Toward a Contingency Model for the Relationship Between Capacity and Effectiveness in Nonprofit Organizations

Defining Capacity

In general, definitions of organizational capacity have emphasized two distinct components: (a) the resources (financial and nonfinancial) an organization has access to, and (b) the internal operational activities an organization performs to accomplish its mission. For example, Despard (2016) describes capacity as “the resources, skills and functions a nonprofit organization needs to fulfill its mission across multiple domains” (p. 2). Others have more explicitly linked capacity with accomplishing goals. For example, Austin (1994) refers to capacity as “those abilities that enable actors to achieve specified objectives” (p. 17). Capacity has also been defined as the actual mobilization of organizational resources toward organizational ends, suggesting that capacity does not exist until or unless it is enacted. For example, Barman and MacIndoe (2012) describe capacity as “the internal ability of organizations to enact a specific task” (p. 72).

In addition to these broad characterizations of the concept of capacity, the literature has also attempted to define capacity by categorizing specific resources and internal operational activities that are deployed when capacity is enacted. Most if not all scholarship on organizational capacity emphasizes the importance of organizational infrastructure. Overall, scholars understand organizational infrastructure as an organization’s basic administrative and operational ability needed to accomplish its work. Second, another critical aspect of capacity that scholars often reference is leadership. Leadership capacity can be defined as the extent to which leaders effectively utilize the organizational infrastructure toward organizational ends.

Another, less common source of organizational capacity identified by scholars is organizational efforts to engage in their external environment. For example, Glickman and Servon (2003) identify both networking capacity and political capacity as core capacity dimensions. Networking capacity involves efforts by the organization to interact, coordinate, and potentially collaborate with other organizations in the environment. Political capacity involves building stakeholder support of those individuals and organizations that impact the organization, especially in terms of maintaining funding and acquiring new resource streams. Christensen and Gazley (2008) also identify a number of aspects of the external environment that affect an organization’s capacity, including contract management, regulatory environment, external relationships, and the relative level of trust within those relationships, among others. Importantly, efforts at external engagement incorporate both core aspects of capacity: resources (ensuring funding from external stakeholders) and operations (organizational activities aimed at collaborating/contracting with external organizations). Taken together, these definitions and categorizations characterize capacity as the “means” by which nonprofit organizations ultimately fulfill their missions.

Defining Effectiveness

Similarly, the organizational effectiveness literature has a long tradition of efforts to define the concept (Cameron & Whetten, 1983; Forbes, 1998; Friedlander & Pickle, 1968; Georgopoulos & Tannenbaum, 1957; Price, 1968). As with the concept of capacity, the consensus in the literature is that organizational effectiveness is an elusive concept. Historically, there have been three broad approaches to assessing organizational effectiveness that are particularly relevant to a discussion of the linkages between nonprofit capacity and measures of nonprofit effectiveness: the goal attainment, system resource, and the multiple constituencies models.

The goal attainment model, which posits that organizations are effective to the extent they are able to accomplish specified goals and objectives, has been a prominent model in effectiveness scholarship. In fact, much of the public and nonprofit management scholarship that focuses on measuring performance through organizational outputs and outcomes utilizes the goal attainment framework in some form (Andrews & Boyne, 2010; Boyne, 2003a, 2003b; Lee & Nowell, 2015). Although this model is intuitively appealing, there are a number of identified challenges associated with it. One of the assumptions of the goal attainment model is that goals can be clearly identified and measured. However, as scholars have noted, goals are multiple, conflicting, ill defined, and ambiguous, making it difficult to measure (Herman & Renz, 1999; Yuchtman & Seashore, 1967).

Unlike the goal attainment model which focuses on organizational outputs and outcomes, the system resource model of effectiveness emphasizes organizational inputs, and the ability of organizations to acquire resources from the broader environment. As stated by Yuchtman and Seashore (1967), the systems resource perspective defines effectiveness “in terms of its bargaining position, as reflected in the ability of the organization to exploit its environment in the acquisition of scarce and valued resources” (p. 898). Furthermore, they view effective organizations as “resource-getting systems” (p. 898). This approach ultimately measures effectiveness as the sustainability of resource streams into the organization over time. Critics of this model argue this perspective does not measure organizational effectiveness as much as it measures the acquisition of resources necessary for organizations to accomplish mission (Boyne, 2003a), and that the mission of nonprofit organizations are social, not financial in nature (Moore, 2003).

Distinct from viewing effectiveness in terms of “inputs” or “outputs/outcomes,” the multiple constituencies model views effectiveness as a socially constructed concept in which multiple stakeholders will assess an organization’s effectiveness differently (T. Connolly, Conlon, & Deutsch, 1980; Mitchell, 2015; Zammuto, 1984). This model asserts organizations should have multiple measures of effectiveness. Furthermore, this perspective emphasizes organizational legitimacy and reputation as the most important measure of effectiveness (Mitchell, 2015; Willems, Jegers, & Faulk, 2016). As Lecy et al. (2012) state, “legitimacy and effectiveness are tied by a continuous feedback loop because legitimacy is often driven by past performance and by myriad interaction with peer groups. As a result, measuring legitimacy can serve as one proxy for assessing effectiveness” (p. 440). While critics have noted that it is difficult to accurately weigh differing stakeholder assessments of effectiveness (Friedlander & Pickle, 1968), and that it focuses on who defines effectiveness and not the substance of the organization’s mission (Boyne, 2003a), this model has informed both studies in nonprofit effectiveness (Herman & Renz, 1998, 1999, 2004) and public performance (Boyne, 2003a, 2003b).

Comparing Constructs: Capacity and Effectiveness

Scholars’ treatment of the constructs of organizational capacity and organizational effectiveness shares commonalities. Scholars use varying definitions for each of the two constructs, such that there is little agreement on a singular definition of either construct. In both cases, this lack of conceptual precision has led to a consensus that each construct is multidimensional, with individual dimensions representing a particular perspective on the constructs. The array of capacity and effectiveness models reviewed above provides a basis for exploring how different measures of organizational effectiveness may influence understandings of organizational capacity. The following section proposes a contingency model for the relationship between these two constructs.

Capacity for Goal Attainment

What does capacity look like when we are using goal attainment as a measure of effectiveness? Given the goal attainment model views effectiveness as the organization’s ability to achieve specified goals and objectives, capacity can be understood as those resources and operational activities that enable nonprofits to generate outputs and ultimately achieve outcomes. In other words, internal resources and basic organizational infrastructure are a precondition, or as Boyne (2003b) states, “potential antecedents” for meeting goals (p. 219).

Much of the nonprofit capacity and capacity-building literature emphasizes the operational activities, including basic organizational infrastructure, as a hallmark of an organization’s capacity to achieve goals. This is especially the case in studies of smaller nonprofit and community organizations that may not have adequate administrative, operational, and governance structures nor the resources to meet service demands and ensure continuance of programs and services. For example, Frederickson and London (2000, p. 235) identify operational support which they define as “staffing, organizational structure and facilities,” fiscal planning and practice and management support systems as important for an organization’s baseline capacity. These types of operational support include both resources (staffing, facilities) and operational activities (structure, fiscal planning, and management support systems). Moreover, literature has also emphasized program evaluation capacity as critical for nonprofit organizations (Carman, 2009; Carman & Fredericks, 2010). More recent literature focused on the measurement of the nonprofit capacity construct has identified and measured a number of specific categories that impact organizational outputs and outcomes, including the presence of a client data system, evaluation process, financial management system, volunteer management processes, staff leadership, and professional development opportunities (Despard, 2016; Minzner, Klerman, Markovitz, & Fink, 2014).

Capacity for Acquiring System Resources

What does capacity look like when we are using system resources as a measure of effectiveness? Within the system resource context, capacity incorporates those resources and operational activities that enable organizations to acquire resources, and it emphasizes the environmental conditions that facilitate or impede the acquisition of critical resources. This is important because the organization acquires needed resources through their interaction with other organizations in their environment. For example, organizations secure funding, engage in collaboration, and build their reputation through transacting with organizations and influential stakeholders in their broader environment.

Literature in organizational theory and strategic management has emphasized this resource perspective. The resource-based view offers a theoretical understanding of the importance of resources for achieving organizational outputs and outcomes by arguing that resources that are valuable, rare, not easily imitated, and not substitutable will give an organization sustained competitive advantage (Wernerfelt, 1984). In addition, resource dependence theory (RDT) argues that critical resources and the organization’s dependence on other organizations to access those resources are important in understanding the behavior of organizations (Pfeffer & Salancik, 1978). Pfeffer and Salancik (2003) state criticality “measures the ability of the organization to continue functioning in the absence of the market for the output” (p. 46). The notion of criticality is salient to the conversation on capacity because if a resource is not “critical” in terms of organizational sustainability, it may not be an aspect of capacity. Scholars employing RDT to understand organizational capacity would state that the more critical resources, including human, financial, physical, and social, an organization has, the higher its level of capacity.

Operationally, this means nonprofit organizations enact resource development processes and pursue strategies in an effort to manage external relations of dependence, as a way to gain control and access to material, technological, and social resources and minimize environmental uncertainty. For example, Despard (2016) found the following resource development processes contributed to organizational capacity: development of fund development plan and processes in place to identify new sources of government, nongovernment, and in-kind funding. Nonprofit organizations pursue strategies to diversify external resources streams, to include a mix of individual contributions, corporate contributions, foundation grants, government grants, and commercial activity (Carroll & Stater, 2009; Froelich, 1999). Conversely, more recent scholarship has found resource concentration of revenue streams provides greater financial resource capacity over time (Chikoto & Neely, 2014). Regardless of an organization’s resource acquisition strategy, nonprofit organizations rely on resource development staff and board members to develop and maintain relationships with donors. Studies have consistently found a positive relationship between higher levels of fundraising and administrative staff and growth in revenue (Chikoto & Neely, 2014). Moreover, recent scholarship investigating the impact of the 2009 financial crisis on nonprofit organizations found that maintaining existing external funding relationships (as opposed to developing new funding relationships) was the only funding strategy that was effective in supporting financial sustainability (Lin & Wang, 2016). These findings offer support for overall fundraising staff capacity as a way to maintain revenue streams during stressful times.

In regard to acquiring nonfinancial resources, Alexander (2000) found that establishing external linkages through networking allowed nonprofits access to new clients. Scholars have identified other interorganizational strategies to acquire resources, including recruiting board members with access to critical resources (Cornforth & Edwards, 1999) as well as engaging in collaborative engagements (Guo & Acar, 2005).

Capacity to Satisfy Multiple Constituencies

What does capacity look like when we are using satisfaction of multiple constituencies as a measure of effectiveness? Capacity in this context includes those organizational resources and operational activities that enable the organization to understand and be responsive to stakeholder expectations and needs, including their ability to develop and maintain the reputation and legitimacy of their organization. It “places an emphasis on understanding the interactions within and among organizations that lead to the development of criteria for evaluating organizational effectiveness as well as the roles that information and communication play in shaping judgments of effectiveness” (Forbes, 1998, p. 195).

The growing literature on nonprofit accountability and responsiveness, especially in regard to organizational communication mechanisms, informs what resources and operational elements of capacity are of particular importance in this context (Ospina, Diaz, & O’Sullivan, 2002; Saxton & Guo, 2011; Saxton, Guo, & Brown, 2007). From a resource perspective, staff and board members who act as effective boundary spanners in their interaction with a variety of stakeholders are an important asset for the organization. Moreover, nonprofit leaders need to be responsive to both “upward pulls” from board members, donors, government regulators, and “downward pulls” from clients, staff, and volunteers (Ospina et al., 2002).

Institutional theory scholars have emphasized the “upward pulls” perspective. For example, studies have found that nonprofits implement organizational processes, such as strategic planning, outcome measurement, volunteer accountability clubs, and board governance, to enhance the legitimacy of their organization in the eyes of external stakeholders, not because it allows them to achieve organizational outputs and outcomes (Barman & MacIndoe, 2012; Hwang & Bromley, 2015; Tremblay-Boire, Prakash, & Gugerty, 2016). As Barman and MacIndoe (2012) state,

capacity also matters because it enables organizations to implement institutional expectations. These external institutions, as explained by new institutional theory do not simply reflect organizations’ pursuit of optimal performance, but instead result from understandings of good governance commonly held by others in the organizational field. (p. 75)

Moreover, accountability mechanisms to report financial data as well as performance indicators are an important capability organizations need to satisfy donors and other funding and regulatory entities. For example, Mitchell (2016) argues benchmark ratings entities, such as Charity Navigator, may drive nonprofit organizations to hold their expense ratios at a certain level to build and maintain their reputation.

Whereas the accountability literature has emphasized donors, the broader nonprofit responsiveness literature recognizes the importance of being inclusive of the broader community, including clients, staff, and volunteers (Ospina et al., 2002), or as Saxton and Guo (2011) term it, “dialogue-based accountability.” There are a number of resources, including communication, marketing and data resources, and the associated operational elements important to these efforts. For example, the use of Internet-based technology and social media as a medium for dialogue with constituents has been examined and studies have found less interactive engagement online with community members than with donors (Saxton & Guo, 2011). Other studies have pointed to the importance of collecting data that capture stakeholder perspectives, including community surveys and client satisfaction surveys (Lee & Nowell, 2015; Ospina et al., 2002).

Moving Forward: Future Research Directions

The three components of the contingency model articulate different measures of effectiveness, and this model suggests these different understandings of effectiveness reflect different areas of organizational focus. While it is clear these models are not mutually exclusive and nonprofits are simultaneously focused on them all at some level (as multidimensional models of effectiveness such as the competing values framework demonstrate), this contingency model underscores the importance of defining effectiveness in a given context before outlining the capacity elements that will contribute to effectiveness. This analysis is only the beginning; it represents a preliminary step in developing and articulating the relationship between nonprofit capacity and different measures of effectiveness.

There are a number of future avenues for research. First, research should further develop this model by testing the specific capacity measures associated with these and other effectiveness models. Second, identifying how capacity–effectiveness operates at different levels of analysis (e.g., individual, program, organization, interorganizational network) would allow the field to better understand the cross-level effects of capacity on different measures of effectiveness. Third, exploring the ways the different effectiveness models interrelate with one another will provide a clearer picture of how capacity impacts measures of effectiveness. For example, a strong organizational reputation facilitates resource acquisition, and resource acquisition supports goal attainment. In addition, to what extent do nonprofit organizations use financial health and reputation measures as proxies for goal attainment in situations when outcomes are difficult to measure and assess? Future research on how these different models and measures of capacity feed into one another, or conflict with one another will help us understand these interconnections in a deeper way. Fourth, empirical research that examines organizational characteristics such as age and size will allow us to better understand how different types of nonprofit organizations in different parts of the life cycle define effectiveness differently, and thus need to prioritize different types of capacity. For example, an organization in the entrepreneurial/start-up phase may view effectiveness primarily in terms of resource growth, while a mature organization may view effectiveness in terms of formalization of policies and processes and accomplishment of established goals. Finally, research investigating different subsectors (human services, arts, advocacy, etc.) and how they assess effectiveness would allow the field to better understand how the construct of effectiveness and capacity play out in different contexts.