Too Many Nonprofits? No -- There Aren't Enough Good Nonprofits

While Jan Masaoka was executive director at CompassPoint Nonprofit Services,A the organization completed two mergers, rejectedA four merger offers, and was rejected by the other party in two other merger explorations. In addition to consulting to many nonprofit mergers, she co-authored The M Word: A Board Member's Guide to Nonprofit Mergers, and is currently the Editor-in-Chief of Blue Avocado.

My response to the rhetorical question, "Are there too many nonprofits?" is: Actually, there are not enough good nonprofits.

Some people in our sector are indignant that there are too many nonprofits. They sound like an established Italian restaurant owner complaining that there are too many new Italian restaurants, or a plumber complaining that it's too easy to become a plumber nowadays. The frustration with competition is completely understandable, but we need to be careful that we don't inadvertently reinforce misconceptions about nonprofits as a result.

Certainly nonprofit mergers often make sense in the right situations. At the same time, the creation of new nonprofits and the spinning off of new nonprofits make sense in the right situations, too. We shouldn't tell the idealistic, ambitious young cook with ideas for
great affordable food that he or she should go work at an existing Italian restaurant. Do we imagine that Olive Garden wants to hire or listen to this eager young chef?

So let's consider a few of the arguments for merger in a different light:

1. Reduced competition. As aggravating as competition is, it also drives innovation and excellence.A We know a group of parents whose children had cancer who started a new organization, despite the indignant snorts from the American Cancer Society (ACS) and other entrenched cancer organizations. In addition to providing services not available before, these parents succeeded in doing two important things: they created a community of people supporting one another (rather than individual families getting services), and their success prodded ACS into providing these services themselves. In fact, several years later, the parents closed their organization and turned it over to ACS.

2. Cost efficiencies. My experience at CompassPoint and that of CompassPoint's clients is that while cost efficiencies do take place in a technical sense, mergers actually increase costs in a broader sense. As an illustration, consider a larger organization with audit costs of $10,000 merging with a smaller organization that doesn't have audits. The new organization may have audit costs of $13,000. Yes, there is a cost efficiency of audit costs per total expense, but the costs are actually higher. The newly larger organization will also need new staff positions, new infrastructure staff and meeting time expenses that were unnecessary in either of the other organizations. Expectations about salaries, benefits, and workplace amenities rise dramatically after mergers. (And speaking of cost efficiencies, is the best school the most cost-efficient school . . . that is, the school with the lowest expenditures per student?)

3. Increased services.A When cost savings are made, they are often made by cutting services -- often the opposite of hoped-for benefits of the merger. When it looked like Midwest Airlines would be acquired by another company, residents of many midwest cities knew that a merger would be good for shareholders, but largely because the less-profitable flights to smaller midwest locations would be sharply curtailed. When a two-clinic nonprofit we know merged with a larger affiliate of the same national organization, one of the clinics was closed. One argument is that the merger resulted in reduced services to the area; a counter argument is that both clinics would have gone under if the merger hadn't happened. There's no alternate universe we can use as a control group; the lesson is that we always need to weigh the sustainability of important but financially problemmatic services.

4. Funders and donors don't want to have to choose among organizations.A One reason funders are so pro-merger is that it can help them reduce funding demands. For instance, in one CompassPoint merger, of the nine funders that funded both pre-merger organizations, seven reduced their combined funding by 50% or more . . . in other words, the merger was a success for them. I admit it's irritating when yet another pizza menu shows up on my doorknob, but I don't complain that there are too many pizza places. I just go to the ones I like.

What are some legitimate reasons for nonprofit mergers? The reality is that most nonprofit mergers occur when one of the organizations is in financial trouble; sometimes a merger brings in talented management that can straighten out problems and attract new funding. Some mergers position the post-merger organization for funding that was out of reach for either of the pre-merger groups, perhaps for a funder that wants to fund on a larger geographic scope. Some mergers are a way for an organization to "hire" the terrific executive at the other organization. Some mergers are an appropriate way for a founder to exit gracefully.

Some mergers are actually closures in disguise. When I expressed my regret to a Bay Area executive that they had closed their Oakland office, she said, without even a tinge of irony, that "We didn't close the Oakland office; we relocated it to San Francisco."A

Starting a new nonprofit is a type of free speech, says arts grantmaker John Kreidler: it's an essential right, but we should only volunteer for and donate to the ones we like. Through the competition and sorting in the "marketplace of ideas," some innovative ideas and organizations will drive change, and others will fade out and close.

A vibrant, rough-and-tumble ecosystem of nonprofits serves our society best -- rather than bemoan its complexity, we should treasure our marketplace of ideas-embodied-as-organizations. It's one marketplace constantly bringing new ideas to "market," and one where we can still confidently invest our dollars, our hands, and our hearts.

See also in this issue:

Comments (15)

  • A vibrant, rough-and-tumble ecosystem of nonprofits serves our society best -- I love this comment. We insure almost 9,000 nonprofits across the country and I from time to time ponder whether this wide array of nonprofits, from very small to very large is the most efficient way to deliver service in our communities. Then, I spend some time with some of the EDs and/or their volunteers and hear about their many accomplishments in their communities and marvel at how much impact they are having for a relatively small cost. Yes, sometimes there are economies of scale that can be had by consolidating backroom services, such as accounting, but it can be very difficult to duplicate the passion of those serving, either as employees or as volunteers, in those small to mid-sized community based nonprofits. There is a value to that passion, and we shouldn't discount it, even if we can't "count" it. This is not to diminish the impact that large, broad-based nonprofits have on their communities. But there are intangible benefits to these many small organizations that are incredibly valuable.
    Pamela Davis

    Apr 01, 2009
  • This article and "Clueless in Seattle" really say what I think a lot of people are afraid to. Thanks, Jan!

    Apr 01, 2009
  • Great counter argument to the "too many" position. While I agree we should more actively consider mergers, I also agree that competition is good, and may the best run (i.e., managed, financed, staffed, you give it your sense of best run) survive. My issue is with two or more organizations that are basically doing the same thing (and this is not an issue of size). I believe we could all benefit from some economies of scale. Good article Jan.

    Apr 01, 2009
  • After more than 20 years helping nonprofits get off the ground, I have reluctantly concluded that too many of them are formed because the founder wants to be a founder and run the show -- not primarily because there is an unmet need.
    However, that's not as bad as something else which happens occasionally: someone forming a nonprofit as a way to earn a paycheck. Not surprisingly, these latter nonprofits generally don't stick around very long.
    These situations can arise because our nonprofit sector is highly entrepreneurial and because, in the United States, it is easy and inexpensive to set up a new nonprofit and obtain tax-exempt status.
    Having a robust marketplace of nonprofits is definitely a good thing, and I wouldn't change that. Nevertheless, it's our tax dollars, as well as our donations, that support the nonprofit sector. Therefore, it is in everyone's interest to avoid the waste that comes from having multiple tiny, resource-strapped nonprofits focusing on the same mission. How we do that (e.g., choosing our donees wisely) depends on our various roles. But we should all do what we can to help good organizations succeed and weed out those that are ill-managed or redundant.

    Apr 01, 2009
  • I think this statement that there are too many nonprofits needs to be dissected when it's made. Are there nonprofits serving the exact same population in the exact same community with the exact same services? Is there a good rationale, for example, why the Latino community might feel more comfortable receiving the same services at an agency based in their own community than from an agency that is not perceived as being part of their community but offers the same services? I find that when people make these statements, they often don't bother to find out the differences in nonprofits and that's our job to educate them. And yes, I agree, many smaller nonprofits could probably benefit from merging with larger compatable organizations. But I think small nonprofits doing poor jobs will die out on their own. (Whereas large agencies doing poor jobs will continue in perpetuity - but that's another issue!)

    Apr 02, 2009
  • As a funder who is looking for ways to support nonprofits in mergers and acquisitions and collaborations, I found these three articles excellent food for thought. They lead me to think that I agree with all three of you and believe the issue is not whether there are too many nonprofits but whether nonprofits and funders have a place to go to get good solid advice, counsel, support, number-crunching persective on whether a merger or acquisition makes sense for both economic AND a program/client-served reasons.
    Mike Schwartz

    Apr 02, 2009
  • way to go, Mike, I agree completely. (Your LGW classmate) Katherine Morrison

    Apr 09, 2009
  • This discussion, while very interesting and useful, seems very black and white to me re: whether there are too many nonprofits or whether they should merge. Why not consider the shades of gray in-between? That there are important opportunities emerging in two ways: horizontally speaking, for nonprofits to more effectively collaborate/partner with each other and form/strengthen cross-sharing and learning networks, so as to complement resources (human and funding). The other approach, vertically speaking, is for nonprofits to consolidate efforts within networks, coalitions, alliances, federations, etc for joint programming and consolidated efforts. This continuum of possibilities in-between the extremes holds promise for moving beyond the competition paradigm to fostering a collaboration paradigm, thereby enhancing the role of the social benefit sector.
    Christopher Szecsey

    Apr 02, 2009
  • The explosion of nonprofits over the last few decades is due, in large part, to the very same political and economic factors that are now shifting rapidly beneath our feet. We are all going to need to adjust. Having worked in the private sector, as well as in finance and fundraising in the nonprofit sector, I firmly believe that it is unrealistic to continue thinking that donors/funding is not limited.
    We do need good, well-run, productive nonprofits and we must make our case more clearly than ever if we're one of them. But the nonprofit world has to understand that we are about to experience what the dot.com people did nearly a decade ago. Nonprofits do not directly generate revenue (e.g.-new energy products or a better energy delivery grid), though indirectly they can help people be more productive. Without the solid revenue generating economy, nonprofits can not exist. So it's good that these articles and discussions begin. Multiple "asks" from seemingly too many organizations is indeed having a negative impact on donors. We need to be responsible in acknowledging and planning for this now.

    Apr 03, 2009
  • Having spent half of my career (so far!) in development/management on the nonprofit side of the fence, and the other half managing a small business and providing strategic support for grantmakers, I want to echo Christopher's comment above. I like this conversation's focus on the big picture of the nonprofit sector, and I'd love to see more folks thinking and talking holistically about all of the organizations working towards community change. I think the (somewhat recent) focus on demonstrating impact has strengthened many organizations, but it has also contributed to the fragmentation of the sector because it forces organizations (and allows funders) to view significant changes as the contribution of a single organization, which is often not the case. For example, major environmental organizations often tout having secured the preservation of large chunks of land, but most of the time that success would not have happened without an intricate web of partnerships across organizations (advocates, land trusts, funders, etc). I guess my point is that the health of the sector should be judged not by "how many" organizations exist, but also by the strength of the network connecting these organizations. I would love to see a local community or collaborative of funders with shared geographic focus, for example, map the connections and the strength of the connections across all of the nonprofit organizations, funders, and social enterprises in their geographic area - something that could be done relatively easily using social network mapping techniques (See the Barr Foundation's work in Boston after-school sector). This would offer tremendous opportunities to strengthen the ecosystem and also hopefully the efficiency of the ecosystem over time. Stephanie Fuerstner Gillis

    Apr 03, 2009
  • One thing we have to take into account for this discussion is that it is NOT always good enough just to manage a nonprofit well. I have to disagree that the well-managed nonprofits will survive and the poorly run ones will close. Funding is not allocated in that manner all the time, either.
    If an ED or board member is politically powerful and well-connected this can keep an organization going for quite some time despite poor quality of care or management. We have seen this happen. This is a frustrating reality.
    Maybe being well-managed sometimes really means hiring a well-connected, political ED who is better at spinning the services than actually delivering them!

    Apr 03, 2009

  • I'm very glad you highlighted this issue. It drives me crazy to hear this, and often from people who should know better. Last month I wrote a piece for our own e-Bulletin that makes some of the same points you did regarding the pro's and con's of mergers. I totally agree that these complaints are usually driven by funder needs, not from a community impact perspective.

    http://www.tsne.org/site/c.ghLUK3PCLoF/b.4992133/k.CB58/ED_Forum__Fiscal...


    Jonathan Spack, Third Sector New England

    Apr 05, 2009
  • Awesome article on "Not Enough Good NonProfits"! I re-read and searched for an unnecessary phrase or an inconsistent tone or an admonishing retort to the other authors of "Yes, Too Many..." and to my delight and goose-bumped skin there are none. Perfect editorial (again)! Please keep up the excellent work!

    Apr 08, 2009
  • I liked the starting article and found many of the comments insightful, but was struck by the reply that noted the need for analysis of each case. I have consulted on a variety of collaborations and mergers and I continue to be awed by the nuisance and complexity of the work. No two situations are the same and there are no easy answers or simple solutions. The only constant I have found is that you have to start with the question; will this improve my ability to serve my constituents. If the answer is yes, you will find ways to structure an alliance that allows for the right organization. If you can’t clearly answer yes everything else (efficiencies, market share, brand or competitive size) are tangential.
    Anita Lauricella
    Lauricella and Associates

    Apr 16, 2009
  • In 2011 Baltimore City was reported, by the Stat of MD to have over 88,700 non profits. This is more than double the two other most populous counties combined. The end result is that already stretched city resources are even more burdened by the inability to tax these entities. To say these non profits provide jobs is to ignore the fact that most employed in these organizations live outside the city. And the argument that they are providing benefits is lost on the thousands of poor living in substandard conditions. From my vantage, as a city resident is that most non profits are feel good organizations which seem to benefit their upper administration more than the community.

    Jul 05, 2016

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