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?”
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?