The “Nonprofit” Millstone: Does your tax classification make a difference to member value?

 

 

Most associations are nonprofit.  Okay.  No problem here. But why is there a general assumption that any respectable association must be nonprofit?  This is what I have a problem with. 

The fact that association professionals consider their tax exempt status as their identity and badge of honor is an even greater problem.   Practices and assumptions about what it means to be an association and a non-profit have evolved internally rather than in response to the way members and markets have been changing, and have shaped a “nonprofit mindset” and culture that are at odds with the market and, hence,  are holding associations and other non-profits back.   

 

Think of the myriads and often hidden or unacknowledged assumptions that drive many decisions in the sector even though they contradict the reality of customer and marketplace behavior, for example:

 

  1. Non-profits are superior to for-profits. (We stand for public good while for-profits are just out for money). Career and start-up consultant, Penelope Trunk, believes that the gap between for-profit and non-profit is over-estimated and dangerous. “I think we should all be careful of dividing the world into meaningful non-profits and soulless corporations,” she says.” 

     I have reached the same conclusion in my research.  After all, market leading companies maintain a far more intense focus on their customers than most associations.  Many among them invest in developing the communities, industries and markets their customers do business in to increase their success, while many associations are still limiting the value they deliver to one standalone product at a time. 

  2. Members are not customers:  Using the “customer” word, in fact, is an insult. By this logic, associations get to impose their own rules on customers, based on assumptions rather than what customers actually do and value and the market forces that shape their behavior.  This is very dangerous. It creates the delusion that standards and information that apply to the rest of 21st century consumers, don’t apply to members and leads to false conclusions:

    • Members should remain members out of loyalty to the profession/our mission and not just for their own benefit as if they were customers.

    • Members value the conventional association menu of benefits. If they leave in droves it just means that they are not aware of them so  we must tell them about them and point out their value.

Members, of course, are consumers of products and services from the crash commercial world. This is the world that shapes their standards and expectations.   By creating artificial distance from the marketplace, many associations are missing lessons learned and new thinking developed in business and lagging behind their members.

3.  The “we can’t do this” mentality: In a fast moving world in which the flexible, speedy and adaptable survive,          most non-profits make slow decisions on the basis of what they are “allowed” to do rather than what customers need  or opportunities arise:

    • Our governance system and bureaucratic processes limit us but that’s the nature of non-profits or associations.

    • We can’t diversify to meet a new demand, or respond faster or create new types of positions or launch a new organization or business line etc. because we are non-profits

    • We only respond to opportunities that fit our mission, governance, policies and procedures rather than opportunities for providing what matters the most to customer.   

Why is it necessary to organize as non-profit, make decisions based on layers of approval and political consensus or spend half of your available time and resources on managing boards rather than customers?   Medieval guilds were created for a crafts economy; in the industrial era and beyond, trade associations’ role was to ensure fair competition, creating monopolies that were later broken by antitrust legislation;  and as professions became specialized, professional associations took on the role of creating standards and entry requirements.   Yet the world has changed.

 With the advent of the Internet, knowledge is widely distributed and accessible; professions and disciplinary boundaries are merging and constantly shifting.  Wealth is not accrued by safeguarding and controlling but through networks, exchange and conversion of value; reconfiguration and innovation.  Just look at associations now. Their claim to value is largely based on providing education, networking, content and information resources. Associations are in fact in the business of knowledge service today, providing knowledge resources and educational services that meet the needs of industries and professions. Yet they maintain vestigial traits from the past that no longer afford them a competitive advantage.  They remind me of the human appendix. While it may have had an important role safeguarding our body in the past, the need to remove them far outweighs any present benefit they might have.  

 I am not arguing that associations should or should not be non-profit.  In my opinion, it is irrelevant. The only relevant issue is that of delivering value to the customers –crafting solutions for problems that interfere with their success.  Does the non-profit status contribute to these goals?  In my research and experience, the trademark characteristics of what association leaders define as nonprofit—emphasis on rules, policies and restrictions; focus on original mission, governance, process and their own products—are maintained at the expense of customers rather that for public good.  Being a non-profit often becomes an excuse for slow response or even indifference to key customer needs, complacency, poor leadership value and opportunity loss.

Boundaries between profit-and non-profit, and among industries and professions, are no longer clear-cut and meaningful, after all.  Today’s knowledge workers and knowledge workplace are not solely driven by the pursuit of profits, for example.  Non-profit characteristics, such as the membership model, community development and social purpose are being adopted by corporations, while many associations are launching for-profit businesses. 

A new form of corporation is the “benefit corporation or B-corporation” used by for-profits that want to combine their profit-generating business with larger, social purpose.  It was introduced in Maryland in 2010 and has been adopted by a number of states.

In February 2014, for example, the Star Tribune  newspaper announced:

“ A proposed new organizational structure for Minnesota corporations aims to put the public benefit mission of the organization ahead of the interests of shareholders.  Two forms of public benefit corporation could be formed: general benefit and specific benefit corporations. Each will “require a corporate purpose broader than shareholder value maximization that do not prohibit pecuniary gain for shareholders.’ In other words the mission of the organization will have priority over investment returns for shareholders.”

There are many new options for how you can organize your business, deliver customer value and achieve your objectives. Fortunately innovative associations are diversifying –merging, acquiring, launching new businesses and partnering—and breaking out of the old mold.  The point is that organizations are not their structures, tax classifications, products or even missions but their relationship with the people they serve.  It is the latter that should determine the former.   Are your organization’s values, culture, capabilities, tax status and business model  the best options for delivering the solutions that matter the most to your members/customers?  This is what association leaders must explore and challenge. 

 


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