Paradigm Shifting

Diarists and the photographer Frank Hurley who accompanied Ernest Shackleton on HMS Endurance in his attempt to cross Antarctica from sea to sea in 1914-15 recorded graphically the loss of the ship to the forces of advancing, expanding winter ice. As if the ice understood the metaphor it would bequeath, it first took the ship’s rudder, then caused a flooding leak preoccupying the crew, and finally, as Shackleton himself observed, twisted Endurance out of shape before causing her to sink.

For many CEOs of nonprofit organizations, being in the nonprofit sector in 2012 feels like piloting the Endurance through advancing and expanding floes of Antarctic ice. Like the Endurance, a great many vessels on nonprofit missions are getting caught in ice and it is flowing in the wrong direction, taking them away from their goals and objectives by limiting their financial resources. Exacerbated but not caused by the Great Recession, it’s an environment characterized by ever-advancing competition for stagnating sources of funding.

We are reminded of a common but powerful statement of management advice: If we don’t change direction, we’ll wind up where we are headed. The situation calls for changing business models. For most, tweaking is out of the question and innovation is demanded.

The nonprofit sector hardly ever benefits from the disruptive influence that capital markets bring to bear on innovation in the commercial sector. Missions anchor the businesses of nonprofit organizations. They rarely change; changing them is rarely justified.  Business model innovation must come from within, and change must contend with the powerful current of mission and the course it sets for organizations’ resource development and management strategies.

Where program initiatives are monetized, there is a functional connection made between the nature and performance of mission and the financial stability and capacity of organizations. The most prominent examples are medical services and higher education. Yet even in these situations, capital is rarely transformative let alone disruptive.

In any case, most nonprofit organizations cannot, and some choose not to, monetize the programs that manifest their missions. And while higher education and health services account for lions’ shares of nonprofit assets and operating income, they do not account for proportionate shares of the nonprofit sector’s organizations.  For the majority of nonprofit organizations, business models have to do with commerce outside the castle’s moat, providing sustenance for those within. The tension between doing good and doing well financially quite often affects flammable friction within and public controversy without.

The most likely sources of funding substantial enough to be disruptive are private foundations. But while private foundations have the freedom to be entrepreneurial, they seldom exercise that freedom. They most always provide funding to organizations because of what those organizations are already committed to do and not because they have the capacity or wherewithal to do something else.

How, under these circumstances, does one bring about change to business models? Not easily. In his book, Change by Design, Tim Brown writes, “More good ideas die because they fail to navigate the treacherous waters of the organization where they originate than because the market rejects them.” He was writing about private enterprise, but his point holds true especially for nonprofit enterprise.

When gears grind in paradigm shifts at nonprofit organizations and progress stalls, the immediate cause is almost always isolation or segregation of program and financial strategies, and contributing cause is ignorance of what really makes organizations financially viable. What’s required are leadership that engenders management staff commitment to learning, collaborative senior management planning, and full partner ownership of the new model.

None of these requirements fits nonprofit organization norms. Nonprofit organizations are normally led by CEOs who are primarily qualified by their mission and program credentials. Just as it took a couple hundred years to understand that teachers – good teachers – were not necessarily qualified to manage the business of public education, it has taken much longer than the private nonprofit sector could afford to understand well enough the need for management-qualified CEOs or COOs to codify credentials in position descriptions or budget for the additional professional skills.

At the management level beneath the CEO, siloing of financial management, program management, fundraising, marketing and marketing communications is the norm. This doesn’t happen because senior managers in nonprofit organizations are characteristically isolationist people. It happens, first, because mission and program are preeminent and self-justifying; second, because the management of program expense and of funding are normally profoundly different from one another; and, third because senior managers are not normally trained or knowledgeable about their colleagues’ realms of work.

People – especially nonprofit organization board members who should know better – are often heard to say nonprofit organizations should operate like businesses. But the fact is operating nonprofit businesses is much more challenging and difficult. This isn’t to say that good management of profitable enterprise is easy; rather it is to say that managing to the bottom line is far simpler than managing to both often elusive mission objectives and to efficient and effective funding. Nonprofit organizations, even those with fungible programs like health services and higher education, have really two businesses to model and manage.

And the business of funding, even in those apparently simple cases, is made complex by the diversity of sources available to the nonprofit: individuals, corporations, private foundations, public foundations (such as community founds), public agencies, and even legislatures. The organization whose management doesn’t understand the range and variety of skills required to pursue all these sources will not fare well.

Of all funding sources available to nonprofit organizations – and not all sources are available to all organizations – the most complex and difficult to manage is individual support. One reason is because of the wide range of knowledge, skills, and experience required to work effectively across the spectrum of donor relationships, from first-ever gift to capital campaign participation or estate commitment. Another reason is because what we might call the retail part of fundraising, all that fundraising that is done through media of direct or mass communication, has become technically complex, economically confusing, and as cacophonous as a flea market in a concrete warehouse. And, third, individual fundraising is hard to manage and complex because the marketplace of individual donors is itself quite complicated.

Right now, in all three respects, the complexity of individual fundraising seems to be running amok. And while nonprofit executives don’t usually perceive of fundraising as something worthy of such grand terminology as fundraising business model the approach necessary to affect change needed is worthy of the term. It means that what’s required is a collaboration among those chiefly responsible for the four realms that we believe comprise the well balanced nonprofit enterprise: program, finance, financial resource development, and organizational competency.

That’s were change starts or it never gets started.