Today the Nonprofit Finance Fund (NFF) released the results of their sixth annual State of the Nonprofit Sector survey and the data underlines a growing crisis in the financial sustainability of our nonprofit sector.
56% of nonprofit leader respondents reported that they were unable to meet demand for their services in 2013, this is the highest rate since the survey’s inception six years ago. And the scary part is that this inability to meet demand is not because of a temporary down period in the economy, but rather because of deeper dysfunctions in how we funnel money to the sector. As Antony Bugg-Levine, CEO of NFF put it, “The struggles nonprofits face are not the short-term result of an economic cycle, they are the results of fundamental flaws in the way we finance social good.”
The survey gathered responses from more than 5,000 leaders from U.S. nonprofits of all sizes, domain areas, and geographies.
The top challenge by far for nonprofit leaders, with 41% of them reporting it, is “achieving long-term financial stability.” And this is evidenced in several ways:
- More than half of nonprofits (55%) have 3 months or less cash-on-hand.
- 28% ended their 2013 fiscal year with a deficit.
- Only 9% can have an open dialogue with funders about developing reserves for operating
These struggles with financial sustainability stem in large part from a lack of understanding among funders of the true costs of social change work. Roughly 53% of nonprofit respondents’ funders rarely or never fund the full costs of the programs they support. And for approximately 24% of respondents their government indirect cost rate (the amount government allows for indirect, or “overhead” expenses) declined over the last 5 years, while about 47% of respondents are subject to a government indirect rate of 9% or less. That is nearly impossible.
For the first time, the survey included questions about impact measurement, a growing interest among funders, ratings agencies and others in the sector. But these questions just further underline the financial Catch-22 in which nonprofit leaders find themselves. 70% of nonprofit leaders report that half to all of their funders want to see proof of the impact of their programs, but 71% of nonprofit leaders also report that funders rarely or never fund the costs of impact measurement.
At the end of the day, government and private funders are putting greater demands on nonprofits whose services are increasingly needed, all while funding is becoming more difficult to secure. It’s a vicious downward spiral.
More than ever this survey demonstrates a need for the nonprofit sector and those who fund it to take a hard look at how the social sector is financed. We are not sustainably financing the social change work we so desperately need. And if we don’t address that, the downward spiral will simply continue.
Here are some fundamental changes to the financing of the nonprofit sector that I’d like to see:
- Government must move to a more reasonable indirect rate. No one can deliver an effective program with only 9% allocated to administration and other “overhead” costs.
- Funders who want to see impact measures need to step up and fund the work and systems necessary to make it happen.
- Nonprofit leaders and funders need to have more open and honest conversations about the hurdles standing in the way of the work.
- Nonprofit leaders need help figuring out sustainable financial models.
In the six years of NFF’s comprehensive and unparalleled view into the world of nonprofit leaders the story is not getting better. Let’s hope this data serves as a wake up call for the social sector. We must collectively realize that if we really want social change we have to figure out how to finance it effectively and sustainably.
Could it be that the nonprofit sector is coming into its own? Increasing prominence in the economy coupled with a growing (we hope) recognition of the need for stronger organizations, the nonprofit sector may be hitting its stride. Add to that some interesting discussions about the effect of crowdfunding and a “revitalizing” Detroit and you have a pretty good month of reading in the world of social innovation.
You can also see my favorites from past months here.
- It appears that the nonprofit sector is beginning to take center stage in a new economy. The rise of the “sharing economy,” where products and services are shared by many rather than owned by one (think Netflix, Car2Go, HomeAway), apparently holds tremendous opportunity for the nonprofit sector. So says Jeremy Rifkin in the New York Times, “We are…entering a world partly beyond markets, where we are learning how to live together in an increasingly interdependent, collaborative, global commons.” Erin Morgan Gore (writing in the Stanford Social Innovation Review) would agree.
- But at the same time, NPR describes a growing individualism in America and an emerging “Opt-Out Society.”
- And lest you forget why we do this social change work, Robert Samuelson, writing in the Washington Post, describes some “menacing mega-trends” facing America and our political system’s inability to keep up.
- We continue to be fascinated by the Millennial generation and this infographic very nicely puts to rest some myths about them.
- Writing in the Huffington Post, Ashley Woods questions whether the recent focus on revitalizing Detroit is helping or hurting long-time residents.
- Crowdfunding is increasingly gaining interest, but can it actually increase money flowing to social change? A new infographic by Craig Newmark, founder of Craig’s List, describes some recent crowdfunding results for nonprofits. And Beth Kanter digs deeper into the data.
- The CEO of The California Endowment, Dr. Robert Ross makes a compelling argument for why foundations need to move beyond funding new solutions and instead get into the advocacy and community organizing game: “Philanthropy has to recognize that community power, voice, and advocacy are, to use a football analogy, the blocking and tackling of winning social change.”
- Are funders beginning to understand the need to invest in nonprofit capacity building? Some recent research by The Center for Effective Philanthropy shows that, not surprisingly, nonprofit leaders think funders don’t understand their need for help with sustainability. But some new data from Grantmakers for Effective Organizations finds that funder appetite for capacity building might be growing. And Rodney Christopher from the F.B. Heron Foundation makes the case for support of capacity building, “Failing to pay attention to nonprofits as enterprises will undermine impact over time.”
- But Kate Barr from the Nonprofits Assistance Fund places a big part of the burden of overcoming the nonprofit overhead myth squarely on the shoulders of nonprofit leaders themselves.
- Albert Ruesga, head of the Greater New Orleans Foundation and contributor to the White Courtesy Telephone blog, very thoughtfully breaks down how to understand philanthropy’s relationship to social change. Well worth the read.
Photo Credit: Alfred Hermida
“Charity” harkens back to the beginnings of philanthropy, which was largely the purview of women and as such was viewed as tangential to and less valuable than the more important “business” of the male-dominated world.
As social problems mount, we must shift from the “charity” of our predecessors to an understanding of social change as part of everything we do.
And here’s why:
Charity Lives Beside the Economy, Social Change is Baked into the Economy
While charity was just an afterthought of the real work of the world, social change is rapidly becoming an integral part of the economy. The number of nonprofits grew 50 times faster than for-profits in the last 10 years and nonprofit revenues grew at double the rate of GDP growth in the same period. And its not just the size and resources of nonprofits that contribute to an emerging social change economy, the Millennial generation actually thinks about social change as part of every aspect of, not separate from, their work and life. The work of social change is ubiquitous.
Charity Addresses Symptoms, Social Change Addresses Systems
Charity is about remedying the immediate and direct symptoms of a larger problem. It is about feeding the poor, sheltering the homeless, clothing the naked. But as very real structural challenges grow (like the widening income gap) we can no longer just stick a finger in the dike. We must come up with approaches that solve the underlying issues causing those problems.
Charity Requires Spare Pennies, Social Change Requires Significant Investment
Charity existed on the largesse of the profiteers of the last centuries. Once they made their millions, they sloughed off a portion of the excess to the charities who cleaned up the messes they made. But you can’t do much with the dregs. Because social change is about changing larger systems it takes real, significant investment of resources.
Charity Employs Volunteers, Social Change Employs Experts
Charity was always the purview of the wives who didn’t work. As volunteers they devoted their time to helping the needy. But as our social problems become increasingly complex and entrenched, we must employ experts – not volunteers – who through education, knowledge and experience know exactly how to approach the problem and how to solve it. And we must pay them what it takes to keep them working on those solutions.
Charity Apologizes, Social Change Demands
When you are voluntarily acting on behalf of a charity and asking others also to act voluntarily on behalf of the charity, you are often apologizing for the interruption to their “real work.” But social change is very necessary work, and social changemakers must demand the investment, mindshare, time and effort required. There is absolutely no space for apology.
Sometimes words and the baggage of the past really matter. When we stop thinking of the work of social change as “charity” we start demanding and creating real investment, real attention, and real change.
Photo Credit: Library of Congress
Americans are increasingly fascinated with the Millennial generation (those born between 1981 and 2000), largely because they are the biggest population cohort the U.S. has ever seen. Whatever they do is sure to have a big impact. I’ve been particularly interested in how they might affect how money flows to social change.
But now I wonder how they might impact the social change workforce.
There was a really interesting article recently about how Millennials are ditching traditional careers in favor of more creative, meaningful work:
A growing number of Americans are abandoning traditional jobs for work that is more hands-on and that they deem more meaningful. For some, it is out of necessity…many people, faced with diminishing corporate opportunities, have been forced into thinking like entrepreneurs. For many, it is a choice. Old-school artisanship—like craft brewing and shoemaking and the millinery arts—is on the rise. A nation of hobbyists and fine artists have brought energy and invention to (and made more than a few bucks on) websites like Etsy and Big Cartel. There’s a sprouting up of first-generation farmers. These days, it would not be odd to see a hedge-fund manager throw it all away to become a mushroom grower. Or a Google gearhead to take up textiles. Call it the New American Dream, where uncertainty is being spun into infinite possibilities, and a pathway to unexpected freedom and deep satisfaction feels like our birthright.
Their staggering unemployment, deepening distrust of corporate America, and civic-minded perspective (the most since the Greatest generation), have all combined to make the Millennial generation crave a creative, flexible and meaningful work life.
And that could be a boon to the nonprofit sector.
I wonder if over the next couple of decades, as Millennials take center stage in the workforce, we will witness people increasingly chucking the corporate ladder for something more meaningful and flexible.
Certainly many Millennials have already, and will continue to, flock to the emerging world of social entrepreneurship, which neatly combines their love of the entrepreneurial with their drive for social change, but not all Millennials can or will want to start their own thing. For the rest of them, I wonder if nonprofit organizations might attract their interest.
For so long nonprofits have struggled to attract and retain talent because of less competitive salaries and packages than their corporate counterparts. But perhaps those benefits are increasingly less appealing to the future workforce.
Now, what nonprofits have in spades – entrepreneurial approach, flexibility, social change – could actually become a competitive advantage. What if the nonprofits of the future become the sought after refuge of creative Millennials ready to make social change, not necessarily on their own, but as part of something bigger?
Definitely an interesting trend to watch.
Image Credit: onlinempadegrees.com
January was all about wealth inequality, all the time. The 50th anniversary of President Johnson’s War on Poverty was an appropriate backdrop to growing unease about the fact that the rich are getting exceedingly richer.
But there is much debate about what the solution is and even how to frame the problem. And where do nonprofits fit in, and what does it all mean for the future? It is an enormous, far-reaching and complex problem.
Below are my picks of the 10 best reads in the world of social innovation in January. But please add to the list in the comments. And if you want more, follow me on Twitter, Facebook, LinkedIn, or Google+.
You can also find the list of past months’ 10 Great Reads here.
- This year marks the 50th anniversary of the launch of President Johnson’s War on Poverty. Despite the long attack, wealth inequality is getting worse, not better, and is becoming a very hot topic. But Mark Schmitt, writing in New Republic, takes issue with how the inequality conversation is being framed. He argues that “we need a way to talk and think about inequality that presents it as a system, and then finds the points of intervention that might actually change the system.”
- Thomas Piketty’s new book, Capital in the Twenty-First Century, due out in March and reviewed this month by Thomas Edsall in the New York Times, takes reframing the inequality conversation even further. Piketty makes a rather depressing argument that when viewed over history wealth inequality is the rule rather than an anomaly and without huge systemic change (like a global wealth tax) will only get worse.
- And where does the nonprofit sector fit in? Mark Rosenman argues that nonprofits should play a pivotal role in advocating for change: “If the United States is again to be a nation where upward mobility applies to more than those already near the top, nonprofits must exercise their moral authority and advocate for economic policies that give a hand up to the poor and advance a vision of the common good that includes all Americans.”
- The often employed method to combat poverty – education – may not be the answer anymore. Clay Shirky takes higher education to task for “preserving an arrangement that works well for elites—tenured professors, rich students, endowed institutions—but increasingly badly for everyone else.”
- But for David Bornstein, appropriately from the world of solutions journalism, there are still some bright spots to point to in the War on Poverty.
- Maybe part of the solution lies in changing our measures of success. This video suggests we move from Gross Domestic Product to a Social Progress Index to measure a country’s success.
- They say long-form journalism is coming back and let’s hope so if Drew Philp’s piece “Why I Bought A House In Detroit For $500” is an example of the trend. He beautifully describes the process of investing his heart and soul in a house and neighborhood in crumbling Detroit.
- And, on a related note, it turns out that “gentrification” may not be a dirty word anymore, according to NPR.
- In other news, writing in the Nonprofit Quarterly Eileen Cunniffe provides some interesting examples of how arts nonprofits are reinventing themselves and their relationship to money.
- Finally, the Nonprofit Tech For Good blog rounds up 19 really interesting social media and fundraising infographics for nonprofits.
Photo Credit: University of Iowa Libraries, 1960
In my eyes, December was about three main things: the After the Leap conference about moving nonprofits to manage to outcomes, predictions about how the social sector will evolve in 2014, and the impact of the second annual Giving Tuesday. Added to the mix were some demonstrations of the growing wealth inequality (a prediction for 2014 from many) and a dash of controversy about the beloved TED Talks. It all made for a very interesting month.
Below are my picks of the 10 best reads in the world of social innovation in December. But please add to the list in the comments.And if you want to see more of what catches my eye, follow me on Twitter, Facebook, LinkedIn, or Google+.
You can also find the list of past months’ 10 Great Reads here.
- I already linked to several people’s great 2014 prediction pieces in my 5 Nonprofit Trends to Watch in 2014 post, but Tom Watson’s Trends and Collisions That Will Challenge the Social Sector in 2014 in Forbes is particularly thought-provoking. He takes what he calls a “meta approach” by analyzing themes from big social sector thinkers and “adding a few morsels to the stew.”
- One of the predictions on both my and Tom’s list was that the growing wealth inequality will become increasingly obvious. Robert Reich helps this trend by providing a scathing critique of modern philanthropy, arguing that it is becoming less about solving wealth inequality and more about reinforcing it: “Fancy museums and elite schools…aren’t really charities…They’re often investments in the life-styles the wealthy already enjoy and want their children to have as well.” And Peter Capelli, writing on the Harvard Business Review blog, seems to agree, but on the corporate side. He takes issue with “companies that pay poverty-level wages or thereabouts to their employees [while] spend[ing] a good deal of effort to be good corporate citizens in other areas.”
- Some people claim the second annual Giving Tuesday was a great success with a 90% increase in day-of online donations over last year, but others, like Michael Rosen, argue that Giving Tuesday is not actually channeling new money to the sector.
- The first-ever After the Leap conference in December promoted nonprofit performance management. Perhaps the high point of the conference was Nancy Roob’s (head of the Edna McConnell Clark Foundation) stirring keynote pushing both foundations to fund outcomes management and nonprofits to demand it. The Stanford Social Innovation Review did a great interview with her where she makes many of the same points, and an interview with Mario Morino, the main organizer of the conference.
- Writing in The Guardian, Paula Goldman from Omidyar Network discusses how, with impact investing, the blending of social and profit motives is really starting to take hold: “Fifteen years from now…We’ll look back on a host of innovations benefitting millions of disadvantaged people – in education, in healthcare,…in solar lighting—and will have a hard time remembering the day when people viewed charity and business as working towards opposite goals.”
- Leon Neyfakh writes a fascinating expose in the Boston Globe about donor advised funds, which he claims is “where charity goes to wait.” $45 billion—more than the endowment of the Bill and Melinda Gates Foundation – currently sits idle in donor advised funds and that amount is growing fast. A huge financial opportunity for the sector.
- The Center for Effective Philanthropy released a new study about how much impact foundation CEOs think their philanthropy has had. Philanthropy heavyweights Paul Brest and Lucy Bernholz each give their take on the study’s findings.
- I have loved writer Steven Pressfield since I read his fabulous The War of Art last summer. His blog about the creative process is a fount of knowledge and inspiration. His post in December about envisioning and embracing the future in your industry applies to nonprofits too.
- The idea of networked approaches to social change has been around for several years and is gaining momentum. Writing in the Nonprofit Quarterly, Mark Leach and Laurie Mazur describe “the power and promise of networked approaches to social change…creat[ing] a force larger than the sum of their parts.” Definitely a trend to watch.
- And finally, I love it when someone steps back and asks some hard questions about something that everyone else assumes is amazing. Benjamin Bratton does just that about the beloved TED Talks, which he claims “dumb-down the future.”
Photo Credit: Imperial War Museums
Among other obvious things, December is a time for reflection on the past year and predictions for the coming year. There have already been some great forecasts about what 2014 will bring the social change sector (here, here, and here). And as is my tradition, I want to add my thoughts about the trends to watch in the coming year. (If you want to see how I did in past years, you can read my nonprofit trends posts for 2011, 2012 and 2013.)
Here’s what I think we should watch for in 2014:
- Growing Wealth Disparity
Evidence increasingly reveals that despite our best efforts the gap between the rich and the poor is widening, not shrinking. This growing disparity means that the work nonprofits do to address the ramifications of these inequities is in growing demand. The problems are simply too big and getting bigger every minute. At the same time government resources are shrinking so the greater burden for solutions is increasingly placed on the shoulders of the nonprofit sector. As problems get worse and money gets tighter the social change sector will take center stage.
- Greater Nonprofit Sector Confidence
As the nonprofit sector is asked to do more and more, nonprofits will no longer be a “nice to have” but an absolute essential component of any way forward. We will move squarely away from the idea of “charity” and toward an economy and a mindset that fully integrates the social. No longer sidelined as a small piece of the pie, the nonprofit sector will be recognized for the undeniable and pivotal role it plays in our economy, our institutions, our systems. As such, the nonprofit sector will stop apologizing for the resources it needs to do the job. The sector will rise up and take its rightful place as a critical force in shaping a sustainable future.
- Increased Movement Toward High Performance
As resources become tighter and we look to the nonprofit sector to solve mounting problems, public and private funders will increasingly want to see the return on their investments. And that can only be done by understanding what results a nonprofit is achieving. The growing push this year away from financial metrics and toward outcome metrics will continue to grow. Nonprofits will have to learn not only how to articulate the outcomes they are working toward, but more importantly, how to manage their operations towards those outcomes.
- More Capacity Investments
And if we are going to get smarter about achieving results in the social change space, more donors will start to recognize that they have to build the capacity of that space. There is no end to the list of capacity-building needs of the sector. From investing in more sustainable financial engines, to funding evaluation and performance management systems, to financing nonprofit leader coaching, philanthropists will increasingly recognize that if we are going to expect more from the nonprofit sector we must make sure they have the tools to do the job. A handful of savvy foundations and individual donors have already made capacity investments, and as those investments pay off, more donors will follow suit.
- Accelerated Effort to Enlarge the 2% Pie
For the past four decades private contributions to the nonprofit sector have not risen above 2% of the U.S. gross domestic product. In recent years there have been attempts to grow that pie. And the big question whenever a new funding vehicle enters the space (like crowdfunding most recently) is whether it will be the magic bullet to shatter that glass ceiling. But we are not there yet. As social challenges continue to grow, the wealth gap continues to widen, and a new generation of donors comes of age, there will be increasing pressure to channel more money (not just the same money through a new vehicle) toward social change.
Photo Credit: John William Waterhouse
This week I attended the After the Leap conference in Washington D.C. and was blown away. As I mentioned in a post earlier this year, the conference was organized by Social Solutions and PerformWell partners Child Trends and Urban Institute and builds on the momentum Mario Morino has created around his book, Leap of Reason, published in 2011, and the companion book Working Hard & Working Well by David Hunter published this year.
This first-ever conference was an attempt to bring the nonprofit, philanthropic and government leaders who are on the cutting edge of the movement to create a higher-performing social sector together to, as Mario put it “grow a critical mass who can mobilize for greater change.”
What’s Government’s Role in Nonprofit Performance?
Day 1 focused on government’s role in driving social sector performance management. A fascinating panel of government agency leaders, moderated by Daniel Stid from the Hewlett Foundation, discussed various efforts at the federal, state and local government levels to drive evidence-based policy and practice. But some in the audience and Twitter-verse wondered whether government could really be the impetus for a greater push towards measuring and managing outcomes in the nonprofit sector.
How Do You Get Buy-In For Change?
From the big, systemic view, the day quickly shifted for me to the organization-level with the fantastic panel on “Getting Buy-In” from staff, board and funders for a shift towards performance management. Isaac Castillo from DC Promise Neighborhood Initiative, Bridget Laird from Wings for Kids, and Sotun Krouch from Roca explained how they had moved their nonprofits toward articulating and measuring outcomes. The most effective approach seemed to be to ask “Don’t you want to know whether the work we are doing is helping rather than hurting?” Isaac made the urgency to move toward performance management clear, “If you haven’t started doing performance management yet, in 12-18 months you will start losing funding to those who are.”
Can We Convince Funders to Invest?
Day 2 of the conference kicked off with an inspiring keynote address by Nancy Roob from the Edna McConnell Clark Foundation that really served as a call to action for the foundation world. Nancy painted a pretty stark picture of the disconnect she saw between how much money we’ve spent on solving social problems in the last decades and how much actual progress we’ve made. She blamed this disconnect on “our piecemeal approach to solutions.” As she bluntly put it, “We are woefully under-invested in what we already know works.” She laid out 5 steps funders can take to move away from piecemeal and toward transformational social change:
- Make bigger, multi-year investments
- Provide more upfront, unrestricted, flexible capital
- Invest in nonprofit evidence building
- Scale what works with innovation, and
- Adopt an investor mindset
But for Nancy, it’s not just up to funders, nonprofits also need to change. She urged nonprofits to:
- Shed the charity mindset
- Focus on the larger context
- Create a performance management culture, and
- Ask for help to achieve performance
From there, Phil Buchanan from the Center for Effective Philanthropy led a panel with Carol Thompson Cole from Venture Philanthropy Partners and Denise Zeman from Saint Luke’s Foundation asking “Do Funders Get it?” While a few funders are willing to invest in helping nonprofits articulate, measure and manage to outcomes, most are not. The panel suggested that some of this reluctance stems from funder’s lack of humility and fear of what they might find. Audience members suggested that it might also be funders’ lack of performance expertise. (You can read Phil Buchanan’s blog post giving more detail on this panel here.)
From there I attended a breakout session “Funder Investment Strategies to Strengthen Nonprofit Performance Management Capacity” where Victoria Vrana from the Gates Foundation and Lissette Rodriguez from the Edna McConnell Clark Foundation and two of their grantees discussed how they worked together to fund and create performance management systems.
The final panel of the day brought an impressive group of nonprofit CEOs together (Mindy Tarlow from Center for Employment Opportunities, Sam Cobbs from First Place for Youth, Cynthia Figueroa from Congreso de Latinos Unidos, Bill McCarthy from Catholic Charities of Baltimore, and Thomas Jenkins from Nurse-Family Partnership) to talk about how they each had built a performance management system at their organizations, the hurdles they encountered, how they funded it, and where they are now.
Where Do We Go From Here?
Mario Morino rounded out the conference with an inspiring call for us to build momentum. He outlined some new ideas coming out of the conference that he’d like to see developed by 2020, including:
- A “Manhattan Project” of social sector evidence
- A National Commission on Nonprofit High Performance
- An Aggregated Growth Capital Fund to deploy billions to solve entrenched national problems
- A Performance Academy for Social Impact
- Presidential Performance-to-Impact Awards
- Social Sector Center for Quality Improvement
- A Solutions Journalism Network to “lift up the hope spots” in the country
- Leap Learning Communities in local settings connected in a national web
This was one of the best conferences I’ve been to in years. The caliber of the presenters and audience was amazing. It felt like I was witnessing the birth of the next generation of the social sector. Buoyed by the ability to see the writing on the wall, this group is determined to lead the fundamental, and critical, shift towards a more effective sector.
The urgency of this movement became increasingly clear through the course of the two days. Our country is witnessing mounting disparity and crippling social challenges. It is increasingly up to the social sector to turn the tide. And the time is now. As Mario charged at the end of the conference “If we don’t figure out how to build high performing nonprofits, nothing else matters. This is the last mile. Our nation depends on it.”
Photo Credit: tableatny
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