If nonprofit groups took aggressive action to reduce their inefficiencies and cut costs, among other things, they could generate more than $100-billion a year in extra dollars for their charitable programs, says McKinsey & Company, a management-consulting company, in an article in the Harvard Business Review (May).
McKinsey examined 200,000 charitable organizations with annual revenues of more than $25,000 to identify how the groups could improve their management and financial practices. The article’s authors -- who include former Senator Bill Bradley of New Jersey, now an adviser to the company, and Paul Jansen, the director of McKinsey’s Institute on the Nonprofit Sector -- suggest several ways charities could apply more businesslike practices to their operations and how grant makers could help them do this. Among their recommendations:
Reduce fund-raising costs. The authors say charities could cut fund-raising expenses by relying more on the Internet to solicit donors. What’s more, foundations can help by providing larger grants to charity so groups don’t have to seek funds from as many philanthropies to survive. The McKinsey study says adopting these ideas, along with others, could generate $25-billion.
Increase grant making by foundations. The McKinsey report says grant makers should increase the amount they provide each year to charity from 5 percent of their assets, as required by law, to about 7 percent, which would “significantly increase the amount of social good they deliver.” If large nonprofit institutions also dipped into their endowments more often to pay for programs, the article says $30-billion could be created.
Cut program and administrative expenses. By adopting better management practices and pooling resources with groups that have similar missions, inefficient charities could reduce their program costs by 15 percent, generating $55-billion, the article says. Trimming administrative costs by 15 percent by consolidating administrative “back office” functions and other areas could create $7-billion.
Improve effectiveness. By applying a cost-efficient, businesslike mentality to nonprofit work, the authors say, charities would become more effective. Moreover, donors can help weed out poorly performing groups by supporting only those organizations that can clearly demonstrate the results of their efforts. The authors say that it is impossible to estimate a potential monetary gain from increasing charitable productivity, but that society would certainly benefit if groups could do more.
The authors say the challenges facing charities “demand fresh thinking, as well as the slaughtering of some sacred cows.”
The article, “The Nonprofit Sector’s $100-Billion Opportunity,” is available at the magazine’s Web site, http://www.hbr.org. The cost is $6.