Ever since last year’s Letter to the Donors of America from GuideStar, Charity Navigator, and BBB Wise Giving Alliance there has been a growing movement to debunk the “nonprofit overhead myth,” the notion that donors should evaluate nonprofits based on the percent they spend on “overhead” (fundraising and administrative) costs.
More and more articles (a most recent one here) are cropping up explaining the overhead myth and highlighting donors who overcame it. And even fundraising journal Advancing Philanthropy is devoting their entire Spring issue to the topic.
But at the same time we have very obvious examples of the continuing strength of the overhead myth. The latest is nonprofit darling Charity:Water, which is often held up as the gold standard of innovative fundraising and nonprofit strategy, claiming that 100% of their donations go “directly to the field.” And thus the overhead myth lives on.
Will we ever be rid of the idea that nonprofits can somehow achieve a nirvana where very little (or no) money goes to boring things like salaries, technology, infrastructure, fundraising, leadership development, planning, R&D?
I wonder if we could gain more traction by talking less about the negatives of an overhead myth and talking more about the positives of nonprofit organization building.
For example, one of the things that is often considered “overhead” and rarely gets funded is nonprofit leadership development. But in the for-profit sector, leadership development is viewed as an incredibly important and worthy investment. According to a recent article by the Foundation Center, the business sector spent $12 billion on leadership development in 2011, whereas the nonprofit sector spent $400 million, or viewed another way, businesses spent $120 per employee on leadership development, whereas the nonprofit sector spent $29 per employee.
And leadership development can have such a positive return on investment. A stronger nonprofit leader can:
- Recruit, train and manage a more productive and effective staff
- Engage a more invested board of directors
- Use money and other limited resources more strategically
- Open a nonprofit to bigger and better networks
- More effectively manage to outcomes
- Create an overall more highly performing nonprofit
So what if we refocused the overhead myth discussion on the power of nonprofit organization building? Beyond leadership development, investing in nonprofit organization building means money for things like: talented, effective fundraising staff; smart long-term planning; performance management systems; effective technology.
At the core, organization building is about creating a smart, strategic nonprofit that can actually realize the outcomes it was set up to achieve. Organization building can make the difference between a nonprofit that is just getting by and a nonprofit that is actually solving problems.
Photo Credit: liquidnight
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
It used to be that a nonprofit leader receiving a check from a donor would smile politely, say a big “Thank You” and go on her way. But just as (seemingly) every aspect of the world as we know it is changing, so too is philanthropy. We are starting to question long-held assumptions about how money is given and how it should be spent.
As a nonprofit leader, if you want to start securing and using money in a more strategic way, if you want to move from fundraising to financing, you need to bring your donors along with you.
It is up to you to enlighten your major donors about how they can use money more effectively. So that instead of being merely the recipient of your donors’ largesse, you become a true partner in putting their money to work for real social change, which is today’s topic in the ongoing Financing Not Fundraising blog series.
The Financing Not Fundraising blog series encourages nonprofits to move from the exhausting hamster wheel of fundraising to a long-term, sustainable financing strategy for their work. You can read the entire series here.
We simply can’t sit around and wait for philanthropists to suddenly understand the hurdles nonprofits face. So the next time you meet with a major donor (an individual, foundation or corporate donor with whom you have a one-on-one relationship), make time to have a deeper, different conversation aimed at enlightening them about the realities you face.
Here are some ways to start that conversation with your donors:
“Overhead Isn’t a Dirty Word Anymore.”
The notion that “overhead” expenses, like administrative and fundraising costs, are unseemly in the nonprofit sector is becoming antiquated. Instead there is a growing effort to evaluate nonprofits based on the results they achieve, not the way they spend their money. And effective nonprofits need strong organizations behind their work. Take some time to educate your closest donors about this growing movement to support all aspects (including staffing, systems, technology) of a nonprofit organization.
“These Are The Hurdles Standing In Our Way.”
Let’s face it, most nonprofits struggle with some key organizational challenges. Perhaps you struggle to secure sustainable funding; or you can’t recruit and engage an effective board; or you want to grow, but lack an effective growth plan. Whatever your challenges are, start being more open with your funders about those challenges. It is a risky conversation, to be sure. But I bet that your long-term funders have probably already recognized some of those roadblocks, and your open and honest approach to facing them might start a new conversation about solutions.
“Here Are Some Solutions to Those Hurdles.”
You don’t want simply to tell your donors a laundry list of woes. As my mother always said “Don’t come to me with your problems, come to me with your solutions.” So before you tell your close donors what is holding you back, do your research about how you might overcome those hurdles. If you struggle to bring enough money in the door, perhaps a Financial Model Assessment could help. If you can’t effectively track and communicate with donors, you may need new technology and systems. If you don’t have enough staff to grow your programs, analyze the additional expertise you need and calculate how much it would cost. Put together a thoughtful plan for how you can overcome the obstacles you face.
“Here is How You Can Help.”
Which brings me to the key conversation you need to have to enlighten your donors. You cannot execute on a change plan if you don’t have the resources to do so. That’s where your key donors come in. If you’ve spent the time educating them about organization-building, the key obstacles in your way, and your plan for overcoming those obstacles, then the next logical step is to ask them for help. If you have invested them in the need and direction for change, you are ready to ask them to invest in the solution.
I know it’s difficult for nonprofits and their major donors to have open and honest conversations. But we will never move forward if nonprofit leaders don’t start initiating some difficult, but potentially game-changing conversations with their donors. Indeed, effective social change depends on it.
There is a growing drumbeat lately (for starters here, here and here) that nonprofits must be more bold. I couldn’t agree more and have argued that nonprofit fear and small thinking sometimes hold them back. But it is becoming increasingly obvious to me that if we want to get better at solving social problems, we have to ask philanthropist to be more bold too.
And I’m heartened to see this conversation starting to emerge. The Letter to the Donors of America, the Donor Forum’s Real Talk About Real Costs effort, Dan Cardinali’s request that philanthropists fund the “unsexy” work of nonprofit capacity building, Rebecca Thomas encouraging funders to support nonprofit resilience, and Ben Powell’s idea that philanthropy provide more start-up capital all add to the philanthropy reform discussion. I love it!
But I want to see the idea that philanthropy can be so much more move beyond talk.
There is a huge disconnect between what nonprofits really, truly need to solve social problems and how funding currently flows. We are locked in a chicken or the egg scenario where often a nonprofit working to solve a social problem encounters some major capacity constraints. For example, a nonprofit doesn’t know how to:
- Create a sustainable financial model
- Effectively grow their solution
- Structure their board and staff for success
- Strategically filter opportunities
- Engage key outside elements in the change effort
And quite often they don’t know how to move past these capacity constraints.
At the same time, philanthropists may recognize that a grantee is encountering some significant hurdles, but doesn’t know how (or is unwilling) to invest in overcoming those hurdles. So the constraints remain unmoved.
But what if nonprofits and philanthropists could start working together to move those hurdles?
What if instead of getting in the way, philanthropists started paving the way?
Philanthropy could provide the critical infusion of the right kind of organization-building money at the right time thereby allowing a great solution to grow.
To me, that’s bold philanthropy.
But how do we get there? Philanthropists need to change in some fundamental ways:
Move to Impact
Just as we are increasingly asking nonprofits to move to impact, philanthropists need to do the same. Instead of tracking outputs (# of grantees, $s given), foundations need to start tracking whether their investments result in change to 1) their grantees and 2) the problems those grantees address. Just as we are starting to ask nonprofits “To What End?” we need to ask funders the very same question.
Help Diagnose the Constraints
Once philanthropists start getting clear about what they want to change and whether their investments are actually resulting in change, they need to become cognizant of the hurdles standing in the way of that change. And I will tell you that there are some almost universal hurdles in the nonprofit sector (lack of management expertise, poor leadership development, board disengagement, financial instability). So if a philanthropist really wants to see change to a social problem, he needs to get clear about what those he is investing in need to make that change a reality.
Invest in Removing Those Constraints
But it simply is not enough for funders to recognize that those they fund have very specific and tangible organizational needs. Those funders then must put their money where their mouth is. More philanthropists need to invest in building stronger, more effective, more sustainable solutions. They need to provide more capacity capital, money to build an effective, sustainable nonprofit that can grow impact.
We have only scratched the surface on what philanthropy can do to solve social problems. But I am optimistic that we can fundamentally change philanthropy so that it increasingly provides the capacity capital the sector so desperately needs.
Photo Credit: Jeffrey Beall
Note: I was asked by Markets for Good to write a post as part of their ongoing online conversation about improving how money flows to social change. Markets for Good is an effort by the Bill & Melinda Gates Foundation, the William & Flora Hewlett Foundation, and the financial firm Liquidnet to improve the system for generating, sharing, and acting upon data and information in the social sector.
Over the past several years, Markets for Good has been a forum for discussion and collaboration among online giving platforms, nonprofit information providers, nonprofit evaluators, philanthropic advisors, and other entities working to improve the global philanthropic system and social sector. Below is the post I wrote. You can see this post and the others in their series and contribute to the ongoing conversation at the Markets for Good blog.
As we talk about creating a space “where capital flows efficiently to the organizations that are having the greatest impact” we must address the elephant in the room: how nonprofits are funded.
Currently that’s a pretty broken model. And if we are ever to direct more money to more social change, we must fix it.
In an ideal world, a social change organization would create a potential solution to a social problem, prove that the solution actual resulted in change, and then attract sustainable funding to grow that solution.
But that’s not currently happening because the way nonprofits are funded is broken in three key ways:
Nonprofits don’t articulate a theory of change. 10 years ago it was enough for “charities” to “do good work.” In an ever-increasing drumbeat nonprofits are being asked to demonstrate outcomes and impact. And for good reason. If we are truly interested in social change then we must understand which organizations are actually creating it and thus deserve our investment.
But you cannot demonstrate outcomes and impact if you have not first articulated what outcomes and impact you think your solution provides. Those nonprofits that truly want to solve a social problem (as opposed to simply provide social services) must articulate a theory of change. A theory of change is an argument for how a nonprofit turns community resources (money, volunteers, clients, staff) into positive change to a social problem. It seems simple, yet most nonprofits working toward social change have not done this.
We need to change that. This simple argument is the first step in creating real, lasting social change and attracting money to be able to do it in a financially sustainable way.
Nonprofits struggle to prove impact. Once a theory of change is in place, nonprofits need to prove whether that theory is actually becoming a reality. Nonprofits have struggled for years to figure out how to measure whether they are actually achieving results. But they cannot figure it out on their own.
Philanthropy needs to step up to help fund the work, or on a much larger scale, social science could prove the impact of overall interventions that nonprofits can then implement.
Either way, the burden of proof can no longer rest solely on the shoulders of individual nonprofits.
Fundraising isn’t sustainable. Once social change is actually happening, we want to grow that effective solution in a sustainable way. But that necessitates a real financial model.
Most nonprofits chase low-return fundraising efforts that lock them into a band-aid approach that is far from financial sustainability. Few nonprofits create and execute on an overall strategic financial model that aligns with the impact they want to achieve and their organizational assets.
We have to stop the madness.
We must help nonprofits create an overall financial engine that strategically and effectively supports the social change they are working toward.
Philanthropists must provide nonprofits the runway necessary to find the right financial model for their organizations. Capacity capital funding could do this, allowing nonprofits the space to analyze their current money-raising activities and create and execute on a plan for transforming those into a sustainable financial model. The end result would be nonprofits with a great solution to offer suddenly have the ability to grow the solution in a sustainable way.
If we are really serious about directing more money to more social change, we need to reinvent how money flows to nonprofits. Instead of relying on a broken fundraising model, we need to take a big step back and get strategic. With articulated theories of change, systems for effectively proving impact and the runway to create real financial models, nonprofits will be able to bring social change to sustainable fruition.
Photo Credit: Markets for Good
The nonprofit starvation cycle is one nonprofit leaders know only to well. Nonprofits rarely have the technology, staff, and systems to function effectively. So they scrape by trying to wring one more drop out of a completely dry rock.
But instead of waiting for funders to fix the situation, it is up to nonprofit leaders themselves to break free. And you break free by raising capacity capital. This month’s Social Velocity webinar, “Raising Capacity Capital,” can help you do just that.
Capacity capital is a one-time investment of significant money that can help build or strengthen a nonprofit so that it can create more social change. Capacity capital funds things like technology, systems, a program evaluation, revenue-generating staff, start-up costs for an earned income business. It is money that strengthens the organization so that it can do more.
But often nonprofit leaders don’t recognize that everything they need to raise capacity capital and break free from the starvation cycle is in right in front of them.
The “Raising Capacity Capital” webinar will show you how to:
- Talk about the importance of capacity capital to your donors and board
- Create a budget for the capacity dollars you need
- Develop a campaign goal
- Break the goal into donor ask amounts
- Identify prospective donors
- Give your board a role in the campaign
- Gain the confidence to start asking for the money you really need
This webinar is an encore presentation of one of our most popular webinars. Here’s what some past participants had to say:
“Thank you! this was helpful and wonderfully accessible. I am impressed.”
“Just a note to thank you for the informative webinar. I found it most constructive, as my organization is right at the stage of getting out of starvation mode. I look forward to participating in more sessions.”
On Demand Webinar
And keep in mind all Social Velocity Webinars are “on demand,” so even if you can’t make this date and time you can still register and watch the recorded webinar, receive the slides and get your questions answered anytime.
The registration fee will get you:
- A link to a recording of the webinar, which you can watch whenever you like
- The PowerPoint slides from the webinar
- The ability to ask additional follow-up questions after the webinar
If you are serious about moving your nonprofit out of the starvation cycle, capacity capital can help you get there.
Photo Credit: gfpeck
The other day I met with a nonprofit leader (let’s call her June) who has a great idea for an earned income venture that fits directly with her mission, but she doesn’t have the start-up capital to launch. When she explained this to me, she threw up her hands as if to say, “I’m powerless to move forward.”
But from my vantage point she has all the pieces necessary to raise the start-up capital and launch, she just isn’t putting them together. It’s a common refrain — nonprofit leaders complain about being in a catch-22 of not having enough money to raise enough money. But the answer is often right in front of you. To break free from the starvation cycle, assemble the assets you already have in order to raise capacity capital, which is the topic of today’s post in the ongoing Financing Not Fundraising blog series.
The nonprofit starvation cycle is one nonprofit leaders know only to well. Nonprofit organizations rarely have the technology, staff, and systems to function effectively. So they scrape by trying to wring one more drop out of a completely dry rock. But instead of waiting for funders to fix the situation, it is up to nonprofit leaders themselves to break free. And you break free by raising capacity capital.
Capacity capital is a one-time investment of significant money that can help build or strengthen a nonprofit organization so that it can create more social change. Capacity capital funds things like technology, systems, a program evaluation, revenue-generating staff, start-up costs for an earned income business. It is money that strengthens the organization so that it can do more.
But often nonprofit leaders, like June above, don’t recognize that everything they need to raise capacity capital and break free from the starvation cycle is in right in front of them. Here are the necessary pieces:
A Plan. You know what you need in order to do more, so put together a change plan and figure out what elements you need (technology, systems, staffing) and what they will cost. Do your homework so you can speak intelligently about what it will take to get you from point A to point B. June has a great business plan for her venture and knows exactly how much she needs in start-up costs.
Donors Who Love You. When raising capacity capital you want to go after donors who already love what you are doing and want to see more. You must convince them that a one-time investment of capacity capital will enable you to do even more of what they already love. June has a great network of long-time donors, which she could convince to become capacity capital donors.
A Connection Between Capital and More Impact. Make a convincing argument to those donors that capacity capital will create more of what they already love. For example, having a great Development Director in place can bring hundreds of thousands of new dollars each year which means many more people will be touched by your organization. Or explain how an evaluation of your program will allow you to focus your resources on highest impact activities. June could describe how a profitable earned income venture could increase financial sustainability while delivering more impact.
June has all of these pieces. She has a great plan for an earned income business that could significantly contribute to a more sustainable financial engine and thus allow her nonprofit to reach more people, a clear articulation of how much capital she needs and for what, and a committed group of donors who love the organization. For her, and for most nonprofits, it is simply a question of connecting the dots.
If you want to learn more about the power of capacity capital, download the Enormous Opportunity of Capacity Capital e-book, the Creating a Capacity Capital step-by-step guide or the Raising Capacity Capital webinar.
Photo Credit: PublicDomainPictures
I’m excited to announce that I will be participating in a Chronicle of Philanthropy Live Chat on Tuesday, March 26th at 12 noon Eastern. Karina Mangu-Ward, from EmcArts will be joining me to answer questions from the audience about connecting mission and money. You may remember Karina from a past interview I did with her. She’s really amazing and is the Director of Activating Innovation at EmcArts, a social enterprise for innovation and adaptive change across the arts sector. She leads the strategy and development of ArtsFwd.org, an interactive online platform where arts leaders can learn from each other about the power of adaptive change and the practice of innovation.
Karina and I will be live chatting and answering questions from the audience, so I hope you can join us. It promises to be a fast-paced, interactive hour.
Here’s an excerpt from the Chronicle of Philanthropy description:
In the mad dash for donor dollars, nonprofits often take money for projects that distract them from their missions. Some donors pitch new programs but provide too little money to pay for a big enough staff to run it, so the charity ends up skimping on efforts that its clients really need. Other nonprofits might think holding a fancy gala will raise tons of money but don’t consider how the time spent planning the event will affect the group’s critical services. Join us on Tuesday, March 26, at noon U.S. Eastern time for a live online discussion about how to take a more strategic approach to fundraising. You’ll learn how to focus your fundraising efforts on your organization’s mission—and why saying no to some opportunities might actually help your nonprofit raise more money.
If you’re interested in participating, it’s easy. Just go to the Chronicle Live Chat page here at 12 Eastern on Tuesday, March 26th. You don’t need to RSVP or login, just show up.
I hope to see you there!
Photo Credit: wikimedia
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