British Journal of Management, Vol, 2, 81-88 (1991) Institutional Theory: Employing the Other Side of Rationality in Non-profit Organizations! Nancy A. Euske and K. J. Euske* Graduate School of Business Administration, University of California at Berkeley “Department of Administrative Sciences, Naval Postgraduate School, Monterey SUMMARY The non-profit sector has become increasingly important in diverse economic, poli and social environments. Its not clear that we have effectively communicated, to colle gues, students and decision makers, theoretical developments useful for understanding and managing non-profit organizations. This paper discusses the potential implications of institutional theory to the management of one type of non-profit organization, the publicly supported non-profit organization with input-output relationships that are not well understood. We review institutional theory and discuss the implications of institut nal theory to the management and evaluation of pul tions. Introduction Over the last 15 years the importance of the non-! profit, voluntary, or non-governmental sector has steadily increased in diverse economic, political, and social environments (Young and Bilis, 1990). ‘Academic courses on non-profit organizations, especially within business schools, areflourishingon university campuses. At least one new academic journal, Nonprofit Management and Leadership, has been created to analyze issues relevant to managing these organizations. Likewise, over the same 15 years, theory for understanding non-profit organi- zations has been proposed (e.g. Salancik, 1981; Bozeman, 1988; Meyer & Rowan, 1977). One the- ory that is particularly appealing is Meyer & Row- an’s institutional theory, because it specifically addresses non-profit organizations. The purpose of this paper is to discuss implications of institutional theory to the management of non-profit organiza- tion. Specifically, the paper addresses the publicly ' An earlier draft of this paper was presented at the Decision Sciences Institute Eighteenth Annual Meeting, We would like to thank Michel Lebas and two anony- ‘mous referees for their helpful comments on this paper. 1045-3172/91/020081-08805,00 1991 by John Wiley & Sons, Ltd. ly supported non-profit organiza- supported non-profit organization (PNO) with input-output relationships that are not well under- stood The PNO receives most or all of its resources other than directly from clients for services ren- dered to the community. The PNO is different from client-supported non-profit organizations, which obtain most or all of their resources directly from sales to clients (Anthony and Young, 1984). This distinction is important because customer satisfac- tion is not directly tied to resource generation. Additionally, for some organizations there are clearly defined methods to evaluate the effective- ness of the services provided, e.g. the removal of a malignancy. For other organizations it is not possible readily to establish the effect ofa particular treatment, e.g. the use of a particular instruc- tional method. Organizations, in which the input ‘output process is not well understood, lack estab- lished techniques for the verification of the effecti- veness of the service provided (Salancik, 1981). This is important because the organization may not readily demonstrate that the resources provided by the funding source are generating the desired results, Received 18 July 1989 Revised 13 March 1991 Copyright © 2001 All Rights Reserved82 The Other Side of Rationality Institutional theory, as developed by Meyer and hiscolleagues (Meyer and Rowan, 1977; Meyer and Scott, 1983),’ argues that some organizations evolve in environments with elaborate institutional rules and that the organizations develop structures to conform to those rules. Institutional theory is at once simple in concept but difficult to under- stand. This is in part because viewing organizations in an institutional context focuses on ‘the way things are: alternatives may be literally unthink- able’ (italics in the original: Zucker, 1983, p.5). To help highlight the ideas and concepts associated with institutional theory, the more traditional tech- nical-rational and political theories are used as a baseline for discussion. Whereas the technical-rational perspective treats the efficiency of coordination and control as the major achievement of organizations (Thompson, 1967); and the political perspective treats maintain- ing adaptability through control over resources as the major achievement (Pfeffer & Salancik, 1978); the institutional perspective treats organizations as successful to the extent that they embody societal myths concerning rationality. A societal myth, in this case, is the belief that two (or more) unrelated events are in fact linked. The belief that a creden- tialed teacher is a better educator than a non-cre~ dentialed teacher, or that a system of analysis such as PERT led to the more efficient development of the Polaris submarine than using traditional project planning techniques (Sapolsky, 1972) are examples of societal myths. It is through the embodiment of societal myths that organizations gain and main- tain legitimacy. Legitimacy is defined as organiza- tional compliance to the expectations of key external constituencies. Examples of external con- stituencies are taxpayers, local or regional govern- mental bodies, or clients, By conforming to constituent expectations, organizations receive funding and support. As a result, legitimacy, as opposed to efficiency or control over resources, is the main criterion for survival and growth. From ® As Scott (1987) has argued, there is not an institutional theory, but rather a number of variants of the theory. ‘This paper uses the sociological formulation according to Meyer and his colleagues, because their theory was expressly developed for the application to organizational forms (Scott, 1987) “anemone wearer All RIGHIS RESSIVEd N. A. Euske and K. J. Euske the institutional perspective, managers employ rational’ means to implement the embodiment of the myth, just as, from the technical-rational per- spective, managers use rationality as a means of discovering the most efficient means of production and, from a political perspective, managers use rationality as a means to gain control of resources. All three models are rational — how rationality is employed differs. The first organizations that come to mind when thinking of examples of organizations that can be described from the institutional perspective are professional organizations. However, the institu- tional perspective may not be the most useful for describing all professional organizations, for instance engineering firms are more adequately des- cribed using the technical-rational perspective. Also, not all organizations that can be described from the institutional perspective are professional organizations. For instance, sheltered workshops which provide employment for handicapped adults are not typically classified as ‘professional’ organi- zations. Every organization has characteristics that are emphasized by other perspectives (Bozeman, 1988). To some degree, legitimacy is important for the engineering firm, just as efficiency will have some importance for the sheltered workshop. However, the concern here is with the relative emphasis of the characteristics. For PNOs the characteristics associated with institutional theory appear to be useful for understanding the organization, For instance, in the 1950s in France there was growing, concern that some, mostly urban, young adults were losing touch with society’s cultural values and not participating in ‘normal’ activities, but rather engaging in activities not considered to be construc tive, such as going to “bars’.* One argument given for the cause of this phenomenon was that the bars were replacing more traditional mechanisms for interacting with peers, and with that came the tancing from cultural heritage and activities. One suggested solution to the problem was to create centres where young adults could gather, interact, * ‘Rational’ is used in this context to mean that the actors, adhere to what could be described as a logical set of riiles or procedures to achieve an end, “These ‘bars’, from a North American perspective, would be more akin to a combination of a coffee house and cocktail lounge.Institutional Theory and participate in culturally desirable activities. In 1958, the "Maisons des Jeunes et de la Culture’ (MICs) were started to provide such an alternative. ‘The MICs created centres in cities and villages throughout France. To acquire and maintain their legitimacy, the centres needed to provide indica- tions to society that they were achieving their goals. Art exhibitions and plays put on by the young peo- ple in the centres constituted an important output. ‘The development and promotion of these activities became a demonstration of both the success of the centres and the ‘normalcy’ of the youth who used the centres. These activities were symbolic, sending signals to the general population that the resources, were being well spent. Although these activities could not have been cost-efficient, they helped legi- timize the centres with the general population, and they had social value. Organizations obtain legitimacy because by doing so they are given the discretion to provide the services as they sec fit. In other words, PNOs are entrusted to provide services advocated by con- stituents. The basis for evaluation is the fulfillment of a social contract, not efficiency. This idea is not new. For instance, Selznick (1949) discusses organi- zations as infused with values beyond their techni- cal requirements. As discussed by Selznick, these values are a reflection of society's values and expec- tations, Although society’s values and expectations are important to all organizations, and are con- sidered in the technical-rational and political per- spectives, according to institutional theory, they are the lifeblood of PNOs. When the organization is, viewed from the technical-rational perspective, the motivation for concern for the environment, and the creation of organizational structures to deal with the environment, can best be explained in terms of buffering the technical core (¢.g. Thomp- son, 1967). When the organization is viewed from the political perspective, the concern for the environment and the creation of organizational structures are explained in terms of control over critical resources (e.g. Pfeffer & Salancik, 1978), and not necessarily legitimacy. The generation of the ‘broad-based support’, argued from a political perspective, can be explained as the process of iden- tifying critical elements in the environment and developing bridging mechanism to help secure them. 83 Implications for the Manager Does it make a difference to the managers of a PNO whether the primary characteristics of the organization can best be explained from a techni cal-rational, political, or institutional perspective? It appears to make a difference to managers at all levels in the organization. Where the dominant pro- cess shaping the organization is technical (technical organizations), the goal of the manager is to isolate the technical work so that it can be more closely and effectively managed. As Meyer, Scott, and Deal (1983, p. 46) suggest “Their [technical organizations] structures act to regulate the flows, to buffer them from uncertainty, and thus (0 insulate them in some measure from external forees. Organizations that arise out of technical processes are characterized by closely controlled and managed technical processes. The role of a manager in a technical organization is that of a controller and coordinator of work and of employees. This includes buffering the organization from outside interference (Thompson, 1967). The assumption is that managers understand the input-output pro- cess, or at least have access to someone who does. Because the input-output process is understood, the organization can be and is evaluated using an efficiency calculus. The manager's role relative to employee evaluation is to coach, motivate and reward behaviours that achieve efficiency. Although it is not the only measure, the “bottom line’ is clearly an important measure. Where the dominant process shaping the organi- zation is political (political organizations), the goal of the manager is gaining power relative to the environment and other organizational actors (Pfeffer, 1978). The manager creates structures and processes to control critical resources. The role of a manager in a political organization is that of ‘tak- ing actions and making decisions that tend to favor their interests and their objectives’ (Pfeffer, 1978, p. 38) within the organization. ‘Each group secks not only power but also the direct ability to affect organizational actions as it desires’ (Pfeffer, 1978, p. 38). Toachieve this end, managers work to create structures that allow subordinates to create effec tive coalitions and gain control of external Copyright © 2001 All Rights Reserved84 resources, which maintains the adaptability of the organization.’ In contrast, when the dominant process shaping the organization is in: nal (institutional org nizations), the goal of the manager is to integrate organizational structure closely with the explan: tions of the environment. It is a key underlying assumption of institutional theory that the organi- zation’s structure becomes isomorphic with the relative environment. That is, the organization adopts structures and other features that reflect the environment in which it operates. In other words, the more the formal structure conforms to social beliefs about what the organization should ration- ally do, the more ‘legitimate’ the organization. The more legitimate the organization, the less emphasis is placed on the evaluation of outputs ~ form in effect becomes output. iven an institutional view, managers develop a strategy for the PNO to promote a ‘rational’ image to match the expectations of its important constituencies, This rational image is projected through activities such as strategic planning, deve- lopment of policies and procedures, budgeting and evaluating internal compliance with rules and regu- lations. It is important to note that these activities reflect the structural aspects of the organization, not the technological (e.g. education, therapy) aspects. The organizational structure in an organi- zation, viewed from this perspective, may be decou- pled from the ‘technology’ of the organization. For example, counselling organizations typically do not have rules or regulations regarding the selection of appropriate counselling techniques, or the expected length of treatment. The organizations do have elaborate policies regarding hiring policies and operating procedures. As another example, Ansari and Buske (1987), in a study of maintenance facilities within the Department of Defense in the USA, demonstrate that information on the cost and productivity reporting system met the structural * As Burns (1961) and Mintzberg (1985) argue, the “poli- tics’ of individuals and groups can be useful to the organi- zation. For instance, success by individuals or groups in the organization can help facilitate the focusing of organizational resources on salient environmental changes. Political success of individuals and groups can also be dysfunctional for the organization as a whole In this paper, the political activities of individuals and groups are considered from the organizational level. Groups and individuals are successes or failures only in that they help or hinder the organization as a whole. scram creer cng ax peor at eR ONO PT RTP BES OL j. A. Euske and K. J. Euske expectations of external constituencies. The formal system did not necessarily provide the information for internal decision-making needs of the mainten- ance facility managers; nor did the system provide a mechanism to control critical resources in the environment or the organization. This does not ‘mean that the development of strategic plans, bud- gets, reporting systems and policies are merely rituals: they have multiple purposes. Their prime purpose is to convey an image of rationality, that is, to translate the activities of the organization in such a way that the environmental requirements for rationality are fulfilled. A secondary purpose may be to provide managers and supervisors with methods to control resources. Because the input-output process is not well understood, managers in institutional organi: tions have a lesser role as evaluators of ‘technical performance’ than do managers in technical orga- nizations. For example, in counselling agencies internal clinical evaluation may be done by other professionals, and not the manager per se. Certifi cation and peer review do not rest with the manager, but instead with internal boards man- dated by external constituencies, or with colleagues and environmental sectors (i.e. professional organi zations), which inculcate the individual with key professional values and norms. Thus, the locus of control for evaluation is typically outside the orga- nization, Examples of major sources of external control for the evaluation function are occupatio- nal associations and accreditation associations (e.g. Association of Marriage, Family and Child Coun- selors and the American Association of Social Workers), As suggested above, the role of a manager in an institutional organization is not one of a con- troller of the input-output process, or that of main- taining adaptability through the acquisition of power, but rather as a facilitator of behaviours that enhance the legitimacy of the organization. Viewed from a_ technical-rational perspective, these managers may be seen as being ‘unable to contro!” the organization. These same managers, viewed froma political perspective, would be seen as naive. Although managers in institutional organizations do not necessarily evaluate the employee on behav- iour relative to the ‘technology’ or facilitating adaptability, they do evaluate the employee on the basis of adherence to the policies and procedures which support the organization’s structure, and hence its image. The managers’ key role is to ensureInstitutional Theory that the organization conforms to the expectations of the environment, because the organization’s sur- vival and growth (including the maintenance of the appropriate funding level) depend upon such con- formity. This role could be described more as an pression manager’ than as a people manager or controller of resources. The PNO manager looks outward, focused on external issues rather than on, internal professional control issues. Implications for Evaluations How do technical-rational, political, and institu- tional theories relate to the evaluation of PNOs? If PNOs are evaluated using the technical-rational model of organizations, they may not fare well. As Meyer, Scott, and Deal (1983) point out, there is no ‘objective market” definition of success in terms of input-output relationships for PNOs; the appraisals of those most involved (e.g. members, constituents, and clients) define success and are therefore crucial. On the other hand, technical organizations succeed by managers developing efficient structures that coordinate and control work processes and de-emphasize environmental demands, From the technical-rational perspective, PNOs are not particularly efficient, PNOs may not control all of their work processes efficiently ~ par- ticularly those processes most closely related to their core purpose. For example, one-to-one client therapy is most often used by therapists, even though group therapy may be more efficient. How- ever, the decision for group or individual therapy is typically left to the therapist, who is not likely to use an efficiency criterion to decide. An interest ing empirical study would be to contrast how pro- fessionals operate in client-sponsored _profit- making organizations with professionals in PNOs. ‘We would hypothesize that counsellors who work for client-supported profit-making organizations (e.g. private practice) use more efficient techniques, such as group therapy, and would tend to deal with problems having more well-defined technological * The description of the manager’s role from the institu- tional perspective and the political perspective may sound similar. However, they do differ. The political per- spective argues that the means justifies the ends and deceit may be appropriate (Salancik, 1981). The institu- tional perspective argues that there are societal expec tations which must be met if long-run survival is expected, 85 solutions (e.g. using behaviour modification for weight control) than counseltors in PNOs. Using, the technical-rational model to understand and evaluate PNOs can produce an image of inefficient organizations with little rationalization of internal work and little capacity to produce useful effects as measured by client performance. The traditional technical-rational evaluation implies efficiency cri- teria that are inappropriate for institutional organi- zations, but nonetheless may be used. If efficiency criteria are applied, the legitimacy of the organiza- tion may be called into question. Once the organi- zation’s legitimacy is questioned, the organization becomes open to close scrutiny using an efficiency orientation, which will result in an even greater weakening of the organization's legitimacy. As a result, effectiveness may well become inconsequen- tial. Evaluation of the organization from the political perspective would provide a somewhat ambiguous result. Although the PNO would be ‘successful’ in that it was receiving support, the organization would not be seen as powerful in terms of controll- ing key environmental resources. A clear definition of the power base that assures the flow of resources ‘would be difficult to identify. The prediction would probably be that the power base is not stable and that resources will probably diminish in the near future Recommendations for the PNO Manager If the institutional model is appropriate for the PNO with input-output relationships that are not well understood, what recommendations can we make for the PNO manager? The general recom- mendation is that managers must be cleat regarding which theory they use for understanding the PNO. As discussed above, institutional theory has differ- ent implications for the manager than technical- rational and political theories. Table | summarizes some of the differences, Recommendations are as follows: 1. The manager must clearly understand the assumptions and perceptions which various groups and individuals use to analyze the orga- nization, This is important so that the manager isnot working at cross purposes with other orga- nizational members, constituents or clients. Having a clear understanding does not imply that the manager must ‘educate’ or change the Copyright © 2001 All Rights Reserved86 N. A, Euske and K. J. Euske Table 1. Implications of the Technical-Rational, Institutional and Political Models Characteristic ‘Model Meaning to managers Evaluation criteria TR Efficiency 1 Legitimacy P Adaptability Rationality T-R A means to discover the most efficient way to operate IIs projected for the organization as a means to gain legitimacy PA means to control critical resources Organizational structure T-R___A means to buffer the organization and its technical core from the environ- ‘ment TA means to integrate the organization with the environment and decouple (buffer) the technology from the structure P A means to interact with the environment, and minimize dependence upon the environment, by gaining control of critical resources in the environment and narrowing the range of possible outcomes in a given situation Resource generation TR Manage internal technical core so that the organization performs efficiently in the market place 1 Ensure the organization conforms to environmental expectations so that the appropriate funding level can be maintained P Done in a way to minimize dependence upon external parties Management of staff TR Staff technical performance I P T- 1 P Organizational performance T-R 1 P Board of directors T. 1 P Coach, motivate reward bel Ensure that staff maintain required credentials Promote effective coalitions “R._ Closely tied to output - evaluated by the manager Not closely tied to output evaluated by the manager Important to the extent that it contributes tothe critical resource base evaluated by the manager on that basis Evaluated in the market place Evaluated by members, constituents, and clients Evaluated by both “RA vehicle for providing direction to the organization ‘A vehicle for maintaining legitimacy ‘A vehicle for minimizing dependence on external entities wwiours that achieve efficiency PR = Technical Rational; | = Institutional; P = Political perceptions of others, but rather that the manager must be equipped with the necessary skills to. satisfy the seemingly incompatible demands and confficting expectations that arise. March and Simon (1958), Thompson (1967), and later Pfeffer (1982) have demonstrated that the philosophical underpinnings of much of organi- zational analysis is deeply rooted in the techni- cal-rational model. Implicit in the argument is, that an efficiency calculus is used to measure the utilization of resources to accomplish orga- nizational goals. It is, as Thompson (1967) argues, the dominant evaluation method, Thompson (1967) and others (c.g. Selznick, 1949), who discuss organizations from the tech- nical-rational perspective, do recognize that other assessment techniques are appropriate, like evaluating whether the desired state of affairs or social acceptance are achieved. How- ‘ever, these other measures of evaluation are pre- sented as secondary assessment techniques (cf. Thompson, 1967, p. 86). From an tional perspective, such assessment techniques are not secondary but primary for PNOs. This issue is particularly important given the recent budget cuts by local and national governments which have raised questions regarding efficient use of scarce resources by managers of PNOs." 2. Managers of PNOs must be able to identify and address the environmental requirements placed ‘on the organization. One important way of satis- fying this requirement is in the selection of the ” The focus on efficiency has impelled PNO managers to investigate analytic tools used 1n technical organiza- tions. Although the analytic tools and techniques of the ‘manager in technical organizations may be valuable to the PNO manager, the concern here is whether the efficiency calculus is fundamental to the evaluation of PNOs, not if particular analytic tools are useful,Institutional Theory board of directors. Board members must be selected with an eye to their own credibility and legitimatizing credentials (e.g, Chartered Accountant (CA), Certified Public Accountant (CPA), Juris Doctor (ID), Justice of the Peace (UP), Doctor of Philosophy (PhD)), as well as to their understanding of the validity of the use of theinstitutional modeltocvaluatethe organization, By approving activities of PNOs, board mem- bers provide an important source of legitimacy. 3. The manager must understand the role of com- mitment builder in both the external and inter- nal realms. Behaviour must be tailored to each realm. Externally, the manager must be able to build commitment through understanding and through tapping the key sources of legitimacy. The manager must be able to defend the status of the PNO without being defensive. Thus, com- munication and social skills are particularly important for the PNO manager. Internally, the ‘manager's primary role is to ensure the conti- nued commitment of the employees by buffering them from the technical-rational demands of the environment. This means that the manager must ensure that structure and technology are appro- priately decoupled. This might be facilitated through the use of administrative staff (e.g. pro- gramme coordinators) to support clinical staff. From an operational viewpoint, the PNO. manager should ensure that the public images of the organization are compatible with funding source expectations. ‘Unique’ formal organizatio- nal arrangements should be approached with cau- tion. A radical departure from traditional forms may influence evaluating entities to monitor the efficiency of a process for which the input-output onships are not well understood. Additio- nally, the PNO manager must recognize that some ‘managerial’ reporting systems may need to exist for the sole purpose of reporting to external enti- ties. These ‘managerial’ systems may have little value for internal decision-making. Finally, the PNO manager must understand that the ‘quiet competence’ of the staff members may not be sufli- cient. Proper credentials and professional recogni- tion provide important complements to the basic abilities of the staff. Within limits, resources should be allocated to staff activities that lead to external professional recognition. The professional recog- nition in turn bolsters the legitimacy of the organ- ization. 87 Conclusion The use of the institutional perspective for the analysis of PNOs (publicly supported non-profit organizations) is in its formative stage. It exposes subtle but important aspects of this sector. Institu- tional theory may also help us understand organi- zations in the profit sector where the technology is not well understood, such as research and deve- lopment. 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