Not Very Profitable

Outsiders often see what insiders don’t. Take McKinsey’s recent report on the nonprofit sector. McKinsey works mostly in the for-profit world. As outsiders, their findings in the nonprofit sector should, as they put it, “give us pause.”

McKinsey is a management-consulting firm that doesn’t typically study the social sector. Their report last November reads like relatives who, having not visited in a year, remark on how your kids have grown. Parents live day in and day out with their kids. They miss the changes that outsiders often observe. McKinsey is the nonprofit sector’s distant relative. In November, it reported on how the nonprofit (NFP) sector is “deficient.” (See McKinsey.com: “What social-sector leaders need to succeed.”)

In the US there are more than one million NFP organizations addressing issues from education to the environment, from homelessness to digital literacy. NFPs account for nearly $837 billion in products and services, or 5.6 percent of GDP. And this doesn’t take into account the millions of churches also in the NFP sector. It’s a big world.

McKinsey’s findings come from surveying nearly 200 social-sector CEOs. Researchers asked these leaders to identify the critical attributes for leadership success in their sector and then rate the NFP world. McKinsey discovered deficiencies across every category. They can be categorized as a lack of capacity building, cash, and collaboration.

Capacity building is about leadership development. Nonprofit organizations spend too little money on emerging leaders. In analyzing 20 years of funding, McKinsey determined that NFP institutions allocate one percent of annual funding to leadership development. In 2011, this was the equivalent of $400 million. The private sector spent about $12 billion in 2011, about $120 per employee annually in the private sector versus $29 per employee in the social sector. Quite a gap.

NFP organizations then widen this gap by using an ineffective educational model. McKinsey says commercial companies understand how leaders “learn by doing.” GE runs innovation labs and provides opportunities with coaching and feedback from seasoned leaders. In the social sector, leadership programs are delivered by lecture and “through classroom training, despite the fact that research shows adults learn best in applied, real-world settings.”

Tight finances exacerbate this problem. NFP organizations rely on donors and foundations. Most funders have adopted a “pay for success” mentality – production over building capacity, immediate results over establishing long-term infrastructure. While this may yield short-term results, McKinsey warns that it curtails innovation and scaling. Even worse, this scarcity of adequate resources produces cannibalistic behaviors.

“In a sector that is mission driven, 90 percent of [survey respondents] think that, when it comes to making trade-offs, they and their peers will prioritize their own organizations and themselves over advancing their causes.” The lack of cash leads many NFP leaders to fear exposing their funding base to other NFPs. This is why McKinsey sees a gap between NFP rhetoric and reality. “Sixty-one percent of leaders put the interests of their own organization ahead of collaborating with others to solve problems. And an equal number report that they see little cooperation occurring across the ecosystem – organizations scramble to claim credit rather than contribute to solutions.”

McKinsey closes with the typical bromides. This isn’t a problem that will be solved overnight. More research is needed. I agree. Let me suggest some recent research. In his provocative book The Master and His Emissary: The Divided Brain and the Making of the Western World, Iain McGilchrist writes how the human brain’s two hemispheres operate in a back and forth collaborative fashion. The right half frames real-life experiences.¹ It gives these images to the left hemisphere that puts words to pictures. The rhetoric then returns to the right for realignment with reality, reducing the gap between talk and walk.

This is how the brain is supposed to work. McGilchrist says we live in a lead-with-the-left, word-based culture. This is a problem. When the left hemisphere leads, it arrogantly assumes it is “bringing things about” entirely on its own. Collaboration goes kaput.

Solving problems requires reframing them. Ambidextrous organizations rely on both hemispheres. They operate like roundtables. They can be found in the for-profit world but are rare in the nonprofit sector. McKinsey, an outsider in the nonprofit world, sees this. Hopefully, more nonprofit leaders, including funders, will begin to see it as well and invest in making the nonprofit sector a more profitable endeavor than it currently is.

Follow me on Twitter: @Metzger_Mike

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¹ Iain McGilchrist, The Master and His Emissary: The Divided Brain and the Making of the Western World (New Haven: Yale University Press, 2010), location 1545.