McKinsey’s Knee-Jerk Fund-Raising Stance

To the Editor:

The recent McKinsey study on the nonprofit world (“A $100-Billion Debate Erupts,” May 29) says that average fund-raising costs of 18 percent are too high because too many organizations are spending too much money seeking “large volumes of tiny contributions.”

This knee-jerk position can only be taken by people who are actively trying to eliminate average people from having a voice in civic life or by people who have bought into the surface appeal of this elitist argument without looking at the real-world effects. You might as well say that elections should be eliminated as a wasteful expense since the incumbent almost always wins.

Having most of your revenue come from large numbers of contributors gives the organization the independence to follow its mission free of the personal whims of a handful of donors. Everyone says (and they probably believe it when they say it) that donors do not affect the mission. But we have seen too many good charities slowly bend their missions over time to please major donors at the eventual cost of the organizations’ integrity.

There have been a few high-profile cases of major institutions returning an extraordinary gift because there were too many strings. But how many institutions return a big operating gift, especially when they have relied on that annual gift for years? Making programmatic decisions based on common goals with a broad constituency rather than a handful of insiders will go much, much further in making an organization accountable to the public.

Can any organization maintain its independence when more than say 5 percent of its operating budget comes from one donor? Maybe in the short run when everybody is on the same page programmatically, but I question whether it is possible in the long run. We all know that in order to get a contribution you must ask for it. And it is simply more expensive to ask 100,000 people than it is to ask 10. Is the significant monetary savings worth it? Should all organizations focus exclusively on major donor programs? The thoughtful, but resounding, answer for organizations who aspire to be a voice for a broad-based community is no.

Lane Brooks
Director of Development
Public Citizen
Washington

To the Editor:

It saddens me that the vast majority of responses to the recently released McKinsey report have more to do with dissecting and debating the study, and less to do with evaluating and considering the merits of the points being made.

Lester Salamon chides McKinsey for its generalizations about nonprofits, then goes on to say that management consultants have “Enron-ed the corporate world” (“Charities Shouldn’t Be Urged to Act Like Enron,” Opinion, May 29). Talk about generalizations — am I missing something? Does anyone care that while there may not be $100-billion lying around, even 1 percent of that would be worth talking about?

I have audited and consulted with the nonprofit sector for over 15 years. Yes, I am a CPA. And while the current environment makes my credentials ripe for jokes, the reality is that I have seen the inner workings of over 200 nonprofit organizations: management, finances, operations, governance, and programmatic services.

While I have no idea whether $100-billion is anywhere close to an accurate number, I can say that there are — without doubt — enormous opportunities for the nonprofit sector to reap significant benefits from many of the findings in the report, especially those related to efficiency and effectiveness. And while, yes, certain comparisons of practices in corporate America with those in the nonprofit sector may not be relevant, many others are. Let’s focus on the ones that can make a difference rather than debating the ones that cannot.

Great organizations are innovative and proactive, looking for ways to continuously improve. Troubled organizations are defensive and reactionary — afraid to change. The value of nonprofits has never been greater. Now is a time to advance performance and reap the resulting benefits, not a time to find fault and make excuses.

Tom Rogers
Founding Member
Rising Point
Germantown, Md.

To the Editor:

The debate about the McKinsey article is an interesting one because so many who have commented on it have missed the big picture.

The authors’ motivation for the article was clearly stated: They wanted to see “millions of Americans with better health, safer streets, cleaner air, stronger schools, more affordable housing, greater hope, and bigger dreams that represent the real potential — and the truest inspiration to action.”

What is sad is that critics such as Mark Rosenman (“McKinsey Study Shows Stunning Lapse in Logic,” Opinion, May 29) and Mr. Salamon are quick to critique the McKinsey article but not so quick to suggest ways in which more resources could be deployed to support the sector. Were it not for the wise and insightful words of Pablo Eisenberg in your Opinion section in the May 29 issue (“Don’t Cry for Thee, Foundations,” Opinion), those out in the field would have been left hoping that someone will figure out how to get more resources to those organizations suffering from government cutbacks.

As one who has seen firsthand the enormous talent and experience the McKinsey team has in the nonprofit sector, I am surprised by the critics who suggest that McKinsey’s business and Enron experience make them insensitive and unknowledgeable about the sector. If McKinsey were to list the number of organizations it has helped to thrive, the critics would be very quickly shut down.

The debate about these issues will continue, but it would be much more useful if all of the authors focused on how to positively impact the funding and operation of nonprofit organizations. Whether the McKinsey proposals result in $100-billion or $20-billion is not nearly as important as whether changes will be made to help the sector recover from the reduced government support.

Gary F. Jonas
Chief Executive Officer
Strategic Philanthropic Advisors
Bethesda, Md.

To the Editor:

I read with both anxiety and exhilaration the Chronicle’s story on the McKinsey report. The McKinsey study is like a grenade lobbed into the room. I especially liked the parts where others should change their systems to free up more resources for organizations like the one I lead. Still, Volunteers of America was able to transform an important part of our services through an engagement with McKinsey & Company 18 months ago. They contributed substantial additional time, and we have confidence in their goodwill toward the nonprofit sector.

And the new McKinsey study is probably just what we need.

Every day legislatures are grappling with painful decisions over which services to cut, foundations are struggling to stretch declining portfolios, and individuals are asking whether they can afford to continue to support charities. Our colleague organizations continue, as do we at Volunteers of America, to state our cases for effectiveness and our deservedness for support. But we could all benefit from systemic changes in the sector.

Some of this is occurring. Volunteers of America has been engaged in a joint venture with two other national nonprofit organizations to develop affordable housing, something each of us historically has done independently. Through a separate nonprofit organization, the National Affordable Housing Trust, our three organizations share staff that is focused on developing tax-credit-financed housing, which is then owned and managed by one of the three organizations. Through this venture, we’ve developed more affordable housing than we could have done by ourselves, at lower cost, and have learned from our colleague organizations in the process. But we’ve only scratched the surface of similar opportunities.

In general, however, the sector is not changing at a rate that’s keeping up with the changes in our environment. Collaboration is still more of a value we all espouse than an operational strategy we fully implement.

The numbers in the McKinsey article are coarse, but necessarily so. There’s not a lot of great data available. It would be wonderful, though, if they’re even partially right.

Charles Gould
President
Volunteers of America
Alexandria, Va.

To the Editor:

Let me get this straight: One of America’s great public servants of the last 30 years teams up with the most prestigious consulting company in the world to publish a report, in America’s most-respected business journal, no less, that provides free advice to the nonprofit sector on how we could annually save an amount that is four times larger than all the money contributed to charities by our nation’s foundations, and according to Mark Rosenman and Lester Salamon, we’re not even supposed to listen to them because their findings are “absurd” and they’re clearly trying to “Enron” the nonprofit sector? Is the nonprofit sector really so healthy, and our leaders really that brilliant, that we can afford to dismiss out of hand this free advice, and furthermore, should we then attempt to discredit the authors as hacks and crooks?

In their Harvard Business Review report, Bill Bradley and his McKinsey counterparts argue that America’s charities could save an extra $100-billion in resources by changing the way they operate. The majority of these savings would be realized if charities simply operated more efficiently — that is, if they developed ways to spend less on fund raising and administration and to streamline the delivery of their programs. Adding this sum to American charities’ coffers would expand their capacity more dramatically than even our most ambitious philanthropists have ever imagined, but yet, even as giving to charities falls off the cliff in these tenuous economic times, the authors’ ideas aren’t even worth considering?

The report proposes a very simple, easy-to-understand strategy for finding this extra $100-billion. Mr. Bradley and his colleagues claim that we need our less efficient charities to perform more like their more efficient peers. If the bottom half performed nearly as efficiently as the top half, we’d realize the bulk of the $100-billion in savings. They base this claim on the fact that the bottom half has a lot of room to improve.

At Charity Navigator, we indeed found much of the Bradley group’s analysis to be simplistic and many of their conclusions to be overly sensationalistic. But that doesn’t mean that we found them to be wrong.

In fact, our financial analysis of 2,500 charities substantiates the report’s central claims. In comparing more efficient and less efficient charities (and using a ratings methodology that indeed allows us to compare apples to apples, and not to oranges, by measuring organizations against their truest peers, and not the sector as a whole), we identify substantial gaps in how efficiently similar charities function. For example, among United Ways of similar size and scope in similar cities, we found gaps in fund-raising efficiencies of 36 percent. Among local community foundations, with similar missions and alike grant-making capabilities, we found fund-raising-efficiency differences of 87 percent. We’ve identified symphonies that spend 39 percent more on administration than their nearly identical peers, and we know of two large educational scholarship programs that have the same size staff, the same size budget, and the same goals, and yet one spent 65 percent more on administrative costs than the other. These disparities are very similar to those described by Mr. Bradley and his colleagues. And yet the contributors to this paper would have us believe that anyone who thinks the nonprofit sector has inefficiencies is “illogical.”

We agree that the nonprofit sector isn’t broken, but let’s not pretend that it’s perfect either. When a man like Bill Bradley, with no apparent ax to grind and a career of promoting innovative social programs that seek to end poverty, couples with the company recently selected as the most desirable place to work in America for outstanding M.B.A. grads, and publishes a relatively thoughtful treatise on how America’s charities can save a sum roughly the equivalent of the state of California’s budget, why don’t we hear them out, look in the mirror, and see if their ideas have merit?

The improvements Mr. Bradley, et al., suggest could help charities dramatically. This makes the overly defensive response of nonprofit leaders all the more indefensible. These leaders must begin to embrace findings like Mr. Bradley’s, to welcome outside, data-driven analysis, and to respond with strategic action, not with the tired arguments that outsiders don’t understand the sector and that financial ratios are irrelevant to charities. At the end of the day, the nonprofit bottom line is helping people, and another $100-billion would go a long way.

Trent Stamp
Executive Director
Charity Navigator
Mahwah, N.J.

To the Editor:

Thank you, thank you for Mark Rosenman’s and Lester M. Salamon’s opinion pieces that speak so eloquently about the flawed and damaging McKinsey & Company article in the Harvard Business Review. I sputtered when I read the article (and The Chronicle’s good report in the May 29 issue). I was so upset that several attempts to put my thoughts in writing were useless. You took care of it for me, saying exactly what I was thinking.

The big worry I’m left with, however, is how will Bill Bradley, et al., get the message and what will they do to correct the mess they’ve started? All the rebuke and rebut in the world won’t be worth a pile of beans if only we, the choir, read it. Maybe The Chronicle and Independent Sector can organize a panel discussion with the McKinsey folks and make sure it gets wide publicity.

Holly M. Redell
Director of Development
Pacific Science Center
Seattle

To the Editor:

The Bradley-McKinsey report missed one of the most crucial factors in the efficiency and effectiveness of charities in this country: donor loyalty. And the study disparages the crucial role that individual donors, including those who give as little as $20, $30, or even $50 a few times year, play in the overall success of an organization’s fund-raising efforts.

Donor loyalty is the engine that drives successful organizations. Loyal donors up and down the giving pyramid provide the financial resources necessary for growth. They also volunteer their time, share their ideas, and endorse the organization to others.

The most successful nonprofit organizations in this country are the ones with diversified and robust fund-raising programs that acquire donors of all financial values and then serve them in a manner that builds strong loyalty.

The Bradley-McKinsey study does a disservice by not acknowledging the importance of individual donors and the necessity of treating them as the stakeholders they are. I wish Bradley-McKinsey had included a sixth section titled “Improve Donor Loyalty.”

What’s needed among nonprofit groups today is a new mind-set toward fund raising — a mind-set that focuses on creating and building donor loyalty. Such a change will force all of us to reassess who we talk to, what we say, what communication channels we use, and how we report the results of our work. And, ultimately, it will revolutionize fund raising, creating organizations that are truly effective and efficient.

Timothy Burgess
Co-founder
The Domain Group
Seattle