Sea Change for Not-For-Profits
Sea Change
Sailors measure each other by the severity of storms they survived. Storms and sea change happen unexpectedly, which is why sailors get caught in them. Such turbulence is unplanned and requires the skills, resourcefulness and experience of the captain and crew to navigate through the sea change.
In recent years, it is my experience and observation that Not-for-profits (hereafter NFP) have hit a rough patch of roiling waters and strong headwinds. There are a series of reasons for these headwinds and many factors that hinder the performance of the management teams navigating the storms.
There are two primary variables in this sea change. First, the exogenous variable of the adverse weather, turbulent waters and harsh headwinds. The second factor is the endogenous element of the response of the ship and its crew.
Consider the External Factors
During the last decade or so, advanced due diligence concerns and practices of donors and their advisors generated much greater sophistication among donors who usually fund the not-for-profits. The level of donor confidence is obviously a highly critical variable. Donors expectations have risen in almost every measure of NPF performance and practice: Reporting; Communication; Definition of need and NFP value proposition; effectiveness of delivery of services; Quality of management and human capital development; alignment of effort and resource allocation; among other factors.
Stanford Social Innovation Review writes in a recent study that the motivation for giving has shifted from empathy to seeking solutions in a rational approach. In other words, gone or going are the days of relying on the heart strings to feed the hungry to providing agricultural solutions to help the hungry solve their chronic food sourcing shortage. Donors are increasingly seeking permanent solutions and more than willing to fund these solutions and resist short term approaches. This can be described as donors investing in solutions with groups that have expertise versus recurring requests for needs without solutions in sight. There is a place for both, but solutions are driving the donor experience these days.
A significant factor in this mind shift of giving is that financial capital has shifted over the years from relationally based to analytically driven. For decades not-for-profits have benefitted from the generosity of institutional and personal relationships developed through churches and religious organizations. Today the source of funding has shifted to pockets of capital that are managed with much greater diligence in analyzing the nature of the cause and the vehicle administering the solutions. The current trend is much more attuned to making an investment versus giving a “hand-out.”
It is also true that the institutional channels ( primarily religious institutions) of funding the not-for-profits have been eroding and attenuating. The flow of funds through these institutional structures have been greatly diminished and reallocated for various reasons unrelated to need or NFP performance. This channel shift in funding source is a process that in financial markets is called disintermediation.
Other factors of donor shift include: the geo-political pressures of serving needs in the third world; the regulatory constraints in affordable housing, which bump up against local zoning standards; financial reporting requirements; food preparation regulations. These factors require more sophistication and administrative competency than in prior periods. Life for NFP’s in these areas became much more difficult and they encountered serial setbacks requiring more sophisticated responses from the NFP.
With all these external factors in mind, it remains true that the need for the effective services of Not-for -Profits are greater than ever.
What about the roles of ship and crew in the Sea Change?
This is the difficult, but solvable part of the situation.
With a changing and rising sea, new skills and great expertise are required for the continuation of the journey.
A ship can be equipped with outstanding electronics and gear that can ease the tragedy of sailing in a storm…but it is expensive and needs trained hands and minds to effectively use the data. Not-for-profits need data information and techniques like Key Performance indicators. But these rich information resources must be wisely designed and applied to directing the effort of the firm and the necessary related resource allocations. Wise use of information must be learned and applied; it should not be considered a given. There is need for thoughtful feedback and collection of data to make better decisions and to better understand the dynamics of those they serve. Timely information is invaluable when well-used and worthless when poorly used.
An institutional and individual commitment to “Doing only what you can do”is a necessary discipline. A commitment to clearly defined portfolios of service staffed by trained and regularly refocused operators. At the same time, risk-oriented forays into new services must be designed to invigorate and grow staff as well as to apply new solutions. Good information used effectively by talented staff increases the probability of success.
Most sailors know the real key to making it successfully through a serious storm is not the ship or the equipment, it is the quality of captain and crew.
Most all NFPs have as a first response to most problems is that they are undercapitalized and if they had more funds they could probably solve the problem. With this I totally agree, but the capital shortage is human capital, not financial capital. There are some fundamental points to be made here:
- financial capital is a commodity.
- human capital is proprietary and exceedingly valuable.
- Both kinds of capital need management.
- Human capital attracts financial capital.
Rising standards among donors are having an impact on NFP boards and managements: operating improvements have been made; hiring standards have risen; and, a shift to meritocracy in promotion is underway. We applaud these changes and encourage them to continue and increase among the NFP community.
In addition to the rising standards of donors, demographics have played a driving force for change in the management of NFP’s. As founders of NFP’s retired from service, there has been increasing recognition of the need for new talent and techniques, which usually requires a retooling of operating approach. A very interesting recent article from the Mckinsey Quarterly describes its 25-year CEO review of over 7,800 CEOs that identified 18 critical variables that impacted successful CEO performance, one of theses was staff performance. The study found that 60% of superior corporate performance comes from the performance of staff two levels below the CEO. This is a depth of management that most NFP’s lack. It is an area for review and consideration. Military historians say that “sergeants win wars”, which is why the army spends so much effort training and developing these key soldiers. A prime area for NFP’s to assess in their human capital development programs is the depth of their programs that apply to their secondary,even tertiary levels of managers.
Stakeholders increasingly want to know about management depth beyond the Executive Director and they focus on training and development programs. These stakeholders want to be reassured of the quality of staff.
Donors have felt the impact of established NFP’s some with great histories following embedded strategies that have become outdated or frozen in place due to unintended “cognitive bias”among senior management. We have learned the lessons of sclerotic leadership and organizational responsiveness from great old secular organizations like General Motors and Sears. Once economic powerhouses, now gasping for air.
A compelling rationale for NFP is that they exist for more than economic reasons. People are drawn to these enterprises for more than economics. This is a huge developmental/organizational advantage.People want to serve and express themselves in community.
NFP’s have used this advantage in the past generally to raise funds. There is a shift generationally and across generations. People want experiences and not just to give a check. This is a huge opportunity for NPFs’. A serious strategic question is how to take advantage of this “service to others” factor to the benefit of volunteers, to NPF and to those whose needs the NPF’s serve.
With the shrinking impact of institutional financial support for NFP’s as described earlier, there is a rising population that seeks meaningful service. So those institutions, once powerful economic NPF’s financial partner, now emerge as an even more powerful human capital partner; what can be a very strong symbiotic relationship. In promoting these symbiotic partnerships, NPF’s can take strong initiatives that are well- conceived and become exciting long-term investments that were not possible to accomplish on with just their own resources. To do this well requires: hyper clarity of NPF purpose; talented staff who can build human bridges with stakeholders effective information and communication commitments by the NFP; and, some organizational risk taking. Human capital is mobile and selectively seeks involvement they deem to be worthy and valuable to them.
in addition to the mobility of human capital that seeks engagement, there is the opportunity for healthy, evolving organizational realignment from ownership and control to strategic engagements that accomplish much with low financial commitment and high human capital returns. The principle of not having to own or control all expansions, but rather seek outcomes over ownership through wise partnerships is compelling in this age.This kind of strategic thinking can provide significant scaling of purpose and result to an enlightened NFP with a competent staff.
Terry L. “Skip” Nagelvoort
January, 2020
So how to proceed. Boards of Trustees and senior management should consider a thoughtful audit of the organization that take into consideration the complete dynamics discussed in this paper.