Not everyone reads The Harvard Business Review, but many wealthy donors and their advisors do. Development officers and executive directors can expect to need to respond to a new challenge to old and perhaps stagnant ways of thinking, when their boards, critics, foundations and potential donors read articles such as “Billions in Charity Money Could be Saved, Study Says,” (New York Times May 10, 2003). In it, reporter Stephanie Strom discusses “The Non-Profit Sector’s $100 Billion Opportunity” (Harvard Business Review May 2003), in which Bill Bradley and co-authors Paul Jansen and Les Silverman report on their examination for McKinsey & Company of the finances, practices and management of the 200,000 largest nonprofits in the US, as well as philanthropies and related intermediaries. Ms. Strom also highlights people in the nonprofit sector who have criticized the findings of the McKinsey study.
The HBR article is addressed in part to donors, and in part to nonprofits. The main questions Bradley et al. studied were “Does the money flow from its source to its ultimate use as efficiently and effectively as possible?” and, “If not, where are the big opportunities to increase social benefit?” The simple version of the answers is found in the subheadings, with estimated savings given: (1) Reduce Funding Costs argues the need to improve on-line solicitation, increase the use of professionally managed donor-advised funds, share resources among donors and grantmakers, and make larger grants. (2) Distribute Holdings Faster refers to the wisdom of increasing payout rates by foundations and faster distribution of endowments by large non-profit institutions such as medical centers and universities. Bradley et al. discuss opportunity costs and investments on returns as related to delaying action on a social problem that could have been “nipped in the bud” with earlier funding but instead becomes “much worse and more expensive to deal with.” (3) Reduce Program Service Costs addresses the wide gap between best- and worst- performers, the importance of setting benchmarks, and discusses use of best practices, comparing per-client costs, and the desirability of capturing efficiencies through shared assets and mergers. (4) Trim Administrative Costs refers to the need to strengthen organizations and systems, consider shared service arrangements, or consolidate “back-office” functions. (5) Improve Sector Effectiveness notes that if donors actively researched the performance of individual non-profit service providers, they (and foundations) could eventually “squeeze the underperformers out of business.”
To all stakeholders Bradley et al. explain, “Soliciting large volumes of tiny contributions is inherently inefficient. You tend to incur a lot of labor, marketing, and other costs for every dollar you bring in.” They urge that donors take on a “‘social investor’ mind-set — supporting the best-performing organizations in their area of interest, not just with money, but with their skills, experiences and relationships.” Other recommendations are given for foundations and government agencies.
Highlighting the non-profit sector and urging improvement may initially put non-profits on the defensive, but this is not all bad. If non-profit boards take on the responsibility of working with staff to review potential changes that might result in both efficiency and effectiveness, and if donors and the boards of foundations learn more about the causes and charities they support, the non-profit sector can improve its functioning, to the greater good of the public at large. Development officers and executive directors may wish to bring this study to attention of their boards, and be prepared to address how they and the boards together can meet the challenges it highlights.