Leading Strategic Change: New Perspectives on the Nonprofit Sector

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Leading Strategic Change New Perspectives on
the Nonprofit Sector

• Jim Phills
• Centre for Social Innovation

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Agenda

• Nonprofits in Perspective
• Purpose
• US Growth
• Significant Characteristics
• Implications
• The Importance of Leadership
• Social Innovation Beyond Nonprofit Leadership
• QA

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The Purpose of Nonprofits

• Why do we need nonprofit organizations?

Beauty Knowledge Justice Fairness Healing
Faith CompassionVoice Understanding Community
The Creation of Social, Environmental, and
Aesthetic Value A better world
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Growth of Nonprofit Sector in the US

• Number of 501(c)(3)s (public charities and
  private foundations) 474,000 in 1989 to 774,000
  in 1999 ( increase of 67 )
• Between 1970 and 2000 nonprofits share of gross
  domestic product (GDP) went from 3.1 to 4.2
• Between 1970 and 2000 government spending as a
  percentage of GDP declined from 13.9 to 10.8
• In 1999, Nonprofits (including religious
  congregations) reported revenues of more than
  1.03 trillion, and held assets of more than
  1.65 trillion
• Source (Boris Steuerle , in press)

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Charitable Giving in the US

• Total giving in 2002 was 241 billion
• 37 million individuals
• 184 B 18 B in bequests
• 400,000 corporate sponsors
• 12 B
• 60,000 independent foundations
• 27 B
• 50 to religious and educational institutions
• Source (Meehan et al 2004)

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Significant Characteristics of Nonprofits

• Product Market
• Produce public goods
• Produce goods or services that are difficult to
  evaluate
• Provides goods or services to those with limited
  ability to pay
• Receive portions of income in the form of
  donations
• High fixed cost as a proportion of total cost

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Significant Characteristics of Nonprofits

• Organization Management
• Lower level of compensation (non-contingent)
• Poor incentives for cost minimization
• Cross-subsidization
• Productive inefficiency

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Significant Characteristics of Nonprofits

• Capital Market
• No equity ownership
• Providers of capital lack of direct influence
  over management governance
• Absence of a market for corporate control
• Limited access to capital
• High cost of acquiring capital

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Significant Characteristics of Nonprofits

• Legal Economic
• Benefit from public subsidy in the form of tax
  exemption
• Non-distribution constraint
• The defining characteristic of non-profit
  organization is that the persons who control the
  organizationare forbidden from receiving the
  organization's net earnings. This does not mean
  that a nonprofit organization is barred from or
  in profits rather, it is the distribution of
  profits to controlling persons that is forbidden.
  Thus by definition a nonprofit organization
  cannot have owners.
• Hansmann, 2000 The Ownership of Enterprise

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Significant Characteristics of Nonprofits

• Nature of Performance
• Given the complex non-monetary objectives of
  nonprofits, operational definitions of
  performance tend to be elusive and contested
• Lack of a single value objective function
  (e.g., maximizing shareholder wealth)
• (Jensen, 2001)

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Challenges facing the Nonprofit Sector in the US

• Increased competition for funding
• Growing private and public sector substitutes
• Increased pressure from donors to
• Demonstrate and measure efficiency and
  effectiveness
• Achieve sustainability
• Establish alliances and partnerships

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Implications of Characteristics and Challenges

• Scarcity of resources
• Difficulty making choices tradeoffs
• Questions about accountability
• Difficulty ensuring adequate motivation
• Difficulty aligning incentives
• Confusion and conflict over organizational
  priorities
• Inefficiency in the allocation of resources
  within and across organizations

LEADERSHIP
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Developing the global leadership capacity of the
nonprofit sector

• The Need
• Globalisation and social change
• New social needs and problems
• Growing complexity and interdependence of social
  problems
• International conflict
• Resource Scarcity

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Developing the global leadership capacity of the
nonprofit sector

• The Possibilities
• More efficient allocation of resources across
  organizations to areas of greatest social return
• Increased legitimacy and respect accorded sector
  managers
• Increased funding to the sector
• Increased innovation, effectiveness, and
  efficiency within the sector
• Progress addressing social needs and problems

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A Caveat The problem with leadership

• There are almost as many different definitions
  of leadership as there are persons who have
  attempted to define the concept
• (Stogdill, 1974)
• Of all the hazy and confounding areas in social
  psychology, leadership theory undoubtedly
  contends for the top the nomination...
  Ironically, probably more as been written and
  less is known about leadership than any other
  topic in the behavioural sciences.
• (Bennis, 1959)

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  The problem with leadership
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A Functional Approach to Leadership

• The leaders main job is to do or get done
  whatever needs to be done
• (McGrath, 1962)
• The emphasis is not so much on what the leader
  should do as on what needs to be done for
  effective performance.... the functional approach
  leaves room as to how to get critical functions
  accomplished
• (Hackman and Walton, 1986)

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 Key Leadership Functions

• "Executive work is not that of the organization,
  but the specialized work of maintaining the
  organization in operation"
• Direction
• to formulate and define the purpose, objectives,
  and ends of the organization
• Motivation
• to promote the securing of essential efforts
• Design (organizational architecture)
• to provide the system of communication   
• (Barnard, 1938 p. 215)

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Leadership Functions Direction, Design,
Motivation
Psychological Emotional Logic
Mission
Economic Logic
Strategy
Execution
Activities Resource Allocation Policies
Source (Phills, in press)
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A Multi-level view of Nonprofit Leadership

• Organizational
• Problem/Need
• Sectoral
• Societal
• Global

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Social Innovation Beyond Nonprofit Leadership
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Social Innovation

• The Meaning of Social Innovation
• Innovation
• The development and implementation of novel and
  useful solutions to problems
• (Burns and Stalker 1961 Kanter 1983 Amabile
  1988)
• Social
• Has a social purpose or benefit
• Is in the service of fulfilling a social need or
  addressing a social problem

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The Meaning of Social Innovation

• The process of inventing, securing support for,
  and implementing novel and useful solutions to
  important social needs and problems
• That are more effective and/or more efficient

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Key features of Social Innovation

• Alternative focus
• Social needs and problems rather than sectors
• Education, Poverty, Hunger
• vs.
• Nonprofit, Public, or Private
• Inclusive Scope
• Individuals and institutions who organize
  activities and allocate resources in pursuit of a
  social purpose

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Paradoxical Assumptions underlying Social
Innovation

• Sector independence
• The legal status of a social purpose organization
  is a choice
• There are multiple possibilities that are viable
  for any given idea or approach

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Paradoxical Assumptions underlying Social
Innovation

• Sector interdependence
• Boundaries between sectors are becoming more
  porous as reflected in the exchange of people,
  ideas, and capital
• Growing emphasis on alliances and partnerships
  between nonprofit, public, and private sectors
• Increasingly efforts to address major social
  problems will require collaboration of all
  sectors as well as reconfiguration of traditional
  roles
• Environmental degradation
• Global health threats
• Educational reform

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The Centre for Social Innovation (CSI)

• History
• Founded at Stanford Graduate School of business
  in 1999
• Mission
• To foster innovative solutions solutions to
  social problems by enhancing the leadership,
  management, and organizational capacity of
  individuals and institutions pursuing the
  creation of social and environmental value

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The Centre for Social Innovation

• Philosophy
• Dissolving boundaries facilitating the exchange
  of ideas, values, and talent between the private,
  public and nonprofit sectors.
• Increasing sense of accountability and emphasis
  on performance in nonprofit public sectors
• Increasing sense of responsibility and awareness
  of social impact in private sector

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CSI Activities

• Research
• Generate knowledge that enhances our collective
  understanding of social innovation
• Teaching
• Facilitate the dissemination and exchange of
  knowledge
• Engagement
• Enable and support the implementation of social
  innovation through community outreach

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CSI Programs

• Alumni Consulting Team (ACT)
• Public Management Program (PMP)
• Executive Education for Nonprofit Leaders (EPNL)
• Stanford Education Leadership Institute (SELI)
• Stanford Social Innovation Review (SSIR)
• Stanford Project on Emerging Nonprofits (SPEN)

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Stanford Social Innovation Review(SSIR)
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SSIR A Recurring Theme from the 1st Year

• Application of Business Ideas to the Nonprofit
  Sector
• High Engagement (Venture) Philanthropy
• Going to Scale Replication of Social Programs
• Alliances and Partnerships
• Social Enterprise/Entrepreneurship

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Stanford Project on Emerging Nonprofits (SPEN)

• Research Team
• Woody Powell, Denise Gammal, Caroline Simard,
  Hokyu Hwang
• Research Project
• A comprehensive study of the social sector in the
  San Francisco Bay Area
• Quantitative Analysis of the more than 9,000
  nonprofits in 10 counties using IRS data on the
  total population
• Qualitative analysis of 200 randomly selected
  operating charities through a series of in-depth
  interviews with executive directors or presidents

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Key motivations for SPEN

• 1) Shrinkage of the Welfare State
• What are the consequences of the increasing
  private provision of public goods?
• 2) Growing Professionalization of Nonprofits
• Is the transfer of managerial practices having an
  impact?
• 3) Emergence of Venture Philanthropy Social
  Entrepreneurship
• What is the impact of these trends?

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SPEN Research Questions

1. What impact do different funding models have on
   organizational behaviour, development and
   sustainability?
2. What are the pressures, mechanisms, and
   conditions facilitating the circulation of ideas
   within the sector and across sectors? What are
   the relationships through which ideas flow?
3. How have nonprofits fared since the economic
   downturn?

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Growing unmet societal need - - health care,
mental health, homelessness, social services - -
creates pressure to increase scale
Accounting, fund-raising scandals prompt demands
for transparency
Lack of sufficient new revenue triggers search
for income-producing opportunities
Nonprofit Sector
3rd party provision of government services
produces standardization
High-engagement philanthropy encourages
outcomes measures
Widespread acceptance of ratio of administrative
to total expenses as a benchmark
Calls from high profile gurus for social
entrepreneurship promote cross-sector transfers
Pressure on Nonprofits to adopt or develop
business-like practices
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Preliminary Insights from SPEN

• How does receptivity to transfer of practices
  vary across nonprofits?
• Fiscal Health inverted U-shaped distribution,
  with poorest and wealthiest less likely, those in
  the middle most receptive.
• Funding Model dependence on earned income
  heightens transfer diversified funding base
  lessens transfer.
• Activity Volunteer, Advocacy, and Religious NPs
  are less receptive.
• Professionalization of Staff more
  managerial/applied degrees, more receptive and
  well compensated professional staff are fertile
  audience for transfer.
• Nature of Board more heterogeneous and less
  corporate, then less receptive more corporate,
  then more receptive and more direct transfer.
• Competition Nonprofits that are in mixed
  industries that compete with for-profits are much
  more likely to utilize business practices.

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Transfers that are counterproductive or
superficial

• Funders are intensifying their reporting
  requirements, but in a misguided way. Theyre
  training nonprofits to write about what they want
  to hear, not producing results. Executive
  director, large human services organization
• Everybody requires a report and everybody wants
  their own format and the data collected their own
  way. They are sympathetic that every funder has
  their own requirements, but each of them thinks
  the simple solution is to adopt their method of
  reporting. Executive director, large human
  services organization
• Well, theres no use doing something if its
  not making you money. Weve learned that.
  Executive director, youth athletic association
• There are so many advisory committees
  recommending requirements for contracting that
  dont really make a lot of sense. Executive
  director, parental counselling organization
• Every single funder adds 2 or 3 little changes
  in their quarterly reports in terms of questions
  and items for reporting. It seems like every
  year more and more time goes into the reporting
  and less time to actually working with people.
  Executive director, transitional housing org.

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Transfers that are deep

• Weve seriously taken on the role of creating
  financial stability. We dont say were like a
  business, we are a business. Exec. dir., large
  human services org.
• Nonprofits need not be ashamed of being
  businesses. We need best practices benchmarks.
  Many NPs not only cant do it, but find the very
  idea offensive. Exec. dir., large human
  services org.
• We are always evaluating our services to see if
  there are things we need to let go. Some
  programs that were very successful in the past
  would just get laughed at by our contemporary
  clients and funders. So weve become pretty
  ruthless about deep-sixing things when they dont
  work well any longer. Exec. dir., large human
  services org.
• We use Stanford GSB students to help us do
  periodic market assessments. With their help, we
  are creating a database that makes it easier for
  us to track every person that comes through our
  doors. Exec. dir., medium-sized public advocacy
  org.
• We were founded by a group of business leaders
  who were concerned about the quality of science
  and math education in our schools and worried
  that students were not prepared to be
  competitive. Exec. dir., medium-sized
  educational NP.

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Transfers that are deep

• We now measure by units of service, and that
  means many things - - number of bags of
  groceries, number of times we talk to a client,
  different types of services we perform for a
  client, number of hours we spend with a client,
  etc. We keep records of all these, its a fairly
  sophisticated process we have to do for our
  grants. Executive director, AIDS services org.
• The grant application process is intensive.
  They evaluate us musically but they also ask Are
  you a viable arts organization? Do you charge
  for tickets? Are your audience numbers growing?
  Is your Board integrated? Is your organization
  serving various economic goals? Executive
  director, boys choral group
• Government is much more intensive. They really
  want to know about your constituency, its ethnic
  breakdown. They want surveys, with age of
  audience and other demographic info. They want
  to know who is coming to our shows, is it
  tourists or locals, so they can evaluate the
  Hotel Tax Fund for the Arts. It is an intensive
  amount of work for us to generate all this
  information for them. Executive director, arts
  organization
• We have a social bottom line. We have to
  report how much we save the city by employing
  ex-convicts, and estimate how much is saved by
  not having folks committing crimes and being put
  back in jail. This is monitored closely.
  Executive director, prison gardens program

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QA
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