Survival Is Not Enough-- The Case for Profit;

Richard Perry, MA

The highest use of capital h not to nmke more money, but to make money do more for the betterment of life.

Henry Ford

Profit is like health. It's nice to have and the more the better. But that's not the reason yon exist. Peters and Waterman - - In Search of Excellence

A B S T R A C T

Mental health centers are facing serious challenges due to funding losses. In such a climate, survival nmy seem to be an acceptable alternative. This article argues that survival is not enough, that in fact, organizations must become proactive and seek stability by generating profit. Altho:lgh profit- making by not-for-profit organizations is contro- versial, the propos#ion is made that profits are necessary, justifiable, and ethical in their own right.

Mental health centers are at a crossroads. We find ourselves at a time when a number of critical decisions will decisively deter- mine the future of our org~inizations. Our decisions will probably not determine whether or not we will survive; that we will survive is more or tess assured by a number of ex- ternal circumstances. What will be deter- mined by our decisions are the types of services we will provide, the clientele we will serve, the quality of our services, and the opportunities for growth we will provide to our staff, volunteers, and board.

These are critical issues not to be dealt with casually. They require a great deal of thought and debate. This article presents only one side of the issues - - financial man- agement. There are other viewpoints which must be integrated if we are to ensure the accomplishment of our long-term goals, in- cluding program requirements, staff needs and demands , payor and consumer de- mands, and the demands of the board and the community . These perspectives may at times be, or appear to be, at odds with a financial position. It is therefore important that those with contrasting views present

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them so that decisions can be based on as much information as possible.

W h y Survival Isn ' t E n o u g h

I f t he l o n g - t e r m e x i s t e n c e o f o u r organizations is not at stake, then given the e c o n o m y m o s t n o t - f o r - p r o f i t s * f ind themselves in today, isn't survival enough? I would argue that, no, survival is not enough? In an article by Lippitt and Schmidt e n t i t l e d , " C r i s i s in a D e v e l o p i n g Organization," the proposition was made that every organization goes through a series of stages in its development.~ Each stage is characterized by a specific problem that has to be solved before the next stage can be successfully achieved. Three primary stages were i d e n t i f i e d - - b i r t h , y o u t h , and maturity. Two substages were then identified for each primary stage: creation and survival (birth), stabilization and reputation (youth), and uniqueness and respect (maturity). The point made by Lippitt and Schmidt was that if the issues at each stage were not dealt with successfully, then the organization stagnated at that stage and eventually declined. Change and maturation are not optional. They are inherent in social systems, like organizations, just as they are in the biological systems which created them, i.e., humans.

Survival is an early crisis in the history of an organization and most of us are beyond that stage. We must deal with the issues of youth - - stability and reputation. In order to ensure stability, we must engage in systematic planning and objective setting, respond aggressively to competition, create an image, especially within the organization, develop and nurture staff, and develop secure, broad-based funding sources. At the same

*A non-profit organization, in an accounting sense, is one that recovers its costs, one u'here revenues equal expenses. A not-for-profit organization is one that exists for other purposes than generating an income stream for its on'nets. To hold an organization to the literal definition of non- profit is to ensure "non-profit bankruptcy' in todays econ- oi:1)'.

time, in order to ensure a desired reputation, we must work to increase the quality of our services, show the communi ty that we are concerned about their needs and wants, and begin to concern ourselves with the issues which will confront us in the maturity stages of our development. Survival is a moot issue for our organizations and will remain so unless we fail totally in our efforts to confront the crisis of growth and maturity. If we do fail to meet the above challenges, then our organizations will regress to the point that survival again becomes an issue. If that is allowed to happen, it is appropriate that our communities decide whether or not we shotdd survive.

There is another argument, similar to yet sufficiently different from the developmental point of view to warrant discussion. Survival implies "cutback management," taking paths of least res is tance , defens ive ac t ions , inflexibility, and the status quo. When people are laid off, potential funds sacrificed for easier i m m e d i a t e f u n d i n g , and needed expendi tu res delayed, the organizat ion becomes vulnerable in two ways - - it no longer can respond to opportunity, nor can it respond to additional shocks from its environment. Survival is a mindset that limits options. While any of the above actions may be necessary given a specific situation, they will not become permanent and limiting if they are part of a balanced, proactive, growth- related plan. 2 If such a plan exists, it will be c lea r to all w h e n and u n d e r w h a t circumstances to apply certain actions, and also when to remove them. If no plan exists, survival strategies tend to act as a ratchet, tightening the grip on the organization until survival itself becomes questionable.

Bu t is Prof i t Ethical?

There are many people who argue that a not-for-profit organization should not make a profit from tts operat ions-- that it is immora l to "make m o n e y " on another person's misfortunes. 3 Ralston contends that business concepts such as marketing are based on questionable values, for example, paying patients, profit, and efficiency, rather than on values such as equ i t y , service, and effectiveness. 4 Fein takes issue with the language of the "bottom line" arguing that business concepts depersonalize the users, providers, and the service through a language

- - att i tude - - behavior link.

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A t t i t u d e s such as these have a sol id foothold in this society, in the staff of not- for-profits, their boards, and their clients - - so much so that it would do little good to try to refute these arguments head on.* A better approach to changing this att i tude is to present the "other side" and hope that s o m e m o v e m e n t t o w a r d a d i f f e r e n t understanding results.

Revenues have to exceed expenses for th ree reasons:

1. Inflation - - it is impossible to raise prices fast enough, or to cut expenses often enough, to cover inflationary increases. Any adjustments are after the fact, anyway. It is necessary to have a surplus in order to pay for increased costs whi le making the necessary adjustments in an orderly fashion.

2. E x p a n s i o n - new services, new technology, and new facilities have associated "up front" costs which have to be covered, and there is usually a time lag before revenues catch up to expenses.

3. Economics and politics - - depressed e c o n o m i c t i m e s lead to h i g h e r u t i l iza t ion of services, h igher fee discounts, higher accounts receivable balances, but also reduced government and philanthropic support. Fixed costs remain, however, and it is difficult to re fuse se rv ices u n d e r t he se circumstances. There has to be prior year profits to cover these needs. 3

In 1976, Long calculated that the required excess of revenue over expenses was, at minimum, 10.8% Even with inflation down to current levels, the concept of a needed return above costs is still valid.

Long's arguments are buttressed by the Hospital Financial Management Association's position presented in its Board Statement # 3 , entitled, "Supplementary Reporting of Hospital Financial Requirements. ''7 In these

*Refutations are possible, however. For example, profit is not inherent in marketing, but exchange is. Exchange is the giving of one valued item (service) for another valued item (money). I f the concept of exchange is valid, then equity, effectiveness and service willbe the rule, and effi- ciency becomes a tqrtue, necessary to optimize the exchange. A more strident approach to r~aation is that taken by Mason 6 who labels the "non-profit mentality" the '*greatest threat to the future viability of the voluntary hospital in- dustry (read, "voluntary sector")."

guidelines to the hospital industry, HFMA supports the proposition that hospitals have legitimate requirements beyond expenses, and has allowed the hospitals to show these requirements in their financial reporting statements. Requirements of hospitals include current expenses, including depreciation and interest payments, uncollectable revenue and operating margin, including working capital, facility replacement, and expansion funds. These professionals are arguing that it is imprudent, if not irresponsible, for managers and directors to be satisfied with simply recovering costs. All not-for-profits, not just h o s p i t a l s , have the same f inanc ia l requirements if they are to meet their stated goals of continuous, responsive, quality services.

A more theoretical perspective on the appropriateness of profit making by not-for- profit organizations is offered by Sherwin in an article in the Harvard Business Review entitled, "Ethical Roots of the Business Sys tem. ''8 Sherwin sugges ts that the organization and its management are in c o n s t a n t exchange w i t h th ree sets of constituents: its owners (board of directors), its staff, and its consumers (recipients of services). The not-for-profit organization gives its board of directors ,psychological pay" and a promise of continued service to the community the board represents in exchange for their t ime and commitment . Staff also receives "psychological pay" ~ind a salary for their time, skills, and loyalty. Consumers, or cl ients , receive services for financial renumeration.

If management shortchanges any of these constituent groups in favor of any other, those that are shortchanged will reduce the quantity and quality of their contribution, and the tota l o u t p u t of the sys tem is diminished. Under this model, management has one primary task - - to manage resources in such a way that each of the system components receive benefits that are perceived to be equal or, at least, equitable. As long as this perception is maintained, constituent inputs are guaranteed and the continuity of benefits insured.

However, in order to accomplish this task, management must focus on two intermediate tasks. The first is to manage resources conservatively while provid ing as much service and benefit as possible, i.e., promote efficiency. The second is to make a profit so that this "surplus" can buffer the system

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from fluctuations in the quality and quantity of the exchanges wi th cons t i t uen t s by augmenting either the benefits provided to the constituents, e.g., higher salaries or new services, or the resources provided to the organization, e.g., specialized skills or cash flow. Thus, efficiency and profit-making become ethical obligations of managers in all organizations.

To operate a not-for-profit in a non-profit manner is not an economically neutral policy, nor is it an ethically superior position to advocate. It is neither--because to demand that an organization maintain a literal non- profit financial position in today's society and economy ensures its decline and eventual demise. The purpose of any organization is to provide benefits to its constituents, and the goa l of management is to ensure the continuity of those benefits. Neither can be attained without profits.

REFERENCES

1. Lippitt, G.L. and Schmidt, W.H. "Crises in a Developing Organization." Harvard Business Review, Vol 45, no. 6, 1967, 102-112.

2. Lewis, C.\V., and Logalbo, A.T. "Cutback Principles and Practices: A Checklist for Managers." Public Administration Review, March/April, 1980, 184-188.

3. Long, H.W. "Valuation as a Criterion in Not-for-profit Decision Making." HCM Review, Summer, 1976, 34-46.

4. Ralston, R.M. "Is Hospital Marketing Compatible with Public Accountabil- ity?" New England Journal of Medicine, Vol 306, 1982, 863.

5. FIin, R. "What is Wrong with the Language of Medicine?" New England Journal of Medicine, Vol 306, 1982, 863-864.

6. Mason, S.A. "Management Implication of a Shifting Marketplace." Hospital and Health Services Administration, Vol 79, No. 1, 1984, 71-83.

7. Hospital Financial Management Associa- tion, Board Statement No. 3, Supple- mentary reporting of hospital financial requirements, Dec. 1980:

8. Sherwin, D.S. "The Ethical Roots of the Business System." Harvard Business Re- view, Vol 61, No. 6, 1983, 183-192.

BIOGRAPHICAL SKETCH

RICHARD PERRY, MA, is director of admin- istrative services, Wheatland Professional Services, Inc., Enid, OK.