COVID-19 made the not-for-profit sector’s value clearer than ever, with demand doubling for many services. But now the sector is under immense strain. Sam Sayers, CEO of the Australian Scholarships Foundation, and Roland Dillon, Partner at McKinsey & Company, discuss the path forward.

In a time of crisis, Australia’s diverse not-for-profit sector rose to the moment and collectively mobilised to address the surge in need for its services. Over the past 18 months, the sector has seen an increase in demand, including welfare support, mental health requests and domestic violence cases – with demand doubling in some areas (Exhibit 1).

Exhibit 1.

However, investment has not increased in tandem to match the sector’s needs. The sector is under immense strain with overstretched resources and widespread fatigue. To meet demand, sector leaders have had to focus on the short term, reducing the time and resources they’re able to invest in broadening organisational capabilities, from people to technology.

In short, performance has been strong, but the underlying health of the sector has suffered.  A collective national effort – spanning not-for-profit organisations, philanthropic entities, government and businesses – can help the sector develop essential capabilities to improve and sustain its health, and boost its impact.

A new report, Building from purpose: Unlocking the power of Australia’s not-for-profit sector, sheds light on how the sector can build on its strengths and improve its health. The report draws on in-depth discussions with more than 100 leaders across the sector, an organisational health survey of 37 not-for-profit sector organisations with 4 500 respondents benchmarked against a global dataset of more than three million responses, and targeted sector-level analyses.

Findings show that the sector has some remarkable strengths to build upon – it outperforms global benchmarks in several areas, including communicating a shared vision, attracting talent, focusing on beneficiaries, and forming deep partnerships with the community.

But there are significant opportunities for the sector to expand its aspirations and build a prosperous, sustainable and inclusive future for Australia and its citizens. Strengthening the following three essential capabilities can help not-for-profit organisations to grow, innovate, and continue to deliver their crucial work (Exhibit 2).

Exhibit 2.

Capability 1: Growing talent 

Australia’s not-for-profit organisations excel at attracting talent, but this is not always matched with practices for enabling that talent to grow. While 90 percent of organisations surveyed are above the global median on the former measure, only 35 percent exceed the median on the latter. And when employees were asked to describe the values they most want to see in their organisations which are lacking today, their three top answers were: coaching and mentoring, professional growth and employee focus.

Organisations can achieve more than they thought possible by recognising, challenging, and extending the natural talent the sector attracts. To do so, leaders can focus on the following practices:

  • Setting clear and measurable performance goals for individuals
  • Using regular, formal performance-feedback conversations to drive individual learning and growth
  • Providing merit-based opportunities and recognition

For one education-focussed not-for-profit, bringing these practices to life meant rethinking the idea that leaders must move away from frontline roles to grow professionally. The organisation inverted this notion by investing first, and most heavily, in professional development opportunities to stretch and challenge their frontline leaders. As their Chief Learning Officer said, “We’re aiming to create a ‘best and getting better’ culture and rethinking how we are rewarding our best talent is our next horizon of focus.”

Capability 2: Developing execution excellence 

Only two-thirds of not-for-profits surveyed believe that they measure outcomes effectively and take corrective, follow-up action when outcomes are lacking – though this is partly driven by government funding models that require more input- or activity-focussed reporting. As one CEO expressed, “We face a tension between executing today and challenging and improving the operating environment we are working in,” to achieve greater outcomes in the future.

The healthiest not-for-profits see operational effectiveness as critical to the delivery of social impact at scale. To build this capability, organisations can think critically about which outcomes measure the social impact they are trying to achieve and put several practices in place to enhance effective delivery of those outcomes:

  • Defining a set of outcomes, operational and financial metrics, and managing team performance against these
  • Clarifying individual accountabilities as part of team goals, and setting expectations around personal ownership of this contribution to team success
  • Identifying and mitigating risks, particularly in emerging areas such as cybersecurity

For example, one social services organisation has been able to grow rapidly while achieving world-class organisational health by seeing operational discipline as integral to its culture and success at scale.  The organisation focusses on recruiting people that are passionate about continuous improvement, and then gives them autonomy to deliver to clear standards. The CEO notes that transparent operational and performance management flows naturally from getting the best talent, “Every single person knows what’s required of them – we don’t measure our people on time spent, but on outcomes.”

Capability 3: Shaping the system

Given its relationships with beneficiaries, partners, funders and government, the not-for-profit sector is uniquely positioned to drive system change. Our research found a strong capability in staying abreast of changing policy, regulations, and the funding landscape, however practices related to innovation, learning and external orientation had room for growth. As one CEO puts it, “Knowing the communities that we are in is a strength; spring-boarding from that into the big picture is what challenges us.”

The sector can capitalise on deep connections with partners and community to drive greater innovation. To seize this opportunity, organisations can perfect the following practices:

  • Understanding where they sit in the system, the strengths of their services and solutions, and where to lean on or bring in others
  • Building mutually beneficial partnerships with stakeholders in the sector and with philanthropic organisations and other businesses
  • Encouraging top-down and bottom-up innovation and investing in tools for sharing knowledge and capturing best-practice ideas

For one not-for-profit training organisation, shaping the system has meant both pursuing their own frontline programs, and also partnering with other large training providers and impact investing firms to deliver the core elements of their model to much larger groups of beneficiaries. As the CEO describes it, “Achieving lasting change is about looking beyond our own organisations and building a pathway for new approaches to scale. It’s a prerequisite to impact – not a ‘nice to have’.”

This article was first published in Pro Bono news in December 2021.

About the authors

Sam Sayers is CEO of the Australian Scholarships Foundation. She has been a champion for not-for-profit sector capability building since joining the team in 2017. Sam has previously worked in senior roles in the not-for-profit and philanthropic sectors. Prior to that, she worked with Johnson & Johnson in Australia and Europe, and has consulted in the manufacturing and retail sectors.

Roland Dillon is a Partner in McKinsey & Company’s Melbourne office. He leads McKinsey’s Social Impact Practice and Resilience and Crisis Response Practice. He has been active in supporting Australian Governments in disaster recovery and COVID-19 response. He specialises in transformations in the public and not-for-profit sector, with a focus on leadership, capability building and organisational health.