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How Many Nonprofits Is Too Many?

June 23, 2008

A few years ago I had a chance to interview Audrey Alvarado, then the executive director of the National Association of Nonprofit Councils. (Full disclosure: Alvarado was also a Foundation Center board member at the time.) During our conversation, I asked Audrey whether she thought there were too many nonprofit organizations in the United States. She responded by saying it depended on one's perspective, then added:

On one level, you can look at the question in terms of efficiency -- that it makes sense for groups offering duplicative services in a community to combine their forces. But if we look at the contribution nonprofits make in our communities apart from the services they deliver -- I'm thinking here of all the things they do to build social capital and strengthen civil society -- then I'm not sure that efficiency is the metric we should be focusing on. In fact, I've argued that, given the lack of civic engagement in this country, we don't have enough nonprofits. I don't doubt that there will be, and probably needs to be, some pruning in the sector, whether through mergers or groups simply shutting their doors. But if we're willing to sacrifice some nonprofits for the overall good of the sector, we also have to be willing to redouble our efforts to strengthen the capacity of the nonprofits that remain.

Passionpurpose_cover_2I was reminded of that exchange the other day as I was browsing a new report from the Boston Foundation. The report, Passion & Purpose: Raising the Fiscal Fitness Bar for Massachusetts Nonprofits (116 pages, 9.57 mb, PDF), offers a detailed look at the nonprofit sector in the Bay State as well as its impact on the regional economy: According to the report:

  • There are more than 36,000 nonprofit organizations in Massachusetts;
  • In 2007, the sector generated $87 billion in revenues and held more than $207 billion in assets;
  • The sector employs 447,000 workers, almost 14 percent of the state's working population -- about twice the national average;
  • In recent years, the number of public charities in the state has almost doubled, despite flat population growth and a sluggish economy. [My emphasis.]

To underscore the many roles the sector performs, the report's authors divide the state's nonprofits into three broad groupings:

  • Grassroots organizations have $250,000 or less in total annual expenses and fuel the creation and expansion of civil society through grassroots action and volunteerism;
  • Safety Net organizations have $250,000 to $50 million in total expenses and deliver services that build social safety nets for vulnerable citizens and otherwise enhance the quality of life;
  • Economic Engine organizations have more than $50 million in annual expenses and contribute in significant ways to the economic health and competitiveness of the region.

Not surprisingly, the report finds that "grassroots" nonprofits (think youth sports leagues and small art groups) are the most rapidly proliferating and have the thinnest financial profiles; that "economic engine" organizations (think Harvard and Mass General) are the healthiest, financially speaking; and that "safety net" organizations, which are clustered in the areas of housing, human services, health, and community improvement/development, are the most vulnerable in terms of their finances -- a situation exacerbated by their reliance on government funding.

Alas, revenues are not keeping pace with the growth in the number of nonprofits in the state -- and that, according to the report's authors, has serious implications: too many nonprofits weakens the entire sector and burdens donors; too few resources suggests that new strategies are required to garner needed support; too short a focus by managers, leaders, and stakeholders in the sector means future services -- and the sustainability of organizations -- is put in question.

The solution is not simply more money, says Elizabeth Keating, visiting associate professor at the Carroll School of Management at Boston College and one of the lead authors of the report. "What the research tells us is that we need a new nonprofit culture. This is not an indictment of the sector's leadership -- we have talented, committed people driving nonprofits forward. But they are undercut by a culture that sees investment in capacity as a diversion of money from what matters most -- which is service."

To help change that dynamic, the report's authors offer a "financial stewardship vision" for the sector based, in part, on three questions that every nonprofit should be able to answer in the affirmative:

  1. Liquidity: Do you have sufficient cash resources to deliver on your mission and pay your obligations on a timely basis?
  2. Profitability: Are your earned income revenues sufficient to cover your current expenses and allow for appropriate growth?
  3. Sustainability: Do you have enough of your own resources to continue operations into the future?

The report ends with a "call to action" that argues, among other things, for more mergers, strategic alliances, and collaborations within the sector to strengthen balance sheets, create economies of scale and efficiency, eliminate duplicative costs and administrative redundancies, and encourage more group purchasing. And it urges funders to do more to support the cost of mergers and strategic alliances and to nurture a culture of collaboration within the sector. Which is pretty much exactly what Audrey Alvarado was urging three years ago.

What do you think? Are the folks at the Boston Foundation onto something? Are there too many nonprofit organizations, or do we need more? And if there are too many, where does the blame lie? With the IRS? With naive, overly optimistic founders? With funders who talk the talk but find it difficult to walk the walk when it comes to collaboration and investing in the organizational capacity of their grantees? Are these even the right questions to be asking?

Don't be shy. Let's start a conversation....

-- Mitch Nauffts

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Posted by David Geilhufe  |   June 23, 2008 at 12:57 PM

Having begun my career in grassroots nonprofits, I have seen, on the ground, what a couple of neighborhood folks and a basketball program can do. So I start from the assumption that more grassroots groups is good.

If you apply liquidity, profitability and sustainability principles, the implication is that thousands of people in communities across the nation should stop doing good... pretty antithetical to the basic values of America.

So we need to find a way to solve the capacity problem without hurting the competitive advantage of the grassroots. Businesses solve this by virtual organizations, contractors, flexible relationships. I can start a company with 2 full time employees and 50 contractors.

Those grassroots organizations are just small scale social entrepreneurs. Our sector needs to create a home for them... that home can be judged on liquidity, profitability and sustainability. The grassroots social entrepreneurs can wink in and out of "business" and the system can still be strong.

Posted by MitchN  |   June 23, 2008 at 08:31 PM

David, thanks for the post. I love the idea expressed in your last graph and the way you said it: Our sector needs to create a home for grassroots social entrepreneurs, a system that makes it possible for social entrepreneurs to "wink in and out of 'business'" without undermining the system. Almost sounds like the farm systems in baseball, in which minor league teams and leagues around the country identify and develop (or not) talent for the "big show." Okay, maybe not a great analogy. One difference: Major league franchises fund their own farm systems, knowing that young home-grown phenoms are less espensive than veteran stars who decide to make market their skills -- and maximize their earning potential -- on the free-agent market. (Thanks, Curt Flood!) There's nothing like that in the nonprofit sector. Foundations and individual donors have no real incentive to support, on an ongoing basis, even their best grantees, let alone a grassroots organization with limited resources and questionable prospects for growth.

Posted by caroline16  |   July 14, 2008 at 08:12 AM

I am new for this blog and this is a great article on nonprofits in the business.

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