The Growth Paradox for Nonprofit Organizations

Often nonprofits can have unchecked appetites for growth, which combine with structural factors that make such growth haphazard.

The Growth Paradox for Nonprofit Organizations
9 mins read

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.

About the Author

Devon Kearney is a nonprofit fundraising consultant with more than 20 years of experience working with a wide variety of nonprofit organizations in the United States and abroad, focusing on civil and human rights advocacy. In supporting the growth of more than fifty organizations as a staff member as well as a consultant, he has developed both an insiders’ and an outsiders’ perspective on the impact of fundraising practices on the fiscal health and organizational culture of nonprofits.

Articles on Blue Avocado do not provide legal representation or legal advice and should not be used as a substitute for advice or legal counsel. Blue Avocado provides space for the nonprofit sector to express new ideas. Views represented in Blue Avocado do not necessarily express the opinion of the publication or its publisher.

5 thoughts on “The Growth Paradox for Nonprofit Organizations

  1. Interesting perspective on growth, but you leave out a key factor, the impact of govt or foundation funders who look at every budget as a zero sum game, not one that helps build capacity.

    1. Good point. The situation is worse, too, outside the U.S. – try getting more than 7% from the European Commission. Especially when investing in the global south, too many donors act as though they have no reason to invest in salaries and infrastructure, with terrible consequences for the groups they fund.

      There was a study a few years ago that looked at the effect of accepting government money on nonprofits that concluded that for every $1,000 of government money raised, the actual value to the org is something less than $300. The conclusion of the authors was that government money crowds out foundation funding – when they see government money being invested, they conclude that the program has “scaled up” and move elsewhere. But I suspect that it’s at least as much a result of the opportunity cost of taking government funds: managing government grants is so much more onerous than other types of funding that they eat up capacity that would otherwise go to cultivating donors.

  2. For me, growth is good if you plan on a long-life nonprofit. In Scaling Up coaching for nonprofits, we refer to the revenue range between $1 million and $6 million as the Valley of Death. In the Valley of Death, tasks in HR, Legal, and Accounting are needed but often unaffordable. Everyone is doing three jobs. If your nonprofit is in that range, I don’t see a way to escape fragility without growth. People burn out in these organizations.

    Well-planned growth builds margins for essential operations although I agree with the author that every type of nonprofit has an optimal ceiling and growth of contracts can lead to mediocrity.

    The fragility of nonprofits is driven by our general mission — we are assigned the 5% of the national economy where Microsoft and Elon Musk can’t figure it out. Together, nonprofit directors lead a $1 trillion operation with 10% of the entire workforce in a complex capital environment.

    Directing nonprofits is the acid test of leadership. It’s no mystery why we feel tired 🙂

    1. Thanks for these excellent comments, Ron. Like you, perhaps, I have walked these twenty years mostly through that Valley of Death.

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