By Emily Xiao
You’ve heard it before--bad things happen to good people. But the power of human innovation means that people organize to serve the less fortunate and to create public benefit. This rings true now more than ever—the nonprofit sector has grown by 20% over the past 10 years. The for-profit sector pales in comparison, with only 2-3% growth in the same timespan.
However, beneath the surface level, nonprofits face deep-rooted leadership and organizational inefficiencies. 30% of nonprofits cease to exist within 10 years of operation, and nonprofits generally do not scale like innovative businesses can—startups like Google and Facebook have grown to become international behemoths, whereas few nonprofits surpass the local or national level.
At issue is the difference in how nonprofits and for profit organizations describe and plan for success. For profit business success largely relies on sound strategic decisions, a thorough understanding of an industry’s competitive landscape, and ample financial backing. For-profit business leaders exercise control over logistics that, in nonprofits, are often overshadowed by vision. What’s more is that nonprofits often fail to communicate their strategic successes to funders, creating a cycle where nonprofits fail to gain adequate strategic and financial support to grow. They are relegated to the fate of being ‘perpetual start-ups’.
Largely, nonprofits struggle to achieve scale, facing both financial and leadership inefficiencies that stem from an inability to describe success. To mitigate this problem, nonprofit leaders need to quantify the impact and better communicate their performances with funders and employees. By using traditional startups as benchmarks, we can identify the unique challenges nonprofits must address to reach the same heights as their for-profit counterparts.
Issues: Leadership and Strategy
The communication problem starts at the top, where entrepreneurial talent battles “founder’s syndrome.” Nonprofit leaders are typically motivated by creativity and internal drive, but adversely, are often unwilling to surrender their ideas to changing circumstances. They struggle to cede control even when transitioning to larger teams, reworking their ideas, or adaptation is optimal. These leaders also tend to set lofty and vague organizational goals, which are not communicated effectively to their teams.
Key findings from The Concord Leadership Group’s survey of nonprofit industry leaders indicate that nonprofits lack organizational structure. Participants identified organizational leadership systems, compelling vision, succession planning, and performance evaluation as pain points within their organizations. This sentiment was not even across the board--senior leaders responded more positively about their organizations’ abilities to lead than those lower down the pecking order. This disparity between nonprofit leaders’ confidence and employees’ lack thereof demonstrates that organizations have trouble defining leadership, strategic planning, and compelling visions.
Developing a specific value proposition and employing accurate performance metrics are thus vital to improving the fate of the sector. To combat the vagueness of nonprofit operations, the Concord Leadership Group recommends writing down a solid mission plan, measuring it, and formalizing leadership training. In all, leaders need to create more formalized organizational structures to implement cohesive, concrete strategies.
Issues: Funding and Financial Health
Both nonprofits and start-ups are constantly hungry for new capital. Traditional start-ups need to woo angel investors through their early stages, and expected future growth is enough to incentivize investors. Conversely, donors have a hard time parsing which nonprofits will be the best investment due to poorly communicated outcomes. Funders are particularly averse to fledgling nonprofits, which are seen as sinkholes rather than real opportunities for change. Similarly, there is a lack of demand for nonprofit M&A. This risk intolerance compounds nonprofits’ cyclical struggles. Beyond these challenges, even established nonprofits see inconsistent inflows. Their funding is often seasonal; organizations expend time and energy applying to grants, diverting attention away from their missions.
Individual organizations alone cannot be blamed for their inefficiencies; funders are also responsible for guiding the growth of the nonprofit sector. According to a Guidestar analysis of the US nonprofit sector’s aggregate financial health, both large and small-scale organizations face a vast problem of insolvency. Financial health is not evenly distributed across the industry, with differences due to size and subsector. To remedy this problem, funders, regulators, and policymakers need to provide more flexible funding and rescue strategically important organizations that are struggling. These external guides need to encourage organizations to restructure or merge when appropriate.
Shortfalls in strategic communication and poor financial health largely explain why early nonprofits rarely reach a national scale. The typical nonprofit plateaus when goals are not clearly delineated to employees and funders. Sustainable funding models over the long term require the awareness and assessment of health by employees, leaders, and external funders alike. Although the entrepreneurial talent is there, the move to achieving scale begins with organizations’ ability to define and communicate value.
Solution: Breaking the Cycle
When in doubt, traditional businesses can point to the bottom line as a litmus test for success. Evaluating the progress of nonprofits’ qualitative goals is more complex. While most nonprofits measure their success through dollars raised, member growth, or overhead costs, these factors fail to demonstrate how well organizations reach their goals. Redefining nonprofit success in terms that are both quantifiable and relevant to an organization’s mission will improve intra-company communication and create funder approval for long-term sustainability.
Successful performances need multidimensional assessments. Based on McKinsey & Company’s research of 20 leading organizations, three primary performance metrics should define a nonprofit’s success: its progress in fulfilling its mission, ability to mobilize resources, and effectiveness of staff. Several evaluation methods are applicable. For one, organizations can define their missions as quantifiable objectives. Goodwill, for instance, measures its goal of bringing people out of poverty and into the workforce through a direct headcount of participants in its job training programs. By narrowly focusing their cause, other organizations can similarly track their progress.
Nonprofits can also more effectively measure their success by reframing how they analyze related outcomes. Jump$tart, a coalition aiming to improve children’s education, uses statistical studies on their graduates’ outcomes to affirm the organization’s efficacy. The group can then use this link between its program and mission to gauge success through the number of children using its services. Historical outcomes can help indicate what activities are effective in mitigating intended problems and providing benefits.
For nonprofits with missions that are difficult to quantify, measuring organizational success can mean measuring the success of proxies. The Girl Scouts of America strive to create “responsible citizens” and can assess these qualities through members’ professional success or civic participation. Finally, if all else fails, nonprofits can develop concrete micro-level goals to imply greater success. This can be as simple as evaluating the success of a measure in a small sample area to be indicative of overall efforts’ effectiveness.
Conclusion
The difficulty of verifying and rewarding success in nonprofits stems from the vagueness of nonprofit missions. With narrower measures of impact, employees will perform better and funders can reward nonprofits with the most growth potential. While these performance metrics offer a substantial starting point, there is no single blanket method or generic indicator to capture the comparative success of all the organizations in the sector. Each must utilize a different strategy to fit their size, values, and specific functions.
Free of rivalrous ambitions or ulterior motives, the nonprofit sector’s superpower is effecting positive change on a grand scale. There are great strengths in the industry—for-profit competition is not the end all be all. However, to continue solving diverse human challenges, nonprofits must fundamentally change how they interact with their stakeholders.