The Spiraling Cost of Nonprofits' Turnover Treadmill

Co-authored by Kirk Kramer

Time and again, executives at the nation's nonprofits tell us that preparing the next generation of leaders is by far one of their foremost challenges. Perhaps a reality check is due. When we trained our analytical lens on the subject of succession planning, we found that nonprofits have a barn-sized blind spot for their own homegrown talent.

We recently interviewed more than 400 senior executives on their efforts to develop their future leaders. Our survey, detailed in "The Nonprofit Leadership Development Deficit," reveals that the overwhelming majority of nonprofits, when confronted with the challenge of replacing a departing C-level executive, pass over the promising talent within their own ranks. Instead, they expend precious resources recruiting from outside the organization. Only 30 percent of C-suite roles in the nonprofit sector were filled by internal promotion in the past two years--about half the rate of for-profits.

This outside-in approach to succession planning is fueling a leadership development deficit, where C-suite executives (senior leaders who report directly to the CEO or COO), frustrated over the dearth of career-development opportunities in their organizations, are not staying around long enough to move higher up. Even chief executives are heading for the exits, simply because their bosses (read: the board of directors) aren't supporting them and helping them grow.

Nonprofits are furiously trying to keep pace with a sector-wide turnover rate that saw one out of four C-suite leaders leave their positions over the past two years. And the outflow is expected to continue, as one-third of our survey's respondents predict they'll walk out in the next 24 months.

Where do nonprofits go to find replacements for their departing executives? Nonprofits' largest source of incoming talent is other nonprofits. Instead of promoting more of the "known" executives within their own ranks, nonprofits are importing far greater numbers of "unknown" executives, thereby exacerbating a turnover treadmill of their own making. Equally puzzling, nonprofits' promotion rate doesn't differ by size. Larger organizations, which should have more opportunities to advance their internal talent, go off on ill-starred recruiting quests as frequently as smaller outfits.

This senseless cycle inflicts steep transaction costs on nonprofits. They lose institutional knowledge when a senior leader decamps and they pay out tens or even hundreds of thousands of dollars to recruit and onboard a replacement. They also bear a significant "distraction cost," since they must divert time and executive attention away from their core mission: to address the world's biggest social and economic challenges.

To reverse the trend, nonprofit management teams--as well as boards and funders--will finally have to walk their talk and commit to growing leaders from within. The good news: that goal is well within their grasp.

For starters, nonprofit executives should define the organization's next-generation leadership requirements, identify A-level talent, and provide the right mix of stretch assignments, mentoring, and formal training to bulk up future leaders' strengths.

Organizations can start small, perhaps by focusing on supporting a few emerging leaders and then build momentum over time. There are resources available to help enterprises do this well, including AchieveMission's Nonprofit Human Capital Management Resource Center and Bridgespan's Nonprofit Leadership Development Toolkit.

Another resource is the Center for Creative Leadership, which champions an explicit formula to ensure that potential leaders don't get short-changed. The model, dubbed "70-20-10," is based on the notion that adults acquire approximately 70 percent of their knowledge through on-the-job stretch opportunities, 20 percent through coaching and mentoring, and 10 percent through training programs to hone discreet skills.

It takes time and effort to embed 70-20-10 but comparatively little cost, since aspiring leaders mostly learn by observing the practices and behaviors of veteran leaders. And the model often yields outsized results. The education crowdfunder DonorsChoose.org, which leverages the formula, has not lost a single member of its seven-person executive team in the past eight years. That kind of longevity has allowed executives to gel as a team and lead the organization to greater levels of impact.

The job of nurturing internal talent can't be left solely to management teams. Boards should hold the chief executive accountable for prioritizing leadership development within the organization and they should ensure that she is getting enough support to evolve and thrive.

Finally, funders, too, can help take homegrown leaders off the endangered species list and simultaneously strengthen the organizations they support. To advance their talent, organizations will have to ante up capacity investments in training, coaching, and performance assessment. Note to funders: more than half of our survey respondents say they have not received any allocations for talent development in the past two years.

The leadership development deficit underscores a sobering reality for the nonprofit sector: an organization that fails to nurture its talent is far less likely to fulfill its mission. Unless management teams, boards, and funders make a serious effort to leverage the inside answer to succession planning--the homegrown leader--the deficit will continue to deepen.

Willa Seldon is a partner with The Bridgespan Group in San Francisco and Kirk Kramer is a partner in Boston and heads the Leadership practice. The authors thank research team members Misa Fujimura-Fanselow and Austin Lee for their contributions. They have drawn this piece from "The Nonprofit Leadership Development Deficit," which published on SSIR.org October 22, 2015.