The Nonprofit Sector

and the Market:

Opportunities &

Challenges

A STATEMENT

FOR PUBLIC

DISCUSSION

N O N P R O F I T S E C T O R S T R A T E G Y G R O U P

Mar

ket

Nonprofit Sector Strategy Group

The Aspen Institute’s Nonprofit Sector Strategy Group (NSSG)is a leadership forum that is addressing the most pressingissues facing the nonprofit sector in America. Formed in1997, the NSSG convenes meetings to explore innovative waysin which the business, government and nonprofit sectorsmight work together to address shared concerns and promotea healthy civil society and democracy.

The NSSG is an initiative of The Aspen Institute’s NonprofitSector and Philanthropy Program, which seeks to improve theoperation of the nonprofit sector and philanthropy throughresearch and dialogue focused on public policy, management,and other important issues affecting the nonprofit sector.

Other NSSG publications include, “The Nonprofit Contributionto Civic Participation and Advocacy” and “The Nonprofit Sectorand Business: New Visions, New Opportunities, New Challenges.”

This pamphlet provides an introduction to the work of theNSSG, followed by the group’s statement, “The NonprofitSector and the Market: Opportunities and Challenges.”

We welcome your comments on this publication. To sharecomments, request more information, or order NSSG publica-tions, please contact:

Cinthia Schuman, Director Nonprofit Sector Strategy GroupThe Aspen Institute One Dupont Circle NW, Suite 700Washington, DC 20036 Phone: (202) 736-5811

Information is also available on The Aspen Institute’s Web site,www.aspeninstitute.org/nssg.

The Nonprofit Sector Strategy Group wishes to thank the W.K.Kellogg Foundation and The Ford Foundation for their gener-ous support.

Nonprofit Sector Strategy Group:

Cinthia H. Schuman, DirectorLester M. Salamon, Senior Program AdvisorGiulia Campanaro, Program Assistant

Table of Contents

Introduction: The Mission of the Nonprofit Sector Strategy Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

The Nonprofit Sector and the Market:Opportunities and Challenges . . . . . . . . . . . . . . . . . . . . . . . .4

Nonprofit Sector Strategy Group Membership . . . . . . . . . . .10

Additional Meeting Participants . . . . . . . . . . . . . . . . . . . . . .12

By carefully examining the most important challenges and opportuni-ties facing America’s private nonprofit organizations, the NonprofitSector Strategy Group is working to stimulate a new consensus aboutthe nonprofit sector’s roles and responsibilities, and offer practical rec-ommendations to enhance policy, practice, research, and public educa-tion on this crucial set of institutions.

America’s private nonprofit sector has long played a criticalrole in American life.1 Its 1.5 million organizations and

associations provide services to meet an extraordinary range ofhuman needs: ministering to the sick through visiting nursesassociations, hospitals, clinics, and nursing homes; educatingtens of millions in its schools and universities, as well as incommunity tutoring programs; providing human services suchas day care, meals on wheels, adoption, job placement, domes-tic abuse prevention, and relief for the poor; strengtheningspiritual life through churches and religious associations; andpromoting arts and cultural activities of all kinds.

Nonprofit organizations also connect Americans to uniqueopportunities: to volunteer, to advocate for public policy, topromote democratic values, to participate in decision-makingprocesses, and—in doing so—to shape a more just and pros-perous democracy.

R E S P O N D I N G T O A C H A N G I N G L A N D S C A P E

In the past 15 years, the nonprofit sector, like business andgovernment, has had to respond to a dramatically new socialand political landscape.

The contours of this landscape include: a new and constantlyevolving mix of peoples and cultures; instant and interactivetechnology in all arenas of life; downsized and devolved gov-ernments; a global marketplace; a commercial presence thatreaches into almost every aspect of life; and a surging, volatileeconomy that is benefiting many but not all.

These new realities pose a complex mix of opportunities andchallenges for nonprofit organizations. On the one hand, they

Introduction: The Mission of theNonprofit Sector Strategy Group

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open up the possibility of productive new partnershipsbetween nonprofit organizations and businesses and newsources of revenues that nonprofit organizations can tap. Onthe other hand, however, they bring for-profit competitors intotraditional nonprofit fields and create commercial pressuresthat can threaten the ability of nonprofit organizations toremain focused on their public-service missions.

T H E W O R K O F T H E N O N P R O F I T S E C T O RS T R AT E G Y G R O U P

This changed environment gives rise to fundamental questions:What are the unique contributions of nonprofit organizations?What traditional nonprofit roles should endure and what newroles need to be imagined? What are the sector’s majorstrengths and weaknesses? How can needed changes best beencouraged?

In 1997, The Aspen Institute, an international nonprofit educa-tional institution headquartered in Washington, D.C., organ-ized the Nonprofit Sector Strategy Group (NSSG) to addressthese questions, to examine the sector’s most important oppor-tunities and challenges and bring constructive ideas and rec-ommendations to public attention. Funded by grants from the W. K. Kellogg Foundation and The Ford Foundation, theNSSG focuses its attention primarily on the public-benefit por-tion of the nonprofit sector, which encompasses those organi-zations whose primary mission is to serve a broad public ratherthan their own members.

The NSSG convenes participants from a variety of backgroundsand institutions—including individuals from business, govern-ment, academia, nonprofit organizations, foundations, and themedia. In addition to gathering participants for regular deliber-ations, the NSSG shares its findings with and seeks commentsfrom a broad range of opinion leaders, policymakers, academicinstitutions, nonprofit and business groups, and journalists.

The following pages contain points of agreement that surfacedduring an NSSG meeting on a critical issue facing the nonprofitsector: the sector’s increasing involvement in market or com-mercial relationships. We circulate this document in the hopethat it will add to the ongoing dialogue on this topic and pro-vide helpful suggestions for future action.

The Nonprofit Sector and the Market:Opportunities and Challenges

Summary of Principal Conclusions

B A C K G R O U N D

1. Market relationships have grown increasingly importantto American nonprofit organizations over the past twodecades.

� Nonprofit reliance on income from fees and charges for services,already substantial, has grown considerably over the past twodecades. Fees and charges accounted for well over half of theconsiderable growth that the nonprofit sector experiencedover the past 20 years and now provides over half of allnonprofit income. While clearly more important in someportions of the sector than others, such income has alsospread in recent years well beyond its traditional significantpresence in health and higher education to penetrate addi-tional arenas of nonprofit activity, such as social services.Income from philanthropy also grew during this period, butat a slower pace. Thus, in the last 20 years, philanthropyhas declined as a share of total nonprofit income.

� While nonprofit organizations have come to rely increasingly on feesand charges, for-profit firms have moved actively into arenas onceoccupied almost exclusively by nonprofit providers. For-profitshave captured much of the growth in the hospital field overthe past two decades and disproportionate shares of thegrowth in such fields as home health, day care, and socialservices. In addition, welfare reform has created a vast newmarket for caseload management and human service provi-sion that for-profits have moved into aggressively and suc-cessfully, sometimes displacing or altering the roles of non-profit providers in the process.

� New forms of nonprofit organizations have also recently madetheir appearance, mobilizing for-profit means in the pursuit ofnonprofit ends. The resulting "social ventures" producegoods and services for the market, yet do so in ways thatserve charitable purposes (e.g. equipping the homeless withskills by putting them to work in catering operations) withthe income raised.

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� Finally, some business corporations have formed productive part-nerships with nonprofit organizations that serve business purposeswhile also promoting nonprofit goals.

2. These developments open important opportunities, butalso raise important issues, for the future evolution of theAmerican nonprofit sector and its ability to promote thepublic good. Of particular concern are the implications thatincreased commercial activity and growing market pressuresmay have for the willingness and ability of nonprofit organiza-tions to serve those in greatest need and to perform a varietyof social functions—such as advocacy, community empower-ment, and research—that the market has traditionally under-valued.

3. To date, however, little explicit attention has been devot-ed to the trade-offs that may be posed by this increasedcommercial involvement on the part of nonprofit organiza-tions. Therefore to explore these issues in greater depth, TheAspen Institute’s Nonprofit Sector Strategy Group took up thequestion of the relationship between the nonprofit sector andthe market at a special meeting on August 12-16, 1999. Thisstatement records the major points of agreement that surfacedin this discussion.

K E Y C O N C L U S I O N S

1. Benefits. Nonprofit involvement in the market can bringconsiderable benefits to the nonprofit sector and to society atlarge. Among these possible benefits are the following:

� A reliable flow of resources for the promotion of charitablepurposes and the public good;

� Incentives for greater efficiency and innovation as a resultof increased competition;

� Better targeting of services to client needs;

� Increased legitimacy for charitable activities resulting fromassociation with the assumed efficiency of the market;

� Attraction of funds into charitable activities from donorscommitted to new enterprise approaches to social problem-solving; and

� Possible greater accountability to the public through theadoption of enterprise-type performance indicators and the"market test."

2. Risks. At the same time, nonprofit involvement in the mar-ket can pose significant risks for the nonprofit sector, the peo-ple it serves, and American society more generally. Thesepotential risks take a number of forms:

� Displacement of the social mission of the nonprofit sectoras a result of pressures to shift attention away from thenon-marketable aspects of nonprofit operations—such asthe promotion of civic participation, advocacy, the buildingof community, and service to the needy;

� Pricing certain populations out of the market for key services;

� Loss of public support for nonprofit tax exemptions due togrowing confusion over the extent to which nonprofitorganizations differ from business corporations;

� Discouragement of private philanthropy;

� Pressures to increase the scale of operations, which can leadto a loss of the flexibility and closeness to the peopleserved, which are hallmarks of nonprofit operations;

� Loss of a critical infrastructure of sustainable nonprofitagencies in communities across the country as a result ofdisplacement by for-profit firms that may ultimately disap-pear if market conditions change;

� Discouragement of volunteers and, potentially, of paid staffattracted to nonprofit sector work because of its distinctivesocial mission;

� Challenges to the capabilities and energies of agency staff,which are increasingly called on not only to promote thecharitable missions of their organizations but also to runcomplex businesses in an increasingly competitive businessenvironment;

� Conflicts of interest within agencies between those engagedin income-generating activities and those engaged in non-income-generating activities; and,

� Loss of the "charitable endowment" of agencies—i.e. theaccumulated assets represented by agency goodwill, goodname, physical resources, and capital endowment—as aresult of their transfer to for-profit businesses.

3. A Reasonable Trade-off. After balancing the risks and bene-fits, the Strategy Group concluded that the recent trend towardgreater involvement in the market by nonprofit organizationscan usefully serve the public good that nonprofit organizationsare designed to promote. In coming to this conclusion,Strategy Group participants took explicit note of the fact thatfor-profit firms also engage in activities that have social value,including advocacy, and that market means can therefore be

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employed to advance public purposes.

4. Appropriate Precautions. More specifically, to take appropri-ate advantage of the benefits that nonprofit involvement withthe market can bring while minimizing the risks it poses, anumber of steps can usefully be taken. Fundamentally, thesesteps should seek to ensure that a suitable balance continuesto be struck between the special advantages that nonprofitorganizations enjoy by virtue of their tax-exempt status andthe contributions that they make to the public good. Amongthese steps are the following:

(a) With regard to fee-for-service income:

� Ensure through charitable and public-sector support,and through the design of fee structures, that those mostin need have equal access to services;

� Develop outcome measures and consumer protectionmechanisms to help clients make effective judgmentsabout the services they receive;

� Encourage nonprofit organizations that are heavilydependent on fee-for-service revenue to retain theircommitment to the public good by expecting somedocumentation of social mission activity as a conditionfor retaining their special tax treatment;

� Avoid excessive compensation of nonprofit executives;and,

� Increase the base of knowledge that exists about the useand consequences of fee-for-service income by nonprofitagencies in different fields.

(b) With regard to for-profit competition:

� Ensure that nonprofits are on a level playing field vis-à-vis for-profit firms by providing them better access tocapital and information;

� Encourage government to reimburse more quickly onpurchase-of-service contracts and thereby reduce thecapital needs for those bidding on such contracts;

� Where appropriate, create a special "set-aside for smallproviders" in government human service procurementprograms modeled on the existing set-aside for smallbusinesses to ensure the preservation of a basicinfrastructure of needed human service agencies in localcommunities despite the vagaries of the market;

� Enforce quality standards for both for-profit andnonprofit firms involved in basic human serviceprovision, including requirements for equal access and

minimum levels of charity care;

� Improve accountability and transparency requirementsfor both nonprofit and for-profit firms operating in thehuman service field, especially those funded in partthrough public-sector resources; and,

� Increase the base of knowledge about the consequencesof for-profit extension into key service fields.

(c) With regard to social ventures:

� Ensure that existing law at the federal, state, and locallevels permits valid social venture activity, i.e., venturesthat maintain a reasonable balance between the tax andrelated benefits they receive and the social purposes theypursue;

� Make information and legal assistance available to socialventure entrepreneurs to assist in adapting this form ofnonprofit operation to the existing legal framework;

� Encourage social ventures to develop effective measuresof the "social benefits" they produce and utilize a"double bottom line"—one commercial and the othersocial—to assess their performance;

� Encourage foundations to consider "social ventures" aspotential recipients of foundation support andappropriate partners with which to work;

� Encourage foundations and other charitable institutionsto work with private financial institutions to fashion newforms of capital assistance for social ventures (e.g.foundation-guaranteed loans, subsidized loans);

� Improve the training of potential "social ventureentrepreneurs" who can combine commitment tomission with solid business experience and who can helpfacilitate the leadership succession that successful socialventures will require;

� Encourage businesses to share knowledge and forgealliances with social venture entrepreneurs, and withother nonprofit organizations; and,

� Improve the base of knowledge about social ventures andhow they can be managed most effectively.

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C O N C L U S I O N

Ultimately, society values nonprofit organizations because theyproduce benefits that go well beyond the provision of goodsand services. These benefits include contributions to the gen-eral welfare, to our sense of community, and to the building ofdemocracy. While a shift to the market may help nonprofitsachieve these benefits, it may also put them at risk by focusingagency attention and energy on those aspects of its operationsthat can yield market returns.

Therefore, the pursuit of desirable social purposes can nomore be taken for granted in the case of nonprofit organiza-tions than it can for any other type of organization. Rather, asa society, we must put in place mechanisms and protections toensure that in reaping the positive benefits that the marketoffers, nonprofit organizations are not enticed or forced to sur-render the essential social value contributions that they areparticularly equipped to provide. It is this type of balance thatthis statement seeks to encourage.

N O T E S

1. The nonprofit sector consists of a broad range of organizationsthat qualify for exemption from federal income taxes under anyof 26 different sections of the Internal Revenue Code. A commoncharacteristic of these organizations is that they do notdistribute any profits they might generate to those who controland/or support them. As noted below, the particular focus of theNonprofit Sector Strategy Group, and hence of this statement, ison a subset of these tax-exempt organizations–namely, those thatare eligible for exemption under either Section 501(c)(3) or501(c)(4) of the tax code. For further detail on the definition ofnonprofit organizations, see: Bruce Hopkins, The Law of Tax-Exempt Organizations (New York: John Wiley and Sons, Inc.,1992).

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ELIZABETH T. BORIS*DirectorCenter on Nonprofits andPhilanthropyThe Urban Institute

KATHLEEN BROWNManaging DirectorPrivate Wealth ManagementGoldman Sachs

KATHY BUSHKINChief Communications Officerand Senior Vice PresidentAOL Time Warner

ELAINE L. CHAOSecretary of LaborU.S. Department of Labor

SANFORD CLOUD, JR.President and CEOThe National Conference ofCommunity and Justice

PABLO EISENBERG*Former PresidentCenter for CommunityChangeSenior FellowGeorgetown University PublicPolicy Institute

BARRY D. GABERMAN*Senior Vice PresidentThe Ford Foundation

MARGARET GATES*Former National ExecutiveDirectorGirls Incorporated

CHARLES R. HALPERNFormer President Nathan Cummings Foundation

FRANCES HESSELBEIN*ChairmanPeter F. Drucker Foundation forNonprofit Management

LESLIE LENKOWSKY*Professor of PhilanthropicStudies and Public PolicyIndiana University/PurdueUniversity at Indianapolis

REYNOLD LEVYPresidentInternational RescueCommittee

STANLEY LITOWPresidentIBM International Foundation

SARA E. MELÉNDEZPresidentIndependent Sector

KENNETH MONTAGUE*DelegateMaryland House of Delegates

DAN E. MOORE*Vice President for ProgramsW.K. Kellogg Foundation

MARK HARRISON MOORE*Professor and FacultyChairmanThe Hauser Center forNonprofit InstitutionsJohn F. Kennedy School ofGovernmentHarvard University

CHARLES B. RANGELRepresentative, New York U.S. House of Representatives

The Aspen Institute Nonprofit Sector Strategy GroupMembership List

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EDWARD G. RENDELLFormer MayorCity of Philadelphia

DOROTHY S. RIDINGS*President and CEOThe Council on Foundations

LESTER M. SALAMON*DirectorCenter for Civil SocietyStudiesInstitute for Policy StudiesThe Johns HopkinsUniversity

VAN GORDON SAUTERFormer PresidentCBS News Group

DAVID SKAGGS*Executive DirectorThe Center for Democracyand Citizenship Council for Excellence inGovernment

ESTA SOLER*Founder and ExecutiveDirectorFamily Violence PreventionFund

C. EUGENE STEUERLE*Senior FellowThe Urban Institute

DEBORAH SZEKELY*Founder and Chairman Eureka Communities

JOHN C. WHITEHEADChairmanAEA Investors

TAE YOODirector of CorporatePhilanthropyCisco Systems, Inc.

RAUL YZAGUIRREPresidentNational Council of La Raza

*Took part in the August 13-16, 1999, session on Nonprofitsand the Market.

The Aspen Institute is a global forum for leveraging the power ofleaders to improve the human condition. Through its seminarand policy programs, the Institute fosters enlightened, morallyresponsible leadership and convenes leaders and policy-makersto address the foremost challenges of the new century.

Founded in 1950, the Aspen Institute is a nonprofit organiza-tion with offices in Aspen, Colorado; Chicago, Illinois; NewYork, New York; Queenstown, Maryland; Santa Barbara,California; and Washington, D.C. Its conference facilities arein Aspen, Colorado, and on the Wye River on Maryland’sEastern Shore. The Aspen Institute operates internationallythrough a network of partners in Europe and Asia.

ALAN ABRAMSONDirectorNonprofit Sector andPhilanthropy ProgramThe Aspen Institute

EDWARD DUGGER IIIPresidentUNC Partners, Inc.

JED EMERSONAdvisory Board MemberThe Roberts EnterpriseDevelopment Fund

JANNE GALLAGHERDeputy General CounselCouncil on Foundations

PETER GOLDBERGPresident and CEOAlliance for Children andFamilies

DAVID CAY JOHNSTONReporterThe New York Times

MARK ROSENMANVice PresidentOffice for Social ResponsibilityThe Union Institute

AUDREY ROWESenior Vice President andManaging DirectorChildren and Family ServicesLockheed Martin IMS

CINTHIA SCHUMANDirectorNonprofit Sector StrategyGroupThe Aspen Institute

EDWARD SKLOOTExecutive DirectorSurdna Foundaiton

WILLIAM E. STRICKLAND, JR.President and CEOManchester Craftsmen’sGuild/Bidwell TrainingCenter, Inc.

Additional Meeting Participants

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Printed: Summer 2001Publication 01-013

1065/NSSG/01-BRO

The Aspen InstituteNonprofit Sector Strategy GroupOne Dupont Circle, NWSuite 700Washington, DC 20036Phone: (202) 736-5800Fax: (202) 293-0525www.aspeninstitute.org