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The Non-profit Sector – The Same Yesterday and Today, But What About Tomorrow?

Let’s ask ourselves some important questions about the non-profit sector. Is the non-profit sector really any different today than it was 5 years ago? Is it even much different from how it was 15 years ago, or even 40? Unfortunately, the answer is no. In fact, there is now more demand than ever for fundraising, Volunteers and public attention. Is there any change to the public perception that nonprofits are “causes” that need to be supported through donated time and money from “community minded” people? Yet again, the answer is no. Employees working in the sector are often paid substandard salaries and have to work with worn out hand me down infrastructure, simply because they work for a “cause”. Is this any way to reward the passion and dedication these people have for helping others? Given their nature, shouldn’t these people be properly rewarded for the public good they create in their communities? 

Most non-profit organizations must spend an inordinate amount of time and energy pressing their foreheads to carpet continually begging for money. For example, by writing grant proposals, managing fundraising campaigns, hosting golf tournaments or organizing special events, all just to keep their operations afloat. There has never been significant change to the organizational structure of a typical non-profit. While at the same time the concept of “donor fatigue” continues to be an issue, where the never-ending pressure on a typical citizen or corporation to give, give, give never seems to go away.

With so many questions that yield less than satisfactory answers, we have to ask ourselves, how did things get this way? And more importantly, how are we going to change things for the better?

It is estimated that there are over 200,000 nonprofits in Canada and about 10 times that in the United States. This is significantly more than there were a few years ago and there are no signs that the growth will ever stop. The non-profit sector is estimated to be about 6% of GNP, so it is not insignificant. This means, the amount of resources expended on competing for fundraising dollars, volunteer time and public attention is also not insignificant.

The nonprofit sector is the only sector in the North American economy that has not yet experienced consolidation. If you think about it, most other industries have. There are less banks, investment houses, automobile manufacturers and a host of other industries from coffee shops to the corner stores giving way to the larger competitors. This is all due to natural economic forces. The big fish eat the small because the small cannot compete with the resources, buying power, marketing reach and scale of the big. Any valuable innovation created by the small fish eventually captures the attention of a larger predator and the innovation is eaten, after hopefully, a lucrative payday to the smaller fish. Both parties benefit from the arrangement.

Consolidation has been a major disruptor in most industries and has created structural change almost everywhere, all for the sake of efficiency. If the non-profit sector followed suit, the duplicated resources of approximately 200,000 non-profits could be consolidated to provide much more efficient service to vulnerable people rather than being lost down the black hole of fundraising and administrative costs.

So why aren’t natural forces pushing non-profits to consolidate? Quite simply, because there aren’t any. Managers of non-profits have an interest in keeping their jobs. Boards, unfortunately have the misguided myopic behaviour of doing what’s best for the survival of the organization and so are blind to the view of doing what is best for the community.

There are no big paydays for anybody so, the status quo is the norm and its barbarians at the gates if another non-profit comes sniffing around to talk merger. The the only thing that changes is that we have even more non-profits out there today than there were yesterday and likely many more tomorrow. More non-profits making do with hand me downs, paying low wages and living precarious financial lives. More non-profit crabs trying to outcompete each other for scarce resources in a donor fatigued world.

So, is there any solution? Is there anything on the horizon that has the promise and scale to grab the nonprofit sector by the scruff of the neck and shake into a new reality? Thankfully, yes there is. It’s called Social Enterprise. Social Enterprises look for investment capital that is used to develop ongoing, long term cash flows. The investment capital is paid a return and eventually paid back. This is almost unfair competition to a typical non-profit looking for a gift of capital that is never paid back and which the donor knows will go down the black hole of paying for operational expenses. Once the money is spent, the donor knows the non-profit will often be coming back for more.

Capital will be one of the natural forces that will force the non-profit sector into a new reality. With the rise of such things as new investment strategies such as Impact Investing, new financial instruments such as Social Impact Bonds and new corporate structures such as 3C corporations, Capital is looking for a new type of home and it is looking for proper management that can make that home comfortable. 

That being said, great Social Enterprise ideas are not enough. An organization needs to convince investors that they can execute strategy effectively. Management capability is key. In my view, a new realization will dawn on forward thinking non-profit managers and boards that investors are seeking those organizations that can demonstrate return AND social impact while, at the same time having sufficient management bench strength to implement strategies and manage risk. Those early to the game will have a huge advantage over those late to the party.

It’s not as simple as just deciding to become a Social Enterprise. There are challenges many non-profits will have to overcome. For instance, how does a typical non-profit assemble an effective management team that has the experience to attract Capital and implement a Social Enterprise? How will the typical non-profit afford to attract this team by paying them below market rates? Unfortunately, for most non-profits, this is a fantasy. The fastest and easiest road to accomplish this is one nasty word in the non-profit sector, Merger.

When two or more forward thinking organizations look at their operations and see that they have all the resources they need by simply eliminating duplication (e.g. duplicated staff in accounting, fundraising, management, etc.), they have the money to attract and properly pay for the management bench strength they need. A merger then becomes an imperative, a natural force that can cause a chain reaction of consolidation and change the way the non-profit sector looks and operates forever.

Watch Adrian's Biz 1 on 1 interview with Randy Lennon here.