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Scaling a Nonprofit Means Confronting the Challenge of Lumpy Growth

Let’s assume that you’re a faithful Grant Writing Confidential reader who started a nonprofit and managed to get enough funding to provide some level of services to your target population. You’ve probably accomplished this through a combination of donations and small grants, and you’re chugging alone or with a small staff. Like many businesses, however, at some point you’re going to face a dilemma, either keep on keeping on (as B. Dylan put it) or try to scale the organization to a larger size.

Scaling up a nonprofit—or a tech startup like Facebook for that matter—is a lumpy exercise. That is to say, the path won’t be a smooth trajectory. For example, if you’re presently operating out of a church basement at little or no costs, an office will have to be leased and equipped to ramp-up services. And since you don’t want to move offices every year, the first office will have to be sized to some future, not current, needs. Similarly, you can’t buy half a Xerox machine or half a van.

While it is possible to hire part-time staff, at some point, you’ll want full-time personnel to attract more qualified people and generally be a fair employer by providing benefits and job security. Let’s say you’ve got one Case Manager. As services increase, the Case Manager will eventually be overloaded, so you will need a second. When you hire the second Case Manager, however, both will probably be underworked for a while. This is another example of a lumpy cost because it will take some time for your organization to swallow the costs of the second Case Manager through increased revenue. It’s rather like the snake digesting an elephant in The Little Prince. But if your organization doesn’t swallow the elephant-like second Case Manager, the first Case Manager will eventually quit from exhaustion or you will have to triage service delivery.

Growing nonprofits will also eventually be faced with the conundrum of when and if to hire professional management staff. This will be yet another lumpy cost, as talented managers will expect appropriate compensation and working conditions (e.g., matching office furniture and a 27″ iMac, instead of a WW-II era dented steel desk and an ancient, temperamental Dell).

Many nonprofits are started by a “true believer” or a human services professional who lacks management training. As the organization grows, management chaos may ensue. Eventually, the founder should probably focus on board/community relations and relinquish day-to-day management to an Operations Director.

This kind of passing of the management torch does not always go well, with Apple’s disastrous hiring of the supposed management expert John Scully by Steve Jobs in 1987 being an especially egregious, famous instance. Of course, the case is often made that the egomaniac Jobs needed to be booted out of Apple to force him to eventually do his best work and return to lead the company to successes unimaginable in the 1980s.

Still, many nonprofits face a fundamental tension between being a grassroots organization and a larger provider. Grassroots organizations tend to be focused on a particular issue, which they often address well. The flipside, however, is that they tend to be poorly managed and lack the impact of a larger organization. Larger organizations tend to provide a wider array of services and thus have a greater impact on more people. The flipside, however, is that they’re sometimes depicted as being out-of-touch, overly bureaucratic, and more focused on the needs of managers and decision-makers within the organization than they on solving the community’s problems.

Neither grassroots organizations nor large organizations are inherently “right,” and both can be good or bad. From a grant-making perspective, either one can be desirable, and the tensions involved with scaling up never really go away.

Many nonprofits fail in the attempt to scale, just like businesses. Some will also wither from not attempting to scale. The funding for lumpy costs requires new revenue, which will also be lumpy. This can take the form of seeking larger donations, going after competitive grants and/or obtaining a line of credit, which must often be initially personally guaranteed by the Executive Director or a board member.

Since balancing lumpy cost increases with uncertain lumpy revenues is an inherent chicken-and-egg problem, you’ll eventually have to decide which to pursue first. One way to overcome the risks of lumpy revenue is to find a service to provide that is funded through a capitated, on-ongoing contract, such as foster care, child care, post-DUI substance abuse education, court-referral domestic violence prevention training and the like. It doesn’t really matter what the capitated service is as long as a more or less predictable revenue stream is attached that enables the organization to cover lumpy expenses while seeking lumpy revenues.

If all of this lumpy stuff scares you, it should. Scaling up a nonprofit or small business is a Tight-Rope exercise. Large organizations will be rhetorically attacked by smaller ones and vice-versa. Be cognizant of the issues involved with each.