that nonprofits adopt good governance practices—to disclose financial conditions, prohibit personal loans to executives, certify financial statements, change auditors on a regular basis, and have separate and independent audit committees. The expectation for nonprofits to be accountable is also reflected in the IRS’s 2008 amendment in the annual reporting requirements, which gives larger nonprofits a field where they can disclose information on governance policies and practices (Blackwood et al., 2014). The prevalence of accountability practices is also reflected in nonprofit reporting requirements—in 2012, most human service nonprofits that received government contracts or grants (or both) were required to provide administrative data on persons served (86%), services provided (68%), and program outcomes (76%) to government agencies (Pettijohn et al., 2013).

Marketization

Marketization is defined as a framework of market-oriented principles and values, the process where marketing and management strategies that are traditionally found within the for-profit sector infiltrate other arenas, and a universal discourse (Simpson & Cheney, 2007, p. 191). Pressures to marketize arise from various factors: government cutbacks may induce nonprofits to find alternative funding sources, nonprofits may partner with for-profit companies to gain greater support and legitimacy in an environment where the market predominates, and nonprofits may adopt market-based solutions because of an underlying belief that the market logic is better (Eikenberry & Kluver, 2004).

The marketization of the nonprofit sector is seen through a variety of developing trends. For example, nonprofits may partner with for-profit companies as the beneficiaries of corporate social responsibility or cause-related marketing programs. Alternatively, nonprofits may attempt to imitate for-profit companies through adopting market principles in the pursuit of a social good, such as creating social enterprises where individuals seek social change through entrepreneurial solutions. The marketization of the nonprofit sector is also reflected in the funding arrangements of some nonprofits. Examples include venture philanthropy and impact investing, where philanthropic “investors” apply market principles to invest in social programs or nonprofit organizations with the aim of achieving financial, social, and environmental returns on their philanthropic investments. Governments can also exert pressure on nonprofits to marketize through the process of privatization and devolution. As described above, rather than governments providing public services, governments induce private organizations, including nonprofits, to compete for government contracts and grants to deliver public services. Competition in the human service nonprofit sector has intensified over the years.

Though marketization offers numerous benefits to nonprofits, such as additional funding streams, the professionalization of services, and enhanced accountability and legitimacy, marketization can also bring challenges. For example, pressures to marketize might reduce the responsiveness of nonprofits to meet the needs of niche communities. Thus, if funding from philanthropic “investors” is based on investors’ conception of performance, which may not pay heed to the voices of the users and providers of social services, nonprofits may be tempted to prioritize the goals of the for-profit sector or funder (or both), which might lead to mission drift or diminish their traditional values of public spiritedness and commitment to the public good. Some scholars suggest that market and nonprofit principles are irreconcilable. Edwards (2010), in particular, enumerates the differences between the market and nonprofit sector—the market is concerned with the financial bottom line, whereas nonprofit organizations have many bottom lines; the market has a single strategy to achieve the bottom line (profit maximization), whereas nonprofit organizations have multiple strategies; the market aims for economic efficiency, whereas nonprofit organizations aim for human fulfillment. Indeed, some scholars argue that market principles might be “incompatible with democratic accountability, citizenship, and an emphasis on collective action for the public interest” (Eikenberry & Kluver, 2004, p. 132).

Political Participation

Finding the financial resources and making the time commitment to participate in policy advocacy are struggles for many nonprofits, especially human service nonprofits that are balancing their main commitment toward service provision (Berry, 2003). Many good reasons exist for human service nonprofits to participate in policy advocacy, however. Policy advocacy can help secure a more stable funding environment for the organization. It can also help communicate the needs of the organization’s often marginalized and under-represented clients to lawmakers. As human service nonprofits often have specialized knowledge regarding the challenges their clients face, communicating that information to policymakers can help improve policy and the lives of their clients.

Despite these important reasons to participate in policy advocacy, most human service nonprofits have only limited advocacy programs, if they have them at all. The reasons for this are many. Misunderstanding of the legal implications of advocacy for 501(c)(3)s is an important one (Berry, 2003), as are limitations in terms of financial capacity (Mosley, 2010), support from board members (Gibelman & Kraft, 1996), and skilled and committed leadership (De Vita et al., 2004). There has also been a move away from teaching macro social work skills, like advocacy, in many bachelor of social work (BSW) and master of social work (MSW) curricula.

To overcome these barriers, researchers have suggested several solutions. Working in coalitions can make it easier to maintain a long-term advocacy presence while possibly reducing risks and costs (Mizrahi et al., 2011). The Internet can be an effective and inexpensive tool for distributing an organization’s advocacy message (McNutt & Boland, 1999). Finally, focusing on local policymakers and administrative agencies may lead to increased access for many nonprofits, while devolution has increased the power wielded by these local decision-makers (Sherraden et al., 2002).

Privilege, Power, and Oppression within Nonprofits

Although nonprofits work with diverse stakeholder groups (board members, organizational partners, funders, and service users) in their roles as change agents, the nonprofit sector itself is not immune from the broader impact of issues related to privilege, power, and oppression. For nonprofit leaders, mangers, and supervisors in the nonprofit sector, (a) recognizing the various forms of racism that clients and staff experience and (b) how these issues are reflected in the organization’s policies, practices, and procedures are components of their roles (Green, 2007). This is important because racism and other forms of marginalization, when present in a nonprofit, not only take a human toll but also may lead to low morale, higher absenteeism, increased stress, and higher staff turnover. In addition, if a nonprofit becomes known in the community as an unwelcoming place to work, recruiting employees will become challenging if potential applicants distrust the organization and assume (perhaps correctly) that they will be treated unfairly and in a biased manner (Curry-Stevens & Reyes, 2014). Organizational privilege represents the intersection of personal characteristics with a nonprofit’s structure and culture that contributes to some individuals having a professional advantage over others. It happens when ascriptive characteristics such as race, class, and gender are unequally distributed across employee tenure, position, and role. Such employees may see unearned privileges such as upward mobility, increased authority, and higher wages (Collins & Barnes, 2014). McPherson et al. (2001) described how dominant, privileged groups are at an organizational advantage as they acquire employment and advance more easily because employers tend to hire, mentor, and promote people who share their characteristics and “look” like them. Factors such as inadequate salaries, limited role models and professional networks, and lack of established, trusting relationships with funders are barriers that result from lack of organizational privilege. For example, the percentage of people of color in the executive director/CEO role has remained at less than 20% for the last 15 years (Thomas-Breitfeld & Kunreuther, 2017). Leadership development programs that aim to increase diversity in leadership have not resulted in the type of top-level leadership they expected.

Workforce composition is also critical for providing culturally responsive services. Research has shown that when staff reflect the characteristics of the local community, service users feel like the providers better understand the context of their lived experiences (Curry-Stevens & Reyes, 2014). Culturally responsive services are those that are respectful of, and relevant to, the beliefs, practices, cultural and linguistic needs of diverse consumer/client populations and communities whose members identify as having particular cultural or linguistic affiliations by virtue of their place of birth, ancestry, or ethnic origin, religion, preferred language or language spoken at home. Cultural responsiveness describes the capacity to respond to the issues of diverse communities. It thus requires knowledge and capacity and different levels of intervention: systemic, organizational, and professional, and individual. (p. 10) Nonprofits have been criticized for using problem-focused, reactive strategies instead of practices that promote equity and justice within their structures (Collins & Barnes, 2014). To make the shift toward internal policies and cultures that reflect social work’s value of social justice, an awareness of race bias, privilege, and unconscious bias within the organizational culture is essential to understanding how a nonprofit’s structure and internal processes perpetuate power differentials and exclusive practices in their overall functioning. Nonprofit leaders will continually need to assess the power dynamics within the organization to determine who controls access to power and how decisions are made (Greene, 2007).

A starting point for nonprofits to develop policies and practices that create an inclusive environment is to minimize structural inequalities and exclusionary decision-making practices (Mor Barak et al., 2016). In addition to assessing the power dynamics, diversity management strategies include targeted efforts to recruit and retain a more diverse workforce (i.e., recruiting from outside of closed networks), creating an environment where employees feel valued and recognized for their contributions, and ongoing assessment of policies and practices. One strategy to expand recruitment is to build relationships with affiliate groups, such as the Black Executive Directors (BLK ED) Network in Maryland or Latinos LEAD (Latinos for Leadership Excellence and Diversity), to welcome professionals into their networks with whom they might not interact with regularly. This strategy may increase awareness of the depth and breadth of qualified applicants for potential leadership positions.

Nonprofits can develop a policy that clearly states the rationale for cultural responsiveness and equity that will allow all staff and volunteers to understand the benefits of being culturally responsive to stakeholders as an extension of their mission (Currey-Stevens & Reyes, 2014). To initiate changes in the nonprofit’s culture, leadership can develop satisfaction surveys, suggestion boxes, lunch-and-learns, and other methods to collect feedback from staff and service users about community responsiveness. Of course, it is then essential that the organization take that information seriously and act on it; otherwise, these strategies can quickly become ceremonial. Organizations can also conduct a formal review of brochures, reports, documents, social media, and other forms of community-facing information to assess responsiveness in terms of language, images used, terminology, and the like in order to ensure that the materials they distribute reflect their stakeholders.

Nonprofit Growth around the World

In the past 40 years or more, the nonprofit sector has expanded around the world in terms of size, scope, and prominence (Salamon, 1994). We have seen what is sometimes called the “global associational revolution”: a growth in the number of nonprofit organizations in countries where the sector was already established as well as burgeoning nonprofit sectors where previously there was little organized action of that type (Salamon, 1994; Salamon et al., 2013). Note that in other parts of the world, particularly the Southern hemisphere, nonprofit organizations are sometimes called “nongovernmental organizations” (NGOs). For eight countries where longitudinal data are available, the nonprofit sector’s contribution to gross domestic product (GDP) grew at an average rate of 5.8% per year from the late 1990s to the mid-2000s; this is greater than the average GDP growth of 5.2% for these eight countries (Salamon et al., 2013). Voluntary contributions to nonprofits have also increased worldwide. Based on the Charities Aid Foundation’s (2016) Giving Index, which contains giving data from 140 countries across the globe, average participation levels for helping a stranger, donating to charities, and volunteering time increased for developed countries, transition countries, and developing countries between 2011 and 2015.

Nonprofit growth worldwide has been attributed to both demand- and supply-side factors (Anheier, 2005). On the demand side, the high profile of humanitarian issues has raised the popularity and support of international issues among international donors. Recent examples include the ongoing European Refugee Crisis, which has seen high levels of refugees enter Europe from worn-torn Syria, Afghanistan, and Iraq, and public health emergencies, such as the outbreak of Ebola in Africa in 2014 and the Zika virus in the Americas in 2016. According to Anheier (2005), increased demand for nonprofits also comes from various groups with different ideological leanings. Conservatives view nonprofits as agents that can replace the services of an overly bureaucratic and inefficient state. Neoliberals perceive nonprofits as agents that can balance the power of the state and increase democratization. Meanwhile, left-leaning activists often believe that grassroots nonprofits are the central agents of change and development that can disrupt the status quo. Supply-side factors have also opened up opportunities for nonprofits to expand. Political opportunities, such as the collapse of the Soviet Union in 1991, reduced barriers for people in transition countries to mobilize. Global governance systems, such as the World Bank and United Nations, support and provide the infrastructure for nonprofit organizations to mobilize and act. Similarly, international NGOs, such as Oxfam and Amnesty International, have opened up opportunities for giving across the world. Finally, technological progress has increased the ease with which people can communicate and organize into voluntary organizations.

The growth of nonprofits worldwide has also been accompanied by challenges. For example, in a cross-country analysis of nonprofits, Anheier and Kendall (2001) conclude that nonprofits worldwide are at a “crossroads.” In developed countries, nonprofits are increasingly treated as a “third arm” of the State and thus face challenges in defining their distinct identity and roles. In developing countries, nonprofits work in fragile political and economic environments, face uncertainties with their relationship with the international donor community, which includes the international NGOs that were referred to above, and experience tensions related to the role and power of nonprofits originating from OECD (Organisation for Economic Co-operation and Development) countries and those indigenous to developing countries. In transition countries, after the collapse of the former USSR, the transformation of civil society organizations into formal nonprofits left many nonprofits fragile (Anheier & Kendall, 2001).

Challenges also pertain to the current knowledge base of nonprofits in an international context. Namely, international comparisons are difficult because of country-level differences in terminology, definition, and data (Salamon, 1994). Moreover, since the problems affecting nonprofits across countries differ in terms of scale and scope, the research, organizational, and policy approaches to these nonprofits will also differ. These differences may have caused a bifurcation of the literature—nonprofits or NGOs in the “global south” are often studied within the development literature; nonprofits in the “global north” are often studied within the social policy and public administration literature. These divides make internationalizing the nonprofit literature difficult and reduce opportunities for researchers and practitioners to learn from different contexts and countries. These challenges largely contribute to the paucity of more recent cross-comparison research on nonprofits and NGOs (and international NGOs) worldwide.