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Nonprofit Organizations as a Contractual Mechanism

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Nonprofit organizations represent, on a broader level, institutions of social responsibility aimed at the creation of social value. Through his public goods theory, Weisbrod (1974,1977) defined NPOs as private suppliers of public goods which meet the residual demand unfulfilled by governmental entities, namely Non-Governmental Organizations. However, according to the contract failure theory elaborated by Nelson and Krashinsky (1973, 1977), nonprofit organizations fight the information asymmetry existing between consumers and producers of specific services. This is due to the fact that NPOs are not profit-seeking entities having an economical raison d’être, therefore it is unlikely that the service quality could be reduced in order to increase profits.

The contract failure theory suggests that non for profit arise where ordinary contractual mechanisms do not provide consumers with adequate means to police producers. NPOs achievement of their social missions constitutes the reason for their existence, and the commitment and passion spent to fulfill this purpose represent the main asset of the organizations. The mission is the raison d’être for which the organization is born and operates. It is not simply a statement of intent and purposes, it represents the scope for action within which the organization can move. The mission defines both the starting point and point of arrival of the NPO, and the highest degree of involvement of an interlocutor is achieved when for him the mission becomes something to engage in, something that is worth doing. Working on the mission is useful for several reasons, such as: to give a clear direction to the organization; it can be a tool for sharing with the stakeholders and a starting point for defining strategies; to avoid the dissipation of resources on non-essential goals; to adopt a common language and values that increase integration. Most nonprofits rely on third parties, such as corporations, private donors, governments and foundations in order to get the financial resources required to operate. Funds are, therefore, limited resources which depend on NPOs’ fundraising initiatives and donations. Since donors can be considered “fans” of the NPO’s work, mission, cause, and therefore of the organization as a whole, then many of them may appreciate being involved on several fronts. In addition, donors who are also volunteers, or active on some campaigns carried out by the organization, have a fairly low level of “abandonment” as they feel part of it. Small and medium NPOs highly depend on volunteers, who can represent the heart of the organization.

As pointed out by … , to give continuity to the voluntary action volunteers should be provided with “placement in a job that matches their skills and passions, supervision and clear communication, good orientation and training, opportunities for development, etc.” Staying current on and meeting volunteers’ motivations, needs and interests allow the NPO to better retain them, and this can be achieved through informal chats, observations, short surveys and formal feedback sessions. The identification of the motivations of each volunteer allows to understand which assignment suits more, thus fostering his/her commitment, and to adapt, where possible and necessary, the organizational context and the working arrangements.

Once the NPO’s mission and values are shared, volunteers are driven to stay when they engage in interesting and meaningful activities. It is important to know that what may be not relevant or tedious for someone can, in turn, be stimulating for another one. This is why NPOs need to accurately listen, understand and adapt to meet the volunteer’s realistic expectations and thus achieve a positive and effective voluntary action. Motivations can change over time, and it is therefore important to be alert to changes in the levels of participation and quality of volunteer work, or by the introduction of a feedback system that works regularly (e.g. monthly mail surveys).

Understanding whether these changes depend on personal situations or dissatisfaction allows the association to identify the best strategies for revitalizing the volunteer engagement and participation. In fact, it can be proposed to change activities, to attribute (or remove) greater responsibility, to make more training, to change people to collaborate with, to move him/her to another project, or even to take a break period. The sooner you handle the changes, the sooner you will avoid the disaffection not only with regard to the activity but also towards the organization.

Volunteers should be considered as a dynamic and growing resource, and for this reason, they should be given responsibilities and even be employed as ‘teachers’ in order to improve their development, since “nobody learns as much as a good teacher”. Why measure performance. Robert D. Behn (2003) states that public managers should measure performance in order to achieve eight specific managerial purposes: (1) evaluate; (2) control; (3) budget; (4) motivate; (5) promote; (6) celebrate; (7) learn; and (8) improve. Following the author’s thought, in order to evaluate performance, following Kravchuk and Schack’s thought, “managers need to formulate a clear, coherent mission, strategy, and objectives,” and to “rationalize the programmatic structure as a prelude to measurement.” To control how to ensure that subordinates are doing the right thing, “traditional performance measurement systems specify the particular actions they want employees to take and then measure to see whether the employees have in fact taken those actions. In that way, the systems try to control behavior.” (Kaplan and Norton, 1992). Budgets cuts are defined as ‘cruel tools’ to increase performance.

However, limited resources should not be spent on improving performances if an overall efficiency improvement is not granted. Efficiency measures are therefore required. In order to have the line staff, middle managers, nonprofit and for-profit collaborators, stakeholders, and citizens focused and motivated to accomplish what is necessary to enhance the NPO’s performance, it is useful to establish performance goals. The measurement of progress toward the organizational targets, together with related feedbacks, stimulate people’s efforts on achieving them.

Managers thus need “Almost-real-time outputs compared with production targets”. Managers can convince political superiors, legislators, stakeholders, journalists, and citizens of the NPO’s good job if they easily understand “aspects of performance about which citizens really care”.Once an organization “has produced a tangible and genuine accomplishment that is worth commemorating, its managers need to create a festivity that is proportional to the significance of the achievement.” After the evaluation of the organizational performances and the information analysis, a learning process takes place since “performance measures that diverge from the expected can create an opportunity to learn”. Managers “need a large number and wide variety of measures that provide detailed, disaggregated information on the various aspects of the various operations of the various components” of the organization. Finally, in order to improve the performance, managers need “Inside-the-black-box relationships that connect changes in operations to changes in outputs and outcomes”.

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Nonprofit organizations as a contractual mechanism. (2018, August 02). GradesFixer. Retrieved January 19, 2022, from
“Nonprofit organizations as a contractual mechanism.” GradesFixer, 02 Aug. 2018,
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Nonprofit organizations as a contractual mechanism [Internet]. GradesFixer. 2018 Aug 02 [cited 2022 Jan 19]. Available from:
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