Academic journal article The McKinsey Quarterly

Not-for-Profit Management: The Gift That Keeps on Giving

Academic journal article The McKinsey Quarterly

Not-for-Profit Management: The Gift That Keeps on Giving

Article excerpt

Nonprofit organizations should focus on building a lasting organization and on developing effective performance metrics. To make this possible, donors must change their approach to philanthropy.

The nonprofit sector is poised to take on unprecedented importance in the United States. Annual charitable giving by individuals, corporations, and foundations amounted to $190 billion in 1999, [1] but that total could double as an additional $6 trillion, and perhaps much more, flows into the sector over the next 50 years. [2] At the same time, the federal government is significantly reducing its role in providing many social goods, leaving the task largely to the nonprofit sector (see sidebar, "The nonprofit landscape," on the next spread).

But most charitable organizations are simply not ready to meet this challenge. With a limited organizational infrastructure and with management teams consumed by a never-ending search for funding, few nonprofits [3] have time to hone their strategy or to improve their effectiveness. Nor do they have the incentive or the ability to grow. The result is a sector dominated by tiny institutions--more than 40 percent have annual budgets of less than $100,000--that work in isolation and duplicate efforts (Exhibit 1). The sector is filled with many talented and dedicated people, but it is far less effective than it could be in achieving its vital social mission.

This unfortunate state of affairs results largely from the funding environment in which nonprofits must operate. Most donors give money earmarked for specific programs and shun the long-term investments that are required to build the organization. The sector lacks appropriate performance measures, so donors have difficulty identifying and rewarding the most successful organizations. Consequently, successful programs are rarely expanded or replicated elsewhere, while many less effective programs linger on for years. To meet the challenge of the future, this situation will have to change.

The funding environment is the culprit

All organizations--for profit or not--are shaped by those who fund them. Consider the experience of Internet start-ups. Venture capital firms put their indelible mark on companies such as and eBay by providing money, management expertise, and incentives. Their recent shift in focus to profitability has brought on a rash of revised business plans, and many failures, among the dot-coins. By sending signals to other investors, venture capitalists determine who will grow and who will not.

The funding environment has played an equally important role in shaping charitable organizations but with a less productive outcome. Nonprofits typically rely heavily on grants and donations from individuals, corporations, foundations, and the government. It is true that many nonprofit organizations do generate revenue from fee-for-service activities, marketing relationships, and other commercial ventures, but most lack the steady and sizable revenue stream needed to borrow from banks or to tap into capital markets (Exhibit 2, on the next spread).

Most donors take a project-based rather than an organization-building approach to philanthropy. Foundations make short-term grants for specific projects, not longer-term grants for operating expenses or capital projects; in 1998, for instance, only 2.2 percent of foundation grants were designated to improve their recipients' performance. [4] And with the average foundation grant to a charitable organization lasting less than three years--and most for one year--nonprofit fund-raising is a never-ending distraction.

Corporate donors are not much better. They typically give one-shot, lump-sum payments to sponsor a particular exhibit or event; multiyear donations to support an organization's operating costs are rare. Individuals, though often more loyal in their commitments, are also usually reluctant to provide support for general operating expenses, preferring instead that their funds directly support programs. …

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