The Growth Paradox for Nonprofit Organizations

We have been talking about the Overhead Myth and the Nonprofit Starvation Cycle for many years, but there has been only modest progress on donor demands that result in underinvestment in nonprofit infrastructure, and malnourished organizations.

But if the Overhead Myth keeps us all hungry, the Nonprofit Starvation Cycle is not all the donors’ fault. Equally important, and less considered, are our organizations’ unchecked appetites for growth, which combine with structural factors that make such growth haphazard.

To be sure, not all organizations are on a nonstop growth trajectory. But many treat year-over-year budgetary increases as normal, even as a sign of health. At times, it feels a bit like we have imbibed the “grow or die” myth from the private sector.

Pressures on leadership often push in the direction of constant growth. Perhaps because of the comparison to their for-profit peers, nonprofit CEOs can feel like they are expected to grow the organization.

And professional fundraisers, typically following a zig-zag trajectory from one organization to another, get ahead in part by demonstrating their “numbers” — the degree to which they contributed to increasing funding in prior roles.

More than this, there is the seemingly limitless scale of need. Ours is a world where injustices are endemic, and human deprivation always outstrips the resources we can marshal. In these circumstances, it can seem morally wrong not to expand services and improve life for those we serve.

Driven by these pressures, many nonprofits grow in unplanned increments. Program budget requests inch up yearly, sometimes adding up to a huge expansion of the organizational budget. Justified by the imperatives of mission-based work, these budgets are often adopted despite the reservations of finance and development.

Over time, “stretch budgets” become the norm, and soon, successful organizations are 30-40 percent larger, all without really having mapped out what is required to maintain that scale.

Is growth always good?

In more than 20 years working with some 50 nonprofits, I have seen the negative consequences of growth without limit. There is, first, the “hungry ghost” — when nonprofits hit a certain size, the monthly burn rate can become so high that fundraising becomes the overarching imperative.

In most organizations, the deeper problem is that growth and stability rarely coexist. A Bridgespan study found that:

[E]ven after years of growth [emphasis mine], the financial condition of well-known and good-sized youth-serving organizations remains remarkably fragile. Funding for organizational improvements consistently lags behind the need for them, putting stress on the entire organization and particularly its leadership.

The groups they studied had existed on average for a quarter century but had accumulated only 4.5 months (or fewer) of cash reserves. Continued growth was far from guaranteed: “50 percent laid off staff, 60 percent shifted to a lower-cost program model, and 45 percent cut entire programs.”

Dr. John Brothers, senior fellow at the Support Center for Nonprofit Management, refers to “high arc” organizations: “In my work with nonprofits, I have noticed a pattern among many organizations: Those with rapid growth trajectories often experienced a similarly rapid decline.”

But the instability does not end, or perhaps even begin, with money. It is built into the way we grow. If I receive a grant to expand work in a particular area in a significant way, I have made the commitment, generally, to do the work before I have the capacity to do it — hiring does not begin until the grant agreement is signed.

I do not know how much or what restrictions may apply, and often, the work the funding generates exceeds the funds. Growth also brings complexity, which requires more sophisticated administration, something that it is difficult to factor in when the focus is on enabling programs to expand.

We do this year after year — what is the result?

For many of us, it is long hours working under many job descriptions, unclear lines of responsibility, too little support, and a lingering sense of never doing enough. Burnout is common.

For organizations, this translates into high turnover and chronic staff shortages — but also low staff morale, poor information flow, gaps in fiscal management and persistent financial unpredictability, mismatches between grants and activities, and delays in programming.

Like Janus, constant growth and perpetual instability are two faces of the same creature. So, is there a better way? Maybe. Perhaps we should follow the shibboleths about running nonprofits like a business.

In theory at least, for-profits exhibit more carefully planned growth — something that may be baked into the profit-making model. To increase revenue, you must first invest in capacity: More workers and machinery are necessary to double unicycle production in my factory. Only later does the money flow in.

But for nonprofits, investment capital is hard to come by. Loans are rarely extended, cash reserves never enough to safely spend down. To increase productivity, we start by fundraising; and when the money comes in, we hire the staff. We are again on the other side of “the looking glass.”

This is why growth in the nonprofit sector often feels haphazard. Rather than looking at the balance sheet and planning to grow, we build what we can with what we are able to bring in.

The inherent opportunism means we may not know exactly what we need until we have committed to do the work, for what we do depends in part on where the money comes from. If we follow a good fundraising; year with more growth of this sort, whatever gaps are left in the plans already on the books are unlikely to get filled.

Of course, there are different structural incentives in the private sector. Accumulations of profit are why private companies exist, where on our side, there is a sneaking suspicion that you are doing wrong when your org has cash left over at the end of the year. For-profit companies understand the need to keep cash reserves, even if they are subject to pressures: For-profits have shareholders, give bonuses, save for the next downturn, and invest in growth.

Investing in growth happens when company leadership can make the case that it will serve those other interests. And while nonprofits sometimes receive capacity-building grants — somewhat analogous to business loans — funders generally do not approve of sitting on those funds for years until conditions are ripe.

Business provides a deeply flawed model, but there are lessons here. Though “run it like a business” is becoming an unfashionable idea, this discrepancy might be used to develop new funding models that enable nonprofits to make more effective long-term investments.

Convincing funders to pledge or give money that may not be spent right away is a tall order. But perhaps not impossible. Meanwhile, organizations themselves can be more disciplined in tying growth plans to building cash reserves that help ensure stability.  

Above all, we can ask ourselves about the costs of growth. Is it always better to be larger? Is there failure in maintaining the status quo? Can we maximize our impact while resisting the pressures that inflate our budgets year over year?

Can we responsibly not scale up our often urgently important work?

I think we can. Ours is a culture that celebrates continuous hustle, but in the nonprofit workplace, something essential is lost when we stuff our days too full.

The strain is most evident in the ability of staff to carry out their responsibilities, who often feel overwhelmed and underwater. But the stressors at play also inhibit reflection, learning, and creative thought.

Holding steady may be the key. After a period of growth, nonprofits need time for consolidation, devoting further increases in revenue to the infrastructure lag described above. An organization that is fully staffed for a certain scale is one that can invest both time and thought — the most precious commodities in a mission-based organization.

The aim should be to reduce the workload across the organization while investing time into creative thinking that improves service delivery and develops more realistic theories of change. In doing so, we may not scale in terms of size, but we can find ways to expand our impact through new efficiencies and better ways to deliver the services we offer.

It may well be that we can do more by simply trying to do less.

Check out From Startup to Success: Guiding Nonprofits with Six Core Principles of Improvement for additional tips and information.

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• Five Years and Growing: How One Nonprofit Built a Sustainable, Collaborative Mission
• Measure What You Value: Designing a Values-based Performance Appraisal System
• The Critical Role of Cultural Responsiveness in Today’s Nonprofits

 

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