Nonprofit Customer Lit Review, Part II

In the first part of this thread, I shared some examples of recent articles and books on nonprofit strategy that equate or nearly equate the nonprofit customer and nonprofit client. In this second part, I look at some authors who make clear distinctions between the two.

Why does this matter? Simply put, because without clarity on who your customers are, it is impossible to achieve strategic clarity. Robert Kaplan, the renowned guru of the "balanced scorecard," and David Norton argue in Strategy Maps: Converting Intangible Assets Into Tangible Outcomes (p. 10):

Strategy is based on a differentiated customer value proposition. Satisfying customers is the source of sustainable value creation. Strategy requires a clear articulation of targeted customer segments and the value proposition required to please them. Clarity of this value proposition is the single most important dimension of strategy.

In considering the challenge faced by nonprofit organizations, Kaplan essentially argues that successful strategies include value propositions for both paying customer and client (p.9):

The mission of [nonprofits], as in the private-sector model, is achieved through meeting the needs of the targeted customers (or constituents or stakeholders, as some of these organizations describe the people who benefit from their services). The organizations create success through internal process performance that is supported by their intangible assets (learning and growth). The fiduciary perspective, while not dominant, reflects the objectives of an important constituency—the taxpayers or donors who supply the funding. Satisfying both financial and customer stakeholders, consistent with the mission, creates a strategic architecture of efficiency and effectiveness themes that mirrors the productivity and revenue growth themes used by private-sector organizations.

Kaplan and Norton expand on this thinking, explaining how nonprofits have modified and adapted the balanced scorecard tool to their circumstances in The Strategy-Focused Organization (p. 135):

...in a nonprofit organization, donors provide the financial resources—they pay for the service—while another group, the constituents, receives the service. Who is the customer—the one paying or the one receiving? Rather than have to make such a Solomon-like decision, organizations can place both the donor perspective and the recipient perspective at the top of their Balanced Scorecards. They develop objectives for both donors and recipients and then identify the internal processes that will deliver the desired value propositions for both groups of 'customers.'

Is The Customer The Giver or The Receiver?

Wrestling with this "Solomon-like" decision is gaining increased attention. You'll recall in my first post on this subject that Drucker argued that the client was the "primary" customer, while donors, public or private, were "supporting" customers. As the power of the donor has grown, so too has the donor's status as a customer.

In their essay "Strategic Management in the Nonprofit Sector," (Included in Handbook of Strategic Management) University of Minnesota's Mellisa Stone and John Bryson look at the multiple stakeholders of the nonprofit organization and see a multitude of customers:

Nonprofit organizations are frequently asked by actors in their institutional environments to answer the strategic management question, 'Who is the organization's customer?' In fact, there may be as many 'customers' as there are stakeholders.

In Integrating Mission and Strategy for Nonprofit Organizations , James Phills introduces the notion of the customer being 'decoupled' from the client (p.9):

...one salient characteristic of many nonprofit organizations is that they raise money from one group in order to provide services to another group. In effect, the users or clients of the organization do not pay for the services that they receive. Rather, these services are paid for by a funder or government on their behalf. This leads to a decoupling of the source of an organization's revenue and the recipient, or beneficiary, of its products or services (in contrast to the traditional commercial situation, in which the buyer and user are the same). Decoupling is important from the point of view of strategy because it alters, and introduces additional complexity into, the relationship between an organization and its customers. Dealing with this complexity is at the core of some efforts to adapt traditional models of strategy to the nonprofit sector. [emphasis added]

The decoupling of customer and client can cause a host of problems for nonprofits, including what Helmut K. Anheier terms, "information asymmetry" in Nonprofit Organizations: Theory, Management, Policy. The situation develops when "inadequate feedback loops exist between the actual recipient and the customer demanding and paying for a service."

For Anheier then, the customer is the one paying for the service. He views the clients such as children, the mentally disabled, and the indigent as being "typically not well-positioned to judge the quality of the [service rendered]."

In Strategic Management for Voluntary Nonprofit Organizations, Roger Courtney suggests that exchange transactions are taking place on multiple levels (p. 47):

In the private sector, there is a trading relationship where a customer purchases a product or service from the company and pays the price agreed. In the voluntary nonprofit sector, the funding usually comes from government and/or private donations to pay for the product, or more usually, the service that the 'customer' receives. Instead of a two-way flow of resources, as in the private sector, there is a one-way flow of resources from funder to voluntary nonprofit organization to client. However, the reality is more complex than indicated. Many voluntary nonprofit organizations are involved in trading activities where there is clearly a two-way transaction. Many beneficiaries ... are required to pay for the service that they receive, albeit at less than the commercial rate. Sponsors, too, are involved in more than a one-way transaction: they require a return on their investment in terms of branding, publicity, etc.

After the holidays: A new post on how attempts to apply business principles to nonprofit strategy go off the rails when the customer (vs. the client) goes undefined and unanalyzed.

Distinguishing Nonprofit Customers from Clients (Lit. Review, Part 1)

Recently, I've done a good deal of reading to help organize my own reflections on the role of the customer and the client in nonprofit strategy. To my pleasant surprise, there's a fairly diverse range of perspectives on the subject, ranging from the traditional customer is the client perspective to a view of the customer and client as "decoupled."

Lester Salamon

That so much is being written about customers and nonprofits is not a big surprise. As Lester Salomon wrote in The State of Nonprofit America, (p. 38)

The [recent] developments point in turn to a broader and deeper penetration of the market culture into the fabric of nonprofit operations. Nonprofit organizations are increasingly 'marketing' their 'products,' viewing their clients as 'customers,' segmenting their markets, differentiating their output, identifying their 'market niche,' formulating 'business plans,' and generally incorporating the language, and the style, of business management into the operation of their agencies.

He goes onto caution that "How fully the culture of the market has been integrated into the operations, as opposed to the rhetoric, of the nonprofit sector is difficult to determine."

Enterprising Nonprofits
An example of this application of market rhetoric and thinking in understanding the nonprofit customer can be found in Enterprising Nonprofits: A Toolkit for Social Entrepreneurs . In a chapter entitled "Understanding Your Customers' Needs and Wants" (p. 217), the authors contend:

In the world of the social entrepreneur, it's not unusual to find a situation in which your core customers seem to want something directly opposite to the mission of your organization. Don't translate 'getting to know your customers' into 'give the customer what they want.' Instead, use customer understanding to help you identify the 'sweet spots,' those areas where what benefits your customers also directly advances your organization's mission.

The Customer As Client
In Strategic Planning for Nonprofit Organizations: A Practical Guide and Workbook, the authors suggest that because the customer [client] rarely pays for a good or service provided by the nonprofit, the customer is not as central to strategy as would be the case in a for-profit enterprise:

For-profit businesses, especially in the past 20 years, have emphasized customer satisfaction to a far greater degree than either nonprofits or government. For-profit businesses have invested heavily in market research in attempts to improve quality as they compete for customer business. Because the direct consumers of products or services of nonprofits and government organizations typically pay only a small portion of the cost, the funders—whether foundations or taxpayers—have had a much greater influence than customer satisfaction on the strategies of organizations in these two not-for-profit sectors.

In Coming Posts

• Lit Review, Part II: Distinguishing customer and client in nonprofit strategy
• Applying Michael Porter's Five Forces principles to nonprofits

Nonprofits & Their Customers

Do you have a social impact strategy in search of a customer, or a customer in search of a social impact strategy?

When you have a clear customer, the road to a clear strategy should be relatively straight and well-paved. When you have a clear strategy but no clear customer, settle in for a long and difficult ride. As a nonprofit CEO, consultant and board member, I've driven down both roads more than once.

The notion of the customer holding a crucial role in nonprofit strategy is neither new nor original. Peter Drucker made identification of the "Primary Customer" the second of his five essential questions for nonprofit strategy in his "Self Assessment Tool." For Drucker, the primary customer of the nonprofit was the client, "the person whose life is changed through your work."

Drucker called volunteers, members, partners and funders "supporting customers." The supporting customer has the power to say no, to accept or reject what you offer. "You can satisfy them by providing the opportunity for meaningful service, by directing contributions toward results you both believe in, by joining forces to meet community needs."

The dirty secret of the nonprofit sector is that mission-based organizations need paying customers in order to survive. The client is rarely the paying customer in a social sector organization. When you conflate one with the other, you run the risk of overlooking one of the keys to your organizational strategy.

The paying customer in a nonprofit is the donor, of course. Donors come in a variety of flavors--government at all levels, institutional foundations, family foundations, major individual donors, smaller donors, and sponsors are the principal archetypes. Many donors have a proxy relationship to the client, essentially buying a service on behalf of the client who consumes it. In other cases, the donor is buying something less tangible, perhaps the halo effect of participating in a movement, the opportunity for recognition by one's peers, the satisfaction of making a larger donation than a social competitor, or the chance to develop a business opportunity by supporting a cause important to a key prospect or investor.

Drucker certainly did not ignore this reality ("The primary customer is never the only customer, and to satisfy one customer without satisfying the other means there is no performance."), but he did resist the notion of putting the customer and client on equal footing:

This makes it very tempting to say there is more than one primary customer, but effective organizations resist that temptation and keep to a focus--the primary customer.

When Drucker's work was originally published in 1993, we were on the cusp of dramatic changes in American philanthropy and the operation of social sector organizations. The 15 years that have followed brought us concepts like "Venture Philanthropy," "Logic Models," "Theories of Change," "Metrics" (meaning measurement of impact, not a system of weights and measures favored by Canadians) and "Social Return On Investment." One might argue that Drucker himself played no small role in this transformation as one of the pioneering voices in applying management practices honed in the world of business to efforts to build and sustain social impact strategy.

Perhaps ironically, these changes have made Drucker's delineation of the primary and supporting customer archaic today. In the relatively genteel world of philanthropy, circa 1993, donors still primarily made grants based on a charity's aspirations for impact. While cost/benefit analysis of granting to one organization versus another certainly occurred, the process that REDF employed in the late '90s [The Roberts fund calculated that a charitable grant to a nonprofit would yield an array of monetary benefits to the newly employed (better incomes and financial stability) as well as social benefits (new tax receipts from new-employee income, lower social service costs). The fund’s charitable grant, in other words, produced ongoing “social returns” that greatly magnified the amount of the initial investment.] was still beyond the horizon of most philanthropies.

For better or for worse (some might say, and for worse), the social contract that characterized the donor-charity relationship for most of the post-War period has largely gone the way of the fax machine--still present in our minds as a salient point of reference, yet mostly a dinosaur. Few donors give grants merely to support an aspiration. Donors--whether government contractors, foundations, or wealthy individuals--expect far more in return for their largess. And on the basis of those expectations, they have become a core customer for the nonprofit, no longer relegated with the "supporting" modifier.



Upcoming Posts:

• Lit review on nonprofits & customers
• Case study: what happens to a business plan without a customer plan