These are times that try nonprofit souls. Charitable contributions are down, while operating deficits are up; board vacancies are rising, while executive tenure is falling; media coverage remains unrelentingly negative, the sector is split by the controversy over foundation pay-out requirements, and the labor market is tightening as the baby boomers begin their long-awaited retirements.
This is a perfect time to build the capacity of nonprofit organizations. After all, that is precisely what private firms do in lean times. Some companies reconnect with their customers, imagine new markets or identify new strategic partners; others rethink their strategies or modernize production lines. But whether they add or subtract, successful firms use economic crisis as an opportunity for organizational change.
In fact, according to Bain & Company, a private-sector consulting firm, corporate capacity building soared 60 percent over the past two years, rising from 10 activities per company per year in 2000 to 16 in 2002. Last year alone, 89 percent of the Bain respondents engaged in strategic planning, 84 percent conducted benchmarking, 84 percent addressed their mission and vision statements, 79 percent segmented their customer base, 78 percent outsourced some function, and 78 percent surveyed their customers.
But private companies do not just strengthen their own organizations during down times. They also pour resources into areas such as the following: trade associations that lobby government on behalf of specific industries such as airlines or big steel; promotional campaigns that shape public opinion; publications that disseminate best practices for capacity building; “good business” groups that promote self-regulation as an alternative to government prosecution; and finally, networks of educational institutions that define the master of business administration (MBA) as the degree of choice for talented young people. Unfortunately, many nonprofits and their funders take a different, and I would argue, a less productive approach, starving and weakening the positions of many worthwhile organizations in already resource-scarce situations. This is foolhardy.
All funders should be investing in the nonprofit infrastructure. There is not only good evidence (presented below) that capacity building makes a significant difference in nonprofit program outcomes at a relatively low cost, but also that capacity building is, overall, far more effective when delivered by or informed by infrastructure organizations.
My case for nonprofit capacity building, and the national infrastructure to support it, is based on three simple conclusions:
• capacity building makes sense because organizational strength contributes to program effectiveness;
• capacity building makes sense because it produces stronger organizations, thereby helping individual nonprofits and the sector as a whole deploy scarce resources more effectively;
• the national infrastructure that supports nonprofits makes sense because it improves the odds that capacity-building efforts will succeed.
Not everyone believes that organization matters. Some nonprofits and funders think of organizations as “black boxes” through which program inputs and activities pass, mostly undisturbed, en route to their final impact. The relationship between organization and program impact is not at all absolute, but is more closely associated with issues of sustainability and improvement of results. According to two-thirds of the 250 scholars, grantmakers, and technical assistance providers interviewed by the Center for Public Service in 2001, an organization could be very effective in achieving its program goals, but not be well-managed; while three-quarters of the group said an organization could be very well-managed and still not achieve its program goals.
However, capacity builders would never argue against the idea that poorly run organizations cannot succeed for long. Many organizations can produce program success for a short period. All they need are extraordinary employees who are ready to work long hours, tolerate stress, and persevere despite organizational barriers. This is the picture of the small early-stage nonprofit — closely connected to its constituency and attractive to others as a result of its passion and accuracy of approach.
The real trick for organizations is to sustain, improve, and build on this strength, producing progressively improving results over time. This is good management.
Can capacity building produce measurable gains in performance? I would answer “yes.” Some of the gains are becoming clear in my Center’s recent study of capacity building among a random sample of nonprofits with annual budgets of more than $250,000. Funded by the David and Lucile Packard and Annie E. Casey foundations, the study is designed to ask whether capacity building works, and why. Its first finding determined that nonprofits use almost as many capacity-building tools as private firms do. The nonprofits in the sample used 11 tools over the past few years, compared to 16 among Bain’s 2002 sample. If the nonprofit sample is generally representative of the sector as a whole, there is a great deal of capacity building going on among nonprofits.
• 87 percent of the first 320 respondents interviewed said their organizations had sought to improve external relationships through collaboration, mergers, strategic planning, fundraising, and/or public relations.
• 85 percent said their organizations had sought to strengthen their internal management systems through new information technology, budget and accounting systems, human resources management, evaluation, training, and/or organizational assessment.
• 85 percent said their organizations had worked to improve their internal structure through reorganization, team building, additional staff, diversity, and/or creating a reserve fund.
• 75 percent said their organizations had made an effort or efforts to strengthen their leadership through board and/or executive development, succession planning, greater delegation of responsibility to staff, or a change in leadership.
The second finding from this ongoing study revealed that capacity building appears to have a significant impact on a variety of organizational outcomes. Asked to identify, and then describe a single capacity-building effort from the past few years, 63 percent of the respondents said the effort had been completely or mostly successful in improving their organization’s management; 65 percent said it had been completely or mostly successful in improving their organization’s program impact; and 74 percent said it had been completely or mostly successful in improving their organization’s overall performance. The third finding from the study disclosed that capacity building begets more capacity building. Given a list of secondary effects of the effort they had identified, 55 percent of the respondents strongly agreed that the work they did “has led to long-lasting improvements in the organization;” 49 percent said the work “gave us a clearer sense of direction and priorities than we had before;” and 47 percent strongly agreed that the work “showed us the areas we needed to improve and the areas where we’re doing well.”
All in all, the capacity-building survey offers considerable support for the notion that capacity building can have a significant impact on program performance, particularly through the greater efficiency and productivity that flow from increased morale, staff delegation, better leadership, and strategic focus.
The emphasis must be on the word “can,” however, for there is also ample evidence that organizational change often fails. It took decades, for example, for the quality movement to take hold in the private sector, and it still has a long way to go in healthcare, education, and government. To the extent that quality improvement has succeeded, it is the direct result of a national capacity-building infrastructure that helped develop strategies, study implementation, disseminate best practices, raise standards, celebrate success, and promote perseverance. Without this national infrastructure, quality improvement would be another in a long list of fads that came and went with little impact.
It is difficult to assign a rate-of-return to a national infrastructure. What is the value of the Harvard Business Review and other learning platforms in giving firms a sense of what works? How important are federal tax breaks and business loans to organizational modernization? How do trade associations, awards programs, and business schools contribute to organizational improvement and sector-wide identity?
The best, and almost only research on these questions comes from the quality movement. According to Robert Cole, a professor emeritus at the University of California’s Berkeley Haas School of Business, the development of a quality infrastructure created the tipping point needed for adoption. “Many factors operated to delay recognition of quality as a competitive factor,” he writes of the early years of the quality movement. Not only were managers hamstrung by incomplete information, but they were also in prisons of existing values, norms, and practices.
The U.S. quality movement began to take hold through what Cole calls an “innovation and diffusion community” — otherwise known as infrastructure: “They created standards, identified bottlenecks, introduced new methodologies, publicized success stories, focused efforts, evolved forums for networking, and provided overall infrastructural support to users.”
A national nonprofit infrastructure does more than simply promote specific improvements. It also helps to create a positive climate for the sector as a whole. It convenes much of the political, intellectual, human, and financial capital needed to implement successful change, and it strengthens the civil society in which nonprofits o