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These are times that try the nonprofit soul. Hardly a day goes by without a news story about a nonprofit or philanthropic foundation gone wrong. Congress seems ready to put strict limits on how much nonprofits can spend on administration and fund-raising. State attorneys general continue to grind through a seemingly endless list of investigations. A deeply divided nonprofit sector remains mostly silent in its own defense. Not surprising, perhaps, public confidence has hit a contemporary low.
Even as nonprofits face unrelenting scrutiny, the so-called jobless recovery has yet to produce a surge in charitable giving. Federal, state, and local governments are cutting discretionary spending wherever they can. Philanthropic investment strategies are becoming more conservative as the federal government's budget deficit grows and interest rates begin to climb. And individual giving remains sluggish. Not surprising, again, nonprofits are doing everything possible to access new revenues but are finding little investment capital available.
At the same time, the nation wants more of virtually everything that nonprofits deliver, but with no administrative costs. The baby boomers are starting to retire, creating a wave of board and staff vacancies and producing intense competition over the next generation of employees both inside the nonprofit sector and against governments and private businesses. Nonprofit organizations are aging, too, with larger, older nonprofits becoming just as bureaucratic as the government agencies that fund them. To top it off, the nonprofit sector continues to add 3,000 to 4,000 new organizations every month, each one requiring at least some investment in organizational capacity, not to mention generating more competition for funding, staff, and board members.
The current crisis is unlike anything the nonprofit sector has ever faced. Watchdog groups are stronger and better staffed than ever. The media are better trained and more aggressive, too, and members of Congress and state officials are more engaged. The sector itself contains twice as many "targets" as it did just a decade ago, including the quasi-nonprofits created in the wake of campaign finance reform and the faith-based organizations that have emerged as potentially significant competitors for government support. In short, the past three years have created a "guilty-until-proven-innocent" climate that affects almost everything that matters to nonprofits: from raising money and managing volunteers to balancing the books and recruiting employees.
Defining the Crisis
Even a cursory sampling of guest editorials from the Chronicle of Philanthropy shows the range of opinion on addressing elements of this crisis. Claire Gaudiani argues for a "generosity revolution" built in part around a corporate tax credit designed to "enlarge the amount of money corporations learn to give and shareholders learn to accept as wise investments in the economy and society." Jeffrey Berry says nonprofits should stop hiding behind federal lobbying law as an "excuse for inaction," accept the fact that it is perfectly legal not only to lobby but to lobby extensively, and start giving "voice to those who can't speak for themselves." Lester Salamon urges the sector to confront the growing imbalance between "the nonprofit world's 'distinctiveness imperative,' that is, the things nonprofit groups do to remain distinct and thereby justify the special tax and other privileges they enjoy, and its 'survival imperative,' that is, the things these organizations must do to survive." William Schambra asks Congress to take on "big, elitist, bicoastal foundations" in search of a "more moderate, sober, humble philanthropy, no longer confident that it possesses a special capacity to shape public policy and more open to supporting citizen groups trying to design their own policies, however haltingly and unscientifically." Pablo Eisenberg urges Congress not to "squander its opportunity to clean up the nonprofit world," in part by increasing the Internal Revenue Service's enforcement budget by $250 million, of which at least $75 million would be earmarked for strengthening oversight by state attorneys general.
Looking in the Mirror
There is much to embrace in these opinions and great hope that the sector's financial condition will improve once the recession ends, assuming that (1) the recession will ever end for nonprofits and that (2) private giving will somehow offset government cuts as budget deficits grow. It is not clear, however, that increased funding, aggressive advocacy, and tougher enforcement will ease public worries about nonprofit performance.
More funding is unlikely to increase public confidence unless the sector can prove that nonprofits do a good job spending money wisely; more advocacy is unlikely to increase confidence unless the sector can make the case that nonprofits are doing a good job helping people, being fair in their decisions, and running their programs and services; and tougher oversight will not help unless the sector can address public concerns about nonprofit waste. Neither can the sector assert itself out of the current crisis by reminding Americans about all the good things it does. Many Americans no longer believe what the sector says on its own behalf, and few nationally recognized leaders are willing to stand up in its defense.
Absent strong objective evidence to the contrary and expanded investment in the organizational capacity to create it, public confidence is almost certain to continue its downward slide. According to an October 2003 telephone survey, only 14 percent of Americans said nonprofits did a very good job of spending money wisely, just 18 percent said the same about being fair in decisions, 21 percent about running programs and services, and 34 percent about helping people. As for stewardship, 60 percent of Americans said nonprofits wasted a great deal or a fair amount of money, while 46 percent said nonprofit leaders were paid too much, compared with just 8 percent who said they were paid too little.
Bluntly put, Americans are not questioning what nonprofits do, but how nonprofits work. Asked to pick the largest problem facing the sector in October 2003, just 15 percent of Americans said nonprofits had the wrong programs for helping people, while 70 percent said nonprofits had the right programs but were simply inefficient. Put a different way, many Americans think the nonprofit sector has the right programs but that it often has the wrong organizations.
It is easy to discount these opinions as mere artifacts of negative press coverage. Yet, hard as it might be to accept, it is entirely possible that the public is more right than wrong about nonprofit performance. After all, millions of Americans are in the nonprofit sector every day, whether as donors, board members, employees, volunteers, or clients. In 2003 alone, roughly 100 million Americans volunteered, donated to, or worked in the nonprofit sector, and that does not include the millions more who went to the shelters, centers, theaters, museums, clinics, schools, marches, and campaigns organized by local organizations. If Americans can see the antiquated systems, executive pressure, employee burnout, constant scratching for dollars, leaky pipes, and broken windows, perhaps the nonprofit sector should see them, too.
Also hard as it might be to accept, former senator Bill Bradley (DN. J.) and his McKinsey and Company colleagues could be right that the nonprofit sector has billions that it could put to better use through better management. "Imagine what an extra $100 billion a year could do for philanthropic and other nonprofit institutions," Bill Bradley, Paul Jansen, and Les Silverman write in the Harvard Business Review. "That's more than three times the annual giving of every charitable foundation in the United States. It's nearly twenty times the amount spent annually on Head Start. In fact, it's enough to give every high school graduate in the country a $40,000 scholarship."
According to Bradley, Jansen, and Silverman, the vast majority of the sector's "$100 billion opportunity" resides in lowering the cost of raising and distributing funds, putting foundation assets to work faster, and improving the efficiency of program and administrative operations by "closing the gaps in performance between the more efficient nonprofits and the laggards." According to the estimates, benchmarking alone would help the bottom half of performers to reduce their service expenses 15 percent, which in turn would produce $55 billion that could be put to better use. Moreover, the savings would not stop there. "Our work with for-profits shows that even top performers can benefit from benchmarking individual functions because few organizations are at the peak level of performance across all of their activities. Thus any efficiency improvements among the top half of performers would further increase the savings.
The argument might be easier to accept if the estimates included the costs of implementation. It not only costs money to make money, it also costs money to save money. Equipping every nonprofit with the technology to raise funds on the Internet would cost billions, benchmarking would require both time and energy, not to mention occasional help from for-profit consulting firms such as McKinsey, strategic planning is both time-consuming and expensive, and McKinsey itself reports that mergers often underperform against expectations. Moreover, as Salamon argues in a scathing critique of the McKinsey analysis, "The McKinsey experts bring a combination of deep biases, serious misunderstandings, wild generalizations, half-truths, and sloppy reasoning to what charities need. In the process, they do a disservice to those who have dedicated their lives to improving the health and welfare of average Americans."
As Salamon rightly argues, nonprofits are much better managed today than they were ten years ago. "This is no longer 'your grandfather's nonprofit sector' awaiting the arrival of the McKinsey geniuses to redeem it from sloth, but a resilient and competitive part of the American scene whose recent growth rate has exceeded that of the business world by 50 percent." Every survey I have conducted confirms Salamon's hunch about improvement: foundation executives believe it, as do scholars, consultants, and executive directors. And, as this book shows, nonprofits are doing a great deal to improve their performance every year.
However, as this book also shows, nonprofits are doing much of that work without any help. The vast majority of capacity building is self-funded and occurs with little or no contact with the outside world. Unlike the private sector, which spent more than $100 billion on consultants in 2003, nonprofits have little access to the kind of capital needed to update facilities and systems and often launch improvement efforts with limited planning and little objective data with which to measure success.
Thus, instead of arguing about where the McKinsey analysis is wrong, the nonprofit sector would be better off asking where it might be right. "We need to more deliberately create an expectation and demand among ourselves for measuring and improving our results on a regular basis," writes Alison Fine, director of a Washington-based evaluation firm called the Innovation Network. "We can continue squabbling among ourselves and allow others to prescribe what they think is best for us, weakening each other-and the sector-in the process. Or we can define the issues, frame the debate ourselves, and work collectively and with renewed vigor to establish what's truly important to our field, our organizations, and the people and communities we serve."
If the nonprofit sector will not listen to the public or McKinsey, perhaps it will listen to Robert Egger, the sometimes caustic founder of the D.C. Central Kitchen and author of Begging for Change. Some might discount the book for its dedication to punk rockers Joe Strummer and Joey Ramone, while others might wonder how a former nightclub owner found his way into nonprofit life. But none can doubt Egger's heart. He built the D.C. Central Kitchen from scratch as one of the first "food rescue" operations in the nation, took a brief leave of absence to help rescue the National Capital Area United Way from a Senate investigation, and remains one of the most visible figures in the antihunger movement.
More to the point of this book, Egger minces few words about the state of the nonprofit sector. Mega nonprofits such as the Salvation Army may have the dollars to invest in basic infrastructure, but most service agencies are constantly struggling to stay alive: "They struggle to hire and train employees. They're stuck between paying high salaries to their upper-level managers and offering respectable wages and benefits for lower-level employees. Many don't have the financial security to plan long-term goals. Some have to cobble together dozens and in some cases hundreds of different grants and subsidies to run their organizations, all of which have strings attached that in some way compromise the mission."
Egger overstates the level of nonprofit pay, which I believe significantly trails comparable government and private business jobs, and understates organizational mortality, which hovers well below government immortality, but above small-business turnover. However, I believe he is quite right about the sector's tolerance for bad behavior: "If our sector were subject to the same forces as the for-profit sector," he argues, "tens of thousands-maybe hundreds of thousands-of social service agencies would have merged, consolidated, or most likely gone out of business. Instead, they stay afloat because of lax IRS rules, an internal code of silence, and a public that hates to see an organization with a worthy cause go under, no matter how anemic it is."
Egger is also surely right about the need for further reform: "The only way to improve the nonprofit sector is for every constituency-the government, the private sector, the public, but most important, nonprofits themselves-to demand more and expect more from our nonprofits. We need to seek out and reward organizations that exemplify leadership, unity, responsibility, and accountability-and let go of those that can't or won't." He is also right about public confidence: "The recent downturn in public support for nonprofits isn't about the economy or 9/11. It's about skepticism. The public has had enough with pity and platitudes. Americans want a plan."
Those who do not believe this should talk to a nonprofit employee.
Excerpted from Sustaining Nonprofit Performance by Paul C. Light Copyright © 2004 by Brookings Institution Press . Excerpted by permission.
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1. The Pressure to Perform
2. The Logic of Investment
3. The State of Nonprofit Capacity Building
4. The Case for Capacity Building
5. Improving the Odds of Success
6. The Spiral of Sustainable Excellence
A. The Capacity-Building Survey
B. Capacity Building in Low-Income-Serving Children and Family