Researchers examine the $1.7 trillion philanthropy sector to find the fissures.
Only a mere 50 years ago were philanthropic and charitable organizations in the U.S. defined as an independent sector distinct from government and business. Since then, the economic impact of the nonprofit sector in the U.S. has grown to $1.7 trillion.
The sector’s sheer heft — it’s larger than the banking and retailing industries — is one reason that Stanford GSB alumni and lecturers Bill Meehan and Kim Starkey Jonker wrote Engine of Impact: Essentials of Strategic Leadership in the Nonprofit Sector, which came out this November. Another is their conviction that the sector has entered a new era, which they’ve named the “Impact Era.”
The good news of the Impact Era is that, by 2025, philanthropists will likely contribute a record $500 billion to $600 billion annually to nonprofits, well above the $373 billion recorded in 2015. The bad news is the nonprofits will still come up short by $100 billion to $300 billion in the funding they require. “In brief, [nonprofits] will need more money, and lots of it,” according to Meehan and Jonker in the introduction to Engine of Impact.
Here, Meehan and Jonker discuss how nonprofits can make up the shortfall and meet the challenges of the Impact Era.
The Missing Elements of Impact
The difference between success and failure in nonprofits in the coming years will be the ability of their leaders and boards to transform them into engines of impact, Meehan and Jonker say. The mechanism that powers these engines, and the core of Meehan and Jonker’s book, is strategic leadership.
Strategic leadership is a management system with seven aligned elements: mission; strategy; impact evaluation; insight and courage; funding; talent and organization; and board governance. While these elements are commonplace in the business world, most nonprofits do not yet have them fully in place. Meehan and Jonker confirmed this in their Stanford Survey on Leadership and Management in the Nonprofit Sector, which collected more than 3,000 responses from a variety of sector stakeholders.
“When we first looked at the data, it looked like everything was going pretty well in the nonprofit world. For every question we asked, about three-quarters of the responses were positive,” says Jonker, who also serves as the president and CEO of King Philanthropies. “But statistical analysis revealed that the vast majority of organizations are struggling with at least one of the seven elements. And a nonprofit must excel in all seven to be truly high-performing — a weakness in any one element can sink the ship, so to speak.”
The Primacy of Mission
Meehan and Jonker track the troubles of many nonprofits back to their missions, which typically are either too vague or too broad or both. “Most nonprofits have a mission that they think is terrific,” explains Jonker. “But when you look at decisions made over time, you find that their programs have expanded far beyond their mission. Somehow these programs have been fit into this mission statement that everybody loves.”
The primary danger of a poorly defined mission is mission creep, which can stretch a nonprofit until it can no longer pursue its core goals. “There’s an old saying that a fish rots from the head down,” says Meehan. “Nonprofits usually rot from their mission down.”
The solution is a focused and clear mission statement. “Businesspeople know that focused companies outperform diversified companies. The same is true for nonprofits,” adds Meehan. “A nonprofit that has more than one focus deserves a skeptical eye. And if it’s not clear what that focus is, that’s the second-level problem that needs to be addressed.”
Fundraise Like Willie Sutton
Money is a perennial challenge for many nonprofits, but Meehan and Jonker find that the challenge is often exacerbated by misdirected fundraising efforts. “Every week, I have somebody in my office talking about raising money from companies, which contribute just 5% of charitable contributions, or foundations, which account for 15%,” explains Meehan. “I tell them what Willie Sutton said when he was asked why he robbed banks: ‘Because that’s where the money is.’ In the U.S., 80% of giving comes from individuals. That’s where the money is.”
There’s an old saying that a fish rots from the head down. Nonprofits usually rot from their mission down.Bill Meehan
Meehan and Jonker coined the word “plutophilanthropy” to describe the charitable activities of the ultrawealthy. They argue that nonprofits need to become partners in plutophilanthropy (PIPs). “PIPs, such as colleges and universities, medical centers, high-end performing arts centers, and museums, are breathtakingly good at raising large moneys from major donors,” says Meehan. “As Robin Hood and The Tipping Point have demonstrated, there’s no reason that other types of nonprofits can’t raise large amounts of money from plutophilanthropists as well.”
To achieve PIP status, nonprofits need to develop a major donor function. “Nonprofits need to invest to build a major donor function. They need to identify potential major donors and cultivate them,” says Jonker. “And they need to make their missions relevant to the lives and giving of major donors.”
Earn the Right to Scale
Just like Silicon Valley startups, many nonprofits are struggling to reach scale, according to Meehan and Jonker. But first they need to develop the seven components of strategic leadership. “A lot of nonprofits are stuck in ‘scale jail,’ ” says Jonker. “Some have charismatic founders or executive directors, and so funds are flowing in. But they need to earn the right to scale. They need to build their engine [of impact] before they fuel up,” she says.
“In this regard, Stanford GSB alums are in a wonderful position to have a great deal of impact in the nonprofit sector,” Jonker concludes. “They will be familiar with many of the concepts in our book and, as donors and board members, they can make a big difference in the sector, even when they have day jobs outside the sector.”
Nonprofits as Jet Engines
A nonprofit’s “engine of impact” starts with its mission, which is the very air that people in the organization breathe as they do their work. A carefully honed strategy serves as the compressor: It applies pressure to the “air” of mission to create a set of goals that govern the design and implementation of programs. Impact evaluation functions as the thrust indicator — a key instrument that allows an organization to compare its performance with its strategic goals and refine its strategy over time. Helping to generate power are the twin “turbines” of insight and courage — human qualities that give an organization its dynamic force. For propellant, the organization draws on three kinds of fuel: sustained funding, well-managed talent and organization, and effective board governance. When it works well, the engine creates thrust, which equates to impact.– Adapted from Engine of Impact
This piece was originally published by Stanford Graduate School of Business