When Funders Aren’t Customers: Reputation Management and Capability Underinvestment in Multiaudience Organizations

In contrast with for-profit companies, many “multiaudience” organizations, such as universities, hospitals, and nonprofits, receive revenues not just from customers but from third-party funders. This distinction is most stark in donative nonprofits that receive all of their funding from noncustomers and have long been perceived to underperform because of persistent underinvestment in organizational capabilities. In this paper, we explore how the need to manage funder perceptions influences how managers allocate resources to investment in organizational capabilities versus programmatic spending. We develop a model of capability dynamics based on fieldwork with six nonprofit organizations that incorporates the mechanism of reputation management. We argue that difficulties communicating the impact of nonprofits to donors often leads managers to instead focus on the amount of work being done, creating a bias toward programmatic spending. Analyzing our model, we show that a capability tipping threshold exists: for nonprofits with low capabilities, it is boundedly rational for managers to underinvest in organizational capabilities in order to manage donor perceptions even when this practice is known to limit performance. Our findings suggest that building high-performance nonprofits requires coordinated action between managers and donors to allow capability investments to accumulate. Counterintuitively, deliberately restraining programmatic expenditure (i.e., serving fewer recipients) while the organization builds its capabilities may be the best strategy for nonprofits to achieve sustained high performance and impact in the long run.