Are There Too Many Nonprofits?

The persistent complaint from the philanthropic community that there are "too many nonprofits" has become so commonplace in recent months that it’s become something of a cliché within our sector. And like many clichés, this one has a deceptively simplistic appeal, combined with a modicum of truth.

This article was originally published in July 2009. We are posting it again now because despite the absence of data to support it, the complaint that there are “too many nonprofits” never seems to go away, as evidenced most recently by a front page story in The Boston Globe. Seven years ago we pushed back at this wrongheaded notion and urged the philanthropic community to walk their own talk by engaging in more active and systematic collaborations. Some local foundations have done just that. A case study by the consulting firm Root Cause describes how the State Street Foundation led a group of public and private funders in a coordinated effort to address the urgent issue of youth violence in Boston. At TSNE MissionWorks, our grant making program, the Inclusion Initiative, funds cross-sector networks of nonprofits and grassroots groups with public and private sector partners seeking to move the needle on endemic inner city poverty. It is time that we finally shift our collective focus. We need more instances of these kinds of collaborations, not fewer nonprofits on the ground -- that argument is still short-sighted and a red herring for other more systemic issues in the sector. 

[Original Article, 2009]

The persistent complaint from the philanthropic community that there are “too many nonprofits” has become so commonplace in recent months that it’s become something of a cliché within our sector. And like many clichés, this one has a deceptively simplistic appeal, combined with a modicum of truth.

But before we drink from that particular glass of nonprofit Kool-Aid, let’s take a closer look at the standard rationales for these assertions – to see how they hold up to even modest scrutiny.

1. “The growth of 501(c)(3)s has resulted in inefficiencies.”

Although it’s true that the sector has grown by more than 40 percent since the mid-’90s – from about 1 million organizations to 1.4 million today – it’s a logical fallacy to conclude that these larger numbers have decreased overall efficiency or effectiveness. The main reasons there are more nonprofits are the growth of the U.S. economy as a whole, the resulting creation of tremendous new wealth and tax revenues, and the huge increase in disparities between rich and poor, leading to a larger universe of unmet needs. I am not aware of any studies that have established or even suggested that nonprofits are less efficient now – individually or collectively – than they were when there were fewer of them.

One could just as easily argue that (a) the system is self-correcting and at that any moment in time the number of nonprofits in operation is exactly equal to the number that can sustain themselves, or (b) having more groups in the field leads to greater efficiency by creating more competition for limited dollars and by attracting new people, perspectives and entrepreneurial thinking to the sector.

2. “With so many nonprofits doing similar work, the limited resources available are spread too thinly.”

To the extent there is validity to this claim, the funding process is itself the source of both public and private funders’ own discontent. Those with the funds – and therefore the power – must be more courageous in their decision-making. Bringing more courage – and rigor – to the funding process would mean that only the most relevant, sustainable, well-led organizations would survive and thrive.

3. “With so many applications to evaluate, it’s difficult for funders to make well-informed decisions.”

This one gets more to the heart of the matter. Understandably, most foundation program officers would prefer to see fewer nonprofits because it would make their lives easier. But there are many ways to address what is essentially a technical administrative issue other than advocating for a reduction in the number of nonprofits. Potential strategies include more collaboration and consolidations among funders, longer-term grants and grants to networks of nonprofits, to name just a few.

The arrogance of the reasoning behind the complaints of “too many nonprofits” becomes clear if one asks, “So if there are too many nonprofits, what’s the ‘right’ number and how do you know it’s right?” Could you answer that question? Could anyone?

The Other Side of the Coin

Many who argue for proactively shrinking the number of nonprofits fail to appreciate the societal benefits generated by the sector’s diversity. Audrey Alvarado, former executive director of the National Council of Nonprofit Organizations, quoted on Mitch Nauffts’s Philanthropy News blog, put it this way:

I’m thinking here of all the things [nonprofits] do to build social capital and strengthen civil society – then I’m not sure that efficiency is the metric we should be focusing on. In fact, I’ve argued that, given the lack of civic engagement in this country, we don’t have enough nonprofits. I don’t doubt that there will be, and probably needs to be, some pruning in the sector, whether through mergers or groups simply shutting their doors. But if we’re willing to sacrifice some nonprofits for the overall good of the sector, we also have to be willing to redouble our efforts to strengthen the capacity of the nonprofits that remain.

A Modest Proposal

Although the number of operating nonprofits is at least in part determined by market forces, the same cannot be said for foundations. Warren Buffet’s example aside, there are few barriers to prevent individuals of wealth from setting up their own philanthropic enterprises. In fact, the growth in the number of foundations over the past 15 years has far outpaced that of the nonprofits they fund. According to the Foundation Center, in 1994 there were 38,807 foundations; by 2006 that number had grown to 72,477, an increase of over 85%, more than twice the percentage increase for nonprofits (National Center for Charitable Statistics). These figures lead one to ask where the efficiency problem in the sector really lies.

Imagine how much simpler and more efficient fundraising and philanthropy would be if the number of national and local foundations was sharply reduced, and if the remaining groups used a standardized set of application guidelines and evaluation criteria. There would be no more need to create a dozen different versions of your proposal and budget or maintain relationships with a score of program officers. Financial reporting would be far simpler too. And the efficiencies created by the conflation of tens of thousands of foundations into, say, a few hundred, would free up tens of millions more dollars for grantmaking.

Ridiculous, you say? Unthinkable? Maybe so, but it’s no less rational or more presumptuous than the calls by philanthropic leaders - most of whom should know better - for wholesale nonprofit consolidations and mergers. First, I say, “Foundations, heal thyselves!”

In the ED Forum, TSNE’s Chief Executive Officer Jonathan Spack reflects on issues facing nonprofit organizations in and around the Boston area and across the nation. Follow Jonathan on Twitter @JonathanSpack.

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