Why Save $100 Billion, When You Can Save $500 Billion?

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One of the major benefits of nonprofit status is continuous access to free (and unsolicited) advice from management experts in business and government. Eager consumers of this plentiful resource will be thrilled to learn of a new report, uncovering $500 billion in available savings and productivity gains over five years for US nonprofit organizations through a savvy blend of cost cutting, capital reorganization and increased pep.

Former Gov. Hal Heartley of Delaware joined with two efficiency experts from the prestigious firm of Van Cleef & Arpels to undertake the top-to-bottom review of nonprofit operations, and delivered first-rate news for nonprofits–and even better news for the people who have to sit through their meetings.

An investigation of the operating budgets, audits, board minutes and coffee consumption of 733,790 organizations uncovered robust systemic management practices capable of increasing social good output by $500 billion (plus or minus $45 billion).

“One of our key accomplishments was establishing the operating assumptions of the Van Cleef & Arpels knowledge management system,” shared Heartley, from the lobby of the efficiency expert’s New York headquarters. “By setting a minimum viability size of $10 million for nonprofits and $1 billion for foundations, we will free up the incredible vitality we need to tackle the toughest problems facing our country.”

“First off, I want everyone to know how much I respect citizens active in these organizations, whether they are a board members, staff or volunteers,” declared Heartley, who donates his time and book royalties to three charitable funds. “The fact that these people try so hard in the face of class B office space, sketchy wages and unreliable funding is heartwarming—but still a mistake. Charity done poorly is not benign. No one is nostalgic about the Dark Ages, and this ‘small and local is beautiful’ era for nonprofit organizations will likewise not be missed.”

The comprehensive study of the US nonprofit sector took over three weeks, taking advantage of years of consulting with Fortune 500 companies, shopping malls and late-night infomercial entrepreneurs. “When we got Anthony Robbins, Oprah Winfrey and Kenneth Lay on the advisory committee, we knew we were going to strike gold for charities,” said Megan Smithson, director of Van Cleef & Arpels’ Institute on the Nonprofit Sector. “I feel as excited as I did when Pets.com went public, except I think this will really work.”

The author’s introduction to “The Nonprofit Sector’s $500 Billion Opportunity” acknowledges the limitations of applying business models to community organizations: “We know that nonprofits shouldn’t be run exactly like businesses or government—we want to take the best aspects of both to help nonprofits stay true to their mission, but also keep accurate books, have job descriptions and maximize efficiency by eliminating unnecessary positions and deliberation.”

The five elements of Van Cleef & Arpels plan are each tied to specific performance gains:

Based on 1999 data from the Urban Institute’s National Center for Charitable Statistics, the US currently has 733,790 Internal Revenue Code Section 501(c)(3) organizations and 139,533 501(c)(4) organizations, yet only 1.8 percent have more than a $10 million capitalization (the minimum nonprofit viability threshold established by the Van Cleef & Arpels Knowledge Management System). A system of systematic mergers and dissolutions would pare this 873,323 organizations down to a more manageable number of 12,000 for the entire United States, maintaining every $10 million-plus organization and transmogrifying the rest into five theme-based meta organizations for each state and the District of Columbia:

  1. Arts-Mart A regional repository for arts and humanities activity by current and new organizations with less than $10 million annual budgets. (One for each metropolitan area with more than one million population in a state, plus one for the non-metropolitan areas of each state)
  2. Health-Mart A regional repository for health care, community clinics, chemical dependency treatment, disease prevention, and other health services.
  3. Human-Mart A regional repository for all human services, youth development, child care, etc.
  4. Work-Mart A regional repository for job training, economic development, and neighborhood and housing activity.
  5. Misc-Mart A regional repository for the rich variety of all other environmental, religious, education, international, community improvement or hopeless-cause nonprofit. In a unique public-private venture, Misc-Marts will also serve as the primary host for the Partici-Kiosks, where citizens register their opinions and have community meetings. Various levels of government will take turns at Democracy Cafe., where officials will ‘listen’ and take under advisement the opinions of the Misc-Mart shoppers.

The authors project that these five meta-organizations can be economically constructed in vacant areas in outer districts in the middle of each state, using ecological and cost efficient tip-up concrete walls—or former K-Mart stores. The economic model assumes that local governments will provide funds for free transportation and child care. Savings gained by eliminating duplicative rent, bookkeeping systems, board meetings, community meetings and newsletters will free up funds to increase management incentives and attract experienced managers from telecom, financial services and energy-trading firms.

The $500 Billion Opportunity notes that, as the United States evolves into a more diverse and varied society, “The five meta-Marts will be a source of cohesion in every state.” Instead of the fragmentation and duplication of 700,000 local initiatives, the big-box approach is designed to give every American access to the same set of services. Under this plan, each Mart would have culturally and linguistically trained greeters to facilitate customers through the “aisles” of services and inform program staff of special needs.

Heartley is optimistic about the improvements, “There is no reason we can’t do for all nonprofits and foundations what managed care has achieved in the health care field. It is no secret that big-box charities will be more accountable, efficient and effective–we’re just speeding up the process,” Heartley said.

The report pays special attention to Foundations, which have been left out of previous merger waves. The Foundation Center lists 50,532 private foundations, 2,018 corporate foundations and 560 community foundations with $46 billion in total assets. Ninety-nine percent of foundations have less than $1 billion in assets (the minimum foundation viability threshold established by the Van Cleef & Arpels Knowledge Management System), so paring these down to a more manageable total of 219 for the United States, would maintain the $1 billion-plus foundations and transmogrify the rest into at least three meta foundations for each state, resulting in 108 private foundations, 56 corporate foundations and 55 community foundations.

Heartley doesn’t mince words when he comes to the need for foundation mergers. “I know there is tremendous sentimental attachment to the dead hand of philanthropy, but get over it. This is about efficiency, not sentimentality,” said Heartley. Savings include $7 billion in duplicative investment fees, $2 billion in board and staff costs, $1 billion in affinity group activities, $790 million in annual reports, and $50 million in hors d’oeuvres at the annual Council on Foundations conference.

The third area of performance enhancement may be the most controversial: reforming the quantity and pace of internal deliberation.

Co-author Smithson is not out to offend anyone when she says, “We want to reinforce our belief in the nonprofit and philanthropic sectors–we love the organizations that do good, and do it well. But, quite frankly, they don’t have to do it so slowly!”

For a field where human connection, motivation and meaning are important, there is a natural susceptibility to extended blather. “We know these are people whose passion is for the work, not the paperwork,” Smithson states, “Yet there is way too much talking and too many people in the process.”

Smithson knows the situation first hand from service on three community-planning projects in Connecticut. “The reason nonprofits are such slow decision-makers is they don’t know how to cut to the chase,” Smithson concludes. “They keep asking who else should be involved, have them at the next meeting and who else should be consulted,” she said. “Drives me nuts!”

The “Nonprofit Sector’s $500 billion Opportunity” proposes its own statute of limitations on decision-making in nonprofit and philanthropic organizations called the “Rule of Nines:”

  • No more than nine people will be involved in a decision (the number on the U.S. Supreme Court, which frankly makes more important decisions).
  • No meeting will last more than 90 minutes.
  • No decision will be dragged out longer than nine weeks.

“We were reluctant to spell out such a basic principle for this book,” Smithson said about the Rule of Nines, “but frankly, after three meetings with these people, we were forced into it.”

The fourth area of performance improvement is to save $37 billion by reducing funds expended on wheedling money from supporters.

The challenge of reaching 250 million donors, with technologies as obsolete as passing a collection plate, to get what is in actuality an intangible resource, made fundraising the most obvious candidate for automation. Heartley and the consultants acknowledged that the human habits are a real factor in fundraising costs–how people need interaction before making decisions, and are accustomed to personal contact. Transcending interpersonal customs to lubricate the transactions of philanthropy is what progress is all about to these consultants, causing them to devise four simple reforms–saving $37 billion:

  • Only electronic contributions will be accepted.
  • Establish a national minimum contribution of $250 (lesser amounts would not be tax deductible).
  • Conditions on contributions from any source (individual, estate, foundation, corporation), and required reports, are limited to 25 words.
  • By 2005, establish a single Internet-based database of high-net worth individuals, with their interests, assets, family histories and VISA available bank balances, available to all organizations remaining in the U.S.

While much of what is proposed in “The Nonprofit Sector’s $500 Billion Opportunity” provides quite specific and concrete direction for America’s charitable leaders, the final area with the greatest increase in achievement possible is harder to describe, but no less real.

If properly executed, the first four reforms will trigger an upsurge of charitable benefit of $137 billion. “Since the title of the book requires us to reach $500 billion, this last section had to get $363 billion in savings and productivity gains,” said Governor Heartley, “Which, I’m happy to report, it does exactly.”

The $363 billion is achieved by shifting the start times of organizations up one hour, and by decreasing administrative spending by 27 percent for the lower quadrant of the top 39 percent of middle-level performing organizations still in existence (give or take $45 billion).

Since “The Nonprofit Sector’s $500 Billion Opportunity” was released, there has been a whirlwind of publicity and reaction, increasing interest in nonprofit and philanthropic management to a new high.

Is the $500 billion in charitable handiwork gains really achievable? The authors knew that some people would criticize them for their lack of data, but accept that as the cost of bringing out new ideas. “Well, we offer data in two places–that should be enough,” answered Smithson. “Nor do we need to illustrate what we mean by effectiveness or review the whole field of practice of program evaluation–we will leave that to those who follow the trail we have blazed.”

Heartley defended the approach, “We don’t need a fact for every new idea, and we don’t need to be dragged into endless meetings with people in the nonprofit sector to find out how they go about their work,” he said. “Besides, that’s how these people trap their enemies!”

“We know that change is not easy–the devil is in the details,” concluded Heartley, summing up the whole effort. “This is truly a great leap forward. The first five-year plan will succeed by spurring our courageous people’s Marts to higher achievements with lower prices, and less process, always!”

“Less Process, Always; the Nonprofit Sector’s $500 Billion Opportunity.” 2003, Van Cleef & Arpels, New York (11 pages).

Phil Anthrop is a consultant to foundations in G-8 countries.