Thursday, May 7, 2009

Is the nonprofit sector wasting your money?

The Center for Nonprofit Management recently conducted a field review as part of its annual strategic planning process. The numbers are astounding.


-          From 1996 to 2009, the # of nonprofits in Texas grew from 33,000 to 78,706.

-          This 138% growth rate outpaced the national average of 115%.

-          Texas is known for its oil and gas industry, but nearly 1 in 25 Texans works for a nonprofit organization compared to only 1 in every 90 or so Texans working in oil & gas.


The Dallas/Fort Worth Metropolitan Statistical Area (MSA) is home to 21,366 501(c)(3) public charities, according to The composition is:

-          28% - Human Services

-          23% - Religion

-          20% - Education & Research

-          9% - Public, Societal Benefit

-          8% - Arts, Humanities & Culture

-          7% - Health

-          3% - Environmental & Animal

-          2% - International

-          <1% - Other


Here is what shocked me the most:


Over 80% of the nonprofits in the Dallas/Ft Worth MSA have annual revenues BELOW $100,000.


That’s nearly 18,000 nonprofits in our community raising less than $100,000 per year, but which collectively raise over $1 billion.




Now, here is where I am likely to ruffle a few feathers.


Yes, I am sure that there is some fantastic work being done by these organizations, and our state would likely be a worse place if they all disappeared.


But let’s think about the ‘opportunity cost’ of sustaining these smaller organizations compared to investing that same $1,000,000,000+ in larger organizations.


I acknowledge that it is not this simple. Many of those funds would not otherwise be donated if those organizations did not exist. However, if even a portion of those smaller organizations were consolidated with larger organizations, the same dollars would yield significantly more impact on our community.


Here is what drives my thinking:


  1. How much duplication of effort is there among these 18,000 small organizations? Does the value of their diversity outweigh the economies of scale achieved by larger organizations?
  2. How much of that $1+ billion is spent on infrastructure and fundraising vs. mission related activities? The average nonprofit has around 16% overhead. That’s at least $160M that is not used for “educational, religious, scientific or charitable” purposes by these smaller organizations. Is this an acceptable rate of loss to gain the value of a diverse array of small organizations?
  3. For example, all nonprofits should conduct a financial audit each year. Let’s assume this only costs $5,000. That’s still $90 MILLION spent on audits just among these 18,000 nonprofits. That’s nearly twice the budget for the entire United Way of Metropolitan Dallas. Would you rather triple the impact of the local United Way, or spend money on AUDITS?


Again, I acknowledge that small organizations make great contributions to our community. Their flexibility makes them very responsive to changing needs, and their grassroots nature keeps them highly attuned to the unique needs of their local environment.


But if our goal is to improve society, is this really the best model?


I believe that the nonprofit sector would achieve far greater impact with the exact same amount of money going to half as many nonprofits.


That’s not a popular opinion.


So, give me your feedback.


What’s the flaw in my thinking?


Is it actually a good thing that the number of applications for 501(c)(3) status has tripled over the past five years?


I’d love to hear your thoughts.