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Wednesday, April 4, 2012

Transitions and Transformations in the Nonprofit Sector: Report from the Strategic Restructuring Cohort

By:
Craig Maier, Consultant, Dewey & Kaye
Kate Dewey, Principal, Dewey & Kaye

“What will your world look like in the next five years?”

Recently, we asked that question of a number of nonprofit leaders taking part in a Strategic Restructuring Cohort sponsored by The Forbes Funds.

What began as a quick question, however, became a wide-ranging conversation about the sector’s needs and challenges. Though the group was small and the discussion tended to focus on human services, participants’ answers had sector-wide implications and raised important questions about the transformation of nonprofit organizations in the years ahead.

A Sector in Transition …
From the start, the session’s participants were deeply concerned about how changes in entitlement programs like Medicaid and steep cuts in discretionary spending at the state and federal levels would affect their organizations. Participants emphasized how funding cutbacks could lead to growing service gaps and compromises on the quality of service delivery that would, in turn, drive increases in community violence, crime and other social problems.

The group spoke at length about the consequences of funding cuts on their programs. Yet, while they believed that public concern would grow in coming years as social problems worsen, some participants were not optimistic that this concern would translate into any restoration of funding. In fact, they believed that the state legislature’s lack of knowledge of the implications of its current approach to balancing the budget for people on the margins suggests that the negative repercussions could last a decade or more.

At the same time, however, the group found shifts in foundations’ priorities and giving strategies to be just as significant. While nonprofits have often looked to foundations to buffer changes in public funding over the past twenty years, the foundation community appears to be realizing that the depth of the current and projected cuts at the state and federal levels makes it virtually impossible for them to plug the widening holes in the community service net. Now, they are increasingly redirecting their attention toward seeding innovation and finding solutions that do not rely on public funding.

Though it is an important change, we noted that this shift in foundation funding priorities is not unprecedented. The Richard King Mellon Foundation’s support of Carnegie Mellon University’s early efforts in computer science and The Buhl Foundation’s funding of the signage project on Pittsburgh’s North Side are two examples of this type of giving that have had a significant historical impact on our region.

Participants recognized the importance of streamlining their operations to meet this increasingly challenging funding environment, but they also saw deep structural changes ahead. In short, they foresaw a sector with far fewer organizations than today. Some organizations would simply cease to exist, while other areas of the market would be dominated by “mega organizations” with budgets of $150–$200 million or more. Participants recognized that such structural changes would force difficult choices to maintain quality and overcome service fragmentation.

The group also highlighted that at a time when seasoned leadership is essential to navigate these challenges, there is a looming leadership gap within the nonprofit sector. The changes ahead are thus not only structural but generational, and the way forward remains unclear.

… and Transformation
“I can imagine some of my private sector friends looking at this,” one participant noted, looking at the whiteboard full of challenges. “All they would say is, ‘Thank God we don’t have to deal with this stuff!’” Yet, participants in the session also noted several potential opportunities within the sector’s transition.

Throughout the discussion, the group emphasized what has now become a common refrain within the sector: the importance of increasing efficiency and accountability. Nonprofits live, for better and for worse, in a time when venture philanthropy, performance-based contracting, social entrepreneurship and organizational scalability are changing what it means to manage a nonprofit organization. Now, more than ever before, organizations will increasingly be challenged to demonstrate the return on social investment.

But while the discussion touched on several issues, perhaps the most interesting – at least to us as facilitators – regarded the “nonprofit” label itself. As the social sector faces increasing pressure to reconfigure how it operates – and the increasing possibility that it will be taxed like the private sector – the discussion raised the question whether the label “nonprofit” was even helpful anymore. What would this trend mean for the sector? What if, instead of seeing themselves as “nonprofit organizations,” nonprofits were to see themselves simply as “organizations” that happen to serve the public good?

Implications
We should be cautious, of course, about drawing any definite conclusions from our discussion. The group was too small and too heavily weighted toward human services, and the session itself was not structured as a formal focus group. In addition, the fact that they were taking part in a session on strategic restructuring could also have slanted participants’ responses. Even so, the group’s discussion may offer some broad and potentially important insights.

First, we noticed that the sector-wide shift toward more business-like systems thinking is continuing. A generation ago, organizations serving the community made the move from “charities” to “not-for-profit organizations” to demonstrate their value in an increasingly competitive landscape. University of Pittsburgh professor Kevin Kearns has described this shift in terms of a progressive emphasis on organizational mission, organizational competitiveness, revenue diversification and accountability.

In the process, nonprofits have become increasingly sophisticated to ensure their sustainability in pursuit of their mission. This trend was evident during the discussion, as well, as participants noted how advances in information technology and social media are changing how they engage stakeholders, raise money and streamline key organizational processes like intake procedures or mental health assessments.

Second, we noticed nonprofits taking an increasingly creative approach toward strategic alliances and collaborations. We could see this in how participants saw the restructuring process as a way to strengthen their mission, solve problems and deliver results, and not simply as a means for organizational survival. They displayed a distinctively entrepreneurial approach, seeking not only more traditional “horizontal” alliances with similar agencies to broaden their reach but also “vertical” alliances with different types of agencies—aging and youth services agencies, for instance – to deepen their portfolios.

Third, we noticed a surprising willingness to think beyond the “nonprofit” label. The willingness of a few of the group’s members to question the label “nonprofit” itself is both important and perhaps reflective of an emerging trend.

Pointing to companies like Kiva.org (which allows people to give microloans to entrepreneurs in impoverished areas) and TOMS Shoes (which gives a needy child one pair of shoes for every pair it sells), Stanford University professor Jennifer Aaker and social venture consultant Andy Smith note a blurring distinction between the private and social sectors.

“Although the idea is not (yet) conventionally accepted, people don’t have to give something away for free to do good; they can instead create a business that does good,” they write in their book, “The Dragonfly Effect.” “The for-profit and nonprofit worlds are merging, creating an opportunity for masses of people who drive more profits and create greater good.”

If the divide between sectors does narrow, we could see more diverse types of strategic relationships that move beyond the simple corporate sponsorship of nonprofit causes or corporate social responsibility efforts that are more about improving public relations than the social good. While the implications of this emerging marketplace are difficult to foresee, nonprofits could increasingly be called upon to share the wisdom they have acquired in pursuing the “double bottom line” of the common good and organizational sustainability.

Conclusion
The concerns our group raised reflected the complex and difficult transitions occurring throughout the nonprofit sector. But where are these transitions leading us? Though the prospect of decreasing funding and increasingly complex social needs presents big challenges, we can also see the beginnings of a new way of being a nonprofit: a sharpening focus on efficiency and accountability, an awareness of new types of collaborating and organizing, and an increasing ability to interact between and even across the private and social sectors.

Some nonprofits may balk at making this transition, perhaps for good reason. But for others, we can see the beginnings of new opportunities that can carry them through this recovery into a different future.

 

Craig Maier's work at Dewey & Kaye focuses on business development and nonprofit corporate communication. He can be reached at 412-434-1335 or craig.maier@deweykaye.com. Connect with him on LinkedIn at http://www.linkedin.com/in/craigmaier.

 

Kate R. Dewey is the managing partner of Dewey & Kaye LLC. She has more than thirty years of direct experience with a variety of nonprofit organizations, foundations, public agencies and corporations at the local, state and national level. Contact her at 412-434-1335 or kate.dewey@deweykaye.com.

 

 

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