Getting It Done: Improving Nonprofit Performance

The disorderliness and complexity of the existing philanthropic environment distract nonprofit management, says HBS Professor Allen Grossman, shifting focus away from organizational performance and putting nonprofits at a competitive disadvantage.
by James E. Aisner

For many years, Americans have shown their generosity to myriad nonprofit organizations. And 1999 was no exception, as charitable giving in this country reached a record high of just over $190 billion. At the same time, however, there is some concern about whether nonprofits are up to the task of making sure that these donations actually make a difference in alleviating some of the major ills and inequities of society. What, many ask, are the measures of effectiveness in these operations? Where is the accountability? Would there be better bang for the buck by relying more on the growing number of for-profits that are focusing on problems in areas such as education and welfare-to-work?

According to Bloomberg Senior Lecturer in Philanthropy Allen Grossman, the answers to these kinds of questions must take into consideration one essential point. "Excellent organizational performance is easier to achieve in a for-profit organization than in a comparable nonprofit," he writes in a recent working paper, "Philanthropic Social Capital Markets and Performance-Driven Philanthropy," and the most important reason is capital. "It is the absolute amount of capital, the stages at which it is available during organizational development, and the conditions of its acquisition that all work together to create a powerful influence on management behavior and organizational culture." It is therefore imperative, Grossman argues, that the world of nonprofit philanthropy undergo systemic changes.

Whereas the for-profit capital markets provide transparent objective criteria for making early- and later-stage investment decisions, balance risks with return, and create a "performance-driving cycle" by rewarding improvements in the top and bottom lines with access to further funding, the nonprofit sector tends to be mired in a process that often results in various degrees of chaos. Supported by a broad mix of foundations, corporations, and individuals, the philanthropic capital markets depend mostly on a hodgepodge of personal relationships, reputations, and motivations rather than hard data and sophisticated feedback procedures.

Grossman points out that unlike their counterparts in the private sector, nonprofit chief executives devote from 30 percent to 60 percent of their time pursuing donations rather than meeting the challenges of building a top-flight organization. Similarly, their boards concentrate on fundraising and other activities rather than performance management. Executive attention is further divided by the need to take care of a large number of clients on each end of the pipeline—both donors and recipients. And without much emphasis at present on meaningful measurement, mediocre performance often goes unnoticed and unpunished by the philanthropic capital markets, while, ironically, a record of successful achievements can make the next round of grants seem less compelling to potential givers.

"The disorderliness and complexity of the philanthropic funding environment distracts nonprofit management, shifting focus away from organizational performance," Grossman writes. "Far from being a benign influence, philanthropic capital markets have an insidious effect on making and keeping high performance a top priority for nonprofit managers. The result is a distinct competitive disadvantage for nonprofits."

A small number of attempts are under way to begin to alleviate some of these problems, Grossman notes, including some eight "venture-capital-type philanthropic funds" that provide the wherewithal for what is commonly called venture philanthropy. "While the approaches of these funds to applying the for-profit venture model [to nonprofits] vary," he explains, "they are all establishing performance metrics for their 'investments' and rewarding [good results] with continued funding." But with only some $30 to $40 million to distribute during the next few years, venture philanthropy's overall impact is quite limited. On another front, The Pew Charitable Trusts undertook a new approach in 1997 by creating the Philadelphia Cultural Leadership Program, which demands accountability every three years from the arts organizations it supports before funding is renewed.

"Over the long term," warns Grossman, "these experiments may be too few and too late for sustaining a large number of service delivery nonprofit organizations." To lead the charge for more broad-based change—or "performance-driven philanthropy," as he describes it—Grossman points to the nation's 54,000 foundations, whose combined assets total approximately $370 billion. If these foundations are willing to embrace this concept as an important priority and "to dedicate substantial resources to developing new market processes, structures, and mechanisms," he writes, "there is no limit to the changes they could effect in the sector."

To help these organizations do that, Grossman concludes his paper with recommendations centering on three areas: knowledge development and information sharing concerning performance metrics via regularly scheduled forums; further experimental initiatives by individual foundations; and the creation of large foundation-supported pools of capital. In Grossman's view, each pool would ideally support a particular stage of a nonprofit's development, with distribution of funding dependent on a "performance meritocracy" that recognizes excellence and encourages less successful performers "to improve or wither."

The need for change shouldn't obscure the fact that nonprofits have long played an important role in American society, Grossman concludes. "As the legislative, executive, and judicial branches of our government have created a unique and valuable balance for the welfare of the country, one could make a similar case for the balance achieved by the for-profit, nonprofit, and public sectors." The analysis and prescriptions Grossman offers make their own contribution to maintaining that balance in the future.