Prospering in a New Age

By Anthony Knerr

As many commentators have observed, we are presently living through a period of significant transformational change, a paradigm shift the full dimensions of which are not yet evident. There can be no doubt that we are in the midst of historic upheaval and change, with the world seemingly more unruly, complicated and uncertain than ever.

The fresh shocks and major upheavals around the globe in just the last year have ranged from the Arab Spring to the Japanese tsunami, financial turbulence in the Euro zone to stubbornly high unemployment and a growing budget deficit in the United States, street riots in London to citizen outrage in China. Even the weather seems to be out of kilter.

Fundamental Forces at Play: The root causes of these and other seismic events are not yet clear, but several fundamental forces appear to be at play:

  • Information technology is continuing its disruptive course, even more violently than only several years ago. Innovations such as tablets, cloud computing, wireless connectivity, smart phones, equipment miniaturization and robotics are fundamentally accelerating the flow and distribution of information, exponentially increasing productivity and radically changing whole industries. More disruption is surely on its way over the next decade.
  • At the same time, social media is upending communications, work processes and traditional organizational structures. Facebook, Twitter, LinkedIn and Google+, among others, are empowering citizen discontent, enabling everyone to know about almost anything anywhere and reformulating institutional and individual relationships. Suddenly, it seems, the globe has gone from being highly connected to hyper-connected. As a consequence, traditional authority figures – be they governments, large organizations or “experts,” to suggest a few – are less tolerated, recognized or revered; participatory action and individual engagement is in the forefront.
  • Globalization continues unabated, creating unparalleled opportunities in much of the world and for the well-educated everywhere. At the same time, new forms of risk and disturbance – hacking and other compromises of electronic security and liquidity crises, among them – are appearing. Sovereign governments are grappling with massive capital flows, immigration, currency fluctuations and realignment of geopolitical interests.
  • Recent excess borrowing and leverage in the United States and other developed countries are radically curtailing discretionary action by government, placing financial institutions under new scrutiny and causing economic difficulties for many institutions, organizations and individuals.

While the full impact and implications of these factors are not yet clear, it is certain that yesterday’s world is gone, forever. We have moved into a new era, with its own dynamics, character and rhythm.

Implications for Nonprofit Organizations: These fundamental forces present three significant implications for nonprofit organizations.

1. Budgetary pressures will continue to be intense for the foreseeable future.

Like many organizations, nonprofits are now faced with a period of general relative financial scarcity after an unusual era of seemingly boundless funding.

  • It will take considerable time in the United States and Europe for governments, financial institutions and individuals to deleverage their balance sheets and normalize their net asset levels and discretionary funding. The deleveraging process is likely to be slow, painful and wrenching, particularly in the short run.
  • In the face of extremely tight budgets, all levels of government – federal, state and local – will increasingly cut support for the nonprofit sector, in part because truly discretionary governmental funding is limited. Presently uncontrolled entitlements and other obligations limit funding options, and it is politically easier to cut education, arts, culture and other so-called “soft” parts of governmental budgets. In addition, strongly-held ideological positions are increasingly influencing public policy in some regions of the country.

This new era of constrained resources will require major shifts in organizational outlook, clarity and focus.

  • By the same token, capital markets are fluctuating more radically and rapidly than in the recent past, a reflection of uncertainty and lack of confidence, the impact of an increasingly frictionless global financial marketplace, and changing geopolitical circumstances and interests. As a consequence, there is continued lack of confidence in the economic and financial future of the United States and Europe, which is making many individuals and foundations more cautious with respect to spending, at the same time that the market continues to generate unparalleled financial returns for others.
  • Pricing options are becoming more restricted in some sectors of the nonprofit world, in view of historically low rates of inflation, stubbornly high unemployment and constraints on personal discretionary spending. Thus, for instance, tuition in higher education and fees for services elsewhere in the sector have probably reached points of inelasticity; rate increases no longer offer significant opportunities to offset reductions in public funding and mitigate the impact of other budgetary pressures.

This new era of constrained resources – whether absolute or relative – will require major shifts in organizational outlook, clarity and focus for all nonprofits. For some, it may mean drastic modification of mission, realignment of programs and services and, possibly, retrenchment. For others, affiliation and/or merger with more financially robust organizations may be the best solution.

2. While the fundraising environment may be more challenging, it still offers remarkable opportunities.

The perplexing paradox confronting all nonprofits during this time of unsettling change is that while resources will generally continue to be highly constrained, the opportunities to attract sizable new funding are unparalleled.

  • The role of the nonprofit sector is getting more, not less important, as government support shrinks, the dislocations of the global economy become more prevalent, and there is growing recognition that major public problems cannot be solved by government alone, but rather through public-private partnerships. In spite of much of the current rhetoric, there appears to be growing recognition of the essential and growing role that nonprofits play today. Higher education is ever more important, because only the well-trained will have significant jobs in the developed world. Arts and culture are ever more critical to interpret the significance of change and disruption, and provide essential values to guide individuals through an unruly world. Social services will increasingly be provided by the nonprofit sector as government offers less direct provision of services and relies upon services provided through networks of nonprofits.
  • There is an emerging recognition of the importance of philanthropy by many high net worth individuals and selectively by major corporations. The recent initiative to encourage high net worth individuals in the U.S. and abroad to commit at least 50% of their net worth to philanthropy is gaining traction as more such individuals are making pledges to do so. The extensive media coverage of major philanthropic commitments is an important manifestation of a significant change in social attitudes and interest in philanthropy. The continued strengthening of U.S. philanthropy over the past several years in spite of the recent Great Recession is broadly encouraging.

• An extraordinary amount of funding is still looking for a philanthropic home in spite of the recent capital market turbulence. Total intergenerational wealth transfer is currently estimated at between $25 and $35 trillion, which, while down from the estimated high point, is still unprecedented in size. The top 1% of the country now controls an estimated 42% of total wealth in the U.S. One consequence is that a cohort of individuals is able to make remarkable gifts, as witnessed by the number of eight-, nine-, and ten-figure commitments in the past few years. Total corporate giving in New York City in 2010 grew 13% above the prior year. The portfolios of many individuals and foundations have grown rapidly over the last several years.

• Some thoughtful philanthropists are making truly significant gifts to nonprofits in order to strengthen institutional balance sheets during this period of economic complexity; others are doing so because they are concerned about actual and possible radical cutbacks in government support; still others are eager to support bold and clear aspirations of favored institutions.

An extraordinary amount of funding is still looking fora philanthropic home.

Two of our clients are mounting major new fundraising campaigns only shortly after successfully completing their largest development efforts to date. Both new efforts are seeking far larger major commitments tied to clearly-expressed strategic aspirations. Another client has changed its business model, replacing sizable cutbacks in public funding with new private giving, while simultaneously refocusing its programs and reducing its total operating budget. And another client has substantially sharpened its mission and program focus, with the result that it is broadening its client base, expanding its global footprint and clarifying its financial architecture.

3. It is critical for nonprofits to understand their present business model while thinking strategically about their best future.

All nonprofits need to ensure they have solid, sophisticated analytic understanding of their present business model. Doing so requires the use of rolling long-term financial plans, an understanding of the source and purpose of every funding stream, and an awareness of net margins for all major program components, including allocation of overhead. A regular review of these factors will allow institutions to re-engineer resource allocation, increase productivity and strengthen efficiency, while ensuring their programs and services truly enable them to fulfill their stated missions. This new era requires strong, thoughtful and imaginative financial leadership at both the board and executive levels. The failure to provide such leadership will leave the organization at the mercy of external financial forces.

By the same token, every nonprofit needs to be continuously thinking strategically – to have a clear understanding of its present positioning; a cogent and bold vision; and a small set of major ideas about where it wishes (and intends) to be in the next five or ten years. Such strategic thinking may be realized through a formal strategic planning process; it may be captured in a solid strategic plan. But without thinking – and acting – strategically, an organization cedes its future and well-being to others, which is never a good idea, even in the best of circumstances.

Strong, collaborative and engaged leadership is likewise critical for nonprofits to successfully navigate the current difficult and uncertain economic environment. Such leadership by the board, CEO and key internal leaders will bring a clear analytical understanding of the organization’s business model and ensure a strong culture of thinking and acting strategically throughout the organization. It will also communicate clearly and regularly with all constituents, internal and external, and expect high performance by everyone associated with the organization. And effective leadership will likewise ensure strong accountability and regular measurement of the impact of all programs, services and the supporting infrastructure.

On the other hand, the need for and importance of the nonprofit sector are significant and only likely to grow over the coming years. The wise nonprofit will look beyond current pressures, challenges and financial constraints to take strategic advantage of the new opportunities and possibilities present in the rapidly evolving global world.

Anthony Knerr is a Managing Director of AKA | Strategy.

STRATEGY MATTERS © No 6
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