Monday, November 28, 2011

Quantity vs Quality and Customer Value: Applications for Nonprofits

A significant amount of what is covered in Types of Strategy: Which Fits Your Business? relates to an article I read for another course, but from a nonprofit perspective. I recommend Outcome Funding: A New Approach to Targeted Grantmaking by Williams, Webb, and Phillips and, more specifically, this book’s chapters 13-15 (I would upload a copy, but I’m not sure if I’m actually allowed to do that. You could ask me personally for a copy or speak with the prof from Creating Results Oriented Programs, Matt Hannigan.).

Low-Cost Leadership

Oh the stories I could tell about cost-cutting in nonprofits. It seems that, while for-profits use cost-cutting as a strategy, nonprofits use it for very survival. In fact, I would change our article’s statement, “The key to success using the low-cost strategy is to deliver the customer’s expected level of value at a cost that assures an adequate level of profitability,” to “…at a cost that allows us to keep our doors open and our funders happy with our frugalness.”[1]

I find this difference very frustrating, as I believe it leads to the low salaries, high turnover, high burnout, operational inefficiency, and myriad other problems within the nonprofit sector. Nobody wants nonprofits to spend a dime on anything other than “direct services” (which, for some reason, doesn’t include the salaries for the people providing those services).

The Outcome Funding article touches on this issue:

“By using the common denominator of costs per hour of training, counseling, or other service, [many funders] point with pride to their ability to compare proposers and achieve cost-effective programs. In the outcome framework, units of service are units of activity, not of result, and the cheapest price may prove the most costly. Funders of training programs, for example, may be pleased to achieve a cost of no more than $100 per trainee day. If they are getting a second-rate trainer who has no ability to relate content to the circumstances of those present, however, the money may be wasted. A cost of $300 per day may be far more effective if it buys a brilliant trainer whose teachings prompt strong outcomes.”[2]


I am not arguing, however, that a low-cost strategy is bad for nonprofits. Rather, the understanding of this strategy has to be adjusted from its current paradigm within the nonprofit sector. Instead of looking at services as cost-per-unit of activity, it needs to be cost-per-unit of result, as suggested above. This small change shifts the focus from quantity alone to quality with efficiency. As Outcome Funding states, “Investors want a return, not a commodity.” [3]

So do clients.

Which leads to a discussion of customer value.

Customer Value

Types of Strategy’s point that “alignment between strategy and customers is absolutely essential,” is just as pertinent for nonprofits.[4] There are several questions that Outcomes Funding asks to get to this alignment (questions just as relevant for for-profits):

“1. Will anybody want to buy and make use of this product? …Programs attempting to offer public services are often top-heavy with early planning and the development of needed infrastructure—staff, space, manuals, and so on. In a surprising number of cases, errors show up in the inferences made about what will happen once the program begins. Prominent among these is the tenet that customers really want the product.”[5]

How common is it for a well-meaning program creator to assume what they find important is what is important to the future clients?

“2. Can we make this product within prescribed cost and quality guidelines? …Although their form may be different, public service programs face the same ‘production’ issues as do private businesses… Quality problems are equally probable. A common one is that people with the right skills cannot be found for the salaries offered.”[6]

This ties back to quantity versus quality. Too often quality is sacrificed to meet cost stipulations or higher service numbers. Shoot for cost-efficiency with quality if you want real, sustainable results.

“3. Are there enough people out there who want this? …Four to five people who sell life insurance on a commission basis leave within a year. The most common reason: they run out of friends. …Many programs mistakenly place their customer expectations on groups and people who have a special reason to be interested, but who are not of sufficient number to provide all needed customers. …An additional problem is that programs can confuse need with demand. The key is not how many people the implementor sees as needing his or her wares, but the number of people who see themselves as wanting to use them.”[7]

That last point is so relevant to nonprofits, but is something program managers like to either ignore or respond to with victimization. Yes, though it sounds harsh, it is acting like the victim. “How can I get children to do better in school if their parents won’t be involved?” “Don’t they see how important this service is?” “Nobody supports us.” “Why don’t our community members value this service enough to donate?” As a sector highly dependent on donations and the participation of clients you are trying to help, it is easy to fall into the frustration of feeling like you’ve done all the right things but no one outside the organization is stepping up to help.

But this line of thought assumes that your external stakeholders view the service and the issue it addresses the same way that you do. If you believe that the way you have crafted your service is truly needed, you have to motivate your external stakeholders to believe so as well. If they don’t, either your motivation strategy isn’t working or your service may need some adjustments. This relates to the points made on differentiation in Types of Strategy:

“…remember that differentiation only matters to the extent that customers value the difference...If these customers truly value that which sets your product or service apart, they will either (1) select your offering over those of others, (2) be willing to pay a premium for what you offer, or (3) act on some combination of 1 and 2. Experience and market research are the best ways to determine if your difference will be valued by customers.”[8]

Are your targeted clients, whom you want to help, motivated to choose your service? Are your donors willing to pay for what you offer (to support what you offer)? These are questions I am asking myself as I explore creating a program myself. And, as needed and important as a service may really truly be, these questions must be asked by all nonprofits if they want to actually achieve the difference they strive for.

[1,4,8] Williams, H.S., Webb, A.Y., & Phillips, W.J. (1996). Outcome Funding: A New Approach to Targeted Grantmaking. Rensselaerville, NY: The Rensselaerville Institute.

[2,3,5,6,7] Types of Strategy: Which Fits Your Business? In Strategy: Create and Implement the Best Strategy for Your Business (chapter 3). (2006). Boston, MA: Harvard Business School Press.

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