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Only Bad Restaurants Go to Scale
Jan Masaoka

February, 2014

  We in nonprofits are good at taking on myths and sacred cows. But perhaps the least examined of these myths is the one about "going to scale." This OpEd takes a closer but brief look at the conventional wisdom in this area:

Myth #1: Nonprofits don't go to scale (get a lot bigger) because they lack the vision or the ambition

The reality here is that the dominant capital markets for nonprofits -- government and foundations -- actively work against nonprofit growth.

Regarding foundations, the common funding policy of "one smallish grant per organization per year" means increased volume doesn't lead to larger foundation grants. In fact, when nonprofits grow, many foundations become less interested in them. A commonly stated reason is "we want to feel where our size grant can really make a difference" . . . which often translates to "we feel better funding organizations where we are one of their most important funders."

Government -- overall the biggest funder of nonprofits -- is not only the biggest engine for growth but also the biggest barrier to growth. Most community nonprofits receive government funds through their counties or other regional/local governments. And these counties (for example) only want to fund nonprofits that are "located" (means "headquartered") in their counties. Furthermore, for political reasons, counties satisfy the most constituencies and voters by spreading the money as widely as possible within the county.

Imagine a situation where no banks were allowed to operate in more than one county, and banks would only lend money in the counties where they are located. The result: thousands of small, county-based companies.

In short, the most basic reason why nonprofits stay relatively small (96% have 100 staff or fewer) is because the actions and policies of their capital markets unintentionally and even unconsciously act to inhibit growth.

Myth #2: If only we were bigger we could afford the infrastructure we need

This myth, held by nonprofits ourselves, can also be explained as "If we were bigger we would be able to a) raise salaries, b) deepen quality, c) attract more donations, d) all of the above." But in fact, when asked "how much bigger would you need to be to get to the next level of productivity," most executive directors name a figure that is 1/3 larger than they are now. This is true for the executives of $500K organizations who want to be at $650K and for the executives at $4 million organizations who think the right place to be is $5.25 million.

Growing out of a problem only works when two conditions exist: first, when a product's cost is lower at higher production rates. This is certainly true with cell phones: a big

manufacturer can make a cell phone cheaper than a small one. But with nonprofit human services, advocacy, and the arts, the opposite is often true: it costs more per hour of social work in large organizations than in small ones. (In economics this is called the problem of increasing -- rather than declining -- marginal costs. Here's a simple way to see it: in a factory you can get a machine to produce twice as many products with only 1.5 times the cost. But you can't get a social worker to do that. In fact, a large organization has to invest in quality control and complex personnel systems that a small organization can manage just by looking around.)

The second condition for "growing our way out of the problem" is that revenue must be coupled directly to production: if you sell twice as many cars you get twice as much money in sales income. But it doesn't work that way in nonprofit economics: if you served twice as many clients this year, at the end of the year you won't get a single dollar more for those clients from government, foundations, or individual donors.

Myth #3: Mission and quality don't need to suffer as an organization gets larger

But the unwelcome truth: an organization changes fundamentally as it passes various size thresholds. To the degree that it becomes more efficient, it often does so at the expense of quality and service. For example, when Midwest Airlines merged last year into Frontier Airlines, everybody in the Midwest knew that service to third-tier cities would be curtailed. Fewer flights on less profitable routes means good news for shareholders, bad news for airline passengers.

In fact, much of the "going to scale" action these days is actually mergers, rather than an organization growing dramatically. One national report recently profiled several case studies of dramatic growth without mentioning that in several of the instances, growth was actually a merger. And of course: two Big Brothers/Big Sisters affiliates merging is far different from one of them doubling in size . . . the way it is inadvertently portrayed.

The unspoken reality is that affiliate mergers are often closures in disguise. Two affiliates merge and within a year, one of the offices is closed, making services less accessible for clients. Such mergers are good for the national office, bad for clients. We can think of several instances, and you probably can as well. (I once remarked to a staffperson at the United Way of the Bay Area -- located in San Francisco -- that I was sorry to hear they had closed their Oakland office. She responded without irony: "We didn't close the Oakland office! We just relocated it to San Francisco.")

Ultimately, what matters more: efficiency or quality? It is here where nonprofits diverge from for-profits. A ballerina's performance is art in itself, not a cog in a ballet production factory. The difference between an outstanding preschool teacher and a mediocre one is not reflected in statistics about service units to unduplicated clients.

Going to mass production demands turning a product or a service into a commodity. That's not necessarily bad, because we need mass production along with boutique production. But consider the following through the lens of the consumer/client/patron/customer: if you had just moved to a new city with your 3-year-old, and all you knew about the preschool choices was that one was run by a local nonprofit, one was run by the school district, and one was part of a large for-profit chain, which one do you find yourself leaning towards? Yet the nonprofit preschool is precisely the one that has not "gone to scale."

Faced with the undeniable reality that very, very few nonprofits succeed in growing really large (and the ones that do accomplish this do so largely with government money), the Philanthropic-Consultant Industrial Complex (a Blue Avocado coinage) has had to back off from its constant urging of nonprofits to go to scale. As a fallback they've started talking about "collective scale" and "collective impact" -- two ideas that are fine, but are old ideas in new language.

We're certainly not saying that all nonprofits should be small. We embrace a vision for the nonprofit sector as a healthy ecosystem -- with some large, mass-production nonprofits, mid-size organizations, smaller organizations that drive innovation, and constant shifting and jostling as ideas and organizations compete in the marketplace. We admire and love the large, multi-service human service agencies, the health clinics, the performing arts organizations, and environmental organizations. But less celebrated are the smaller, on-the-ground organizations who -- precisely because they are smaller and on the ground -- are those we choose here at Blue Avocado to support and champion.

(Okay, I'll stop ranting now.)

 

Check out Blue Avocado and a whole BUNCH of comments on this amazing article... at http://www.blueavocado.org/node/697



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