Only Bad Restaurants Go to Scale

Fast food collageWe in nonprofits are good at taking on myths and sacred cows. But perhaps the least examined of these myths is the one about "going to scale." This OpEd takes a closer but brief look at the conventional wisdom in this area:

Myth #1: Nonprofits don't go to scale (get a lot bigger) because they lack the vision or the ambition

The reality here is that the dominant capital markets for nonprofits -- government and foundations -- actively work against nonprofit growth.

Regarding foundations, the common funding policy of "one smallish grant per organization per year" means increased volume doesn't lead to larger foundation grants. In fact, when nonprofits grow, many foundations become less interested in them. A commonly stated reason is "we want to feel where our size grant can really make a difference" . . . which often translates to "we feel better funding organizations where we are one of their most important funders."

Government -- overall the biggest funder of nonprofits -- is not only the biggest engine for growth but also the biggest barrier to growth. Most community nonprofits receive government funds through their counties or other regional/local governments. And these counties (for example) only want to fund nonprofits that are "located" (means "headquartered") in their counties. Furthermore, for political reasons, counties satisfy the most constituencies and voters by spreading the money as widely as possible within the county.

Imagine a situation where no banks were allowed to operate in more than one county, and banks would only lend money in the counties where they are located. The result: thousands of small, county-based companies.

In short, the most basic reason why nonprofits stay relatively small (96% have 100 staff or fewer) is because the actions and policies of their capital markets unintentionally and even unconsciously act to inhibit growth.

Myth #2: If only we were bigger we could afford the infrastructure we need

This myth, held by nonprofits ourselves, can also be explained as "If we were bigger we would be able to a) raise salaries, b) deepen quality, c) attract more donations, d) all of the above." But in fact, when asked "how much bigger would you need to be to get to the next level of productivity," most executive directors name a figure that is 1/3 larger than they are now. This is true for the executives of $500K organizations who want to be at $650K and for the executives at $4 million organizations who think the right place to be is $5.25 million.

Growing out of a problem only works when two conditions exist: first, when a product's cost is lower at higher production rates. This is certainly true with cell phones: a big Subway Applebee's Zunimanufacturer can make a cell phone cheaper than a small one. But with nonprofit human services, advocacy, and the arts, the opposite is often true: it costs more per hour of social work in large organizations than in small ones. (In economics this is called the problem of increasing -- rather than declining -- marginal costs. Here's a simple way to see it: in a factory you can get a machine to produce twice as many products with only 1.5 times the cost. But you can't get a social worker to do that. In fact, a large organization has to invest in quality control and complex personnel systems that a small organization can manage just by looking around.)

The second condition for "growing our way out of the problem" is that revenue must be coupled directly to production: if you sell twice as many cars you get twice as much money in sales income. But it doesn't work that way in nonprofit economics: if you served twice as many clients this year, at the end of the year you won't get a single dollar more for those clients from government, foundations, or individual donors.

Myth #3: Mission and quality don't need to suffer as an organization gets larger

But the unwelcome truth: an organization changes fundamentally as it passes various size thresholds. To the degree that it becomes more efficient, it often does so at the expense of quality and service. For example, when Midwest Airlines merged last year into Frontier Airlines, everybody in the Midwest knew that service to third-tier cities would be curtailed. Fewer flights on less profitable routes means good news for shareholders, bad news for airline passengers.

In fact, much of the "going to scale" action these days is actually mergers, rather than an organization growing dramatically. One national report recently profiled several case studies of dramatic growth without mentioning that in several of the instances, growth was actually a merger. And of course: two Big Brothers/Big Sisters affiliates merging is far different from one of them doubling in size . . . the way it is inadvertently portrayed.

The unspoken reality is that affiliate mergers are often closures in disguise. Two affiliates merge and within a year, one of the offices is closed, making services less accessible for clients. Such mergers are good for the national office, bad for clients. We can think of several instances, and you probably can as well. (I once remarked to a staffperson at the United Way of the Bay Area -- located in San Francisco -- that I was sorry to hear they had closed their Oakland office. She responded without irony: "We didn't close the Oakland office! We just relocated it to San Francisco.")

Ultimately, what matters more: efficiency or quality? It is here where nonprofits diverge from for-profits. A ballerina's performance is art in itself, not a cog in a ballet production factory. The difference between an outstanding preschool teacher and a mediocre one is not reflected in statistics about service units to unduplicated clients.

Going to mass production demands turning a product or a service into a commodity. That's not necessarily bad, because we need mass production along with boutique production. But consider the following through the lens of the consumer/client/patron/customer: if you had just moved to a new city with your 3-year-old, and all you knew about the preschool choices was that one was run by a local nonprofit, one was run by the school district, and one was part of a large for-profit chain, which one do you find yourself leaning towards? Yet the nonprofit preschool is precisely the one that has not "gone to scale."

Faced with the undeniable reality that very, very few nonprofits succeed in growing really large (and the ones that do accomplish this do so largely with government money), the Philanthropic-Consultant Industrial Complex (a Blue Avocado coinage) has had to back off from its constant urging of nonprofits to go to scale. As a fallback they've started talking about "collective scale" and "collective impact" -- two ideas that are fine, but are old ideas in new language.

We're certainly not saying that all nonprofits should be small. We embrace a vision for the nonprofit sector as a healthy ecosystem -- with some large, mass-production nonprofits, mid-size organizations, smaller organizations that drive innovation, and constant shifting and jostling as ideas and organizations compete in the marketplace. We admire and love the large, multi-service human service agencies, the health clinics, the performing arts organizations, and environmental organizations. But less celebrated are the smaller, on-the-ground organizations who -- precisely because they are smaller and on the ground -- are those we choose here at Blue Avocado to support and champion.

(Okay, I'll stop ranting now.)

 

Share this > Read more

Comments

I don't understand how all of your examples use for-profit, public corporations. Although there are lessons to be learned from large corporations, the translation is hardly enough to clarify the distinctly different structure, services and personnel makeup that comes with being an NGO.

Regarding Myth #1. If an organization expects to grow with only grant funding, well, that's a problem right there. Continually chasing down grants is a problem for even the smallest NGO, and certainly a bigger challenge as you get larger (and your financial needs increase.) There are many ways almost any NGO can generate at least some income without soley relying on grants. First an organization needs to think about being at least partially self-sustaining, then start making plans to scale up.

Myth #3. I completely disagree. Mission and "quality" (whatever quality means) absolutely do NOT need to suffer when an organization gets larger. It's about hiring the right people and maintaining solid leadership. Granted, many, if not most NGOs have poor leadership, lack of defined vision, and don't hire well. So in that case, sure, whatever quality of service they currently maintain will not necessarily get worse, but will at least appear to be worse because simply there's more poor quality. But by no means does size inherently equate to lower quality, or a diluted mission..

Your contention that mission and quality do not need to suffer when an organization gets larger would be more convincing if you included examples.

Well said!

I would, I think, like to hear more about your stunning statement, "...many, if not most NGOs have poor leadership." How do you back that up? It certainly does not hold true in my experience, so your vehemence intrigues me.

Hear ! Hear! to the previous commentor.Quality and mission do not need to be compromised by growth, nor are they improved or maintained by staying small and static. The principles of communication, organization, culture, vision and cost experienced by for-profit businesses that grow have many lessons for non-profits that we should not overlook just because shareholder profit and community benefit are often at odds. The need for the third sector is not decreasing in a world where government is hamstrung, where business has fewer local allegiances, and poverty is growing fast. A good well-run non-profit has a duty to grow, (unless its mission is to maintain its own status quo.)

There are a many large NGOs that remain visionary, flexible and effective. National Public Radio, international relief organizaitons like Mercy Corps, Habitat for Humanity, and the Nature Conservancy are examples of organizations that have found revenue streams beyond government and small grants to grow quite large and thrive.

"Anonymous on Wed, 09/21/2011 - 11:15", or anyone else, please provide more details on a nonprofit becomes "at least partially self-sustaining"? Other than applying for more grants and raising more donations. Sure there are social entrepreneur projects and non-profit hospitals, etc., but for the typical nonprofit is serving folks that don't have the ability to pay, which is kind of their purpose. I've never really understood that "self-sustaining" idea. Always open to brilliant ideas, though.
(and, Jan, liked the article.)

i agree

I always thought of "going to scale" more as replicating a successful model, rather than just growing an agency larger. What if you had a small, grass-roots nonprofit that really worked, and they were able to synthesize the factors that make their program work, and then let another community start its own similar organization? I'd love to see your thoughts on "going to scale" via replication, rather than growing larger organizations.

I agree that "going to scale" as used here is limited. I think the author means achieving administrative scale (i.e., spreading fixed costs over a larger set of service units, resulting in a lower cost per unit/client). Unfotunately, from this pespective bigger is better. The smalls may have to choose between achieving administrative scale (through merger) or becoming a niche provider that is recognized as best in class. Mediocrity won't survive.

Part of my argument is that for many (not all) organizations, larger is actually more expensive per unit produced. In other words, that in terms of "efficiency," small is the most efficient. One reason for this is that many nonprofits are economically ones with increasing marginal costs, not decreasing marginal costs.

A second reason is that small nonprofits can get away with lower levels of internal services. For example, two small organizations (let's just say $1 million each) don't get audits. If they combine they need an audit. So their accounting costs went UP because the merged, not DOWN.

A third reason is that larger organizations have more infrastructure . . . not just accounting but coordination costs. If you have ever tried to do a partnership with a large organization you have a sense of how many levels of approvals there are. Those levels are necessary for quality control where in a small organization the same can be down without the levels.

Finally, the holy grail of efficiency often means not serving people who it's more expensive to serve.

I'm not arguing that small is right for everyone. What I am saying is that decreasing administrative costs are a MYTH. Like all myths it's true for some folks, but not for most.

Those types of nonprofits exist--I work for one. It's a great model, but it's very frustrating trying to evaluate our programming at multiple sites (and having funders say, "But how do I know it will work in my city?) as compared to other organizations offering programming at a single site, or at least within a single metropolitan area.

We are actually quite excited by the idea of "Collective Impact," which we are learning is the creation of a network of small, medium and large organizations, all continuing to do what we do best, at the scale at which we best operate. But,by aligning our work with the others in our network, we can achieve economies of scale and impact far greater than what we could accomplish alone -- even if we were bigger. As my favorite bumper sticker says, "What we can't do alone, we can do together." See "Collective Impact," by Mark Kramer and John Kania, Stanford Social Innovation Review, Winter 2011, accessible at http://www.fsg.org/tabid/191/ArticleId/211/Default.aspx?srpush=true

Jan, I completely admire your "rants". Somebody has to initiate these conversations! Thank you. First though, I have to take issue with your inclusion of In-N-Out Burger in the bad restaurant photos. I love that chain. Have you tried their burgers, fries or milk shakes? And they have clean bathrooms to boot! Back to the issue of scaling, I think another ironic outcome of government funding is that organizations often need to get bigger to stay in business. A couple of examples: I've recently done a lot of work with domestic violence organizations in California. To receive a key State government contract, these organizations are required to perform a whopping 14 different services, ranging from shelter services, to counseling and access to legal services. That's a lot of service activities for a small, independent organization to provide on its own, particularly in rural communities where private fundraising (individuals and foundations) are lacking, and opportunities to collaborate are few. For the 100 or so shelter-based organizations in the State, they are hard-pressed to truly stay at the "mom and pop" size, and often push into the $1-2 million range with a small expansion of services, or from episodic bursts of new government funding. Health care is of course, a whole separate world. Remember in 1999 when we were all in a huff about Y2K and it's unknown consequences....I'm having similar feelings about 2014 when most of the major Affordable Care Act provisions come into affect. Small health care providers (the free clinics and others that haven't embraced the FQHC or "look-alike" model yet) are grappling with how to stay in business without growth and significant infrastructure investments. I agree with your view that there is too much current hype about the scaling of nonprofits. Thank you for pointing out that many of the mergers that we're currently seeing are really the product of failing nonprofits getting "acquired" by more stable ones. It's unfortunate that we can't learn from these failures before they have to be positively spun into a "win win" to comfort donors. And for those small to mid-sized nonprofits that are growing to survive, the journey ahead seems especially precarious. Growth is risky given the bad economy and the limitations built into many government and philanthropic funding sources, but for many organizations, resisting growth leads to contraction and decreasing capacity, not the preservation of the status quo.

I like In N Out too, although my local one is so crowded I think it should be named "In and In and In and In and Finally Out." :)

What's "small" and what's "big" are open to many interpretations. I think of small nonprofits as those with fewer than 50 staff, and mid-sized ones as having staff between 50 and 100. At 50 staff a budget of $3 million would still be small to me.

Thanks for your other comments, too! Let's go out for an In N Out! Jan

While I agree with some of the points in the article, I also agree with some of the disagreements in the comments. Regardless, I work for an organization in which the board is pushing for us to grow to new cities, while the staff feels we have yet to master our current (and only) location. We will soon make decisions on this, so the article will help us chew over all of these points. Thanks for giving us some food for thought!

I think a nonprofit's Board may be another barrier to growth. They are usually made up of representatives of the community that the nonprofit currently serves. They typically want their nonprofit to continue to serve their community rather that grow into serving other communities.
Donors might be another barrier. Many of them might be donating because of the good feelings they have about the particular niche that the nonprofit is operating in. If the nonprofit expands into other niches, their existing donors might have less passion for that cause, and reduce or cancel their financial support.

I liked the article. It does identify some of the barriers to growth and, while the examples are for-profit, there are lessons to be learned for the nonprofit world. However, the biggest challenge to growth is the 'Myth of Replication'. Since nonprofits are naturally local, we can replicate principles and practices geographically, but not organization. Every new location, whether neighborhood, city or whatever, needs to be built from the ground up, with new local leadership, locally-engaged sponsors and locally-tailored services. Moreover, there are solutions to the three proposed "myths" and to other challenges to growth, For example: - "Vision" needs to be realized through a strategy for growth - a strategy that leverages distinctive competences; - "Infrastructure" can be provided by others - through partners with complementary competences, including geographic presence; and - "Quality" need not suffer from scale if you don't de-skill front-line jobs - and aim for a multi-local model rather than a regional oversight model. I've shaped and secured growth strategies for labor-intensive nonprofits, in the fields of education and human services. Accordingly, I know that going-to-scale can happen reliably and fast IF you're willing to focus on doing whatever it takes to fulfill your mission and don't reject opportunities to further that mission through partnerships.

ShellyAlexa, thanks for these notes. I enjoyed your comments about the "Myth of Replication." A related problem is that everyone wants to fund pilot projects but nobody wants to fund a longstanding service. So nonprofits have to reinvent everything constantly.

Hi, Jan. I'd say that's true of many smaller family and community grantmakers, but not of the majors I've worked with. Indeed, in the current economy it's difficult to become a new grantee because endowment returns are already ear-marked for multi-year commitments to existing grantees. In my view, the key is to find the right grant-making partner, one that not only shares your mission, but also has complementary strengths for, and a focus on, your current stage of evolution. For just one example, if your issue is US childhood obesity and you have a successful local community-based initiative that you want to bring to sustainable scale, I'd take a look at Robert Wood Johnson. The Foundation Directory Online is of course a good place to start.

This is so off base. Seven branches of an organization can all combine resources and pay 1/7th of the cost of insurance, audits, directors, bookkeepers, attorneys, marketing professionals, fund development experts, consultants, etc. If all seven branches required access to those high quality specialized services, their combined costs would be seven times as much. Without them, they would likely have much less quality.

If by scale, your main point is administrative efficiencies through economies of scale (as Jan clarified in the comments), then don't forget about back-office collaboratives (Chicago's own BOC is an example) which outsource common processes. There are other kinds of scale, though, some of which apply to service-driven organizations, not just social enterprise / earned income ventures. Organizational growth and replication is just one mechanism, also consider

Sustainability (this is the category mostly addressed in the article)

  • Revenue growth
  • Operational efficiency through processes and systems
  • Standardization / “productization” of delivery
  • Market access (discussed in some of the comments)
  • Penetration - more thorough service to one geography
  • Distribution channels
  • Franchise / replication Social impact beyond the enterprise (very important)
  • Influence on government, partners, other providers
  • Diffusion, emulation
  • Behavior modification (think public health awareness campaigns and interventions)

Ultimately, "scale" for a social organization has to mean "greater impact" not just "larger size" or "greater revenue". You have to define what your goals are for scale before assuming one model. I focus on earned income models, but my experience is similar to ShellyAlexa's - these challenges can be managed.

David, thank you for a helpful comment, pulling out some of the various components of "scale." Jan

Yes, David, back-office scale economies through group purchasing, shared services, etc, are an obvious opportunity for increasing the social return on investment, unless the service itself is critical to the mission. Regardless, while I've worked for more years than I care to count on trying to get major nonprofits to collaborate, getting the change to happen is like pulling teeth. The challenge goes beyond the simple observation that many nonprofits see themselves as competitors for funding. Let's take the example of credit card processing. While even the largest nonprofits don't have the scale to get the same deal as a major corporate, the "let's look into it" is usually assigned by the CFO to some finance department manager who neither wants to admit that they don't have the best deal nor lose their comfortable processing relationship. Regardless, progress is being made in the sector. After many years of false starts, the National Assembly of Health and Human Services, representing its members' more than $30 billion in national nonprofit operating costs, is now realizing major back-office savings from a group purchasing initiative. Let's hope others get the message and follow suit.

I began working at our non-profit 25 years ago when it had 5 staff members. Now we have 38. Though we're still a small NFP, getting bigger allowed us to hire staff with specialized expertise which helped increase the quality and responsiveness of our services. I'm not a fan of mega-agencies and I do think communities benefit from having a diverse array of arts and human services programs, but many small non-profits suffer from a lack of administrative and management infrastructure. Staff burn out when there's insufficient support. We've all seen busy professional staff responsible for copying and cleaning because there was no one else to do it. It takes a certain level of budget and staff to afford consistent expertise in important areas like HR, marketing, technology, data collection and evaluation. Board members and volunteers can help fill the gap, but there are limits to what they can do. Every case is different, but I believe that it's useful for small non-profits to consider whether strategic alliances - collaborations, shared back-office functions, shared space, and, yes, even mergers - might help them to achieve the scale and infrastructure needed to be more effective in carrying out their missions.

Hi Jan, Thank you so much for writing this article - I love it! It was forwarded to me because your sentiments are directly in line with a book we just published The Big Enough Company: Creating a Business that Works for You. In it we reject the notions that success is about size and that bigger is always better. Success is about satisfaction and impact. How big do you need to achieve your goals? That is the question that most businesses don't ask but should. Instead the grapple with the pressure and perception that growth is always good and that bigger is always better. We include the stories of 100 entrepreneurs who have worked hard to find the right size for them, based on what they want their business to achieve. I'm thrilled by your perspective. No matter how people come out on the issue it's a really important one to consider. I'd love to chat further about Blue Avocado and your thoughts on size, satisfaction and success. I couldn't find contact info on the site though. I can be reached at info @ in good company dot com. I'd be happy to get you a copy of the book and see what you think. We profiles lots of wonderful non-profit organizations in addition to for-profit companies. Thanks for the brain food and so glad to know about you!! - Adelaide Lancaster www.thebigenoughcompany.com www.ingoodcompany.com

Adelaide, I love the title of your book. It's a great model for nonprofits: The Big Enough Nonprofit. Thank you! Jan

Hi Jan - I'd be delighted to send you a copy if you'd be interested. My email is adelaide@ . Glad you think it sounds interesting.

I think nonprofit growth can be a positive if mission and connection to the community are maintained. In my experience having consolidated infrastructure support (ED, HR, development, finance) enabled my community-based nonprofit to grow from $2.7 million to $9 million over 15 years. Quality was maintained by consolidated training and management-by-walking/driving-around. There was definite synergy among staff in the six different programs we operated, serving children of different ages. And for the client families there was a seamlessness as their children aged, all strengths. Katherine Morrison Morrison Nonprofit Transitions

I admire the people who say they have led nonprofits to growing into very large (200+ staff) without loss in quality or cause. It may very well be true. My contrarian self can't help but point out that the CEOs (in any sector) always think that quality is being maintained . . . it's the line staff and the community that disagree. Jan

Thank you for this thoughtful article. I think there is a certain size (not sure what that is) that most nonprofits need to get to be sustainable that probably depends upon mission and scope of services. I have had two experiences with agencies that grew huge and challenges came up. One started as a small group home and ended up a $20M agency providing an array of services. This agency suffered from a bad case of founder's syndrome, in which the founder was visionary but unable to manage a large organization. When she looked for help, she looked for it from the business world and that became a disaster. This agency ended up merging with another large agency. Currently I work in a county where there are three contractors who provide different kinds of mental health services. My agency has been around the longest and has focused mostly on prevention and early intervention and kids living at home but has the smallest contract and overall budget. The other two agencies were started by visionaries and entrepreneurs around ten years ago and have focused heavily on kids in the system. They were encouraged by a previous administration to develop model programs and therefore they ended up billing lots of Medi-caid to fund these extensive services. One agency was able to stay relatively small (although larger than us) and maintain quality; the other has a director who tends to take on everything that comes her way without thinking it out and quality sometimes suffers. I was always cautious that eventually all this billing Medi-caid, even though authorized by the county, would eventually come back to haunt them and guess what - this year it did! A new administration, a county with a serious budget deficit, and a cost per kid much higher than the state average. They took 15% contract cuts and we took none. The county told me that they were interested in giving us more contract work and liked my philosophy of slow sustainable growth where it made sense.

Myth Number 1: that foundations are a dominant funder for nonprofits. The Bridgespan Group has published several studies of nonprofit funding, including "How Nonprofits Get Really Big" in the Stanford Social Innovation Review, which noted that, excluding hospital and college foundations (which are fundraising arms), foundations provide about 2% of the overall funding in the nonprofit sector.

Thank you for this article and for others like it that challenge us to consider alternatives outside of perceived norms for our sector.

Great insight in this article. Thanks for the ideas.

Post new comment

CAPTCHA
This question is for testing whether you are a human visitor and to prevent automated spam submissions.