Monday, July 24, 2006

The Challenge of the Multi-site Nonprofit

Why is it more difficult for nonprofit organizations than, say, retail chains, to run efficient multi-site operations? A recent Harvard Business Review story concluded that nonprofits waste $100 billion a year through inefficient fundraising and dispersal practices and clumsy administrative operations.

The problem, according to Harvard Business School professors Allen Grossman and V. Kasturi ("Kash") Rangan, rests in inevitable tensions and battles for power that arise between national headquarters and local operations.

Not helping the problem is the fact that many nonprofits employ management techniques developed for for-profit companies. "We say this is not a good approach," said Grossman. Instead, nonprofits need their own management practices that recognize the unique characteristics of the nonprofit enterprise.

Grossman and Rangan presented their findings—and some possible solutions—at the Faculty Research Symposium held at HBS on May 20.

Whether a particular nonprofit organizational structure favors central or local control, inevitable tensions develop between national headquarters and local operations, Grossman said. These disputes often result from the unique characteristics that differentiate them from for-profit concerns:
The real value creators for nonprofits are the dispersed units, where money is raised and good deeds accomplished. With for-profits, headquarters is usually where the value is created.
A constant power struggle takes place between local and national leaders.
Wide use of volunteer labor makes worker motivation more of an issue.
Up to 60 percent of a nonprofit CEO's time is spent fundraising, time that could be spent building a more effective organization.
The strong emotional environment around nonprofits can challenge rational decision making.
Nonprofits often have a cultural opposition to structure.
A lack of theory of management practice exists for nonprofits.

These characteristics lead to a number of disputes between headquarters and affiliates, according to Grossman and Rangan. For example, who controls the donor list and money raised? Is it the affiliate that actually raises the funds, or the national organization that provides the overall brand and direction? Are affiliates delivering the level of service defined by the national organization? Does the affiliate adequately represent the values and goals of the national brand? Do affiliates receive an appropriate level of national services from the fees they pay?

Traditionally these strains have fueled centralization versus the decentralization debate in the nonprofit community, Grossman told his audience. And that's the wrong approach to take—the value proposition created by a national organization with local units is lost. Instead, the debate should be reframed with autonomy and affiliation as the key dimensions.

In their research, Grossman and Rangan looked at the system behaviors of five nonprofits: Outward Bound (where Grossman once served as CEO), Planned Parenthood, Habitat for Humanity, SOS Kinderdorf, and The Nature Conservancy. Each was mapped on two dimensions—one that exerts forces toward unit autonomy and the other influencing the degree of organizational affiliation. (The Nature Conservancy and Habitat for Humanity were the highest affiliation organizations; Planned Parenthood and Outward Bound were high autonomy organizations; SOS Kinderdorf ranked lowest on the autonomy scale, and about in the middle for affiliation.)

The point isn't whether an autonomous-biased organization is better than a more affiliate-driven one, but rather to identify "levers of influence" system managers can employ to get their organization the desired balance between the two forces.

"Headquarters should undertake actions to enhance system value and then sustain it, and affiliates should maximize local resources to enhance their credibility and increase their voice in the running of the system," Grossman and Rangan wrote in a working paper on the subject. "The key for management is to develop a governance system that accommodates this tension in a constructive rather than a destructive fashion."

To get constructive co-existence of unit autonomy and organizational affiliation, organizations must have in place a clear process for making decisions as to who will perform the functions necessary for the system, and a process that commits operating units to adhere to systemic decisions.

At the seminar, Rangan cautioned that there is no single cookie-cutter approach to solve the problems of all nonprofits. For example, if a meal kitchen has 100 strong, local operations there is little need for national people to come in, other than to provide a few services.

Among their conclusions, Grossman said, are:
A multi-site nonprofit's value proposition must be real, and consistently communicated externally and internally.
Strong unit autonomy and strong systems can be compatible and mutually supportive.
Lack of understanding of multi-site dynamics leads to a waste of money and resources.

More research is underway on several issues. To what degree are corporate structure and strong unit autonomy incompatible? How much strong national leadership is required to complement local program customization? And how important is national leadership in determining the success of a multi-site nonprofit?