In my last post, I started looking at Jim Collins’ latest book, How the Mighty Fall, and how the five stages of decline Collins’ research team found in businesses applied to nonprofits and foundations.  Here are the last three stages…

Stage 3:  Denial of Risk and Peril – Collins’ team found that in this stage, leadership continues to ignore mounting internal warning signs, explains away negative date trends or blames them on others, or spins ambiguous data.  Teams no longer engage in honest dialogue to analyze situations and solutions.  The results quickly show in deteriorating financial ratios and stakeholder loyalty.  I’ve seen this happen most often in the nonprofit sector as executive directors attempt to shield board members and donors from negative trends or the consequences of their own mistakes.  They’ve tended to display the hubris described in Stage 1 to external stakeholders while developing more dictatorial management internally.  Based on Collins’ book, answering “yes” to any of these questions indicates warning signs of this stage of decline:

• Does management discount negative news or data trends?  Do they only look at the positive side of ambiguous data?
• Is the organization pursuing bold goals or big bets without any accumulated experience or data to prove they could work?
• Is there a decline in the quality and amount of team dialogue and debate, or a shift toward quick consensus or dictatorial management?
• Does management externalize blame rather than accept full responsibility for setbacks or failures?

Stage 4:  Grasping for Salvation – companies that declined pursued silver bullet solutions that didn’t provide lasting results. They showed their mediocrity through chronic inconsistency and desperation.  The companies that turned around did so by making a series of well-executed decisions and changes based on facts and research, and by creating greater clarity around their core strengths and then providing resources to those strengths.  I’ve seen nonprofit boards more often than staffs pursue silver bullet solutions.  Often they’ll replace the CEO with a well-known civic leader, attempt big new productions or events to attract audiences and donors, and/or cut into the core of the organization’s services.  The organizations that kept declining seemed to lurch from one idea to another in search of success.   Two organizations that turned around did so through collaborative and deliberative work with their donors and customers over a number of months.

Answering “yes” to any of these questions indicates warning signs of not making it out of this stage of decline:

• Is the organization looking for a charismatic leader or outside savior, or pursuing other silver bullets such as big acquisitions, untested new strategies, or radical organizational or cultural transformations?
• Are big decisions being made in panic and haste instead of in disciplined, fact-based deliberation?
• Are leaders selling the hype of new ideas and directions before they deliver results?
• Is there a sense of confusion, dashed hopes, and/or cynicism?  Do stakeholders no longer believe in what the organization says it stands for?  Have they lost faith in its ability to prevail?

Stage 5: Capitulation to Irrelevance or Death – the leaders have abandoned any hope of creating a great enterprise and either sell out, allow the enterprise to atrophy into insignificance, or allow it to die.  Collins writes more than once that Stage 1 doesn’t automatically lead to Stage 5, but also warns that the longer a company spends in Stage 4, the more likely that Stage 5 occurs.  Organizations in Stage 5 answer yes to the following questions:

• Is the organization still earning money but has increasing debts (no working capital)?
• Are the leaders exhausted and dispirited?
• Does the organization not have a seriously compelling answer to the question, “What would be lost, and how would the world be worse off, if we ceased to exist?”

Conclusion

Collins writes, “Institutional self-perpetuation holds no legitimate place in a world of scare resources; institutional mediocrity should be terminated, or transformed into excellence.”  The philanthropic sector continues to debate “Are there too many nonprofits?” when the real question is “Are there too many mediocre or insignificant nonprofits?”  I agree with Collins’ team that the point isn’t to struggle to survive; it is to deliver great results and make a distinctive impact.

I’ve been involved in some way in closing three nonprofits.  It was hard emotionally to be sure, but in each case it allowed what few charitable resources were remaining to be put to better use elsewhere.  Unfortunately, most nonprofits I’ve seen in decline don’t make the decision to close soon enough – they wait until Stage 5 when everyone’s spirit, resources, and goodwill are already gone.  How the Mighty Fall should be recommended reading for any nonprofit or foundation leader that wants to reverse decline before it is too late.

What do you think?

I just finished Jim Collins’ latest book, How the Mighty Fall:  And Why Some Companies Never Give In.  The book is the result of his team’s research into why previously-successful companies went downhill and how their management teams dealt with decline poorly.  A quick read, it builds on a number of key ideas in Collins’ previous book, Good to Great.

The shorthand result of Collins’ team’s research is that organizational decline is largely self-inflicted, can be avoided, and can be reversed.  The team found the companies mostly shared five stages of decline, going through them at varying depths and paces.  I think what they learned can also serve as good warning signs for nonprofits and foundations.

Stage 1:  Hubris Born of Success – great enterprises can become insulated by success and allow it to blind them from continuous learning.  In my work, I’ve seen successful funders coasting on good investment returns, successful nonprofits boasting about their awards and short-term wins, and both ignoring early warning signs from their stakeholders – all in the name of “look how successful we are!”  Based on Collins’ information, answering “yes” to any of these questions indicates warning signs of this stage of organizational decline:

• Does your management team see success as “deserved” rather than something fortuitous or hard-earned in the face of daunting odds?
• Does management constantly distract itself with new opportunities, adventures, or extraneous threats?
• Is the rhetoric of success (“We’re successful because we do these specific things”) replacing continuous questioning of why specific things work and under what conditions they’d no longer work?
• Have management staff members lost an orientation to ongoing learning and inquisitiveness?

Stage 2:  Undisciplined Pursuit of More – overreaching and undisciplined growth damaged companies far more often than complacency.  They lost sight of the disciplined creativity (or “hedgehog” in Collins’ terminology) that led their enterprises to greatness in the first place.  They also lost sight of keeping talented people in key positions and planning for healthy leadership succession.  I think it is especially easy for foundations and nonprofits to confuse growth with success – to confuse more income and customers with high-quality impact.  Answering “yes” to any of these questions could mean warning signs of this stage of decline:

• Does your organization confuse big with great?
• Do your staff answer the question “What do you do?” with a statement of personal responsibility (their stake in the organization’s success) rather than a simple job title?
• Is there a declining proportion of talented, productive people in key positions?
• Are bureaucratic rules subverting the ethic of freedom and responsibility that marks a culture of discipline?
• Is management investing more (money, acclaim, privileges…) in itself and less in building the long-term greatness of the organization?

I’ll cover the other three stages of decline in my next post in a couple days.  In the meantime, do any of these problems sound familiar to you?  Do you think foundations and nonprofits are as susceptible to hubris and lack of discipline as businesses?