The Complexification of the Nonprofit Sector


This post also available on Rooflines.  

“Substrate” by Jared Tarbell

Intuitively, just from being around the nonprofit sector for a stretch, it’s easy to tell that things have gotten more, well, complicated.  Organizations are bigger, operations more tentacled, financial tools more wonky, budgets bigger and bigger.  And don’t just take my word for it.  Thanks to the lovely folks at the Standford Social Innovation Review you can enjoy this whole, provocative article: “Why More Nonprofits Are Getting Bigger.”  

The problem is, I don’t think we’ve really done a good job of keeping up with our own complexification.  

I recently began a new project – developing a conference on mission related investing and its intersection with the complexification of the nonprofit sector.  It’s a heady subject and I can tell right now that it’s going to consume several posts over the course of the next few months.  But for today I just want to point out a couple of examples of where I think we really need to be picking up our game.

In “Why More Nonprofits Are Getting Bigger,” the researchers point to several interesting facts about the 200 or so nonprofits started since 1975 that now have annual revenues in excess of $50 million:

  1. They tend to focus on a single type of funding (public contracts, corporate supporters, wealthy individuals);
  2. Growth was driven primarily through increased access to government contracts, and secondarily through accessing corporate supporters;
  3. The fastest growing organizations were generally found in one of three sectors:  international development, health care, or human services (even though these three sectors make up only 25% of the nonprofit sector); and
  4. A number of the fastest growing nonprofits benefited early in their development from big philanthropic investments from a single source.

Think about it:  these groups are adding at least $1.25 million per year in revenues – and that’s just the small guys in this study group.  Many of them added much more.  We are relying on the nonprofit sector to deliver complex social benefits across multiple operational areas including direct service delivery, facilities construction and management, training and technical assistance, even finance and investment.  I can pretty much guarantee that all these organizations also have multiple corporate entities built to shield assets and mitigate risks, even for-profit affiliates that throw off some serious cash.

And yet for all that, many of them are still constrained by the same challenges that face the nonprofit sector everywhere:  struggles with leadership development and transition management, limited abilities to aggregate equity-like capital, supporters and stakeholders too focused on fiduciary oversight rather than organizational growth, and a general lack of trade association leadership.

Allow me to briefly elucidate:

  • MANAGEMENT:  Way back in 2004 the Support Center for Nonprofit Management was predicting a wave of Baby Boomer retirements among nonprofit leaders – many of whom are founding executives.  We know this wave has been delayed because many of these good folks took a serious hit in their retirement savings, and they are going to hang in there for a few more years.  But nonprofit management specialists have been arguing (persuasively) for a number of years that boards and executive management haven’t necessarily paid enough attention to building the next layer of leadership.  Tom Adams is one of them who’s done some lovely writing and thinking on this topic, and in my own prior blog posts I’ve talked about the importance of developing leadership at multiple levels within an organization.  In spite of the fact that many of the largest nonprofits have built complex leadership structures and practices, we still lag behind or corporate peers in developing full-scale staff development strategies, compensation structures, and transition plans to better insure long-term sustainability and growth.
  • EQUITY:  NY Times reporter David Bornstein recently did a really nice opinion piece on new capital strategies needed by the nonprofit sector.  He refers to the very interesting approach of folks like George Overholser with NFF Capital Parnters, which has evolved philanthropic strategies to mimic the role of private equity.  Basically, in forcing nonprofit executives to go out and raise every dollar as if it were operational funding as opposed to organizational equity, we hamper any nonprofit’s capacity to invest in its own development.  I’ve certainly seen this repeated ad nauseam in the affordable housing sector, where CDC’s and supportive housing developers can’t opportunistically acquire distressed properties.  But it goes deeper than this: many funders actively shun service nonprofits with money in the bank.  Perversely, the logic is that if a group has some net assets lying around, then it doesn’t really need ongoing support.  The question really needs to be, “what capacity does this nonprofit have to effectively use its capital, and how can my capital make a critical difference in allowing it to do so.”  Unfortunately, that kind of thinking is rare.
  • OVERSIGHT:  Nello McDaniel of Arts Action Research is just one of my absolute favorite thinkers on the role of nonprofit boards.  Although focused on the arts sector, he’s built a remarkable framework for identifying the dynamic center of an organization’s being, and then orienting the entire leadership around that center.  He acknowledges the importance of board engagement, but comes down very firmly on the necessity of backing nonprofit executive leadership and its decision-making.  In other words, let the artistic director do their damn job.  Board members are there to help connect the organization to a broader network of relationships, stakeholders, and reference points to build its operational and artistic capacity.  In short, they look a lot more like corporate board members, who play a critical role in securing new business (rather than overseeing operations).  There’s much more to say on this topic (I’m eager to address the role of public sector stakeholders), but it will have to wait for a later post.  I’m running out of room.
  • TRADE LEADERSHIP:  The nonprofit sector really doesn’t have a lobby.  Subsectors within it do (affordable housing, healthcare, veterans’ services, homelessness prevention, refugees and immigrants, etc.), but we haven’t really built an entity that represents the needs of the sector itself in terms of critical tax issues, compliance and reporting, local versus national regulations, and a host of other concerns.  As the sector grows more complex, and as nonprofits find themselves working in multiple issue areas across multiple jurisdictions, there must be a voice that can represent the needs of the sector overall.

Look, all I’m saying is that we’ve made enormous headway in building highly mission-capable organizations.  The problem is that the sector itself (its management, investors and other stakeholders) must evolve a larger paradigm to accommodate this leading edge.  Very large nonprofits are starting to really look far more corporate than ever, and yet are constrained by a conceptualization of who they are that harkens back to the concept of the friendly society or the settlement house.  Unless we can creatively address our own evolution, we run the risk of hitting a glass ceiling of our own manufacture.

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