When It's Time to Pull the Plug on a Nonprofit That Shouldn't Exist

Credit: Molly via Flickr (CC BY 2.0)Over the past year, the press has printed many articles about significant changes in philanthropy. There have been discussions about nonprofit infrastructure; funding for general operations vs. funding restricted to specific purposes; overhead costs; and the overlap of multiple organizations addressing the same mission.

Charity Navigator made some of the biggest headlines when it announced new criteria and other changes in how it evaluates nonprofit organizations. The charity rating site will no longer penalize a charity for reporting administrative and fundraising costs. Overhead is coming out of the closet! Financial capacity and what it means for an organization’s long-term sustainability, as well as the organization’s financial performance over time are now more important than the most recent year’s results.

Other articles noted the increase in general operating grants and some funding is being directed specifically toward administrative expenses. Others have encouraged increased financial support for organizations that assist charities in building their capacity to endure over the long term. Capacity-building assistance is seen by some as critical to the success of the nonprofit sector. Resource providers are urged to focus on an organization’s leadership and the depth and capacity of its staff. But at the same time, funders are urged to avoid charities who pay their CEOs “inordinately high salaries.”

And finally, there have been articles, including one on this website, that express the opinion that there are just too many charities in existence. The claim is that there is significant overlap due to multiple charitable organizations addressing the same mission in the same market. For example, the Boston Globe noted that there more than 40 organizations that partner with Boston schools in an effort to boost graduation rates for disadvantaged students. Yet one more organization has just joined this market with the same goal.

Organizations that spend 100 percent of their funds on program activities do not perform the best. Having the capacity to address issues as they evolve depends on well-trained staff who have developed over time. Such training and development is accomplished by overhead spending. Like any other company, nonprofit organizations must have a viable infrastructure to support program activities.

Larger organizations do work better than smaller organizations. Every organization needs a certain level of organizational capacity to operate and larger organizations that have spent years developing this capacity as an organizational goal (along with their programmatic mission) are more efficient and effective than smaller organizations that are frequently praised for their passion, energy, innovation and fearlessness.

Often, when someone came to me wanting to start a new nonprofit organization, I brought them to an existing client suggesting that they “sell” their idea to the larger organization as a potential new program. All too frequently, the passionate and innovative individual did not want to be a program manager in a larger organization—they wanted to run their own shop. When pressed, they admitted that they knew they could solicit resource providers to fund them; resource providers who would positively react to their passion, energy and fearlessness. But they were concerned that in the larger organizations, other programs might be seen as more deserving of scarce resources.

Are there too many nonprofit organizations? Most certainly. In the for-profit world, when there are too many bakeries in a community, some eventually go out of business. Unfortunately, this same process does not work in the nonprofit sector. There always seems to be a resource provider wiling to keep a dying nonprofit on life support. Those resource providers fall under the spell of the director’s passion, energy and innovation, but don't question the effectiveness of the dollars diverted to these small organizations. I have seen it many times—no one wants to make the difficult decision on these organizations. The director is certainly not going to make the decision to terminate their own job.

Terminating your funding to a small organization, when that decision may mean the end of a half dozen individual’s jobs—people you have come to know personally—is difficult. But you need to ask yourself if continued funding has more impact on their employment than it does on the organization’s mission. Consolidation in the nonprofit sector will only begin with pressure applied by the resource providers—and consolidation is desperately needed.

Large organizations with multiple programs and hundreds of employees are like any other large business. They need policies and procedures; they need trained HR people and a professional fiscal staff; they need a full-time professional development office. The CEO of such a large organization is in demand by many businesses—both for-profit and nonprofit—and this reality is what affects CEO compensation more than anything else.

Unfortunately, as passionate and energetic as these CEOs may be, their general business demands eventually turn them into business executives more than fearless, innovative program warriors. As a resource provider, you want to see both. You want a fully functional professional support system that starts with the CEO and extends to the various essential overhead departments. And you also want passionate, fearless program directors finding innovative ways to achieve the mission to which you are directing your resources. Key to making the correct funding decision is meeting both the CEO and the program director(s).

In the for-profit world, customers make the big decisions by voting with their spending dollars. In the nonprofit world, the resource provider has the role of the customer. The resource provider is purchasing the services for the charity’s direct beneficiaries. Those beneficiaries are depending on you to bring efficiency and effectiveness into the sector.