Perspectives

A new afterschool program is established in a neighborhood that is home to six other afterschool programs. Is this a good thing or bad thing for the community?

Despite the fact that we reside in the wealthiest nation in the world, the degree of societal need is astounding. Addressing this need is what has led many of us to dedicate our lives, careers and financial resources to serving the public good. Furthermore, the idea that anyone with a charitable mission can form an organization to serve the public good is central to the American spirit. So, why would another organization dedicated to helping a community's young people be the subject of debate?

According to the National Center for Charitable Statistics, there are 1.3 million IRS-registered nonprofit organizations in the United States, the majority (57 percent) of which are classified as public charities. Independent Sector's The New Nonprofit Almanac reports that the sector is expanding at a rate that outpaces the growth of the business sector. What are the implications for the sector, philanthropy and the public? FN&C has asked the five individuals whose responses follow to consider the sector's growth and to weigh in on the debate: Are there too many nonprofits?

A Loaded Question

A caveat must be to overcome the temptation to believe that bigger is better and consolidation of the sector is a more cost-efficient way to go.

By Audrey R. Alvarado

In 2002, there were 909,574 charities registered with the IRS, a 76 percent increase from 1992. Questions have been raised about the number, practices and enforcement of nonprofits, as the media has begun to pay more attention to nonprofits.

At their best, nonprofits are committed to the public good through their service, active civic engagement and intention of applying their skills for the betterment of their communities and society as a whole—the public benefit. At their worst, they have lost their way and focused not on community building and public service but on personal, individual or organizational enrichment, often to the detriment of the image—and ultimately, the purpose—of the sector. Those "nonprofits" might reconsider their purpose, confess that they do not provide a public good and reclassify themselves out of the charitable sector.

The criticisms of nonprofits can be categorized into two schools of thought. One is directed at efficiencies, usually at the organizational and structural level. The second centers on value, usually emphasizing the role of the nonprofit sector and how this role is played out at the practical level.

In terms of efficiencies, it is logical to argue for consolidation and streamlining efforts that promote efficient operations. There are valuable lessons to learn from this market-driven standpoint. Organizations will do well to lower their total administrative costs and comply with key market forces that influence which nonprofits succeed and fail, which ones consolidate and which ones are able to make a competing case for continued support by showing a distinctive mission and tangible results. However, a caveat must be to overcome the temptation to believe that bigger is better and consolidation of the sector is a more cost-efficient way to go. Very little, if any, data exists to substantiate the claim that smaller nonprofits have higher administrative overhead costs and are not successful in achieving their mission.

The second school of thought about value speaks directly to the purpose of the sector. This school of thought also has focused attention (mostly negative) on the practices of some nonprofit organizations and their leadership. The questions raised speak directly to the broad and fundamental question "To what end?" Questionable practices and decisions raise concerns about whether such actions represent the heart of what nonprofit work is about—that is, the defining characteristic of the field toward public good.

In the end, the question of whether there are too many public charities depends on the driving motivation behind the question. If taken from the context of organizational efficiencies, nonprofits would do well to heed the advice offered and look for ways to streamline while maintaining their commitment to quality and service in the public good.

The market forces that drive a nonprofit's work and attention will never pay for themselves. The nagging commitment that overrides business decisions will always be to serve those in need, as well as fulfill its role in the promotion of civic engagement and sustaining civil society. Adhering to the concept of public benefit, both in terms of our reason for existence and how we manage resources and make decisions, should always be at the forefront of our actions and practices. If we do this properly, then we would worry less about how many nonprofits exist and more about achieving the vision for stronger communities, social and economic justice and opportunities for all.

Audrey R. Alvarado, Ph.D., is the executive director of the National Council of Nonprofit Associations. The full version of this speech can be read at www.ncna.org/index.cfm?fuseaction=Page.viewPage&pageId=300.

The Wrong Debate

Sometimes more with less is better than fewer with much.

By Mark Rosenman

There are historical moments when public debate passionately engages the wrong question. Wondering whether or not there are too many nonprofit organizations is an example of such misdirected attention.

The question is driven primarily by a sense of scarcity in resources to finance and otherwise support nonprofit organizations and their myriad programs. Secondarily, it raises concerns about efficiency and scale in service delivery, fundraising and organizational administration—about promoting best practices and driving out organizations with high cost ratios and limited impact. In culling the wheat from the chaff, one hopes that scoundrels, charlatans and troglodytes will be put out of business, beneficially reducing competing calls for the public's attention. While each of those issues is real and consequential, they still frame a false debate.

Our nation has the capacity to better tend the problems addressed by charities. First, through improved public policies and institutions—and through social investment—it is possible to slow the emergence of human misery and the creation of other needs. Second, as a society, we have the resources to fuel human and community development, service provision and other nonprofit programs, even when preventive public action fails some of us.

Government funding and private philanthropy can supplement fees-for-service and other self-generated income to finance a healthy, creative, responsive and diverse charitable sector. The debate should be about why those resources aren't available.

Recent tax cuts favoring the wealthy have helped create a massive deficit that is used to justify cuts in program funding for the rest of us. Tax revenue is at its lowest level as a percentage of GDP since 1950. Federal outlays today are well below where they were against GDP between 1980 and 2000. Domestic spending—beyond homeland security—will decrease by an additional 7 percent before 2009. Skewed federal priorities yielded a significant rise in poverty, the loss of jobs, growing income inequality and the decline of public institutions.

And it may get worse: A Brookings Institution study finds that if current proposals to permanently repeal the estate tax are enacted, charitable contributions will decrease by $10 billion a year, equivalent to an annual loss of the combined grantmaking of the 110 largest U.S. foundations. Fully phasedin estate tax repeal would also decrease federal revenues by more than $70 billion a year, costing the Treasury $1 trillion over 20 years. Instead of wondering whether or not there are too many nonprofit organizations, would our society not be better served if we questioned whether the wealthiest 2 percent of our population—since only they benefit from estate tax repeal—really needs even more money?

Resources are needed to increase the efficiency of nonprofits' programs and administration, to improve practices and bring good efforts to scale, to rid the sector of the self-serving and those anchored in the past. While a death-with-dignity process also would be helpful for charities that have outlived their utility, our society still needs a multiplicity of organizations that are responsive to diverse needs and constituencies, are reflective of and accountable to their local communities, enable the range of choices necessary to true democracies and avoid the problems and costs inherent in conglomerates and large corporations. Sometimes more with less is better than fewer with much.

Mark Rosenman works in Washington, DC, as a distinguished public service professor at Union Institute & University, headquartered in Cincinnati. He coordinates a project, under the auspices of the Union Institute & University and Independent Sector, to explore ways to help human service leaders increase citizen participation.

A Question of Integrity

Charity, in its purist form, is an endangered concept.

By Susan K. Staricka

The opinions expressed herein are those of the author and are not intended to represent the opinion or position of the Attorney General of Texas.

Are there too many charitable nonprofit organizations? Is it possible to have too much of a good thing? The second inquiry would naturally flow from the first, if one were to assume that all charitable nonprofits are valuable to society. This is simply not an accurate assumption. Although all charities profess a worthwhile mission and most attempt to accomplish that mission to the best of their abilities, the mere statement of a charitable purpose does not itself create an organization worthy of preservation. An organization plagued by inefficiency, waste, personal greed and/or aggrandizement is detrimental to the public interest, in spite of recognizable good that may flow from it in negligible quantities.

In my role as an assistant attorney general, whose charge it is to protect the public interest in relation to charities, I am faced with the recurring reality that charity, in its purist form, is an endangered concept. "Charity," as defined by Black's Law Dictionary, is the "attempt, in good faith, spiritually, physically, intellectually, socially and economically to advance and benefit mankind in general, or those in need of advancement and benefit in particular, without regard to their ability to supply that need from other sources and without hope or expectation, if not with positive abnegation, of gain or profit by donor or by instrumentality of charity."

In today's world, there is little doubt that even the most respectable charitable organizations are viable only if they "support" the individuals who make them run. When carried to excess, however, this support compromises the value of the charity. The organizations fall all over the spectrum in this regard, and within the universe of surviving nonprofits lie those of questionable "charitable" value to society: the billion-dollar foundation funded by family money dedicated to charity, but expending more to pay the salaries of connected individuals who write the checks than to charitable organizations fulfilling the intended mission; the large public charity of impeccable reputation that stockpiles huge reserves of cash and pays salaries, benefits and expense account budgets to rival any for-profit entity; and the small founder's organization with noble purpose and small salaries (perhaps), which freely allows excessive amounts of discretionary expenditures with little thought or oversight in terms of proper business management.

The funds a charitable nonprofit organization holds belong to the public, so management of those assets is governed by a higher public duty. Governmental enforcement authorities provide protection for the public's interest in charity, and recent events have led to increased awareness and oversight by those authorities. The number of nonprofit charitable organizations, however, continues to increase and the public must also rely and depend upon the integrity of the organization itself. The integrity of the organization, in turn, is necessarily defined by the integrity of the individuals who operate the organization. Charitable business is, in large part, conducted on the honor system.

There are nonprofit, charitable organizations of great value to society. They exist because of individuals' true dedication and commitment to the charitable mission of the organization. Consider whether it may be more appropriate to ask the question, "Why are there so many nonprofit charitable organizations doing so little charity?"

The answer? "Perhaps because those managing them want it that way." It is a question of integrity.

Susan K. Staricka is chief of the Charitable Trusts Section, Consumer Protection and Public Health Division, of the Office of the Attorney General for the State of Texas. Staricka will be speaking at the Council on Foundations Annual Conference in Toronto at the April 27 concurrent session "The State of Regulation in Philanthropy."

Achieving a Better Balance Between Numbers and Scale

An increasingly crowded sector is often going after the same funders, the same management talent, the same board members and even the same clients or patrons.

By Les Silverman

The nonprofit sector's large number of organizations is surely among its greatest strengths, enabling the sector to meet the evolving needs of diverse communities with the latest ideas and programs.

There are more than 1.3 million nonprofits in the United States, and the number of public charities has increased by 40 percent in the past six years. Eighty percent of nonprofits have budgets under $100,000. Many of these organizations—both large and small—are well managed, pursuing their missions effectively and efficiently.

But we may have too much of a good thing. The sheer number of organizations operating at small scale poses challenges for individual nonprofits and for the sector as a whole. Unable to afford professional staff in many areas (e.g., fundraising and financial systems), the smallest organizations require their leaders to wear many hats, not always comfortably.

While many nonprofits stretch their resources impressively, myriad organizations in any region collectively have duplicative facilities, functions and systems. Fragmentation makes it difficult for nonprofits to benefit from the best information and communication technology, procurement practices and human resource management and to identify and realize opportunities for improving program effectiveness. Finally, an increasingly crowded sector is often going after the same funders, the same management talent, the same board members and even the same clients or patrons.

Efforts on three fronts will enable the nonprofit sector to address these scale-related challenges without sacrificing its historic diversity and attention to local needs.

• Consolidation, through merger or greater use of partnerships and shared service arrangements. In Chicago, 54 United Way groups have been combined into one, reducing administrative costs by 18 percent and improving effectiveness. The Girl Scouts in Boston and the American Red Cross in Dallas have combined affiliates, freeing up significant resources and focusing talented staff and volunteers on mission-critical activities without leaving any constituencies behind.
  
  Other national federations should look for similar opportunities, as should regional funders who have both the vantage point and financial clout to overcome the inevitable barriers to combining duplicative organizations.    
• Use of intermediaries, operating on a regional or sector-wide basis, for administrative and program services. The Tides Center and Third Sector New England, for example, provide backoffice services (such as payroll and information technology) to nonprofits in their regions, freeing up scarce resources and talent for mission-related activities. Such intermediaries can also collect benchmarks and best practices that allow individual nonprofits to benefit from lessons learned by others in their field.    
• Mechanisms and institutions for funding the growth (or replication) of successful nonprofits, which can then take advantage of their own greater scale. Funders of all types should seek transparency about nonprofit performance and be prepared to make decisions based on an organization's effectiveness, efficiency and viability.

Judicious moves to capture the benefits of scale will be good for those who provide resources to the nonprofit sector, those who manage those resources, and—most importantly—those who benefit from them.

Les Silverman is director of McKinsey & Company. He leads the firm's Nonprofit Practice.

Consolidation—Crisis or Opportunity?

Merger. What word strikes more fear in the heart of a nonprofit CEO?

By Vincent Stehle

Among charity leaders, mergers and consolidation are commonly thought to be alien ideas, imported from the commercial sector. For some, merging with another nonprofit is generally regarded as a quick fix—often suggested or imposed by board members and funders—rather than a strategic decision. For others, the push for consolidation threatens to undermine essential values of the nonprofit sector.

How can the nonprofit sector—charities and funders alike—find a sensible approach to the question of mergers? Viewed dispassionately, perhaps consolidation should not be seen as an absolute value in black and white terms. There is probably too much consolidation happening in the commercial sector and too little happening in the nonprofit sector.

Excessive consolidation can be dangerous and unhealthy for society. A free market benefits from a diversity of producers and a vibrant democracy depends upon a wide array of viewpoints. The rise of monopolies and decline of competition is threatening a variety of industries, including software, banking and broadcasting. An obvious example is radio broadcasting, where a handful of companies have taken control of thousands of stations since passage of the Telecommunications Act of 1996.

By contrast, the nonprofit sector is highly fragmented, with many, many small entities delivering services inefficiently and struggling to survive. Surely there are benefits in delivering cultural, educational and human services in a highly localized way. But would anyone seriously argue that America needs more than 1.3 million nonprofit organizations? More to the point, is the nearly $900 billion spent by nonprofits each year delivering the maximum impact to their beneficiaries?

As grantmakers, we must tread carefully, striving to avoid the impression that we are imposing our demands on unwilling subjects. Even so, it is possible to urge nonprofit organizations—and their boards of directors—to consider the possibility of merging with other complementary organizations.

Many factors may encourage or prevent a merger. Among nonprofits, the open secret is that executive egos can often be a major impediment. When two executive directors face the prospect of forming one organization, negotiations often break down due to the self-interest of charity leadership. It's not that for-profit business leaders view merger negotiations as a Zenlike selfless exercise—far from it. In a business setting, a lot of money changes hands to salve the wounded egos.

One possible solution lies in another seemingly unrelated problem—a gathering storm of executive transition among nonprofits, as a generation of leaders who started their careers in the 1960s prepare to retire. According to a Baruch College survey of New York nonprofits, nearly half of their chief executives expect to retire within the next five years.

Surely, most departing chief executives will be replaced through traditional methods—promoting internal candidates or executive searches. However, boards faced with a leadership transition should first investigate new strategic relationships. As an example, seven years ago, the American Council for the Arts (a research and advocacy group representing high-level arts benefactors) was without a leader in a particularly tight funding environment. At the same time, the National Assembly of Local Arts Agencies (NALAA) was hoping to develop a stronger advocacy capacity in Washington, DC, and in states and cities nationwide. Rather than hiring a new chief executive, the arts council agreed to merge with NALAA.

Today, the new group, Americans for the Arts, is far larger and stronger than the sum of its parts. "It's been an unqualified success," says Robert Lynch, president and CEO. "We took two groups that were operating at $1.5 million each and now the annual budget of the combined organization is $12 million."

Sometimes, a far-sighted chief executive can look past individual needs, pursuing a strategic relationship that makes the position obsolete. Last year, TechRocks—a nonprofit technology service provider—found itself hard hit by the 2002 funding downturn. At risk was the organization's signature service, ebase—a free relationship management software program used by hundreds of small advocacy groups. Marshall Mayer, then executive director of TechRocks, negotiated a deal with Groundspring.org to acquire ebase, taking on key employees and continuing to serve ebase users.

"My concern was not that I would end up with a job at Groundspring," says Mayer, who is now chief executive of LiveModern. "My overriding concern was that ebase would be able to continue to flourish."

Few nonprofit executives will actively pursue strategic relations that would put them out of a job, as did Mayer. But leadership transition may provide the opportunity for appropriate consolidation for select nonprofits.

Vincent Stehle is program officer for Nonprofit Sector Support at the Surdna Foundation, a private family foundation with assets of approximately $650 million.