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Wednesday, December 7, 2011
Are There Too Many Nonprofits?
By: Susan Eagan, Senior Consultant, Dewey & Kaye
There has been a long&standing debate about whether there are too many nonprofit organizations. While an argument for reduction in the number of nonprofits has been made in good and bad economic times, the length and depth of the current recession has led to renewed attention to the idea of organizational contraction, particularly through mergers and other forms of consolidation. What are the underlying issues that prompt this discussion of sector size? Is the question of numbers significant or is it distracting us from other problems that require attention?
The belief that there are too many nonprofits is an outgrowth of one or more of the following concerns. A frequent observation is that there are too many organizations chasing too few resources. Two problems are perceived to arise from this scarcity of resources – (1) money is distributed across too many organizations, leading to chronic underfunding for individual organizations, and (2) institutional and individual donors face the daunting challenge of identifying the "worthy" organizations among the many applicants. A derivative problem from undercapitalization is that many nonprofits are not able to hire enough and/or well-qualified staff that are needed to operate effectively. The latter is perceived to be a more significant problem for smaller nonprofits which constitute about 85% of the sector. As Les Silverman noted in Foundation News and Commentary (May/June 2004), "Unable to afford professional staff in many areas . . . the smallest organizations require their leaders to wear many hats, not always comfortably."
A second concern is duplication of services. This duplication is seen as causing a less-than-optimal distribution of resources with too much going toward administrative overhead. There also can be economies of scale achieved by larger organization that lead to lower per-unit costs for the same service or better quality in service delivery.
A third concern is that barriers to entry are low. This is an incentive for founders to create a new organization rather than examining ways in which their goals might be achieved through existing organizations. Once formed, nonprofits have proven to be remarkably resilient and may continue to exist even when their mission has become less relevant to their communities' needs.
The most typical solution presented in response to these concerns is some variant of mergers or other forms of consolidation. This, however, may not always be the right answer because numbers per se are not the underlying problem. To see why, let’s look at each of the three concerns that drive the numbers argument.
The first, scarcity of resources, is a fundamental economic phenomenon. As the availability of public and philanthropic resources fluctuates over time, it is hard to imagine how one identifies the “right” number of nonprofits to achieve a balance between demand for resources and fund availability. No matter what the number, there will always be competition as organizations seek to respond to increasing needs for services. Furthermore, distributing money across too many organizations is a choice made by institutional and individual donors, not an inevitable consequence arising from a particular number of organizations. The scarcity argument obscures more basis questions, namely, how to evaluate organizational performance and impact and how to incorporate performance measures into funding decisions.
The second concern, duplication of services, does have validity in some circumstances. However, sheer numbers do not in and of themselves substantiate duplication of services. A recent article in the Stanford Social Innovation Review notes that a large number of small nonprofits addressing similar issues may suggest a level of community need that is unmet. (“Merging Wisely,” by David LaPiana Stanford Social Innovation Review, Spring 2010). Or a large number of certain types of organizations – for example, theatre companies – may be indicative of a community preference for diversity in artistic interpretation. In effect, an assertion of duplication of services merits careful examination of what specific service is being delivered, to whom and in relation to what the level of demand. Mergers or other forms of organizational consolidation may be appropriate when duplication of services is substantiated and/or economies of scale could be achieved.
The third concern is that low barriers to entry encourage the proliferation of nonprofits rather than a more considered approach of program expansion by existing organizations. It is interesting to note that this argument is made about nonprofit organizations but not private enterprise. In fact, small business formation is often seen as an indicator of a dynamic economy. What accounts for this difference? In the case of small businesses, their fortunes rise and fall based upon their success in the market place. In the case of nonprofits, their fortunes most typically depend upon not only revenue from individual customers or clients but also government, foundation and individual donors. This suggests that the key difference is the contribution of public and charitable giving toward the nonprofit bottom line.
There has been a great deal of progress in developing more sophisticated techniques for evaluating nonprofit performance. However, much work remains to be done, particularly in evaluating “softer” or long-term outcomes. Advances in the design and application of performance measures are likely to be a more productive path than a continued debate about the appropriate number of nonprofit organizations.
Susan Eagan is based in Ohio and specializes in planning and strategy development for foundations and nonprofit organizations, policy analysis, and program evaluation. She can be reached at 216-403-4319 or susan.eagan@deweykaye.com.
Dewey & Kaye