Seven Habits of Highly Effective Nonprofits

Grantmakers in the Arts

READER

Ideas and Information on Arts and Culture

Volume 11 No. 1 Summer 2000

by Claudia Chouinard

One summer weekend several years ago, the psychiatrist husband of a dear friend of mine remarked over the dinner table how emotionally healthy his two weekend guests were. "We've taken you through all sorts of things you've never done before, and you've leaped into everything with no fear. You take risks and cope with whatever happens, whether good or bad. It's so impressive!" We looked at him over the tops of our wine glasses and said, "Oh, this is so sad. You've been with sick people for way too long."

Perhaps the same can be said for many of us in the arts. Perhaps grantmakers and we long-time consultants in the nonprofit vineyards may focus too much on "sick," needy, and dysfunctional nonprofits.

The history of arts support itself seems appropriate to a medical analogy. In the 1960s we diagnosed our "illness" as the perennial gap between income and expense. In the 1970s "remedies" like stabilization were tried. In the 1980s treatments for the symptom du jour seemed fashionable whether bailouts or bailout bans, general operating grants or project-only grants. But

this emphasis on our ills has perhaps distracted us from a close scrutiny of the achiever organizations whose practices I believe should inform and direct our thinking.

Are we in the arts looking closely enough at the healthy organizations thriving in our midst? Are we, as is the medical field, directing our gaze away from curing illness and toward encouraging the practices that define lifelong good health? I think not. And I believe we should.

While good health is its own reward in real life, this seems not necessarily the case in our sector. In fact, stable and well-managed institutions tell me they sometimes feel penalized by their excellence. Some are threatened with loss of grants if they don't show substantial - and growing! - annual deficits. We all know of cases where chronically ill nonprofits receive major grant after major grant, often profiting financially while their more responsible peers pinch pennies.

The vast majority of nonprofits I've encountered face no questions about their right to life. They provide valuable, even irreplaceable, programs and services to their communities. Instead the "illness" I most often observe is one of weak management leading to financial troubles, a sort of malnutrition where cash and expertise cannot be provided in sufficient quantity or regularity to sustain an enterprise.

But why? Why do some organizations grow and prosper while others are sickly and in near-constant financial pain?

Studying highly successful nonprofits can define and refine our picture of a healthy nonprofit lifestyle. The value of such study is not to discover cures for nonprofit woes but rather to define health in order to promote it. Let's be clear from the outset that, as in life, good health is a lifetime commitment. No program that anyone can design will turn years of high risk, low return lifestyle into nonprofit health. Let's move away from cures or fixes for nonprofit ills and focus instead on preventive medicine.

Through my own experience with nonprofits, I have observed the contrasts between "sick" nonprofits and healthier ones in and beyond the arts. Over the years, I have worked with both outstandingly successful organizations and frighteningly endangered ones.

Seven critical habits emerge as particular indicators of financial and management resilience and health. In my observation all seven are largely present in healthy nonprofits and notably absent in their more troubled peers. The seven factors enable and often cause a highly desirable effect: financial stability.

Managers of a healthy nonprofit tend to live by the numbers and are empowered by the numbers. Management is "about" the numbers as a daily means toward an end: fulfilling the nonprofit mission. The mission is the why, the numbers are the how. Both are linked inextricably in the enterprise's value system. Healthy enterprises discover that "stretch goals" with built-in accountability are motivating, exhilarating, and empowering for staff and board alike.

Less healthy nonprofits shun accountability, fearing to ask (let alone answer) the question, "What will happen if we don't achieve these numbers?" They view accountability as a burden, a useless exercise to be dodged. Without accountability, nonprofits can quickly become "about" politics, popularity, or personalities, paths that typically lead anywhere but to success.

Accountability is perhaps the most critical of all the seven habits I will identify. It's the glue that holds all seven together in a pyramid supporting financial stability. I define accountability as an equation: measurement + enforcement = accountability.

Measurement is something we all do. Time and again I have seen in nonprofits the truth of economist W. Edwards Deming's theory on the relationship between measurement and quality as expressed in the maxims:

• If you measure everything you can measure, and if you improve these, then the unmeasurable will also improve.

Measuring with accountability means doing so in a regular and disciplined way best described as, "Plan, Measure, Replan." Nonprofits often err by using the wrong yardsticks or - worse yet - using no yardsticks at all. The first step toward accountability is to use the proper yardsticks, especially for income. I suggest three very simple income yardsticks: first, a gross goal for the year; second, the prior year's actual; and third, a net goal for the year. Goals need only be assessable, so a goal of "better quality feature stories in the local press" is just as relevant as a financial goal.

Enforcement simply means linking measurement to the individual who is responsible and making achievement of the stated goals part of your annual relationship with him or her. Million dollar incomes do not grow by themselves - even though it sometimes seems expenses do. Only hard working people with clear and motivating goals can make income grow, item by item, dollar by dollar, prospect by prospect, year by year.

Accountability works best in this context as an enabler, a motivator. Saying to a nonprofit's leadership, "You need to increase your income" is guaranteed to bring blank, fearful stares all around. Saying instead, "You and your managers need to renew 100 more returning members plus attract 200 more new members than last year" typically kicks off a spirited working discussion of resources, obstacles, offers, and feasibility that enables achievement.

An accountable nonprofit tends to match its management size and style to its own clearly defined needs, creating...

Too often, the quality of a nonprofit's management is far below the quality of the art or service it produces. When this balance is out of sync, the enterprise itself begins to malfunction. And as all grantmakers know, arts organizations are far more expensive to fix than to maintain in good health.

A healthy nonprofit management uses accountability to monitor its goals and its external environment. This constant feedback enables it to tweak systems and make mid-course corrections that prevent more serious and more expensive problems later. In-sync management deploys limited resources where they will do the most short-term good.

An unhealthy nonprofit often has difficulty detecting any health problem less dramatic than a heart attack. Only the most life-threatening illnesses tend to be diagnosed...and these typically after the fact. An out-of-sync organization lacks the feedback that keeps decision-making in touch with a fast-paced and competitive outside world.

Being out of sync can be costly. Beyond lost-opportunity costs, its most expensive side-effect is the likelihood that the artistic or service mission will grow well beyond the capacity of management to support that mission, putting the entire organization at high risk.

Management that is in sync with its artistic and service activities tends to invest in maintaining a...

A healthy nonprofit keeps its management learning curves low, short, and inexpensive. It refuses to pay the high price of on-the-job learning and instead recruits staff and board members who bring relevant abilities and new outlooks plus real-world experience into their management of the organization. Once such individuals are recruited, a healthy nonprofit supports them by investing in their lifelong training and motivation.

A less healthy nonprofit convinces itself (by ignoring cost-versus-benefit facts) that management experience is unaffordable. It endures long, steep, expensive learning curves that often end in tears while also failing to achieve results. Such nonprofits prove time and again the truth of Derek Bok's famous remark, "If you think education is expensive, try ignorance."

Nonprofits with the highest standards in their missions - those with the very finest artists, scientists, or other program personnel - often reduce their standards to a frighteningly low level in their own management. When this happens, the resulting learning curve can have a near-fatal effect. Parochialism can often raise learning curve costs still higher, by continually discouraging or silencing fresh new opinions. Intentionally or not, some grantmaking practices can encourage this bad habit through a primary emphasis on a nonprofit's artistic or program strength without a balancing concern for the ongoing development of its management strength.

One common effect of keeping learning curves low is that experienced leadership demands increasing...

When you're measuring to stay in sync with yourself and keeping your learning curves low, competition is your horizon line. It's something you think about every day, something you scan frequently because it's only partly in your control, yet it drives your numbers both up and down.

Unhealthy organizations always answer my questions about competition in the same way. "Oh, we really don't have any competition. No one offers exactly what we do." They are uncomfortable with competition, view it too narrowly for their own good, and fail to consider it in their day-to-day decision making.

Healthy nonprofits answer quite differently, typically saying, "Well, we are the only science museum in town, but we compete directly with the aquarium, the children's museum, and the historic submarine pier as well as the new commercial Imax movie and that computer history exhibit they have over at IBM. Oh, and those family science weekends they're doing out at the University, those too. For donors, our competition is every major institution in town plus several of the non-majors." They are comfortable with competition as a fact of life, and they factor it into their daily decision making.

It is exceedingly difficult today to be a successful nonprofit in the absence of clarity about competition. Lacking this clarity, the decision-making process can be dysfunctionally driven by those three evils: politics, popularity, or personality.

Nonprofits that are specific and clear about their competitive goals and positioning tend to invest in policies that foster...

When I visit extremely "sick" nonprofits, I am struck by the barricades that management has built to insulate the organization from its publics. Complaint letters and phone calls go unanswered. Unhappy individuals are avoided.

A bunker mentality often prevails, pitting unhappy staff against disgruntled constituents.

In the healthiest nonprofits, the chief executive personally accepts and responds to complaints, reasoning that even the smallest changes must begin at the top. Today's healthy nonprofit values feedback and gathers it constantly and routinely, using such vehicles as toll-free comment lines and website email. It seeks and creates opportunities to meet its supporters face to face. By policy, a healthy nonprofit responds to all feedback, good or bad, immediately.

An unresponsive nonprofit very soon loses touch with the constantly changing real world and becomes insular and out of touch, often becoming defensive and downright unattractive. The cost of unresponsiveness can be seen in expensive yet preventable marketing and fundraising problems.

Healthy and responsive nonprofits are in touch with the outside world as well as with their own organizational needs. They constantly match internal needs with outside resources, trying and trying again until the right match is struck.

Healthy nonprofits accept risk as a fact of life and manage it as just one more daily cost-to-benefit ratio. They actually seek limited, managed risks and embrace a test-measure-retest strategy within their plan-measure-replan lifestyle. Without risks, there are no rewards. And a healthy nonprofit actively seeks the best rewards.

Less healthy nonprofits are often completely risk averse, viewing even the smallest change as hugely dangerous even if they have far more to gain than to lose. Unhealthy managements are often unaware of testing as an option, and view risks as leading to frightening, all-or-nothing, roll-of-the-dice outcomes. They are often ignorant of how to manage risk, having long used their relative isolation to practice risk avoidance.

The ability to evaluate and manage risk can disappear within a nonprofit, just as an unused muscle will atrophy. When this happens, management is rendered virtually colorblind in a world where red/stop and green/go traffic lights govern every street corner in today's fast paced and highly competitive marketplace. A risk averse management tends over time to become more and more conservative, more and more fearful of the unknown in a dangerous downward spiral.

The ability to take and to manage risk enables a healthy nonprofit to make investments and to build a track record of return on those investments. Perhaps the most important element supported by this skill is...

Despite the fact that their livelihood depends in large measure on individuals, dysfunctional nonprofits often astound me with their inability to make and sustain even the simplest human relationships.

Let's say your Aunt Dora sends you $100 every year on your birthday. She's done this every year for forty years, a "cumulative gift" of $4,000 to you. But Aunt Dora isn't your favorite aunt, so you often neglect to phone her. You can't remember her birthday. Last year her Christmas card was returned because you misaddressed it, and you never got around to resending it. Well, lo and behold, Aunt Dora one day will stop sending you that birthday gift...at a potential lifetime cost to you that could have included her bequest.

Dysfunctional nonprofits fail to invest in Aunt Dora, telling her they cannot afford to call or write. "Do you know how many aunts I have who send me money?" an unhealthy management says. "I couldn't possibly phone each of them! I would go broke!" A dysfunctional management sees this as yet another item they "can't afford"...one which of course costs them more and more in income and goodwill with each passing year.

Healthy nonprofits know they can't afford not to thank Aunt Dora, because there just aren't that many loving and generous aunts in anyone's life. They call her immediately when they get her card, send a chatty thank you note, and make sure she's remembered at Christmas and on her own birthday. The message they deliver is, "You are special, you are valuable, and I am honored by your gift." A healthy nonprofit management has many corporate, individual, civic, and foundation Aunt Doras, and invests in getting to know them as an explicit agenda item with its own budget and long term goals.

Almost every nonprofit is dependent for its health upon annually renewable relationships with prospects, donors, grant officers, and consumers. Yet only the healthiest nonprofits actually invest sufficiently in these critical relationships.

Strong relationships combined with and enabled by the other six habits most often produces...

A healthy management uses all its habits to achieve financial stability, thus staying in relative possession of its short-term destiny. The seven habits serve as a constant early warning system of when risks or relationships are out of balance and might impact income. An in-control management balances its checking accounts, accrues savings accounts, and becomes a shrewd investor. Nonprofits with these seven habits are our true health maintenance organizations, and they benefit from higher morale and markedly lower leadership burnout than our industry norms.

A less healthy management typically focuses on income after the fact. It sees no need for any early warning devices. It waits for the bank to send the overdraft notice. It tends to be reactive (but not responsive). And in reacting, it finds its options are limited and its lifestyles deeply frustrating. Low morale and burn-out often cycle through it like an annual flu, often causing high turnover of valuable staff and volunteers. Income cannot be sustained and deficits become one symptom in an unhealthy syndrome.

Let's imagine that all your life your sole human contact was with patients in a hospital heart attack intensive care unit. You might believe that all humans were graying, weak, slow-moving, frightened, and in pain.

Many talented and well-trained nonprofit managers and board members suffer from a similar fate. They have spent their careers almost entirely inside unhealthy, ineffective nonprofits. One difficulty they face in changing lifestyles is a lack of understanding of what a healthy lifestyle might be.

If nonprofit health is worth pursuing, we need education to raise our health awareness. Our managers and volunteers need to see and experience what a healthy nonprofit looks and feels like.

If I won a lottery large enough to enable nonprofit health education, here's what I would do to build health awareness.

• Develop easy-to-use accountability grids, self-tests, and simple case studies providing success stories and lessons learned to illustrate real-world examples of a "seven healthy habits" lifestyle.

• Share the above materials widely with nonprofit leaders and managers and with foundation staff and boards in ways that enable them to immediately put the principles to use with positive effect.

• Provide ongoing training to nonprofit leaders (both paid and volunteer) and to foundation staff and boards until a healthy-habits lifestyle is a central value of our sector.

• Continually refine, update, and refresh the concept by integrating real-life healthy habits success stories and lessons learned into ongoing communications.

• Motivate nonprofit leaders by creating an annual competitive cash prize, similar in content and spirit with the "quality awards" given in the for-profit sector.

Healthy nonprofits are enabled by talented individuals. We cannot legislate or clone talent, much as we would like to, and we know that these individuals foster health wherever they go in the industry. Our most talented nonprofit leaders often perform relative miracles. But are we allowing their tactics and secrets to remain untold? A doctor who worked medical miracles would be besieged with requests for his methods and lessons learned. But our most outstanding practitioners remain unasked.

If we study nonprofit health, we can measure it. If we measure nonprofit health, we can improve it. If we improve it, our valued and valuable nonprofits will be forever stronger. What better reward could we ask?

Claudia Chouinard heads Results Group International in New York City. She has been a consultant to cultural and advocacy nonprofits since 1982 and has an abiding interest in organizational development. She can be reached at ClaudiaC@ResultsG.com.

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