Third, the biggest inherent differences between for-profits and nonprofits stem from their fundamental corporate structures, which determine what they are able to do with their profits—and thus affect their ability to attract capital and scale—as well as what opportunities look attractive.
For-profit corporations have owners or shareholders; nonprofit corporations do not. Having owners means that for-profits may not always reinvest all their profits into their core business as successful nonprofits will, but instead have the option to return some of those profits to their owners. This is not necessarily a bad thing, however: as for-profits provide returns to their owners, they attract even more capital to grow and scale operations and attract more top talent when there is a viable market. Successful for-profits tend to be crystal clear about their end objective: Make increasing profits by doing the job their best customers pay them to do.
Nonprofits lack this easy metric, which makes it relatively harder for many of them to stay focused on a particular job. They play a vital role, however, because without shareholders, they can remain invested in a sector even in the absence of a viable market—a circumstance from which successful for-profits retreat.
The government should employ both for-profits and nonprofits to serve the public good, as favoring one over the other may shortchange society’s interests. Critically, for-profits and nonprofits alike will only move the needle if the government customer demands continual improvement. Laws and regulations should therefore focus on and define the desired outcomes where possible without specifying the processes or inputs used to achieve them. They should also reward organizations that achieve the best outcomes for the best price relative to the competition and align those outcomes with what the end user actually needs.
Michael B. Horn is the co-founder and executive director of the education practice at the Clayton Christensen Institute for Disruptive Innovation, a non-profit think tank applying the theories of disruptive innovation to solve problems in the social sector. He is co-editor of the new book “Private Enterprise and Public Education” (Teachers College Press, Aug. 2013), from which this article was adapted. © 2012 Teachers College, Teachers College, Columbia University. For more information, visit www.tcpress.com.