McKinsey’s $100-Billion Prediction Strikes a Nerve

To the Editor:

The impassioned response in some quarters (including in these pages) to our recent Harvard Business Review article, “The Nonprofit Sector’s $100-Billion Opportunity” (May 29), suggests that our research has struck a nerve.

Part of the controversy stems from the current political and economic climate, which is putting serious financial pressure on many nonprofits, and hurting those they serve. Yet the current climate makes it even more critical to start a dialogue about how the sector can deliver more — dialogue that some critics of our study seem to resist, acting as if the sector had few opportunities to pursue. In the interest of making this dialogue as constructive as possible, we want to clear up some misunderstandings about our perspective, and make a few suggestions for how the conversation might best move forward.

Start with “the big picture” that inspired our research — a picture that has nothing to do with specific efficiency estimates or effectiveness benchmarks. The big picture is that the United States will face unprecedented financial and governmental challenges as 76 million baby boomers start to retire in less than a decade. In ways that even many elected officials do not yet fully appreciate, the boomers’ retirement, and the need to fund their colossal health and pension costs, will create fiscal pressures that will invariably reshape some of what government does. We believe nonprofit leaders must think and act strategically about this overarching challenge now to make the sector and the nation as ready as we can be. The current economic and political environment only heightens our sense of urgency.

Dealing with the near- and longer-term challenges will require all sector players to seek ways to be more effective and more efficient. In our view, this means an open-minded willingness to explore bold new ideas and question current practices. It will also require (though some seem to have misread our research on this score) that many organizations in the sector invest in the managerial talent needed to capture these opportunities. Some nonprofits are already moving in this direction, and they need the continued support of their staff, board members, and funders as they do so.

Let us be crystal clear on one point: The nonprofit sector can never “pick up the slack” from government, whose much larger scale will always require it to take the lead in countless areas, such as health and education. But the sector’s role remains critical and its opportunities large. To listen to some advocates, however, the sector is already operating in the best of all possible ways. When this brand of defensiveness slips into a classic circling of the wagons, it simply isn’t credible, and risks damaging the sector’s reputation. More important, it ill-serves disadvantaged Americans, who most depend on the nonprofit sector’s vitality and capacity for innovation and renewal.

To see how a different frame of mind might promote the dialogue we need, take one area where some have questioned our conclusions: namely, that the nonprofit sector’s aggregate funding costs could be substantially lowered.

Certain facts here are beyond dispute. The nonprofit sector is highly fragmented, with hundreds of thousands of small organizations competing for what in any given year is a relatively fixed amount of aggregate national contributions. Most people agree that the costs of fund-raising efforts are too high, though we might disagree as to how low they could be. For example, a leader of a $6.5-million nonprofit recently told us that she has 171 different funding sources to manage (and “all individuals” count as just one of those), each with its own management and reporting processes.

Clearly, the sector has a big stake in lowering fund-raising costs. Funders need to help, perhaps by coordinating application requirements and due diligence as well as greater use of pooled funds. Nonprofits can employ better donor-relationship-management tools enabled by technology and can analyze the actual cost-effectiveness of each of their fund-raising strategies to best focus their efforts.

Beyond this, sector observers also acknowledge that today’s fragmentation and the resulting duplication of effort have serious implications for efficient and effective program delivery. Some of the small nonprofits that compete for scarce resources provide very similar services within the same community, yet they often fail to collaborate with one another on either administrative or programmatic issues. The question naturally arises: Is there an optimal organizational scale for service delivery that could free up more dollars for the core mission — and if so, how would the sector get from here to there? Also, what are the potential downsides of such collaboration or consolidation in terms of community leadership and sector diversity, and how can they be acknowledged and taken into account?

In business, of course, the profit motive creates economic incentives for innovation, growth, and consolidation. Since there is no equivalent “forcing device” in the nonprofit sector, we think it may be timely for sector leaders to look more deeply at what might be called “the nonprofit industry structure” in their regions with a view to increasing the money available for direct services. How can we create meaningful performance information that enables donors and government to help small but effective nonprofits grow to scale? How might we better use technology to improve how services are delivered and nonprofits are run? Leadership on these matters can’t come from smaller nonprofits alone, but must also come from funders, boards of directors, and even governments that can take a systemwide perspective.

We’re aware that some in the sector consider topics like consolidation and greater performance transparency taboo. But asking questions about how the sector is organized and how it operates — and estimating the cost the nation pays for the status quo as best we can — is the only way to ensure that the sector is doing as much as possible to meet the needs that it exists to serve. The alternative view — that the sector is doing such challenging work with so few resources that we should not question the way it functions — in effect undermines the nonprofit world’s highest ideals.

We’re also aware that the data available to perform these and related analyses are imperfect today. But the absence of ideal data cannot serve as an excuse for failing to assess the rough magnitudes of opportunities in ways sufficient for managerial judgment and action. We hope to work with others to improve data on the sector so they are as comprehensive as possible. Form 990s could be made far more useful, for example, with better and enforceable guidelines on how fund-raising expenses are tallied. Better methods for assessing and reporting performance could also be developed. To throw up one’s hands in the face of imperfect information, however, is a license for complacency that sector leaders shouldn’t embrace.

To be sure, no analysis is perfect; neither, of course, is ours. But McKinsey’s work with more than 200 nonprofit and community organizations around the world every year gives us a vantage point to raise what we believe are constructive questions. Indeed, many sector leaders have told us privately that our study is already helping to start a needed conversation.

While some have criticized our efforts, most agree that the sector does have significant opportunities to free up resources to meet the challenges ahead. Whether you think they add up to $100-billion or some other large number, the focus should be on where these opportunities exist and what needs to happen to capture them. The solutions will be neither easy nor obvious, but we look forward to working with, and learning from, others as we seek to find them.

Bill Bradley
Senior adviser to McKinsey & Company’s nonprofit practice
New York

Paul Jansen
Director of McKinsey’s Nonprofit Institute
San Francisco

Les Silverman
Partner
Washington office
McKinsey & Company