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Too Many Nonprofits -- or Not Enough?

January 26, 2009

(Bradford Smith is president of the Foundation Center. This is his first post for PhilanTopic.)

Strength-in-Numbers In my travels around the country as the new president of the Foundation Center, I've heard a number of pundits and philanthropic leaders suggest that there are too many nonprofits in America. Some argue that 1.3 million nonprofits is simply too many for funders and the public sector to support; others point to examples of multiple organizations working on the same issue in the same neighborhood, or lament what they see as the inefficiency and ineffectiveness of many nonprofits.

In my view, some of that frustration is driven by the very real pressures funders feel at a time when their assets have been ravaged by turmoil in the markets and many nonprofits are looking to them for a lifeline. But it's also a reflection of the growing influence of market-based thinking within the nonprofit sector. In its ideal form, a nonprofit marketplace assumes a mechanism by which foundation and individual donations are allocated to the highest-performing nonprofits as measured by a set of reliable, generally accepted metrics. Many good minds, a great deal of innovation, and growing resources have been applied to the creation of such a marketplace; that it will become a reality, either by design or through a more fluid, open-source process, is a given.

There are limitations, however, to the market framework, the most important of which is the fact that the nonprofit sector exists precisely to deal with challenges that are the result of what economists would call market failure. If markets never failed and always allocated resources efficiently, we would live in a society where everyone had access to quality health care, adequate housing, and a decent income; felt safe in their homes and communities; and took clean air and pure water for granted. It is precisely because markets do fail and aren't perfect that we have as many nonprofits as we do.

According to supporters of the nonprofit marketplace concept, the goal of such a market is to create maximum social value from every philanthropic dollar so as to ensure continued progress in solving a range of social issues. As the Austrian economist Joseph Schumpeter famously observed, however, markets reward winners -- sometimes extravagantly so --and punish losers (sometimes harshly) through what he labeled a process of "creative destruction." In theory, a well-functioning nonprofit marketplace would efficiently allocate philanthropic resources to fewer nonprofits working at near-maximum efficiency to make the world a better place.

Unfortunately, reality has a tendency to trip up theory. Today, for example, we find ourselves mired in a deepening economic crisis that, among other things, has caused the collapse of many of yesterday's most spectacularly successful firms. Unemployment is rising and predicted by many to reach 10 percent or more. People in growing numbers are in need of jobs and the services nonprofits provide. Indeed, a recent article in the Wall Street Journal suggested that financial sector professionals who had been laid off should consider taking a course at the Foundation Center!

No one would argue that nonprofits shouldn't strive to be more effective and efficient. But in my view, the most constructive time to have that conversation is when resources, opportunities, and employment in other sectors are abundant -- not in the midst of a worsening recession. Right now, instead, we need to be doing everything in our power to support and strengthen this country's nonprofit sector. A nonprofit job is a job, plain and simple. Even if it's a job at an underperforming nonprofit, that job is giving someone an opportunity to learn skills of trust and cooperation, foster social solidarity, and contribute to the public good -- precisely those civic values that serve to underpin a robust democracy.

I asked a friend the other night if he thought America had too many nonprofits. Without hesitating, he shot back, "Are you kidding, we don't have enough."

-- Bradford Smith

Comments

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"No one would argue that nonprofits shouldn't strive to be more effective and efficient. But in my view, the most constructive time to have that conversation is when resources, opportunities, and employment in other sectors are abundant -- not in the midst of a worsening recession. Right now, instead, we need to be doing everything in our power to support and strengthen this country's nonprofit sector. A nonprofit job is a job, plain and simple."

I suppose it all hinges on what measures should be taken to support the sector. With a few word substitutions, that paragraph could be about the banking or auto industries, and the same questions are raging around them as well.

I agree that a job is a job- but if that job is at an underperforming nonprofit, it may not be a job for long. It's a bit of a false choice, to keep status quo, or to allow the cull of the weak from the strong.

The way to strengthen the sector now and for the longer-term future is to make more NPOs stable and viable, able to run effectively in good times and bad. Then the public can decide which ones they want to support for whatever reasons.

Just like in the for-profit sector, we're best served when we have many choices to choose from, as opposed to a small number of giants.

I've often wondered about that number of nonprofits, which comes from the IRS. After 9/11 several organizations were fast-tracked into existence and almost as quickly became dormant, yet I'd be surprised if they're not still counted. I suspect also that hundreds, perhaps thousands of organizations are counted that exist purely on paper, waiting to be activated by city or state governments in need of a legal entity that can do things immediately when called upon. To my knowledge, no one has ever truly investigated the number of charities beyond what the IRS counts. But this is all we can work with for now.

This comment was submitted by PhilanTopic contributor Michael Seltzer from his cellphone. Better luck next time, Michael! ;-)

Thank you, Brad, for surfacing this issue, which has been simmering below the surface for too long. It's high time that the "too many nonprofits" trope be subjected to public scrutiny and discussion. As you point out, some -- usually grantmakers -- believe that the effectiveness of the sector is hampered by the proliferation of nonprofits because it leads to redundancy, inefficiency and duplication of efforts, although it's hard to gauge how many hold this view.

Drawing on my 40+ years in the sector, I weigh in on the opposite side of the debate. Allow me to share my own experience in one nonprofit sub-sector -- the fight against AIDS -- to illustrate my point.

In the earliest days of the HIV/AIDS pandemic, few existing human service and health care organizations chose to address those in their midst suffering from the disease. In response, AIDS-affected individuals created thousands of invaluable and truly life-enhancing care and prevention organizations and projects. Our successes in stemming the devastation caused by the pandemic can be traced to the efforts of those early ragtag groups. Today, of course, some have evolved into multi-million enterprises. Was there unnecessary duplication? Not necessarily. In some cases, organizations merged, others closed their doors, and still others grew substantially. The point is that through a process of evolution, the AIDS/HIV organizational sub-sector went through its own right-sizing and realignment -- and continues to do so.

As any management consultant knows, both short-term collaborations and long-term mergers are not accomplished by waving a wand. Most efforts of that kind are fraught with problems and require imagination, persistance, and financial where-with-all to succeed. Let's not exacerbate the current situation through a heavy-handed approach that ignores the way things really work.

Michael Seltzer, executive director, Funders Concerned About AIDS (1983-1995)

I think that the 1.2 million figure will be reduced dramatically after the new IRS reporting rules take effect. I do think that many of the 1.3 million are "paper only" non-profits, or are non-profits that were active 25 years ago for 4-5 years and then just ceased to exist. My prediction is that there will be a net reduction of about 250,000 non-profits.

The point however is, so what? The real issue is to we as a society have enough strong, vigorous and active non-profits to deal with the issues at hand, and that answer is obviously "No."

The non-profit sector spends way too much time on ignoring real issues (the competition for funds is not only with other non-profits, it's with Starbucks and other discretionary spending), and on ignoring proven, successful fundraising methods, such as workplace giving, to chase down the latest Internet craze. One obvious fact that most non-profits do not seem to realize about workplace giving, is that it is subsidized fundraising. Name one other method where a different third party (not the non-profit and not the grantor) pays for the majority of the cost of fundraising.

Regards.
Bill Huddleston

Thank you DJ, Matt, Michael and Bill for your comments. I have my doubts about how either a Darwinian withering of the nonprofit sector or an engineered "optimization" will give us "many choices to choose from, as opposed to a small number of giants." Many of those that survive will most likely be the best connected, not necessarily the most efficient and effective.

Michael calls our attention to a speficic issue-focused subsector--organizations dedicated to the fight against HIV/AIDS, in which he was a real leader. In the early days of the pandemic, in which ignorance and prejudice prevailed, the "ragtag groups" laid the groundwork for major shifts in treatment, public policy, and public understanding. As in so many fields, nonprofit innovation often comes from the periphery--the startups and the "ragtag" organizations--not always the center.

Nonprofit data is elusive as Matt Points out and Bill asks (an answers) a crucial question: "The real issue is to we as a society have enough strong, vigorous and active non-profits to deal with the issues at hand, and that answer is obviously "No."

The even larger question is what is the right mix of government initiative, private enterprise and nonprofit services (and advocacy) that will allow us to pull out of the present crisis and create the kind of society we want to live in?


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