COMMENTARY

The not-for-profit (NFP) sector has been taking some hits in recent years ... and in many cases long overdue ... and in some cases totally unjustified.

I did engineering and economics at Cambridge and learned accountancy at Cooper Brothers in London. This served me well in professional and corporate management where the goal was to earn a sustainable growing profit.

After about 20 years I migrated into consultancy, mainly international and then into humanitarian relief and development ... NGOs, World Bank, UN and so on. From a management perspective this was total disaster with almost all the dataflows self serving and unverified. My career in this arena was not a great success because as an accountant and former CFO I am not totally naive about fund flows and misappropriation of money and other assets.

I was appalled at situations where there was obvious total failure on the ground and reports to donors and higher-ups that the project was a success ... complete with a picture and a cute story. In my view this is not how you do project accounting and enforce accountability ... and not much helped by self-serving independent monitoring and evaluation!

The NFP world needs a very different approach to performance metrics than anything that is presently available in business money accounting. I am arguing that the broad goal of all economic activity is socio-economic progress .... better quality of life in the community. The performance of an individual NFP depends on the context. In other words externalities really matter.

Most NFPs tend to focus on 'their' mission, and I would ask whether or not this matters. Is 'their' mission of any value in the context of the place where the activities are going to be done?

This perspective of state, progress and performance changes everything ... and sorts out very easily what deserves funding and what does not.

You will not be surprised that I am not getting huge encouragement for this initiative ... but I am not discouraged. As a corporate CFO nobody 'wanted' good management accounting, but when it was adopted everyone used it and performance improved in remarkable ways. The same will happen with an appropriate system of performance metrics in the NFP world.

Stay tuned

Peter Burgess @truevaluemetric

The Cure for the Not-for-Profit Crisis

There is a crisis in the not-for-profit sector. Since the great recession began, donations to the largest charities in the U.S. have dropped by billions — down 11% in 2010 alone, according to a recent report from the Chronicle of Philanthropy. This was the worst decline since the Chronicle began ranking its 'Philanthropy 400' list of America's largest fund-raising charities in 1990. Leaders of philanthropic and other non-profit organizations naturally blame the economy for this problem; and many expect things to get worse as the economic malaise drags on.

But the financial meltdown has not affected all charities and not-for-profits equally. It is the more versatile, general-purpose charities — including such well-known, diverse institutions as The United Way Worldwide and the Salvation Army — that are faring the worst. For more tightly focused not-for-profits, such as the Cleveland Clinic and the network of Food Banks around the country, the decline is not nearly as sharp.

Why the disparity? Our own research on organizational strategy and leadership more broadly suggests a reason. Since 2010, we've been conducting an ongoing survey of managers' attitudes about the strategies of their organizations (click here to take the not-for-profit version of the profiler). More than 65% of the respondents from the non-profit sector said it was a significant challenge to bring day-to-day decisions in line with their organization's overall strategy. When asked about their frustration factors, 76% (the largest group by far, and a larger percentage than their for-profit counterparts) named 'too many conflicting priorities.' When asked about their organization's core capabilities — distinctive things their association could do better than anyone else — only 29% said these supported their organization's strategy, and almost 80% said that their association's efforts to grow had led to waste.

All of these results suggest that, while the hit to fundraising has hurt many not-for-profits, the more fundamental core problem is strategic. These institutions lack a strategy for connecting their mission with their ability to deliver. In short, this is a crisis of coherence.

Coherence is a fundamental alignment among the elements that create value in an organization. A coherent not-for-profit has three core strategic elements fitting seamlessly together. First, there is a well-defined 'way to play,' a distinctive way of achieving the organization's mission — thus making a difference in a way that would otherwise go unfulfilled. Second, the organization backs up its mission with a system of interrelated capabilities: a combination of processes, tools, knowledge, skills, and organization, all focused on reliably and consistently delivering what is needed to create value according to that way to play. Third, all its activities relate to this strategic mix; if it doesn't have the capabilities to perform some service, in a way that fits with its overall strategy, then it leaves that to a different organization.

The struggle to raise funds makes it more difficult to be coherent. When cash is tight, not-for-profits inevitably see themselves as competing for donors. The perpetual chase for revenue can lead an association to 'help in any way we can,' following donor priorities and chasing a multitude of opportunities to serve, including those in vogue at any moment, rather than abiding by their core strategy. Many of these won't fit with its existing capabilities or other activities, and the not-for-profit will be poorly equipped to deliver them.

For example, a donor might say to a health or educational group, 'I want to give you a transformational gift, but I love community theater — so part of the gift should subsidize plays related to your basic theme.' Suddenly, the charity must muster a vastly different set of capabilities, where it has little experience. Once these incoherent services are taken on, they are very difficult to dislodge.

When a not-for-profit becomes incoherent, its attention is distracted from the thing it needs to do most: Investing time, energy and funds to build critical capabilities to accomplish its strategic purpose. Worse still, more investment in time and cost goes toward these supposedly revenue-generating programs, thus actually hurting the bottom line and breeding more fundraising pressure and more incoherence. Nan Stone, Jeffrey Bradach, and Tom Tierney of the Bridgespan Group, a not-for-profit advisory service, call this phenomenon 'scatterization,' and they link it to the way not-for-profits are organized. It's a sign that just as catering only to Wall Street expectations can pull a company into incoherence, following the short-term demands of donors and 'growth opportunities' can do the same for a foundation or association.

Another factor leading to incoherence, especially in times of tight money, is the immense pressure placed upon overhead costs. At many associations and institutions, the level of across-the-board cost reduction has become a key performance indicator. Because these cuts don't distinguish between 'good overhead' (used to build and maintain essential capabilities) and 'bad overhead' (used on projects or activities unrelated to core purposes), they become a kind of pressure forcing the organization to avoid spending money on itself. This means that the building of critical capabilities is underfunded, and the association often becomes much weaker as a result. (The only area spared from cost reduction is the development group — focused on competitive fundraising.) Prominent donors give money to new facilities, programs, or university chairs bearing their name, but very few donors explicitly fund the nitty-gritty ongoing costs of capabilities: maintenance of an R&D lab, training programs to bring new people up to speed, or distribution system logistics that get food and medical supplies to people on the ground.

All of these forms of incoherence undermine the mission of the not-for-profit. Does it leave society any better when there are multiple charitable organizations trying to do the same thing in the same way, essentially investing to compete for limited funds, and ignoring the capabilities that would allow them to genuinely serve?

Fortunately, there are some examples of not-for-profits that take a more coherent road; they manage to sustain their activities in these very difficult times by focusing their efforts on a coherent group of purposes and programs. One good example is the Harlem Children's Zone (formerly known as the Rheedlen Centers for Children and Families) - a not-for-profit originally set up in 1970 to help truant children in Manhattan's troubled Upper West Side neighborhoods. As Bridgespan (which worked closely with this organization) tells the story, the Rheedlen Center grew steadily during the 1980s, and then dramatically in the 1990s, offering a broader range of services that included support for the homeless, and the elderly. All of these were worthy, and Rheedlen's reputation and competence attracted donations - up to $10 million by 1999 - but they required a far more diverse operation. In 2002, director Geoff Canada led an effort to divest some of these services, not by shutting them down but by transferring them to other qualified agencies like the Jackie Robinson Senior Center. The name change to 'Harlem Children's Zone' further signified that henceforth this agency would focus on its core mission: helping children and teenagers who would otherwise be at risk. They still offer a wide range of services (including parent support and co-direction of a charter school), but all of them focus on children and teenagers, drawing upon the capabilities that Canada (a much-recognized educator and youth advocate) and the staff are known for.

We've seen similar kinds of focus in other successful not-for-profits. The Mayo Foundation, tied closely to the Mayo Clinic, funds and oversees medical health care research with the capabilities needed to make that research most effective. The environmental group the World Wildlife Fund, generally recognized for its global scale and effectiveness, decided in the 1990s to conserve particular types of high-risk ecosystems around the world, and has maintained that coherence in its research and activity ever since.

To become more coherent in your own association or not-for-profit, start by looking at your own differentiating capabilities. What is your organization great at doing? How do your strengths and practices fit together? How do they link, in turn, to your stated strategic purpose as an organization? Do you spend the majority of your investment in your area of strategic purpose, and are all your products and services lined up accordingly?

By becoming more coherent, you could make your own organization far more effective even at fundraising. After all, the organization that focuses its energies and investments most coherently will ultimately build the capabilities it needs to be the best at accomplishing its mission. Ultimately, it will be a much more attractive donation target, because the world will see that its work and activities relate directly to the solutions they want to see.

Paul Leinwand is a Partner in Booz & Company's global consumer, media, and retail practice. He serves as chair of the firm's Knowledge and Marketing Advisory Council.

Cesare Mainardi is Managing Director of Booz & Company's North American business and is a member of the firm's Executive Committee.

They are co-authors of The Essential Advantage: How to Win with a Capabilities-Driven Strategy, published by Harvard Business Review Press.