Efficiency in Nonprofit Organizations

Abstract

Efficiency is a fundamental concept in the business world. Yet in nonprofit organizations (NPOs), which are financed through donations, it should be even more important, particularly when public funds are involved. Measuring efficiency in NPOs is more complex than in firms as it is not possible to resort to measures related to profitability or profit, so little is known about the efficiency with which NPOs go about their activities. This lack of knowledge substantially reduces the possibilities of NPOs being able to learn from their own experiences, and indeed those of others, in order to improve in the future. Data Envelopment Analysis is a particularly suitable method for nonprofit sector, given that it adapts to the unique characteristics displayed by NPOs and because it helps to establish an objective measure of efficiency in groups of organizations that have no aggregate indicators to accommodate the multiple simultaneous objectives they pursue. This measure allows a ranking of organizations to be established which would prove extremely useful as it identifies the best practices associated with high levels of efficiency and pinpoints which organizational designs and management systems produce the best results, resulting in greater pressure to achieve constant improvement.