Michael Wells
by Michael Wells
Mon Mar 16th 2009 at 7:08pm UTC

Nonprofit Blues

One so far relatively undiscussed aspect of the downturn is the effect on America’s nonprofits, sometimes called the third sector. I spent this weekend with a friend who’s a retired corporate CEO, has a personal foundation that supports local and international projects, and is very savvy in business, finance, and nonprofits. He said he’s heard that as many as half of U.S. nonprofits (charities) will go out of business during the current downturn, which he expects to last a couple of years.

Here are a few observations I can make from what’s happening in Oregon, and in the grants world.

  • Many foundations, having seen their endowments dive with the stock market, are cutting back on large grants. In addition, they’re moving from longer-range capacity-building grants to meeting people’s immediate needs (as one foundation director put it, from philanthropy to charity).
  • Arts organizations are seeing their donations and audiences shrinking. Seasons are being cut back, shows canceled. Some of the weaker players are seeking mergers or takeovers by larger organizations.
  • Safety net organizations like free clinics and food banks are flooded with not only the poor but the formerly middle class.
  • Capital building campaigns are dead in the water.

Nobody knows yet whether or how the stimulus money will affect nonprofits. If the federal government decides to fund projects through grants it may save or even enlarge some nonprofits. To the extent money flows through the states or direct federal spending it will probably have little effect.

A story in today’s New York Times says nonprofits are being flooded with high-level formerly employed volunteers. As anyone who’s worked in nonprofits can tell you, this can be more of a headache than a blessing.

There have been numerous stories in Oregon about how various nonprofits are faring. What are others finding in your communities?

7 Responses to “Nonprofit Blues”

  1. KIRSTI Says:

    Interestingly enough, a student of mine who is on the job market was saying that pretty much the only jobs out there are in non profits or grant related work. I know I am always astounded when I hear of people hiring and even this week’s Economist has some terrible news about the jobs crisis and how the jobs that are going now will never return. I think we are looking at an apocalyptical shaft in our understandings of profit and non profit which is going to make your comment about the former highflyers headed for the third sector, somewhat interesting! We work for a non profit, I sure hope they survive, mainly because we need a lot of them for all the good work they do!

  2. Michael Wells Says:

    Kirsti,

    Interesting. What field is your student in?

    It may not be all bad news. For at least a couple of decades people have been saying there are too many new nonprofits being formed. Too many similar ones in a region and they duplicate work and each one gets a little piece of the pie and keep any one from growing enough to reach economies of scale. And each one eventually needs an executive director and an office and a financial person.

    Being in the grants world myself, I wouldn’t be unhappy to see some of the stimulus spent on grant funded projects for nonprofits. In some fields it’s more efficient and effective than direct government programs, in other areas it’s not.

  3. Michael Wells Says:

    Kirsti,

    Interesting. What field is your student in?

    It may not be all bad news. For at least a couple of decades people have been saying there are too many new nonprofits being formed. Too many similar ones in a region and they duplicate work and each one gets a little piece of the pie and keep any one from growing enough to reach economies of scale. And each one eventually needs an executive director and an office and a financial person.

    Being in the grants world myself, I wouldn’t be unhappy to see some of the stimulus spent on grant funded projects for nonprofits. In some fields it’s more efficient and effective than direct government programs, in other areas it’s not.
    Sorry, forgot to add great post! Can’t wait to see your next post!

  4. SM2 Says:

    Across the board, I’m seeing contraction in the NPO world, though I’m seeing an uneven impact. The smaller NPO’s who had limited fiscal and organizational capacity are the most threatened. This is especially true for some rural organizations I’ve looked at.

    I work for economic development NPO’s. Those organizations which receive state funding for a major source of revenue have been especially hard hit. While the federal government is attempting to stimulate the economy, states are destimulating in order to balance budgets. I’m working on an innovative project with a lead regional organization. They had been about 1.5 FTE down before the downturn. They’ve since seen their budgets cut by 7%, and are expecting another 9% cut. They don’t have the capacity to take on new projects, even those which are innovative and intended to prepare the region for emerging opportunities. So how can the organizations do the work without the revenue? Now that the Omnibus Budget has passed, the federal funding for ED projects may now be available, but most of these have matching requirements- state coffers and regional foundations are strapped. It takes almost as much creativity to get innovative projects funded as it does to develop them.

    I am seeing some NPO’s benefiting from stimulus money, but there are issues with this huge influx of cash. An organization which retrofits low income housing is expecting millions in funding (previous budgets were approximately ~250K/yr). This is a huge step-up function. Do they have the capacity within their organization to deal with the laborious federal grants management process? This funding is reimbursable so I wonder if they have the working capital to float them through the process.

    I’m working on an organizational and fiscal capacity analysis of some of my region’s NPO’s in order to better understand the dynamics they are facing. These organizations are doing important work, especially in the rural areas which don’t have the municipal leadership capacity to help the communities cope in the present, let alone adapt for the future.

  5. Michael Wells Says:

    Boy, I generally advise organizations to not take on that much of a budget jump. In addition as you say, the federal grants management process is Byzantine. They’re not only looking at reimbursement but allowable costs under the OMB circulars, so they could spend money and not get repaid. I’d suggest they find a larger federal-savvy group to partner with. As I’m sure you know, when you get a federal grant the feds will want to re-negotiate the terms and agencies can lose their shirts.

    Some years ago I consulted to a number of small-town and rural Community Development Corporations that built affordable housing. Most of them never got to the size where they could afford to provide the required resident services and struggled to just stay afloat. This is one of the areas where too many small players is less efficient than one large one or direct government involvement.

  6. Campus Entrepreneurship Says:

    the explosive growth of NGOs/Non-profits over the past 10-20 years has been as much like a bubble as anything else that we have witnessed. the numbers are staggering and have been global (from India to Russia and Latin America)….
    there will no doubt be a ‘reordering’ in that universe. that said, there is huge activity/creativity in this 3rd sector (ie social entrepreneurship) that speaks to policy failures demanding non-govt solutions.

  7. Ali AL-SHAABI Says:

    The Non-Profit sector, as any other industry, is facing the challenge of transformation and adaptation to dynamic market and economical conditions. When in the profit sector, changes are usually unavoidable, and money is put where expected returns are worth the investment (with no hesitations to make cuts in budget and staff when necessary), in the non-profit sector the dynamic is still relatively slow, and the very nature of the business makes a few passionate people run usually smaller organizations, relying heavily on volunteers and grants. The lack of profit makes economies of scales some kind of taboo, where the cause seems to be more important than anything for people involved; but for those who believe in market and capital theory, it seems that waste is not avoided with this logic, and competition is not working as it should (awareness and size have a bigger impact than quality).
    This economic crisis makes it more obvious, but the trend has been growing recently with a number of Social Entrepreneurs and the rise of the concept of Social Business.
    I worked for a small non-profit last summer, and they were eager to go into structural transformation that would allow them to join a Social Business as a fundraiser for their organization. I believe that these kinds of creative initiatives are the key to survival in order to avoid dependence on big grants that would come short in hard economical times and put the survival of the organization on the line. On the other side, competition on quality will bring healthy competition that could raise the standards for this 3rd sector. With products that are perceived as useful investment for a good cause, individuals would contribute to non-profit endeavors in a completely new way.
    Unfortunately, the economies of scope issue is a tougher one, and I am not sure any leader in the field will give up control; and the survivors might not be the fittest, but those with the best connection…