May 29, 2003 | Read Time: 5 minutes
The former senator Bill Bradley has recently confessed that his Princeton education was not worth anywhere near what he paid for it, that he was urging friends to cash out their retirement savings and distribute them to their children, and that the money he spent appealing to millions of New Jersey voters in his Senate elections was an unnecessary extravagance since the elections could have been determined more efficiently by collecting votes from only 1,000 to 2,000 major contributors.
Those, at any rate, are the logical implications of the suggestions that Mr. Bradley and his new colleagues at McKinsey & Company have urged on the nation’s private charitable organizations in an article in this month’s Harvard Business Review. According to Mr. Bradley and his co-authors, Paul Jansen and Les Silverman of McKinsey’s Institute on the Nonprofit Sector, American charities and foundations are wasting at least $100-billion a year by going after small contributors instead of just the big fish, spending too little of their endowments, and committing assorted other unspecified inefficiencies in the operation of their programs.
Given the cold shoulder they are receiving in many corporate boardrooms, it is understandable that the nation’s management consultants should be seeking new fields to conquer. What is more, there are surely opportunities for America’s charities to improve their performance. But after helping to bring us Enron, we might hope that McKinsey’s other gurus of efficiency would display a degree of diffidence and a great deal of care as they prepare to assault a field so different from their own.
Not so. Amid some useful suggestions, the McKinsey experts bring a combination of deep biases, serious misunderstandings, wild generalizations, half-truths, and sloppy reasoning to their analysis of what charities need. In the process, they do a disservice to those who have dedicated their lives to improving the health and welfare of average Americans.
Take, for example, the general image Mr. Bradley and his colleagues convey of the nonprofit field as an administrative backwater that “lacks the managerial processes and incentives that help keep the for-profit world on track.” Overlooked in this account is the fundamental process of re-engineering that the nonprofit world has undergone over the past two decades. Strategic planning, marketing, performance measurement, organizational restructuring, partnerships, and professionalization are just some of the innovations that nonprofit groups have adopted with gusto during that period. Indeed, many of the innovations that the McKinsey consultants advance have been standard procedure in significant parts of the nonprofit world for a decade. This is no longer “your grandfather’s nonprofit sector” awaiting the arrival of the McKinsey geniuses to redeem it from sloth, but a resilient and competitive part of the American scene whose recent growth rate has exceeded that of the business world by 50 percent.
Nor is the McKinsey assumption that nonprofit groups are exclusively service providers close to the mark. While this is surely one of the functions of American charities, it is only one. Universities conduct research, not merely “produce” graduates. Family-service organizations engage in advocacy, not merely “service” clients. By narrowing the focus to the service functions of charities, McKinsey’s analysts leave little room in their calculations for the very features that make charities so valuable.
Finally, there are the sleights of hand built into the $100-billion computation. Thus, for example, the cost of fund raising is computed as a share of funds raised, which, at an estimated 18 percent, makes it appear excessive compared with the 5 percent private businesses pay to raise capital and the 10 percent of total spending McKinsey’s analysts tell us corporations spend on marketing. But charitable donations are only one source of nonprofit income. When the cost of fund raising is measured comparably as a share of total nonprofit expenses, it turns out that nonprofit groups are devoting closer to 3 or 4 percent of their spending to this purpose, well below the corporate marketing figure. Perhaps the corporate world should be taking lessons from the nonprofit one on how to lower its costs.
So, too, with some of the other claims. The estimate that foundations could preserve the value of their endowments while increasing the amounts they pay out in grants from 5 to 7 percent must surely have been computed before the market meltdown of the past few years. While there may be other reasons to favor higher payout rates, every other reputable analysis has suggested that a 5 percent payout rate makes sense over the long run if the value of institutional assets is to be preserved.
Similarly suspect is the $55-billion savings the McKinsey experts project from bringing the expenditures of organizations with high per-client costs down to the level of those with low per-client costs since it takes little apparent account of the known fact that organizations even in supposedly similar fields often have widely diverse clienteles and offer significantly different services. This makes the “average cost per client” number the McKinsey analysts use a crude and misleading measure of organizational performance, even without considering the known limitations of the data source on which those estimates are based.
Certainly no one can fault Mr. Bradley and his colleagues for searching for ways to improve the operation of nonprofit organizations, even as part of a search for nonprofit business. But we have a right to expect them to leave their biases against nonprofit managers at the door, to be cognizant of the enormous revolution in nonprofit management that has occurred over the recent past, and to avoid playing loose with the numbers. Having Enron-ed the corporate world, let’s make sure the management consultants are not set loose without proper preparation to Enron America’s charities as well.
Lester M. Salamon is director of the Center for Civil Society Studies at the Johns Hopkins Institute for Policy Studies and the editor, most recently, of The State of Nonprofit America (Brookings Institution Press, 2002).
