Too Risk-Adverse To Fail (Nonprofit Edition)

by Josh Jacobson

“Eight out of 10 businesses fail. Are you sure you want to do this?”

Not exactly the sort of thing you want to hear when you’re contemplating launching a new business.  Now almost three months into my own new consulting venture (76 days to be exact, but who’s counting?), the knowledge that it is far more likely that Next Stage Consulting will fail than succeed is actually a tremendous motivator.  I’m a guy who likes to know my odds, long as they may be.

upsideAs a rule, no one sets out to fail, but a new book suggests that falling on your face may not be as bad as one might think. In her book, The Up Side of Down: Why Failing Well is the Key to Success, author Megan McArdle suggests that failing, and even being encouraged to fail, is a critical component of future success.  In fact, McArdle suggests that what sets America apart is an underlying tolerance for failure, with a lenient bankruptcy policy that allows for forgiveness and growth.

For everyone but the nonprofit sector, that is.  In a country that prizes entrepreneurs as champions of innovation and change that in turn drives our economy, Americans are reluctant to give the same leeway to community-serving nonprofits.

If “failure is how businesses learn,” as McArdle suggests, what does it mean that we refuse to let our social good organizations take similar risks?

A few causes of risk-aversion are below, and thankfully, the news isn’t all bad:

  • Over-Reliance on Government Support
    As noted seven years ago in a study by the Stanford Social Innovation Review, “government is by far the most important source of funding for the high-growth nonprofits in our study.” The Urban Institute reported that “in 2009, governments contracted with human service nonprofits for over $100-billion worth of contracts and grants. For organizations with government contracts and grants, government funding amounts to 65 percent of total revenue.”

While there is no doubt that government sources of support are critical to sustainability for many nonprofits, the increased accountability standards and outcome measurements expected post-Recession effectively overwhelm nonprofits, swallowing up the time and energy of leaders.  It is a system badly in needed of reform.

There are some signs that governments are thinking outside the box.  Depending on whom you ask, Social Impact Bonds may be some of the most important/exciting/unexpected tools created to inspire new ways of tackling social issues. By encouraging private investment, Social Impact Bonds create a market where one did not exist previously and keeps the focus where it should be – on rewarding positive outcomes.

  • Vilification of Overhead
    By now, I hope you’ve had a chance to watch Dan Pallotta’s game-changing TED talk about the double standard that penalizes nonprofits for how much they spend on supposedly non-mission serving expenses. The dreaded 15% overhead ratio expectation, which states that no more than 15% of a nonprofit’s budget should be spent on administrative costs, is a huge drag.  It is an expectation utterly unique in the business world – no other industry is held to such a standard, laughable in for-profit enterprise, and hardly the expectation of our own government.  And yet it is something that continually comes up in conversation with would-be donors to local nonprofit clients, as if such costs were evil and to be largely avoided.

Thankfully, there is a move afoot to refocus donors on demonstrated success over fiscal conservatism.  In an unprecedented move, the leadership of Guidestar, Charity Navigator and the Better Business Bureau released a joint statement in 2013 denouncing the overhead ratio as imprecise and inaccurate.  Further, the trio acknowledged that “organizations that build robust infrastructure—which includes sturdy information technology systems, financial systems, skills training, fundraising processes, and other essential overhead—are more likely to succeed than those that do not.”

I mean, duh, right? But the fact remains that as long as organizations feel squeezed by their donors to demonstrate extreme frugality, the likelihood of nonprofits embracing risk-taking opportunities remains low.  Accountability standards like these were meant to protect us from fraud, but have also taken all the wind out of the sails of social entrepreneurs.

  • Reluctant Volunteer Boards
    I am personally a big fan of local leaders who believe so strongly in a nonprofit’s mission that they are willing to take on a role that pays nothing and yet is likely to take up a big chunk of their time.  As a board member of the Charlotte Chapter of the Association of Fundraising Professionals, I know from experience.  Volunteer board members are mostly deserving our praise.

Note that I said mostly.  That’s because the system of serving as a board member for a nonprofit is wholly different from serving in the same role for a for-profit corporation.  Without a profit motive, nonprofit board members are identified based on their own passion and interest in the cause.  And that isn’t always so reliable.  “Let’s all remember that we already have full-time jobs,” is typically not the preface to a board member signing-up for risk-taking opportunities.

For some volunteer leaders, it is enough to simply steward the nonprofit to ensure no crises arise on their watch.  When it comes time to consider high-risk, high-reward opportunities to advance mission, some board members use a different set of priorities in assessment than the population that organization is called to serve.  Not all, but some. Thankfully, board training has never been more plentiful, and offerings like the Arts & Science Council’s Cultural Leadership Training Program are helping nonprofits secure volunteer leaders who understand their roles well.

McArdle suggests that the key failing well is to recognize mistakes early enough to allow one to channel setbacks into future success.  But if we never let our nonprofits have that same opportunity, we’re apt to see the entire system fail as organizations cling to doing things the way they’ve always done them.  

Three Questions to Consider This Week:

  1. What do you consider your biggest professional failure?  What did you learn from it?
  2. If you’re a manager, do you encourage your employees to take risks?  If so, how do you handle potential failures?
  3. What is the one thing you wish your organization or department would try that leadership has been reluctant to embrace?  How might you mitigate the negative impacts of failing?

Image credits: Featured Image (123RF – tomwang), Book (goodreads.com)

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