Nonprofits at the Crossroads: Threats and New Paths

The Not for Profit sector in the US has a strong history of service to communities in need. However, the sector is facing significant threats that could negatively impact NFPs for years to come. Not for Profits are approaching a simple but far-reaching choice. Continue the policies and practices that have worked in the past or try new paths.

Threats

Alternatives to the Not for Profit Structure

NFPs address issues not adequately handled by government and commercial organizations. However, new hybrid structures such as Benefit Corporations and Social Enterprises have arisen.  These organizations seek to provide services formerly provided by NFPs. They operate in those areas where profits can be made and returned to investors. NFPs will have trouble competing with these organizations that have less regulatory oversight and the ability to cherry pick the best opportunities.

Potential Government Changes

Two potential issues are related to possible government policy changes.  First, reform of tax law could remove tax advantages associated with charitable contributions and second, cutbacks in government funds for some programs. These change may create additional needs for NFPs to address while decreasing access to funding.

Big Bet Philanthropy

The vast majority of NFP organizations are very small and their range of service is limited by the resources available to them.  Some NFP funders question if supporting many small programs is an efficient and effective way to produce desired outcomes.  Instead, they are creating much larger program funding opportunities that most small NFPs do not have the capacity to deliver.

These issues are only a sample and there are plenty of others. The NFP sector needs to consider new ways to operate via new paths.

 

New Paths

Strategic Partnerships

Organizations are often limited by their available resources. To extend their reach some NFPs have entered into partnerships with other NFPs to focus efforts on a particular issue or set of issues.  These partnerships benefit both organizations by providing more resources and avoiding the risk of dividing available funding across multiple NFPs.  These partnerships can take many forms from joint funding proposals to coordinated fundraising events and shared program operations.

Philanthropy News Digest summarized a Wallace Foundation Study on strategic partnerships. Click here to check out that article.

Consolidation

The number of NFP entities is growing unsustainably. Figures from the National Center for Charitable Statistics indicate there are over 1.5 million NFP entities in the US and that number is growing.  The vast majority of these are very small organizations, many of which provide service to similar or overlapping communities.

There is opportunity here for these organizations to take a step beyond strategic partnerships and look to merge.  Consolidation can broaden scope, provide access to larger funding sources and can generate significant cost and operational efficiencies. This, along with strategic partnerships are two ways NFPs can seek to participate in Big Bet Philanthropy.

Focus on Outcomes

While the NFP sector is great at providing service that helps the members of its client communities, it has had trouble clearing measuring if that help is fixing the causes, not just the visible symptoms.  NFPs need to focus on outcomes, not just outputs as they have done predominantly in the past.

This is a big concern as the sector faces social enterprises that help people while turning a profit for investors.  These organizations have the resources to assess impact and the skills to turn those impact assessments into further investments. Most troubling is that with the investment return component, potential NFP donors won’t look too closely at claims of impact.  Changes to tax laws could drive donors to consider these alternatives to charity contributions.

Nonprofit Chronicles posted a thoughtful article on measuring outcomes. Follow this link to see the article.

Another way the sector can focus on outcomes is through the use of innovative funding models, such as Pay for Success. For these programs, instead of generating funding by counting the number of clients served, the NFP is only paid when is can demonstrate success in improving a measure of impact.  This model drives the NFP to focus on the cause of the issue not the symptom.

Engaging Funders

From the example above, Pay for Success is a new funding model created to satisfy funders’ need to see evidence of impact.  NFPs have had varying levels of interaction with funders in the past with many interactions focused on the NFP’s needs.  The funding relationship is a two-way street, so NFP should look for ways to enhance those relationships.  Transparency and interaction are paths to stronger relationships.  Sharing information and requesting (and acting on) feedback are ways NFPs can build stronger ties to funders.

NFPs need to talk with funders at times when the NFP is not actively requesting money.  NFPs have had success in decreasing restrictions on items like indirect cost recovery. They did this by having conversations with funders about the value of strong operations support in driving positive outcomes.  These conversations are most effective when they are proactive and strategic, happening well before a funding request.  This gives the funder the opportunity to adjust their own budgetary considerations.

 

More on NFP risks and potential paths are available via the following links; NFP Risks and NFP Opportunities from the Not for Profit: Beyond the Numbers blog.

 

Bottom Line

These are interesting times in the Not for Profit sector.  Major threats are looming from hybrid service organizations and government changes, as well as, structural issues within the sector.  The sector must find ways to become more effective and efficient.  Individual NFPs cannot be left to fight alone.  It is time for the sector to look for ways to build capabilities across organizations while decreasing the sheer number of NFP entities via consolidation. Most importantly, to remain relevant, the sector needs to focus more on outcomes versus outputs, as this is how NFPs add value beyond service.

It is said that the rising tide lifts all ships. Well, it is time for the NFP sector to work together in new ways to raise that tide.  Are there new ways that NFPs can work together better as a sector to secure long term relevance and viability? That is the question that NFP leaders need to ponder and there will be more on that concept in a future post!

 

Please share your comments via LinkedIn or directly on the Not for Profit Leadership Blog:  Not for Profit Beyond the Numbers

Contact me at mfcade@nfpbeyondthenumbers.com

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2 thoughts on “Nonprofits at the Crossroads: Threats and New Paths”

  1. To be sure the changes outlined in the article require NFPs to adapt to a changing environment. Learning to adapt while respecting traditions, being more data driven, learning to scan and recognize future thinking options, putting action in vision, and actualizing the power of the NFP sector capabilities is often stuck by being risk adverse and the whilewind of current day to day activities. Boards and Executives need the courage to adapt and realize the impact of the 21st Century ecology where political, social, technological, and economic changes are outpacing NFP organizational adjustments. Those that adapt best will be sustained. Those that don’t will go the road the dinosaurs.

    1. Thanks for your thoughtful comments Michael. I am encouraged by the fact that some NFPs are starting to recognize the need for strategies aimed at securing long-term viability and relevance. There is a lot of work to do to help Boards see the challenges and act to address them.

      Your point on risk and day to day focus is exactly right. Boards need to stop thinking that risk management equals risk avoidance. The biggest risk may be in not doing something that is necessary for the organization’s survival. And NFP management needs to find the time to think more about tomorrow’s programs, not just today’s.

      As NFP leaders and advisors, we have an ongoing responsibility to help the sector tackle these issues in order to continue its important work. I’m glad you and others like you are supporting and guiding these incredible organizations as they seek to evolve.

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