Abstract for:Organizational Poverty in Nonprofit Organizations: Why Do Non-Profits Persistently Underinvest in Capabilities?
Nonprofit organizations have been observed to persistently underinvest in organizational capabilities, despite widespread academic and practitioner acknowledgment that building organizational capabilities is critical to improved organizational performance. Why is this? We develop a model based on ethnographic fieldwork with six nonprofit organizations that relates organizational performance to the management of funder perceptions, and investments in programmatic and non-programmatic activities. Inherent in nonprofit management is the need to raise funds from donors, who are distinct from the recipients of the nonprofit’s services. Given difficulties observing the objective impact of nonprofit programs, many donors rely on ‘overhead ratio' as a measure of operational efficiency, measured as the fraction of non-programmatic expenses over total expenses. In this paper, we show that nonprofit managers' keenness to manage their reputation with funders leads them to underinvest in organizational capabilities so as to keep their overhead ratio low. We argue that the challenges that many nonprofits face in achieving sustained high performance can be explained by this boundedly-rational bias towards programmatic spending, which has the unintended consequence of starving the organization of essential investments in organizational capabilities.