It may be easier to achieve breakthrough performance if managers
find themselves in an organization that consistently outperforms
its competition. But we want to help managers meet the challenges
they face even when they find themselves in an average or
underperforming organization.
We have identified four management principles that are essential
to creating breakthrough performance at any organization. It takes
enormous discipline to stay focused on these four principles.
Whenever new managers take over an organization they face a
daunting list of tasks. They must spend time with their employees,
customers, clients, suppliers, and funders. They must
simultaneously look to the future and run the dayto- day business.
Managers of nonprofits or government agencies feel pressure from
donors or voters to meet expectations. Knowing what tasks to
undertake and in what sequence to do them can become an
overwhelming challenge for many managers, particularly because
everything initially appears so urgent.
Managers of nonprofit organizations should use the following
four principles to help make the decisions that lead to
breakthrough performance: 1) costs of serving should always
decline; 2) market position determines your options; 3) clients and
funding pools don't stand still; and 4) simplicity gets
results.
These four principles are derived from the recently published
book The Breakthrough Imperative, written by two of this article's
three authors (Mark Gottfredson and Steve Schaubert). When the two
of us began work on the book we wanted to uncover the secrets of
companies, organizations, and governments that outperformed their
peers. (See p. 38 for our methods.) We drew on our 50- plus
combined years of consulting experience at Bain & Company and
on the firm's extensive research into corporate results. We also
interviewed more than 40 leaders from industry and the nonprofit
sector, including our co-author for this article, Elisabeth
Babcock, CEO of the Crittenton Women's Union, one of Boston's
oldest social service organizations.
In the course of our research we found both striking
commonalities as well as one significant difference between
for-profit and social sector managers. The commonality was the
value of the four principles; the difference was that in the social
sector these approaches are applied with two customers in mind-
clients and funders-whereas in the for-profit sector attention is
focused on just one customer-the one who buys the company's product
or service.
In this article we'll explore these four principles of
breakthrough performance and the ways that nonprofit managers can
take advantage of them.
PRINCIPLE 1 Costs of Serving Should Always
Decline
For-profit managers pay a great deal of attention to reducing
costs because it is one of the main levers they have to increase
profits. Nonprofit managers, on the other hand, often pay too
little attention to reducing costs, even though doing so could
enhance their organization's impact. Nonprofit funders, for
example, often push for what is new and different rather than what
will reduce costs or increase outcomes. The specialized nature of
many of the problems that nonprofits tackle is also an impediment,
often resulting in organizations that are too small to achieve
economies of scale.
In spite of these challenges, every organization-whether
for-profit or nonprofit-that accumulates experience by making the
same product, offering the same service, or deploying the same
function should be able to reduce the cost per unit (in constant
dollars) of its offering. Just as people progress along a learning
curve for any given task, organizations follow the same sort of
curve and become more efficient and cost-effective producers. The
challenge, particularly for nonprofits, is to get the unit of
experience just right, given that new approaches can often appear
more costly. (See "More Bang for the Buck," Stanford Social
Innovation Review [spring 2008], for more on this subject.)
When tire manufacturers introduced radial tire technology, for
example, the cost of making a tire rose. But because radial tires
lasted longer and were more fuel efficient, the tire cost (in
constant dollars) per mile traveled actually decreased. The right
unit of experience for most nonprofits is the client outcome or
benefit, not the cost of the service itself. For example, the cost
of treating a particular disease may rise, but the number of
patients cured per treatment may rise even faster, making the cost
per positive patient outcome lower.
Boston-based Partners In Health, for example, lowered its cost
per outcome by incorporating new practices based on what it had
learned. "We are much better at starting treatment projects for
tuberculosis or HIV/AIDS on the ground than we have ever been,"
says Jim Yong Kim, a co-founder of Partners In Health. "Every time
we do it, we're more efficient and use resources much more
effectively." When Partners In Health began its first program
attacking multidrug-resistant TB in Peru, the cost of the medicines
ranged up to $32,000 per patient, with the average cost about
$15,000. As Partners In Health gained experience, it learned to
diagnose patients better and start treatment earlier, which reduced
the cost of the treatment by shortening the drug regimens. By 2006
the organization, with the help of the World Health Organization
and Doctors Without Borders, brought the per-patient cost of
medicines down to as little as $2,500.
The cost per client successfully served not only should go down
over time, it should decline predictably. And they do at nonprofits
that are relatively large and repeat the delivery of a given
service without major shifts in their funding, the populations they
serve, the services demanded, or the geographies they cover. The
Girl Scouts of the USA, called the best-managed organization in
America by the late management guru Peter Drucker, is one nonprofit
that has been able to do this.
The Girl Scouts of the USA procure millions of boxes of cookies
on behalf of more than 200 Girl Scout Councils, which sell them as
the organization's annual fundraiser. One of the ways that the Girl
Scouts save money is by licensing just two bakers to produce all of
their cookies. Consolidated supply allows the organization to
implement process improvements quickly. More efficient packaging,
for example, has reduced the Girl Scouts' costs of materials and
transportation by allowing more boxes to be packed into each
delivery truck1. The Girl Scouts also track sales by cookie type
and troop location in order to recommend an optimal mix of products
the following year, boosting sales and avoiding excess
inventory.
Accumulating experience should not be confused with growing as
large as the Girl Scouts. Some nonprofits should remain small and
focused. Regardless of size, however, the best nonprofits have
learned how to make use of the experience curve.
PRINCIPLE 2 Market Position Determines Your
Options
In the for-profit world, garnering more market share is an
important measure of success. Nonprofit managers, however, aren't
accustomed to thinking of their organizations' relative position in
the market.
A simple yet effective way to measure an organization's market
position is a gauge called relative market share (RMS), which in
the nonprofit sector is usually defined as the percentage of
potential clients an organization is serving. If an organization is
the market leader, simply divide its share of the market for a
given service by the share held by the closest alternative
provider. (For example, 30 percent divided by 20 percent equals a
RMS of 1.5.) If the organization is not the market leader, divide
its share by the share of the market leader. (For example, 20
percent divided by 30 percent equals a 0.67 RMS.)
In the for-profit world the RMS metric is a powerful indicator
of a company's financial performance. A high RMS provides
higher-than-average profits (technically, its return on assets) and
increases the probability that the organization will achieve those
profits. Nonprofits with a high RMS also benefit from some of the
same advantages that for-profits garner, such as economies of
scale.
"Organizations need to be larger in order to have any clout,"
says Bill Walczak, director of the Codman Square Health Center in
Boston's Dorchester neighborhood. Late last year, Walczak and his
colleagues were looking at the advantages and disadvantages of a
merger between Codman Square and Dorchester House, a community
health center of roughly the same size. The proposed merger would
create a $40 million organization with 550 employees. The benefits
would include increased visibility among donors and clients,
sizable economies of scale in overhead costs and facilities,
greater negotiating power, and greater ability to launch related
services-all the advantages of a larger RMS.
Other organizations have already gained the benefits of merging.
In Boston, Crittenton and the Women's Union were both
well-established nonprofits serving low-income women. Crittenton,
which began in 1824 as a program to house and care for single
mothers, had developed a strong program of service delivery for
homeless and at-risk women, but lacked a diversified funding base.
The Women's Union, founded in 1877 to provide education and skills
training for poor women, had an illustrious history of research,
advocacy, and services, along with cash in the bank (the result of
the 2004 sale of its headquarters building), but it lacked
strategic focus.
Both organizations also needed a succession plan, as their
leaders were retiring. Thanks to a timely encounter between board
members, the two organizations found one in the same person: our
co-author Elisabeth Babcock, former director of the Lynn Community
Health Center, who signed on expressly to lead the merger.
The newly merged Crittenton Women's Union (CWU) has focused its
research, advocacy, and direct-service programs on helping
low-income women and their families achieve economic
self-sufficiency. Following the merger, CWU has raised its
visibility in the community and among potential donors, and lowered
its service delivery costs-turning an operating loss of more than
$500,000 into an operating surplus of more than $200,000.
RMS is an important metric, but it is not always synonymous with
size. Some nonprofits might have a 100 percent market share yet
remain small. Examples of this are nonprofits operating in a fixed
geography where no other organization will serve (such as remote
development zones in Afghanistan) or nonprofits tackling a narrow,
though significant, social problem (such as fighting for research
into diseases that have very low occurrence).
PRINCIPLE 3 Clients and Funding Pools Don't Stand
Still
For-profit and nonprofit markets undergo regular changes,
largely because customers' needs change. The organizations that
meet customers' needs also evolve by providing new and innovative
offerings to retain and attract customers. One of the outcomes of
these shifts is that the point on the value chain where the bulk of
the profits are made, or in the case of nonprofits where the bulk
of the funding takes place, can also change. (The entire pool of
profits or funding in a given market is called the profit pool or
the funding pool.)
In the coffee industry, for example, the profit pool includes
the entire spectrum of companies, from those growing and roasting
the beans to those distributing and brewing the coffee. Before the
advent of Starbucks, the coffee industry made most of its profits
in roasting and relatively little in retailing. But when Starbucks
introduced its innovative retail model based on the Italian-style
coffee bar, customers began flocking to the experience and profits
shifted dramatically from roasting to retailing.
In the nonprofit sector there are two sets of customers. The
first is the people who use the services, such as recipients of
social services. The second is the donors and payers whose funding
makes these services possible. Nonprofits operate best when they
meet the needs of both sets of customers. In the nonprofit sector,
customers' demands also change: clients' needs change and funders'
priorities evolve. These shifts may, in turn, cause changes in the
funding pool.
Take HIV/AIDS prevention and treatment, for example. In the late
1980s more funding was available for hospices because few remedies
existed and patients needed inpatient, palliative care. Today, with
the advent of drug cocktails to keep symptoms in check, the funding
pool has shifted to outpatient care, including clinics and
community health agencies.
The HIV/AIDS care funding pool has shifted in other ways as
well. In the early years foundations focused most of their
attention on the United States and Western Europe. Today,
foundations focus much more attention on Africa and the developing
world, where the disease continues to spread at a more rapid pace
than in the developed world.
Lynn Community Health Center provides another example of how
changing customer needs can affect nonprofits. During a 10-year
period large numbers of immigrants arrived in Lynn, Mass., first
from Central America, then from Southeast Asia, and finally from
the former Soviet Union. To meet the needs of these new immigrants
Lynn Community Health Center had to provide services in three and
sometimes four additional languages.
At the same time, the health center needed to educate its
funders about these changes so that the funders' priorities would
stay in sync with clients' needs. Experienced nonprofit managers
monitor these shifts closely so that they aren't caught unaware
when one source of funds dries up. Great nonprofit managers
anticipate both client and funding-pool shifts and plan their
strategies and tactics accordingly.
PRINCIPLE 4 Simplicity Gets Results
As customer needs and profit and funding pools change,
organizations often change with them, offering new products and
services to new groups of customers or in new geographies. When
organizations make these changes they increase the likelihood that
they will drift away from their mission or become too
complex-potentially costly mistakes for nonprofits and for-profits
alike. To avoid this problem, organizations should find ways to
simplify their operations and focus.
To understand the benefits of simplicity, consider an example
from the automotive industry. Hal Sperlich is an automotive legend.
He led product teams that created the Ford Mustang and the
industry's first minivan for Chrysler. Both were runaway hits,
generating billions of dollars in profit for their makers. Sperlich
was successful because he realized cars had to stand out on only
three dimensions and could simply be competitive on all other
dimensions. He got this insight by observing customers, who when
asked why they bought a particular vehicle could seldom remember
more than three reasons, even immediately after buying the car.
Sperlich's insight also applies to strategies, processes, and
organizations themselves. Human beings can't effectively focus on
more than three or four things at once. A nonprofit with too many
disparate services usually drives up costs and confuses its donors.
An organization with too many layers of management is probably
unable to take quick action, even when the need for action is
obvious.
When David Cicilline was elected mayor of Providence, R.I., in
November 2002, the city's situation was bleak. The previous mayor
had been convicted and jailed for corruption, the city faced a $59
million budget gap, its crime rate was increasing, and it had the
third highest rate of child poverty in the nation. To make matters
worse, Cicilline inherited a city workforce that lacked skills
because jobs had often been awarded as patronage instead of on
merit.
Cicilline decided to begin addressing the myriad problems by
focusing on just five priorities: government integrity, strong
neighborhoods, safe streets, great schools, and a dynamic economy.
Each priority encompassed a variety of short-term initiatives. For
example, as part of his effort to clean up graft, Cicilline refused
campaign contributions from city employees and suppliers. He also
abolished lists of preferred vendors that had been based on
campaign donations.
To upgrade Providence's workforce, he persuaded some city
employees to retire early and replaced them with new talent. To
combat crime and revitalize neighborhoods, he brought community
policing to the neighborhoods, put police officers back on walking
beats, cleaned up graffiti, improved garbage collection, and
tackled a backlog of municipal trees that needed cutting or
trimming.
Cicilline's decision to concentrate on five priorities gave his
administration a focus that other reformers have often lacked. By
the end of his first term, Cicilline had achieved impressive
results: boosting the city's credit rating, creating a budget
surplus, reducing crime to its lowest level in 29 years, and
growing the city's tax and job base. Cicilline's focus for his
second term is likewise clear: He will plow the city's budget
surplus into upgrading its public schools and after-school
programs. "Those are the things that make cities great places to
live in," said Cicilline in an April 2006 speech to the Bridgespan
Group. "A relentless focus on the quality of life in a city will do
more than anything else."
Putting the Principles Into Action
Nonprofit managers can create breakthrough performance by using
all four principles together. An example of an organization that
has done this is the United Way of Massachusetts Bay and Merrimack
Valley (UWMBMV), one of 1,300 United Ways in the United States.
Three years ago UWMBMV decided that it should narrow its efforts to
increase its impact. "In the old United Way, we did anything and
everything, depending on who gave us funding for what," says Jeff
Hayward, senior vice president of community impact. To create a new
United Way, Hayward and his colleagues first had to decide what
issues to concentrate on. To do this they surveyed community
leaders, agency clients, and policymakers-"a process of 1,000
voices" as Hayward describes it-and identified a handful of issues
where they could achieve the greatest results in the community and
the highest returns for the donors who contributed to its $35
million annual budget.
UWMBMV used three criteria to select which areas the
organization would concentrate on: The issue should take advantage
of the organization's accumulated experience; the issue should be
one in which impact could be achieved with investments of several
million dollars and where the organization could achieve some
degree of market leadership; and the issue should be one where
donors and policymakers-the voices of the customers-were clamoring
for change. "It came down to: Was it called for? Did we have the
expertise? And could we make a difference?" says Hayward.
Several issues fell off the table during the selection process.
Two of these were health care and public education-issues where
government and the private sector were already spending billions of
dollars. Another was elder care, where UWMBMV had less expertise.
Four issues emerged as having high potential: healthy child
development and youth opportunities, where UWMBMV had a long and
strong track record; and sustainable employment and affordable
housing, which are prerequisites for healthy and stable
families.
UWMBMV helped the agencies it funded adopt programs to reach
specific goals with agreed upon measures of success. To create
affordable housing the goal was eradication of homelessness, with
two measures: the number of families prevented from entering
homelessness and the number of homeless families moved to permanent
homes. The financial rationale behind these measures was
indisputable: It cost an average of $2,000 to prevent a family from
falling into homelessness (covering a medical expense or back
rent), compared to about $19,000 to shelter a homeless family for a
year.
The new measures that UWMBMV and its grantees adopted realigned
incentives. Homeless shelters, for example, now received flexible
funding to empty their beds and provide support services to
transitioning families. Some of the direct subsidies to the
homeless were also changed. In the past, all homeless people
received a housing voucher worth the same amount of money. Under
the new system the value of vouchers was tiered on the basis of an
individual's true barriers to keeping his or her housing.
Implementing the new strategy required healthy partnerships between
policymakers, shelters, and other parts of the community.
The results of this new approach to ending homelessness have
been dramatic. Homelessness in Quincy, Mass., where the program was
implemented, plummeted 55 percent after two years. In Denver, which
implemented a similar program, homelessness dropped more than 36
percent. Adopting clear priorities has also helped improve UWMBMV's
relations with its donors. "The focus has made it easier now to
communicate with donors and manage those relationships," says
Hayward. "The program focus has brought expertise to the team.
We've become more efficient at judging where to spend a
dollar."
UWMBMV is not the only nonprofit that has benefited from using
these four principles. In our interviews with numerous nonprofit
leaders, nearly every case of breakthrough performance that we
encountered reflected a manager's deep knowledge and implementation
of these principles. By the same token, most of the instances where
nonprofits underperformed could be traced to a manager's failure to
understand one or more of the principles, or to apply the
principles accurately and aggressively.
1 Bradley Jacobson, "Buying More Means Less Packaging," Waste
Age, April 1, 2000.
Research Methods This article is based on years
of extensive research on corporate performance that we and our
partners at Bain & Company have conducted. One set of studies
was originally conducted by Chris Zook, a Bain partner and author
of three books about understanding a company's core business,
titled Profit From the Core, Beyond the Core, and Unstoppable. Zook
compiled a database tracking the performance of 1,804 public
companies over 10 years. We used the latest version of Zook's
database to better understand the role that individual managers
have in improving a company's performance. First, we took the 202
companies in the database that maintained profitable growth of at
least 5.5 percent a year over the 10-year period ending in 2005.
Next, we examined the tenure of the 413 CEOs leading these
companies during this period, and we compared the stock performance
under each leader with a broader stock index.
Our research found that for the first six months of a CEO's
tenure, these companies' average stock performance tracked the
relevant index almost exactly: the ratio was about 1.1-to-1.
Performance then crept up steadily, but not until nearly six years
after the CEO took office was the company outperforming the index
by an average of 2-to-1. After nine years of the CEO's tenure these
companies outperformed the index by 3-to-1.
From these studies we knew that a manager could make a big
difference over time. But how did these managers get better results
more quickly? What specific practices made some more successful in
just two or three years than peers with equally stellar track
records and leadership attributes?
To answer these questions we turned from study to experience. We
interviewed more than 40 successful managers, most of whom had held
multiple general manager positions en route to their CEO role. Many
were people whom we or our colleagues had come to know in the
course of our work. Many others came from our search for successful
managers. We spoke with leaders from companies as diverse as
Northrop Grumman Ship Systems, Burger King, and the Australian
telephone company Telstra. We also interviewed leaders of
nonprofits and governments, including Teach for America's CEO and
founder Wendy Kopp, Partners In Health co-founder Jim Yong Kim, and
Providence, R.I., Mayor David Cicilline, who has done much to turn
around that city's government in a short period of time.
Our research revealed a striking commonality in successful
general managers' approach to their task-whether they headed
for-profit businesses, nonprofit organizations, or city
governments. Like engineers designing a mission to Mars, they all
understand and apply four basic principles that govern what they
do. Using those principles, they map out where they are starting
from, where they are going, and how they plan to get there. And
then they actually do it. -M.G. & S.S.
MARK GOTTFREDSON is a partner with Bain & Company in its
Dallas office and co-author of The Breakthrough Imperative: How the
Best Managers Get Outstanding Results (HarperCollins, 2008).
Between 2000 and 2003 he took a leave from Bain to work for his
church in Japan.
STEVE SCHAUBERT is a partner at Bain & Company in its
Boston office and the firm's chief investment officer. He is also
co-author of The Breakthrough Imperative.
ELISABETH BABCOCK is president and CEO of the Crittenton
Women's Union, a Boston nonprofit dedicated to moving low-income
women and families out of poverty and into lives of personal and
economic independence.
