Australia’s not-for-profit sector is hugely diverse: it includes service organisations with tens of thousands of staff, as well as highly focused advocacy organisations and global thought leaders on topics such as sustainability. Taken together, this mission-driven sector is critical to meeting fundamental societal needs and fostering social cohesion. It is also an important part of the economy, employing 1.38 million people—11 percent of jobs in Australia—and contributing an estimated $129 billion, or 4.8 percent, of the country’s gross value added in direct and indirect contributions.
In a time of crisis, this sector has risen to the moment, collectively mobilising to address surges in need for its services. Yet the sector is also under immense strain, with resourcing struggling to keep pace with demand and staff experiencing burnout.
In this context, a collective national effort is needed to sustain and improve the health of the not-for-profit sector. It has some remarkable strengths to build on, but also significant opportunities to expand its aspirations: to grow talent, enhance its execution discipline, and boost innovation and collaboration.
If the sector can unlock these opportunities—in collaboration with its partners in philanthropy, government, and business—it can play a central role in ensuring that the country’s recovery and future are equitable, inclusive, and sustainable.
Rising demand, growing complexity: a sector under pressure
The COVID-19 pandemic has made the sector’s value clearer than ever. Extended lockdowns and border closures have created many challenges for the vulnerable, and the not-for-profit sector has mobilised rapidly to support those in need, lessening the financial and social impacts of the pandemic.
Over the last 18 months, the sector has seen an increase in steady-state demand, including welfare support, mental health requests, and domestic violence (Exhibit 1). However, while demand has grown, supply has not increased to match. One third of not-for-profit organisations believe that COVID-19 created a significant threat to their viability, and 78 percent experienced a downturn in revenue due to COVID-19, with 40 percent reporting a revenue decrease of more than 15 percent.
This gap has stretched the sector to the limit. Leaders in the sector have had to focus on the short term, reducing the time and resources they’re able to invest in broadening organisational capabilities, from people to technology. In short, performance has been strong, but the underlying health of the sector has suffered.
Recovery from COVID-19 is also likely to be uneven. As restrictions on economic activity subside, socioeconomic gaps may widen further, replicating a pattern we have seen in many previous crises and adjustments. Cohorts are left behind, resulting in a persistent struggle to catch up and accommodate long-term costs.
However, the crisis has created a unique moment of choice for Australia, given the willingness to collaborate and innovate outside of normal activity lanes. There has been an unparalleled surge in social ambition and entrepreneurship. With more disruptions expected in the coming years, Australia has an opportunity to harness the power of the not-for-profit sector, in collaboration with leading institutions in every sector.
Building organisational health across the not-for-profit sector
This research explores how Australia can better harness the power of the not-for-profit sector (See Box: About this research).
Leading Australian not-for-profit organisations are on par with the world’s best. They display many strengths that put them ahead of global benchmarks for all sectors—including communicating a shared vision, attracting talent, focusing on beneficiaries, and forming deep partnerships with the community (Exhibit 2). These are underpinned by the sector’s unique endowment of being purpose-, values-, and mission-driven.
Indeed, our social-sector leaders have much to teach the rest of the world about alignment with purpose and mission.
Looking at the healthiest organisations in our survey, we found a pattern of three essential capabilities: talent growth, execution excellence, and system shaping (Exhibit 3). To ensure robust health, an organisation needs to achieve effectiveness in all these capabilities; however, our research shows that most organisations face challenges in at least two of these areas.
Capability 1: Growing talent
The ability of not-for-profit organisations to recruit talent is not matched with practices for challenging that talent to grow. While 90 percent are above the global median on the former measure, only 35 percent exceed the median on the latter. Indeed, when we asked employees to pinpoint the values they most want to see in their organisations, but which are lacking today, their three top answers were: coaching and mentoring, professional growth, and employee focus.
Organisations can achieve more than they thought possible by recognising, challenging, and extending the natural talent the sector attracts. Three practices on which they can focus include setting clear and measurable performance goals for individuals; using regular, formal performance-feedback conversations; and providing merit-based opportunities and recognition.
Capability 2: Execution excellence
Only 40 percent of organisations are above the median on execution excellence and operational discipline, with many employees seeking greater emphasis on efficiency. Only two-thirds of not-for-profits surveyed believe that they measure outcomes effectively and take corrective, follow-up action when those outcomes are lacking—although this is partly driven by traditional funding models being output-focused.
Organisations need to see operational effectiveness as critical to the delivery of social impact at scale. To build this capability, they can aim to enhance three practices: using role clarity to empower employees to make decisions; defining outcomes and operational and financial metrics; and identifying and mitigating risks.
Capability 3: Shaping the system
On shaping the system in which they operate, 60 percent of organisations are above the median. Most have strong practices in beneficiary focus and partnerships, but efforts to drive and scale deeper innovation are not consistent across the sector.
The sector has the potential to capitalise on its deep connections with partners and community to drive greater innovation. To seize this opportunity, organisations need to build their strengths in three practices: understanding the value they offer and their place in the system; building mutually beneficial partnerships with stakeholders; and encouraging top-down and bottom-up innovation.
While harnessing the full potential of the not-for-profit sector will require collective effort (see next section), there are things that organisations can do on their own—and many in the sector are leading the way—to build these essential capabilities. In consultation with the sector, there is a strong desire to build more proactive sharing to enable learning from their best in their context. At the end of Chapter 2, we outline the key step of understanding the mindset shifts required, and the actions needed to move them.
A collective commitment to an inclusive and sustainable future
The not-for-profit sector can play a critical role in ensuring an inclusive and sustainable future, and opportunities exist to build on its significant strengths, and unlock potential across the sector even further. But even the healthiest organisations find that internal efforts to build capabilities can only take them so far. So, how can Australia collectively move at the speed and scale required? And how can leaders from all sectors play a concrete role in helping not-for-profit organisations capture opportunities and overcome barriers?
We propose ten bold, cross-sector ideas for further investment in the capabilities of not-for-profit organisations, to enhance the impact of the sector, and give it the greatest chance of delivering for all Australians (Exhibit 4).
Growing talent must be a priority for the sector, both as a critical enabler of impact, and as the support most requested by employees. In particular, support must go to middle- and upper-tenure managers who form the critical executive layer, whom we found had the lowest satisfaction with their career pathways and recognition, and are at highest risk of departure. We propose three ideas to broaden opportunities for cross-sector professional development: expanding sponsored leadership development for the sector; scaling investment in immersive cross-sector leadership programs tenfold; and expanding access to coaching and mentoring on critical practices, such as performance dialogues.
Well-functioning enabling systems are crucial to achieving impact at scale, particularly in compliance-heavy domains. There has been unprecedented progress on some fronts of digital enablement, including digital service delivery, but progress has been inconsistent across the sector.
Additional focus here could improve beneficiary outcomes, reduce risk, and simplify processes. We propose four ideas to enhance these crucial support functions: upskilling digitally to unlock the power of data for mission delivery; taking action on risk; building foundational skills on streamlined enabling systems; and scaling cross-sector secondments to build execution capability.
Given its deep relationships with beneficiaries, partners, and government, the not-for-profit sector is uniquely positioned to support system change. Unlocking system change requires that we reshape the numerous institutional norms and incentives tied up in the maintenance of current funding and delivery models— particularly with government partnerships. We propose three ideas to support innovation, collaboration and entrepreneurship—across organisations and sectors—including investing in evidence collection and dissemination to improve innovation; scaling outcomes-based contract procurement and management; and quarantine funding for ‘issue-centric’ collaboration across organisations and sectors.
Overcoming the challenges of collaboration won’t be easy: historically, tough barriers have held the sector and its partners back from effective cross-sector collaboration and innovation. This makes it all the more important to galvanise investment and support with the specific goals of driving collaboration, growing capacity, and shifting incentives.
Leaders can consider what their organisations are best placed to do by reflecting on the following questions:
- Are you extending and rewarding your talent, and having challenging conversations?
- Are you equipping your organisation with the data, decision-making authority, systems, and processes to execute with excellence?
- Are you fostering the culture and practices to collaborate, learn, and to innovate within and beyond your organisation?
- Are you creating time for leaders and employees to participate in cross-sector secondments, sponsorship, mentoring, and coaching?
- Are you sharing your expertise with the not-for-profit sector, through tailored or existing training programs and leadership forums?
- Are you improving access to, and support for, tools and resources your organisation has available, such as digital tools?
- Are you providing resourcing for dedicated bodies that address knowledge gaps and work with partners to translate evidence into action?
- Are you linking government funding to outcomes rather than activities, and establishing the management systems to support it?
- Are you encouraging and convening cross-organisation and cross-sector “tiger teams” to address systemic issues and solutions?
- Are you paying what it takes to ensure organisations have access to required development opportunities and enabling systems?
- Are you practicing outcomes- rather than activity-focused grant making, and establishing the management systems to support it?
- Are you channelling funding and using your convening power to drive issue-focused collaboration across organisations?
The Australian not-for-profit sector is a valuable asset that should be treasured and nurtured, but also challenged to innovate and grow as it faces an uncertain future. With meaningful investment in its people, the sector could play a leading role in driving an inclusive, sustainable future for all Australians.
Sign up for pro bono programs, research, and resources
In addition to the research on the not-for-profit sector, McKinsey & Company in Australia and New Zealand also offer pro bono capability building programs and resources for not-for-profit leaders.
If you would like to stay in the loop with McKinsey’s new not-for-profit sector research, program dates, and resources, please sign up using the button below.