Nonprofit groups fear consultants’ article will cause problems with lawmakers and donors
An article in this month’s Harvard Business Review asserting that charities nationwide could reap more than $100-billion a year by eliminating inefficiencies and making other changes has prompted concerns about its reliability.
The article, “The Nonprofit Sector’s $100-Billion Opportunity,” was written by Bill Bradley, the former U.S. senator who is now an adviser in McKinsey & Company’s nonprofit division, and two of his colleagues at McKinsey. It says that changing fund-raising tactics would give charities more cash that they could use to fulfill their missions, argues that foundations should distribute more to charity annually, and suggests that nonprofit groups do more to share ideas and approaches that increase productivity.
Nonprofit officials say that the prominence of Mr. Bradley and McKinsey means that the article will probably be read closely by members of Congress, state legislators, donors, and others. Critics of the article say they worry that many donors and policy makers might conclude that charities don’t need additional funds, while others say they are worried that criticism of McKinsey’s methodology could distract attention from necessary efforts to make sure charities are as productive as possible.
Diana Aviv, president of Independent Sector, a Washington group that represents 700 charities and foundations nationwide, said she feared that the charges of nonprofit inefficiency made by the McKinsey authors could prompt action in Congress. “If Congress were to decide that the study has enough merit to hold hearings on it, then the sector could be damaged,” she said.
Charity leaders, nonprofit consultants, and scholars of the nonprofit world say the article wrongly compares business costs and approaches with those of nonprofit groups and fails to acknowledge the different goals that motivate for-profit and nonprofit organizations. What’s more, they say the article, which was based in large part on an analysis of the finances of the 200,000 largest groups, drew incorrect assumptions about the way many organizations operate, especially the 700,000 smaller ones.
Among the key points in the article:
- Nonprofit groups could raise up to $26-billion more by concentrating on raising money through the Internet and securing larger grants from fewer foundations. By conducting Internet fund-raising campaigns instead of ones that rely on more expensive methods, such as direct mail, organizations could save 10 percent of their fund-raising costs. The article says that fund-raising expenses run about 18 percent of the annual total raised. Charities could reduce the amount of energy they put into fund raising, the article says, if grant makers would award fewer, larger grants to programs that would have the greatest impact, rather than forcing organizations to apply to numerous sources for small grants.
- Organizations could save $55-billion annually by eliminating inefficiencies among the worst-managed organizations. Donors could put pressure on charities to perform better by financing only those groups that are well-managed.
- Charities could further reduce costs by $7-billion by consolidating chapters and sharing their functions, such as providing services jointly with other groups.
- Nonprofit groups could increase the value of their services to society by $20-billion a year by concentrating on the most effective programs.
- Foundations could provide $30-billion to charities annually by distributing a greater share of their endowments in grants.
McKinsey says it based those conclusions on its work with 600 nonprofit clients, including Ashoka, United Way of America, and the Global Fund to Fight AIDS, Tuberculosis and Malaria, an analysis of federal informational tax forms filed by charities, and numerous studies conducted by think tanks and others. Some of the recommendations, however, are based on a smaller sample. Its calculations of the cost of fund raising, it says, were based on the experiences of six to 10 organizations.
Charity leaders say McKinsey came up with the $100-billion figure to grab headlines. “It was sensationalistic and superficial to float those big numbers out there,” said Peter V. Berns, executive director of the Maryland Association of Nonprofit Organizations, in Baltimore. “I’d be very surprised if there’s $100-billion in inefficiency and untapped sources out there. I’ve seen nonprofits stretch dollars in ways that businesses or governments never do.”
Scholars of the nonprofit world also say the $100-billion figure fails to take into account the cost of achieving charity savings. Paul C. Light, director of the Brookings Institution’s Center for Public Service, said the article doesn’t properly emphasize that charities might need to buy better computers or spend money to train their managers in new skills. “The notion of this $100-billion just lying out there that you don’t have to spend to get is not true,” he said, adding that foundations rarely want to pay for such operating costs. “The sector is crying for improvements, but foundations and donors don’t like to spend money on those kinds of things.”
McKinsey officials defend the article, though they concede that the $100-billion figure is not necessarily solid. They say they felt that policy makers, business leaders and nonprofit groups would be most likely to take the recommendations seriously if they could see that the result would be a significant sum of money.
“We knew that putting numbers on opportunities would get people’s attention -- it always does,” said Les Silverman, head of McKinsey & Company’s nonprofit practice and one of the authors of the article. “We thought there would be value in broadening the debate and talking to all the stakeholders -- not just the people who run the nonprofits, but the funders, the board members, those who benefit from the services of the sector.”
The suggestions in the article “are all tough actions,” he added. “If they were easy, they would have happened. Unless people can see the upside, the payoff, the prize, from all that hard work, how do you motivate people to take it on?”
Making Distinctions
Some charity leaders faulted the article for not doing more to distinguish among groups by the type of work they do, such as providing social services or lobbying to protect the environment.
“You can’t make gross generalizations across the nonprofit landscape and come up with something useful to everyone,” said Mario Morino, chairman of Venture Philanthropy Partners, a Washington organization that works with donors who serve needy children. “They’re comparing apples, oranges, watermelons, and everything else.”
Nonprofit experts also criticized the article for comparing the percentage of their budgets that charities spend on fund raising with the percentage spent by multinational corporations to raise capital. Businesses typically spend only about 2 to 5 percent of their budgets to raise capital, the article says, adding that charities should not spend more than 5 to 10 percent of their budgets on fund raising, but that most spend twice as much as they should.
Mark Kramer, a foundation consultant in Boston and former venture capitalist, says the comparison with businesses is flawed because it doesn’t compare charities with small businesses, which he says may spend 20 percent of their budgets to raise capital.
Charity leaders also found fault with a recommendation that fund raisers should seek fewer but bigger grants. Critics say the authors failed to consider federal tax laws that require charities to raise a significant part of their funds in small contributions from large numbers of people. Groups that fail to do so can lose their status as tax-exempt charities.
Ms. Aviv, of Independent Sector, says other problems can occur if charities rely too much on a few big donations. “If a higher percentage of your dollars come from high-end donors, then there is a chance that those donors will have more control over your programs,” she said. “Besides that, large donors or foundations may not be interested in helping ex-prisoners, their children, or people with spina bifida. Not all charities have access to high-end donors.”
Paul Jansen, director of McKinsey’s think tank on the nonprofit world, says he and his colleagues wanted to make the point that foundations could do a great deal to streamline the process of getting money to charities and to reduce the administrative burden for charities seeking grants, and that doing so would produce more financial gains than other cost-cutting ideas, like getting deals on office supplies or laying off employees. “Because administrative costs are easy to identify, people pound on them, measure them, try to compare them, and run the risk of missing the much bigger opportunities that exist in the sector,” Mr. Jansen said. “Part of the purpose here was to get that area of traditional focus in context with the other areas of opportunity.”
Some nonprofit scholars are also worried that the article is too aggressive in urging foundations and other donors to steer away from inefficient groups.
Joel Orosz, a former program official at the W.K. Kellogg Foundation, in Battle Creek, Mich., who now teaches philanthropic studies at Grand Valley State University, in Grand Rapids, Mich., says focusing exclusively on cost-effective programs poses potential problems. “If you pull resources from less effective programs and they go belly up, who provides the services they were offering?” he said. “In a small community, there may be one homeless shelter that is not terribly efficient, but it’s the only one.”
Praise for Article
Despite the controversy over the approach McKinsey took, some charity leaders and consultants agree with the article’s overall point that nonprofit groups need to overhaul their management approaches. Renata J. Rafferty, a Palm Springs, Calif., consultant who works with donors and nonprofit groups, says many boards fail to supervise their organizations. More attention from them might improve the groups’ services and internal practices.
“Donors aren’t getting the worth of their donations in social value,” she said. “Nobody’s minding the store at nonprofits, which have no accountability.” She pointed to controversies over executives’ pay at the national headquarters of the American Red Cross and its San Diego chapter as examples of waste “that occurs regularly. If boards, who aren’t looking at these issues, start looking at them now, then the report will have some value.”
Some charity officials also see McKinsey’s recommendations as reinforcing efforts they are already making to improve their management. The American Lung Association, in New York, for example, is examining its reliance on direct-mail campaigns, which “can be pretty inefficient,” said Steven P. Smith, the organization’s vice president for field operations. He said he agreed with many of the points in the article. “We have a responsibility to find ways to spend our fund-raising dollars more wisely. This study reminds us of our obligations.”
The article in the Harvard Business Review is available on the magazine’s Web site for $6.