"If I had a choice between spending time with a $100k donor or a potential candidate for a senior role, hands down it's the candidate" - Nonprofit Executive Director

Accomplished nonprofit leaders recognize that nothing matters more than having the right people in the right jobs at the right time, especially when their organizations are growing. Money is an essential (and often scarce) resource - we struggle throughout the year to achieve fundraising goals and resist adding incremental costs; we celebrate significant grants. Indeed, money naturally grabs headlines and dominates share of mind.

But it is people and the organizations they build that ultimately do or do not deliver the social results that this money is expected to purchase.

Business is heavily aligned around financial performance, yet belief in the predominance of talent is deeply imbedded in the for-profit world. You would be hard pressed to find respected chief executives who would intentionally place short-term revenue imperatives over the quality and depth of their management teams. Indicators ranging from the millions of dollars spent on human resource and executive recruiting consulting to lofty levels of executive compensation attest to the perceived importance of organization building.

A business that does chase money at the expense of organizational capacity will ultimately undermine its position in the marketplace. The pattern goes something like this: in the quest to "make the numbers," executives pay disproportionate attention to revenue and earnings, constraining organizational costs like recruiting, training, headcount, and compensation. If the financial pressures persist, organizational expenditures will be further restricted and may even be accompanied by layoffs. Eventually, morale plummets, individual performance suffers, star talent resigns for better jobs (the best people always have the most options), and the best candidates don't apply. These people problems exacerbate the financial problems, necessitating even further cutbacks. Such a "doom loop" can cripple a company for years, or even send it into bankruptcy.

Nonprofit organizations confront a somewhat different set of dynamics, which create their own form of "doom loop." Because results can be difficult to assess, there is often a partial disconnect between inputs (like organizational ability) and actual outcomes. Since charitable giving tends to be motivated as much by emotion as by hard facts, it creates momentum for organizations adept at marketing themselves and their causes. Factor in the absence of competitive market pressures and you have a situation in which underperforming organizations can persist for years - neither going out of business nor generating significant outcomes.

If organizational capacity is the gateway to performance, why is it that more nonprofits don't operate according to this basic truth? Why isn't more money invested in recruiting and retaining top talent, in developing future leaders, in succession planning, and in building the basic human resource systems required by high performing organizations? Why do compensation and benefits packages often lag marketplace realities? Why does the nonprofit sector seem so much more aligned around money than talent?

This paradox may be explained by two related dynamics: America's cultural beliefs about the nonprofit sector, and the absence of marketplace supports for investments in capacity building. Central to the nonprofit - or, as it is often called, "voluntary" - sector is the ideal of citizens contributing selflessly to society, making personal sacrifices for the good of a cause or the welfare of a community. Society expects nonprofit leaders to work for deep discounts to what they could earn elsewhere; our tax laws reinforce this perspective. By and large, the nonprofit sector (with a few notable exceptions like higher education and health care) is expected to be the cheap sector. In short, we expect to get performance we don't have to pay for.

Moreover, while society expects nonprofits to accomplish a lot with a little, it cannot accurately judge their accomplishments; so again, the natural inclination is to focus inordinately on minimizing costs, regardless of whether the costs are necessary (e.g., to attract talent) or wasteful (e.g., to rent top-dollar office space). Under-investing in organizational capacity is simply and consistently rewarded, since perceived low overhead appeals to donors. Reputable publications and websites rank nonprofits on the basis of their cost structures, while government contracts specify the limited amounts they will reimburse for overhead burden. When it comes to organizational expenditures, we persist in the apparent belief that "less is more," despite the real-world reality that all too frequently less is, in fact, less.

Second, because nonprofit organizations are not as susceptible as businesses to marketplace forces, and because their performance can be so agonizingly difficult to measure, stakeholders don't perceive the direct consequences of under-investing in organizational capacity. If a professional service firm like Bain & Company did not continually invest in talent it would lose clients to competitors. This dynamic is true of any business where the value added depends upon people; the marketplace will ultimately punish those with relatively weak organizations.

Nonprofits, however, are not punished by competitors if they fail to attract, retain and motivate top talent. They don't suffer market share erosion solely because they lack the bench depth to compete. If and when underperformance is recognized, the root cause is often ascribed to programmatic design shortfalls (e.g., a flawed strategy) than to the organization's inability to implement.

Ultimately, it is not so much the case that the nonprofit sector is aligned around money as it is that nonprofits are aligned away from capacity building. This presents an enormous problem. The actual social impact achieved by the billions of charitable dollars contributed each year in America is largely dependent upon the capacity of the organizations that receive this support. Yet we fundamentally and repeatedly discourage investment in building that capacity.

And the problem is about to get much worse.

Over the next decade, the nonprofit sector will confront a massive leadership deficit as current leaders retire (or exit for more attractive occupations). At the same time, the number, scale and management needs of America's nonprofits will continue to grow, fueled by a range of trends from increased philanthropy to government outsourcing. In fact, for nonprofits over $250k in annual gross receipts (excluding health care and higher education), 640,000 NEW senior leaders will be needed. As I noted in "The Leadership Deficit," recently published by the Stanford Social Innovation Review, this is 2.4 times the total number of senior people serving in those organizations today. Investment in capacity building will have to increase if nonprofits are to maintain, much less improve, their performance; otherwise, it will become harder and harder to attract and retain the right people in the right jobs. Many nonprofits may already be sliding into the chronic underinvestment in organization building that will erode their performance and eventually undermine their funding, causing curtailed growth or cutbacks in programs. As noted, this insidious cycle can be very difficult to reverse once it gains momentum.

What can be done? Given the structural nature of this challenge, there are no simple answers. One thing is clear, however: nonprofit boards must collaborate with executive directors and take accountability for building strong and durable organizations. The standards of excellence reinforced by a board must ensure that the nonprofit is able to get the right people in the right jobs and that the appropriate human resource policies and practices are in place to support those people. All of this costs money - expenditures that will usually be classified as "overhead." Boards need to balance their responsibility for prudent expense control with the overarching objective of delivering as much sustainable social impact as possible. The right level of overhead is not necessarily the lowest level of overhead; boards ought to be more concerned about spending too little on quality leadership than too much. Board agendas should reflect the central nature of capacity building by dedicating time to organizational issues, measures and objectives. Board chairs must exercise special leadership to insure that organizations' capacity building remains an ongoing priority.

Businesspeople, as both board members and donors, are particularly well-positioned to contribute to the importance of organizational initiatives and the imperative to develop strong nonprofit leadership teams. They can champion prudent but aggressive investment in capacity building, provide hands-on knowledge about proven management practices, and model unrestricted giving practices. Nonprofit executives clearly can benefit from the experience of accomplished business builders, who understand that in the end achieving results is all about people.

The nonprofit sector's proclivity to under-emphasize capacity building, fueled by external forces bearing down upon it and combined with the escalating sector-wide leadership deficit, creates enormous challenges - challenges that all of us must confront. Our responses cannot wait; delay is the deadliest form of denial. America's communities and causes need the results that only strong, capable organizations can deliver.