Forty eight percent of [INGOs] may not survive the next two years
After decades of growth, the international non-governmental organization (INGO) has reached a turning point. The model of a Northern-funded, Northern-led organization operating programs around the world is under pressure and attack from many directions. The question now is whether INGOs can — or should — be reformed for a role in a rapidly changing world.
Today, international NGOs are facing growing competition, both within the sector and from sources outside the sector. At the same time, INGOs face looming political challenges, economic headwinds, and ethical questions. Can INGOs change and still remain viable? What good can they achieve that isn’t better accomplished through other means?
As a close observer and participant in INGOs for decades, I have been thinking about these issues for some time. This is the first of some blogs I’m planning to organize those thoughts and present them in a constructive manner.
First, I want to offer some ideas about how to think about INGOs in the current day, from a business perspective. Next, an effort to review the current pressures and critiques of INGOs. Then, some thoughts on where and how to take this debate forward.
INGOs are incumbents
In business schools, the work of Clayton Christensen is well known. But in the non-profit sector, his ideas are often overlooked. What Christensen is best known for is the “theory of disruptive innovation”. The basic idea is that business leaders tend to focus their energy on their most profitable customers and their most immediate threats, and as a result miss the much graver threats that are emerging. Those threats, according to Christensen are usually coming from unexpected places and, especially, from the bottom of the market. Business leaders see themselves in intense competition and are trying to beat one another and maximize profits in the short term. But their vision is too narrow and misses the bigger business threats from outside their sector and from the “bottom dwellers” in the market. They fail to recognize the insurgents as a threat, and underestimate the risk.
At the bottom of the market, there is a lot of dynamism, risk-taking, and innovation. New businesses come and go; many fail, but some will gain a foothold in a market to be a profitable business from which to innovate and improve as they compete for a bigger chunk of the business. Usually insurgents are competing on price or speed, and trading lower quality for price or speed or ease-of-use. The “incumbent” businesses ignore the new competition, or try half-heartedly to swat them away. Occasionally, incumbents will try to buy off the insurgents to remove the threat. The incumbents can see the insurgents, but do not take appropriate action to respond to the threat. This is because the insurgents are usually making their business at the bottom of the market; low margins, small profits. The incumbents do not see the insurgents as true competitors, and typically decide to focus their energy on competing at the top end of their business with more innovation, quality, and higher margins. But over time, the insurgents climb up the product line until they are competing with the incumbents at the top of the market.
This was the pattern when Japanese automakers started selling “junky” cars in the US. In the 1960s and 70s, Japanese automakers often marketed their cars as “second cars” for growing families, or “starter” cars for people just out of college or starting out in life. Japanese cars were cheap, expendable, low-quality. US automakers tried to fight them off, but not very hard. After all, these these low-quality cars offered very low profit margins. For the US automakers, profits were much higher in luxury cars, SUVs, trucks. But over time, the Japanese automakers built better cars, developed customer loyalty, won prestigious awards, and eventually opened luxury lines (rebranded as Lexus and Acura) including very profitable SUVs and trucks.
This pattern repeats in sector after sector: steel, photography, book selling, etc. With agile management, fewer legacy costs, and a more focused business, the insurgents overtake the incumbents; slowly at first, and then quickly. Often the insurgents are targeting a market that the incumbents didn’t know existed, like college students or families looking for a second car. Eventually, the older “incumbent” businesses face a collapse as their business has been eroded.
This doesn’t mean that incumbents are not innovating. In fact, they may be innovating intensely to develop and improve products, built customer satisfaction, and outshine their competitors. But they are focused on competing in the fattest part of the market, where the profit is highest… until it’s gone.
Why is this model useful in the context of INGOs?
I think it’s useful to see INGOs as incumbent businesses. Most of us in the non-profit sector don’t like to think of ourselves as a business, but the truth is we must operate like a business in order to pursue our non-profit mission. Like a business, INGOs have income and expenses, assets and debt, brands and vendors, employees and customers (donors). Profit isn’t the motive, but ignoring the business or pretending the same laws don’t apply is a recipe for failure.
So, in the international development sector, who are the incumbents? The big INGOs like the Red Cross, CARE, Save the Children, Oxfam. You might include other big development institutions, like the World Bank, US Agency for International Development, the UK’s Department for International Development. Maybe also UN agencies like UNICEF or UN Development Programme. [Full disclosure, I worked for Oxfam, one of the oldest, biggest, most respected international development non-profits.]
Over decades these incumbents have created a dense sector of international development, health, education, and humanitarian programming. We have improved our operations and effectiveness. We have grown big. We have developed business models that work, but that increasingly rely on large bureaucracies with high overheads and professional, specialized staff. We have grown laterally to take on more and more problems. We have grown geographically to span the globe. We have grown vertically with more and more layers of management, oversight, quality control, finance. Our quality has improved, but so have our costs and complexity. We deliver “products” that people value, but our customers have grown very familiar — too familiar with our brands, which are not fresh or exciting.
So, if INGOs are incumbents, what is the disruptive threat? I can see at least 3 or 4 threats to INGOs, but there are probably others.
- Corpocracy: There is a growing trend of international programming flowing through corporate, often for-profit, entities. Some of these are subsidiaries or branches of much bigger firms, which means they have strong brands, business and marketing competence. They can handle large contracts and are professionalized. They advertise private-sector mindsets, delivery-oriented approaches, and professional staffing. Many donors are looking for public-private enterprises and are looking to leverage aid dollars for greater scale and impact. These corporate delivery mechanisms are attractive and a break from older, charity-framed approaches.
- Crowd-sourcing: Many of the biggest disruptive innovations have been in the form of technologies for “disintermediation.” This is collapsing the relationship between consumers and producers and cutting out the middle-man, as it were. Ebay, Amazon, Uber and other tech companies have used internet platforms to connect buyers and sellers, and to remove existing business from the exchange, like consignment shops, bookstores or taxi companies. They sometimes facilitate exchanges by removing geographic, communications and regulatory hurdles. The same phenomena can be found in the philanthropic sector, with new platforms emerging to facilitate a more direct relationship between donors, projects, and beneficiaries (like Kiva and Kickstarter). Donors are attracted to the immediacy of the interaction, rather than the aid being “mediated” through INGOs or via government aid programs.
- The rise of the South: Another form of disintermediation is the emergence of strong civil society organizations in developing countries. Whereas INGOs once dominated competencies like project management, lolegistics, accounting, now many excellent NGOs have emerged in countries where aid is targeted. They have professional leadership and management, and inherent advantages in delivering programs. These NGOs might previously been partners or even spin-offs of INGOs. Often their staff previously worked for INGOs and other international organizations (UN, DFID, USAID, etc). Their knowledge and networks give them advantages in program design, delivery and sometimes in innovation. [This idea was described well by Burkhard Gnärig in his book The Hedgehog and the Beetle.]
There are probably other insurgents that I’m missing here. And there are synergies between them that deepen the challenge to INGOs.
But the broader point I want to make is that the INGO sector feels like it’s at the point of disruption, if not collapse. Incumbents INGOs should try to learn from the theory of disruptive innovation to see the emerging pattern. Is the current business working? Is it eroding? What are the sources of this erosion? Where are the threats coming from? Are there insurgents we can identify? Should we try to compete with the insurgents? Accommodate them? Align with them?
Part of Christensen’s analysis has been that incumbents often did see the threat to their business, eventually. And sometimes they saw it in time to make changes. But management inertia, risk aversion, and bureaucratic obstacles very meant that they could not act decisively to compete and save themselves.
INGOs will need brave and forceful leadership to avoid — or accommodate the coming disruption.
- Note this is a working document and may be edited or updated.
Ends///
