Optimizing

I describe Goodwill’s overall objective in general terms as “Maximizing mission-related impact while maintaining a financial position that enhances long term viability.” Of course, such a definition requires that we be able to define mission-related impact. And, despite the use of the word maximizing, the overall challenge is really one of optimizing.

optimize

Many of our management challenges involve finding optimal solutions. For example, how much of our revenue should we spend on General and Administrative expenses (In the not-for-profit world, this is typically referred to as “overhead.”)? Some people believe not-for-profits should minimize G&A. In the long run, that is a recipe for ensuring less than optimal performance, as it results in inadequate value-added support of the high mission impact parts of the organization. Spend too much, though, and there could be legitimate questions about whether the organization is being a good steward of its resources. In this, as is in so many situations, one size does not fit all. Two very important factors in arriving at an optimal percentage are the size and complexity of the organization. In our large, very complex organization, somewhere around 10% of revenue seems to be close to optimal. While to some it might seem counterintuitive, a well-run smaller organization would likely have to spend a larger percentage of its revenue on G&A, as those expenses should not increase at the same rate as revenue.

Another example: One of Goodwill’s historic roles is to provide work for people whose options are limited by disability, criminal history, low education level, or other significant barrier. This is a very important part of our mission and one way we can add unique value in a community. Obviously, then, we want to provide as many jobs as possible for individuals who don’t have many options. However, because retail is the financial backbone of our entire organization, we must have a sufficient number of people with skills that enable us to be competitive and efficient. If we do not have enough people with barriers who have the necessary skills, we must hire others who can fill the gap. In recent years, filling approximately 2/3 of the jobs in donated goods/retail operations with people who have employment barriers has generally seemed to result in an optimal mix.

There’s another optimizing challenge embedded in that example, though, and that is the mix of full-time vs. part-time employees. We have quite a number of employees who for any of a variety of reasons are not able to work full time. However, if we have too few full-time employees, productivity can drop, and that will affect financial performance.

External factors can also have a powerful influence on optimization challenges. For example, the Affordable Care Act has resulted in a large increase in the number of employees who have signed up for coverage under our health plan. While we’re glad more of our employees now have health insurance, this has greatly increased our operating expenses – so much so that we might find it necessary to reprioritize and determine a new optimal mix of operations and services and/or full-time vs. part-time employees that will enable us to continue maximizing mission-related impact while maintaining a financial position that’s good for long term viability.

Nothing is static. Conditions are constantly changing, and we must constantly adapt or suffer the consequences. Optimization issues are always before us, and we’re always striving to find the best balance point – at least until something else changes.

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Newton’s Laws and Goodwill

In high school and college physics, I became well acquainted with Sir Isaac Newton’s Laws of Motion. After nearly four decades as a CEO, I’ve concluded that the concepts underlying at least two of those three laws apply to organizations – actually, to institutions of all kinds – as well as to the physical world.

For example, Newton’s First Law of Motion – the Law of Inertia – is often paraphrased as “A body at rest will stay at rest until acted upon by an external force.” How can that apply to organizations? It’s been my observation that the more an organization is removed from day-to-day competition (a powerful external force), the slower it is to adapt as its external environment changes.

When you are subject to competition on a day-to-day basis, there’s more of a sense of urgency, more of a drive to improve. You know that if you don’t improve, someone is going to take your customers (or in the case of a school, your students) away from you. For organizations that lack strong competition, the faster the rate of change on the outside, the more they tend to lag. They might survive, but they are likely to become increasingly ineffective.

This is not generally as much of a problem in the for-profit world as it can be in the public and not-for-profit sectors. In the for-profit world, if you don’t successfully adapt to external changes – including new or stronger competition – in most cases you will become extinct.

Newton’s Third Law of Motion – or a reasonable facsimile thereof – also applies to institutions. This law is often stated, “For every action there is an equal and opposite reaction.” A Corollary might go something like this: “For every excess there will be a proportionate reaction and correction. The greater the excess, the greater the pain associated with the correction.”

Think about that in light of the financial problems currently plaguing the U.S. and much of the rest of the world. For example, excessive spending (and related borrowing) by individuals, organizations, or governments will eventually prompt a correction. Sometimes the correction will come only after years of excess. But eventually it will come. And with the correction will come pain proportionate to the degree of excess.

Of course, excessive conservatism can also be a problem. Companies that do not spend enough to properly maintain their physical assets, develop and retain their human capital, and improve their productivity are jeopardizing their future. They can also jeopardize their future when they fail to invest in opportunities for which they are well-suited, thus leaving the door open for more aggressive, well-managed competitors to increase their strength.

Governments – cities, states, nations – that fail to adequately maintain their infrastructures will eventually have a huge price to pay – and you can count on a strong reaction from their citizens when the bill and the pain associated with it come due.

While we take nothing for granted, at Goodwill we’ve thus far been able to avoid the kinds of excesses that can jeopardize an organization’s future. Goodwill is also fortunate to have functioned in a competitive marketplace since its founding. From the beginning, we have operated a commercial enterprise that sells goods to the public as a primary means of accomplishing our mission. This has been a driving force in creating and sustaining the culture of our organization and is a major reason we’ve grown and evolved the way we have.

Introduction

My career with Goodwill has now spanned forty years.  It’s been a wonderful fit for me and an incredible learning and growing experience.  Over the years we’ve tried an enormous number of different ways of growing our businesses and accomplishing our mission.  Some of those initiatives have worked great; some have been reasonably successful – at least for awhile; and some have been dismal failures.  But we’ve learned from all of them.

The emphasis on business and mission is important.  The way and the extent to which we emphasize both is, I think, Goodwill’s most unique characteristic.  We operate businesses in a competitive marketplace and generate most of our revenue from the sale of products and services.  But we do so as a means to an end.  Rather than try to maximize profits or shareholder value as would be the case if we were a for-profit company, our overall objective is to maximize mission-related impact while maintaining a financial position that’s good for the organization’s long term viability.

While Goodwill has been in central Indiana since 1930, it is in many respects a very young organization that is constantly evolving.  During the last twenty years the pace of the evolutionary changes and our growth in revenue and number of employees have accelerated.  To be sure, we have our share of problems, frustrations, and even failures.  Yet, most people who know us would describe Goodwill as a very successful organization.

And yet – if I look at our organization in the context of changes in the country as a whole over the last forty years, I’m dismayed.  During those decades, despite massive increases in public spending and an incredible proliferation of not-for-profit organizations,  a lot of major social indicators have become worse.    Three examples:

  • The amount of money – in constant, inflation-adjusted dollars – spent on federal anti-poverty programs has gone up nearly 500% since 1968. Yet, the poverty rate is higher than it was in the early 1970s.
  • Per pupil spending – again, in constant dollars -on public K-12 education has more than doubled since 1969. Yet, high school graduation rates and other indicators of education attainment have fallen.
  • We are incarcerating people at three times the rate we were in 1980 and four times the rate we were in 1970.

Clearly, as a society, we need some different approaches to some of these problems.

In this blog I will write about how and why Goodwill has evolved the way it has.  I’ll describe some of our experiences (good and bad) and offer some thoughts on what makes some organizations successful and others less so.  I’ll also offer some observations and perspectives based on our experiences that might be worth considering in a search for long term solutions to some of our perplexing social problems.  I hope you will find these postings interesting and perhaps even useful.  I also invite and hope to learn from your comments.

Thanks for taking the time to read this.