July 22, 2024
Doing good is big business.
The nonprofit business is huge, 5.5% of the United States GDP HUGE, and is a significant chunk of the U.S. economy. To this day, the entire nonprofit industry operates with a business operations model mimicking traditional business organization charts. Is using traditional business as the operations model the correct benchmark for nonprofit organizations? Why or why not? Is there a better, more appropriate aspiration?
Since 1970, more than 200,000 nonprofits have opened in the U.S., but only 144 have reached $50 million in annual revenue. Operating business as usual has not resulted in consistent rapid and scalable growth in nonprofits, whereas 10,000 for-profit companies have reached that same revenue threshold since 1987. An inability of single nonprofit entities to capture a disproportionate market share has created imminent and looming industry risks that could result in market compression, all beyond the control of a single nonprofit.
Examples of macroeconomic industry risks include:
- A change in ethos and American views around organizations’ effectiveness in accomplishing their mission. According to an Indiana University study, “Americans trust nonprofits more than government or business, but levels of trust in all three sectors of society are low.”
- The growth of niche nonprofits watering down the donor pool stifling the potential for rapid growth.
- A change in government oversight initiatives including market regulation, reduction in tax deductibility of philanthropy, and potential tax implications
With only 7bps of nonprofits reaching $50MM annual revenue, something needs to change to foster growth and stabilize the marketplace. Throughout history, unregulated marketplaces always found regulation.
The time is now to take voluntary action to prepare for future shifts before the actions are involuntary.
The nonprofit industry has reached an inflection point: senior-level staffing challenges combined with zero regulation places the entire industry in jeopardy. Offering unique product delivery when compared to the for-profit marketplace, nonprofits should begin building a new modern operating model following a different more appropriate aspirational leader: start-ups.
How we got here: the first mover advantage.
Stubborn leadership and inability to modernize operations have resulted in record layoffs in the for-profit monopoly industries, despite record-setting profits. Instead of changing behavior and shifting organization models to be more efficient for-profit has doubled down on historical trends and has chosen to wait out market conditions in hopes of a return to the status quo.
For publicly traded companies there are obvious reasons not to disrupt operations: employee compensation plans tied to stock value designed to retain talent, American investor wealth connected to the stock market through individual stock ownership, not to mention retirement plans, and mutual funds growth through stock market investment. The for-profit industry isn’t too big to fail, failure would be catastrophic.
The for-profit industry has identified a universal truth: narrative control in a perceived bear market is more valuable for shareholders than actual industry shifts. The disheartening news is that forprofits have perfected a specific shell game: through consistent and decisive industry-wide behaviors forprofits have successfully commoditized the workforce driving the cost of labor down, thus manipulating the price of doing business.
While the for-profit industry is probably due for a change, cash reserves and stock market share positioning have stifled innovation, unlike forprofits, nonprofits are ripe for disruption.
Why do nonprofits use this archaic model to execute business operations? For years the golden goose of nonprofit managers are late-career Fortune 1000 executives who have transitioned with golden parachute safety nets. They brought their perspectives to the industry shaping the way nonprofits are run. The reality is that CXOs from for-profit companies to this day are the splash hires nonprofits seek to validate their market share, even though this specific talent pool hasn’t moved the needle for market cap.
How can nonprofits increase effectiveness while reducing costs?
The same trends in the for-profit industry apply to nonprofits. Revenue uncertainty and record inflation create instability. For nonprofits current economic conditions and post COVID negative trends in giving show revenue down by 2%+ YOY.
The stock market always grows. The reality: Inflation has played a huge role in stock market results. Inflation since COVID; 2024: 3%, 2023: 4%, 2022: 8% 2021: 4.7%, 2020: 1.2%.
The inflation impact combined with a decline in giving is causing a 10%+ net reduction in buying power; the value of a single donation from a generous donor is much less valuable than it was pre-COVID. The corporate mantra of “expand in all ways, always” has proven not applicable in the nonprofit space as consistent seismic revenue growth has not actualized. The immediate best way to see net neutral YOY results or slight positive annual gains is to control expenses. But how? The belt has already been tightened over the past few years.
Nonprofits frequently operate on a familiar cycle, major gift to major gift, and are not as financially fortunate to weather fluctuations in the economic climate. While the for-profit labor market favors corporations, the non-profit market is talent-forward. Staffing supply trends in nonprofits create an inverse supply and demand cure compared to traditionally capitalist industries.
For nonprofits, the reduced supply of high-value leadership has resulted in record costs for “unicorn talent” in CXO positions. Reduced supply can be blamed on a couple of factors. For nonprofits in-demand employees have the power, the transition from one organization to another is easier than ever. Moreover, because of the unregulated status of nonprofits, there is little consistency in individual knowledge transfer between organizations. Every nonprofit operates business differently, from finance and methodology to programmatic delivery. Nonprofit CEOs are now faced with a tightened budget in an overpay attempt to attract high-quality talent that must relearn their execution on the job.
Recruiting FTE CXO unicorns is expensive and you don’t know the value of the investment until they are on staff. A bad hire has a downstream financial impact on expenses, efficiencies, morale, and staff churn.
Now is the time to fundamentally alter the operations of the business. The goal is to take risks and bet on broad shifts to future-proof the industry. Instead of mimicking traditional business operations, nonprofits should follow the lead of a similar peer: start-ups. The start-up ethos is familiar:
- Run lean: continued reduced costs while reaching for scale. This is a practice nonprofits claim to employ regardless of economic conditions, but are hamstrung by norms. Read as “be frugal”.
- Define Value Proposition; create a differentiated product with a proprietary delivery that is not easily mirrored. Read as “deliver mission results”.
- Achieve scheduled funding targets; build value that clearly defines the need for the offering and spend disproportionate resources on securing funding. Read as “achieve fundraising results”.
- Double down on what you do best: start-up leaders work long hours and surround themselves with cost-effective leaders who complement their skill set. Read as “self-awareness”
Start-ups and nonprofits are selling an idea investors believe in.
CEOs must recognize that the only nonnegotiable for your nonprofit is mission excellence and resource development, everything else is B-tier. Under the current business structure the likelihood of achieving $50MM in annual revenue is infinitesimal, so think differently. Lastly, promotion to CEO does not automatically create the knowledge nor wisdom to manage every aspect of running the business, so surrounding yourself with a knowledgeable experienced team is paramount to success, FTE status is nonessential.
CEOs should treat the generous philanthropic community with the same respect their start-up counterparts treat profit-minded investors. The start-up industry realized long ago that there is no need to have basic and required operations all in-house as FTEs. No investor would commit funding for inconsequential operation talent, that is a poor investment when the goal is outcome-driven results and hitting revenue and product development milestones.
Self-actualization is paramount. Understand and accept the skills that resulted in career elevation to CEO. Focus your time and all your energy to double down on the skills that got you there, that is your differentiating factor and secret sauce for success. Spending time inward facing aspects of the business for which CEOs are not equipped to lead is a detriment to growth and is a trust buster to staff when well-intentioned guidance is wrong.
The future of nonprofits lies in leveraging the efficiencies of the rapidly growing gig economy to improve your organization’s operations. There is a growing industry predicated on the professionalization of the “business of the business of nonprofits”.
Now is the time to explore outsourcing departmental execution and recruiting fractional leadership to improve the opportunity for scale and drive results while stabilizing expenses with predictable talent costs delivering at a high value for the mission.
The biggest hurdle to growth is the CEO splitting time into vital but inconsequential aspects of the business and ignoring the areas you know best or areas where senior leadership time investment creates more impactful returns, like fundraising. Start-up founders already recognize this reality, it’s time for the nonprofit’s valuable, $1.74 trillion, industry to catch up.
What’s next?
It’s your move: find a proven experienced fractional CFO, COO, CMO, HR lead etc, and bring an elevated skillset to your organization. Is your nonprofit’s mission delivery is essential for the community served? If yes, CEOs should focus solely on revenue generation, predictability, and programmatic scale exclusively, achieving aspiration milestones as quickly as possible. Your investors will want to know that their donations are going to program staff and fundraising staff to build a rapid growth flywheel. It is the CEO’s primary job to make every dollar count.
The easiest place to start is to speak to an outsourced financial services firm; with a simple outsourced move, you can lead by standardizing and professionalizing your reporting: make strong data-driven decisions quickly and effectively. Bring in a Fractional COO to manage the new third-party relationships and reporting. Hire a Fractional HR executive to ensure you are protected. You now have a predictable and contacted annual budget. Now you can focus FTE staff on the two aspects of the business that are A-tier priorities.
Be prepared for the looming marketplace changes, set your organization up for success, and aspire to be the standard other nonprofits must follow.
For decades this model has worked for smart and effective start-up leaders, this is a path to embark on to achieve results fast, to scale, and to grab market share. The industry is mature enough now to have cultivated a new talent pool of leaders who have grown in the nonprofit world. The latest crop of professionals has seen the strengths of great leaders and the pitfalls of poor ones and can lead the transition to an innovative model.
Disrupt the process so you can support the mission and focus your work. Let’s protect the industry with a strong NGO Strategy. Contact me directly, to explore your immediate options.
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