To the extent a foundation wants to simply act as a conduit to nonprofits, costs should be squeezed out. But to the extent the foundation views itself as an intelligent organization that adds value to the grantmaking process, than costs (while important) are secondary to the value being created. In this sort of “premium product” analysis, a foundation would want to judge itself by impact more than cost structure.

For-profit hospitals could easily decide that profit maximization meant providing quality emotional care. However, in our health care system, the customer is mostly insurance companies, not patients. Traditionally insurance companies have not cared about the emotional well being of their clients.

However, we have a cultural value that says sick people should be taken care of even if they do not have the ability to pay. This means that the system must be at least partially supported by the public and so the nonprofit structure often makes sense.

I think you raise a great question in this post – one with implications for organizations well beyond direct service providers. In fact this is an implicit question we, at the Center for Effective Philanthropy, frequently find ourselves asking funders’ boards of directors as we present assessment results. If the funder in question is non-strategic (a “Charitable Banker”) and it’s just trying to get money out the door efficiently, then there could be a lot of value in a commodity viewpoint and a zealous pursuit of minimizing it’s own administrative expenses.

But more frequently, staff and directors alike see themselves as premium: creating knowledge, conducting and analyzing research, providing technical assistance to recipients, interacting with grantees and other stakeholders to hone strategies and tactics, and more. And yet, many still won’t stomach administrative spending that rises above “typical” for foundations – because that cost data is the only publicly reported data. The power of the commodity argument is that, if you accept that many funders are super-efficient, “low-cost” funders, then other funders should expect higher than typical administrative costs.

That’s certainly not an apology for wasteful spending, of which I’m sure there’s plenty. But it is an argument for a more rational conversation within organizations about aligning approach with organizational capacity – and thus administrative cost. And it’s a call to verify, with external stakeholders, whether you’re actually providing a commodity or something more premium.

I’m so sorry to read about your daughter’s accident. I hope she’s recovering well.

Your question about commodity vs. premium product goes right to the heart of the concern about nonprofit hospitals. It will be important to keep this in mind in the near future, as Congress increases scrutiny of nonprofit hospitals. From what I have seen, health care, done well, cannot be a commodity. That’s why for most of our history, hospitals needed to be nonprofit. The current push to take tax exemption away from some hospitals is looking through the wrong end of the telescope. It’s driven by competitive desire for profits (spurred by requests from campaign contributors) in that small slice of the health industry that can support that, rather than looking at the whole picture of health care in this country, the number of uninsured and so on. Full disclosure: My wife is Associate General Counsel for a nonprofit cancer research and treatment center, and within a week of starting there, in her required physical they discovered an enlarged thyroid, and so we experienced firsthand what it was like to be a consumer of their services.

Away from health care, I agree with your point that the traditional view of nonprofits that asks about overhead does treat nonprofits a bit like commodity producers. Ironically, a lot of the glow around “social purpose enterprise” seems to assume that, simply because there is some fee-based discipline (I won’t say market pricing), that magically there is going to be innovation, where there would not in a “traditional” nonprofit as service provider setting. I think that assumption is often wrong, on both ends.

Best,

Pete