Large Nonprofits Approaching Crisis
Recently, I wrote about smaller nonprofits approaching or who are in crisis (here). The focus of that article was to illustrate how small nonprofits with weak administration and governance can get into trouble by living on the edge of insolvency. Unfortunately, it is not only start-up and emerging nonprofits that can fail but also large established organizations. For example, in 2015, the nonprofit Federation Employment & Guidance Service (FEGS), with a budget of $250 million failed. A post-mortem analysis report reviewed many organizational stressors that led to the organization’s demise and one analysis suggested that for FEGS, a focus on nonprofit growth become a risk factor (see here). The argument is that by adding additional programs, large nonprofits can inadvertently create additional organizational liabilities that makes management and governance more unwieldy.
Scroll through the results of a Google News Search for “nonprofit revenue shortfall” and you will see examples from across the nation where large nonprofits are facing restructure, budget cuts, or like FEGS, a closure that leaves a gaping hole in the public sector infrastructure. The conclusion one can reach is that organizational size does not ensure success. So in this post on nonprofit courage, I would like to offer four strategies that large nonprofits can use to manage the imbalance between size and sustainability.
1. Stop Staring at the Dashboard: The first strategy is for nonprofits to look up from their dashboard every once in a while (see a primer on dashboards here). Too often growing nonprofits manage their enterprises by carefully tracking financial and program indicators such as service delivery goals, accounts receivable turnaround times, and cash flow. As a nonprofit gets bigger, the scope of its dashboard gets layered and complicated, which focuses the leadership and board’s attention on micromanaging the agency’s economics. However, as this series of articles on nonprofit courage points out, there are big changes that are one, two or even three years out. For the nonprofit agency with their head down staring at the dashboard, trying to figure out how to fill this year’s $200,000 budget hole, they may miss (or chose to ignore) the sharp curves in the road ahead. Large nonprofit organizations that are anxious about their fiscal health need to look up long enough to build the future perspective into managing in the present. Incorporating scenario planning and trendspotting can help a nonprofit make decisions about the present while positioning itself for the future.
2. Be Honest about Impact Not Value: Many nonprofit leaders have used some version of a sustainability matrix to describe the relationship between the impact and profitability of their programs. However, it is important to understand that such a matrix is only as strong as the data that supports it. The lack of measured program outcome data stymies many nonprofits’ ability to judge the impact of their programs and services. Without strong impact data, nonprofits are substituting a values judgment for a true impact statement. It is one thing to think your reading buddy program is effective because kids and volunteer readers express high degrees of satisfaction. It is quite another thing to have comparison data for standardized educational tests demonstrating that your tutoring intervention results in a 1.5-year reading gain over the course of a school year (and that the gain is twice the expected student gain without your intervention). For a large agency that hosts multiple programs being able to differentiate between programs you value and programs that create an impact is essential to strategic planning. When you lack impact data your strategy conversation requires brutal honesty because a program that feels good but doesn’t create an impact can become a liability.
3. Merge or Spin-Off Programs: For a large nonprofit who’s span of control is getting too wide and complex, assessing the impact and profitability of programs and services, opens the door to potentially merging or spinning off assets that detract from your core. I am never surprised at the number of nonprofit social service agencies that cobble together tangential programs simply because they have the scale to do so. It is also surprising how seductive it is for a large established nonprofit to acquire smaller programs as a way to expand service scope. But the FESG report cited earlier, suggests that growth (for the sake of growth) can be hazardous to the health of an organization. There are times when a tangential program of your agency might be more impactful if merged out of your nonprofit and into a more establish organization better aligned with that program areas. So, for example, if you have a weak and fledgling mentoring program that is regularly under-resourced, why not merge the mentoring program with another agency that only does youth mentoring. Proactive and thoughtful program consolidation can strengthen the service delivery system.
While merging a program into another or organization is one way to reduce organizational complexity, another option is to spin off a program into a separate nonprofit. The Harvard Business Review offered a quick checklist of assessing the viability of a spin-off (see here) and a more thoughtful consideration of the process was developed by the Vera Institute of Justice (see their spin-off toolkit).
4. Stop Innovating and Focus on Keeping Pace: A fourth strategy to manage the imbalance between size and sustainability is to stop innovating and just keep pace for a while. Growth requires time to assimilate change and those nonprofits that continue to rapidly expand without regard to assimilation will stain your infrastructure (see Bain & Company here). There are times when growth is mistaken for sustainability. The thinking is that “if we can only get bigger we will have more cash flow… more stable infrastructure… the ability to retain quality employees.” Unfortunately, the math does not always pencil out. Cash flow could worsen; Infrastructure might cost more; the constant change may battle fatigue employees. Fast growth can come at a cost (and must be planned for as I wrote here). When my kids were toddlers, I once heard a dad say to his child who was wrestling with a bike on a bike rack, “slow down, you will go faster.” Those words always stuck with me and serve me well.
Again, my point in this article is not intended to diagnose and oversimplify the complex challenges of managing a large nonprofit. Indeed, locally, some of our largest nonprofits have had to navigate financial crises, in part, attributed to size and complexity (see here and, more recently, here). At the same time, as the social and economic winds of change are gathering in the storm clouds of State and Federal fiscal and public policy changes, we would be remiss not to elevate the conversation about nonprofit strategy. The potential impact of an uninformed strategy is no respecter of organizational size. Forward thinking nonprofits are engaged in ongoing planning and the larger and more complex the nonprofit is, those conversations must include frank conversations about restructuring, breaking up and focusing on the organization’s core competencies.
As always, your thoughts are welcome.