In today’s Social Velocity interview I’m very excited to be talking with the co-founders and editors of the new History of Philanthropy blog: Benjamin Soskis, Stanley Katz, and Maribel Morey.
The HistPhil blog launched this past June and focuses on how history can shed light on current philanthropic issues and practice.
Because how can we hope to create social change without understanding the results of efforts that came before us?
Ben, Stanley, and Maribel are all academics with specialities related to history and philanthropy. Stanley is on faculty at Princeton’s Woodrow Wilson School and has also taught at Harvard, Wisconsin and Chicago. Benjamin is a Fellow at the Center for Nonprofit Management, Philanthropy and Policy at George Mason University and a consultant for the history of philanthropy program of the Open Philanthropy Project. And Maribel is a professor of history at Clemson University and is currently writing a book, From Tuskegee to Myrdal, which describes how and why white Americans in big philanthropy transformed from proponents of segregated education to advocates of racial equality.
Nell: Stanley, you write, in your inaugural post for the HistPhil blog, about the tendency of philanthropy to get swept up in “new” approaches that actually aren’t all that new. Is there really anything new in philanthropy right now? Are there any structural or cultural developments or approaches in philanthropy that are significantly different than in the past?
Stanley: It is hard to separate rhetoric from reality in the current environment of philanthropic hype. From my perspective, the current boasting that all is new in philanthropy (see the recent New York Times “Giving” section), is pretty uninformed (naïve?).
One of the most common claims, repeated frequently in the New York Times piece, is that philanthropists are no longer simply trying to alleviate the “symptoms” of distress, but in fact are aiming to remove the underlying causes of social and physical problems. This attempts to distinguish what the large foundations are doing from what the traditional foundations did in the 20th century (and of course no one is making this claim more loudly than Judith Rodin of the “new” Rockefeller Foundation.)
But the emphasis on the elimination of problems by identifying their root causes was the innovative claim of the founders of the first American foundations, best articulated by Andrew Carnegie and John D. Rockefeller, Sr. So from this point of view there is not much new in the current aims of big philanthropy.
But what is actually new, and there is a lot that is new, is the determined focus on short-term, measurable, results — this is the mantra of the genuinely new “strategic” philanthropy. The older foundations of course aimed to be effective, but they defined effectiveness much more loosely and measured it less precisely than current large foundations. This is an enormousdly important attribute of the current mega-foundations, and all the other foundations that have jumped on the “strategic philanthropy” bandwagon.
The current foundation rhetoric also makes use of a wide range of business metaphors, none more important than the notion that philanthropy is best thought of as “investment” in change, and frequently characterized, using the language of hedge funds, as “bets” on successfully producing change. Much of the current language of philanthropy is drawn from venture capital activity, and the new philanthropy can also be thought of as “venture” philanthropy. This is a new attitude.
The original philanthropists knew they were adapting the then modern techniques of business organization and management to their grantmaking, but they thought of philanthropy as different from business. That distinction seems to have eluded much of the current generation of philanthropists.
But I need to say that I am a little uncomfortable with these large generalizations, since not all current philanthropists speak or act as I have just suggested — nor did the earliest generation of philanthropists. But there is something new in the philanthropic air. The question is whether that air is as salubrious as its current advocates claim.
Nell: Stanley, philanthropy got its modern day start in the missionary work of Europeans and Americans in third world countries. What, if any, parallels do you see in philanthropic work in developing parts of the world today?
Stanley: Here the important fact is that the Rockefellers (John D. Sr. and Jr.) originally intended the Rockefeller Foundation to be a missionary foundation, operating mostly (possibly entirely) in China. For a variety of reasons, in particular the influence of their advisor Frederick T. Gates (a minister who had turned in a secular direction), they abandoned the missionary focus in favor of a secular focus. Their work in China, and especially the founding and support of the Peking Union Medical School, continued to have a missionary flavor, but their work in Africa and other tropical areas was more early medical philanthropy than missionary philanthropy. They turned to the eradication of tropical diseases both because they were attractive to current medical research capacity, and because it was politically safe to engage in medical experimentation abroad — a lesson that Big Pharma learned from them later in the century.
But the emphasis of the large foundations, beginning in the 1960s, with grant-making in the underdeveloped world, was quite different, and unrelated to any neo-missionary instinct. Many of the large American foundations at mid-century thought they could assist the process of decolonization and local self-determination by supporting a wide range of development activities in what was then called the Third World. They later came to be attacked by neo-Marxists for allegedly supporting US and Western imperialism in the developing world, but that is a big subject all in itself.
Ironically, there is now a burgeoning effort by American evangelical business people to invest in private development projects, especially in East Africa, and this is a throw-back of sorts to much earlier notions of philanthropic support of development. But it needs to be contrasted with the massive Gates Foundation public health efforts in Africa and elsewhere — an effort purely “strategic” in its inspiration.
Nell: Ben, historically, philanthropic giving has not grown above 2% of US GDP, why do you think that is and do you think there is any hope of changing that?
Ben: The answer to the 2% conundrum is the holy grail of the nonprofit sector, and I don’t pretend to have any certain answer about it myself. It’s worth noting, though, that 2% of GDP is still pretty good relative to other developed countries (in fact, by many measures, it’s one of the best rates). But it’s still confounding why it hasn’t budged for more than four decades. There’s obviously a tangle of causal factors at play, and I’ll just offer a few possibilities that have occurred to me in the course of my research, without making any claims that this is an exhaustive list.
Given the persistence of that rate, it makes sense to look for some equally persistent characteristic of the American nonprofit sector that has also remained unchanged over that long timespan. A recent article in the Chronicle of Philanthropy can give us a clue to a possible candidate. As part of their Philanthropy 400 ranking of the nation’s largest nonprofits, they note how little the list has changed from when it was first tallied in 1991 (especially when compared with the churning of the list of the largest for-profit companies). In part by dint of habit, and in part because of the power of the institution’s “brands,” Americans have tended to stick with a handful of large charities—through scandals, evolving social needs and changing fads.
As I pointed out to the Chronicle reporter (though my observations got a bit lost in translation; Josephine Shaw Lowell, a founder of the American charity organization movement, wouldn’t have suggested that bigger is better, only that a degree of centralization in charity administration was necessary), we can trace this development back to the turn of the last century, when charity reformers instituted a process of centralized, bureaucratized and professionalized giving. That is, from the late 19th century-scientific charity movement onward, individuals were warned that their disparate giving was too often haphazard, scattered, wasteful, and overlapping, and so were encouraged to hand over the administration of charitable resources to a centralized institution. The community chests and the United Way came out of this impulse; Catholic Charities succumbed to it as well.
It’s very possible that the development toward more centralization and professional administration has bolstered American giving by providing citizens with more confidence and by making decisions about where to give easier. But I think we also have to wonder whether it imposed a sort of cap as well, since it might have removed some of the immediacy, intimacy and individuality from the charitable exchange that could push individuals to give beyond an initial comfort point (which very well might be around 2%).
The Chronicle suggests that we might see more disruption in the list in the coming years, or at least that some of the big names, like the United Way, might be ceding ground. If that is the case, and if some of the space they occupied is filled with smaller upstarts, it’s possible we might see some movement beyond 2%.
Another possible factor worth considering for the persistence of the 2% rate is the declining role of religion in determining charitable allocations. I don’t only mean that the percentage of total giving going to religious institutions has been steadily declining over the last few decades. But also that giving itself has, for many Americans, become an increasingly secular activity.
Again, we can trace this back to the early 20th century, when charity reformers sought to “secularize” giving by stripping it of any sectarian taint and endowing it with a degree of rationality; the indiscriminate giver in their rhetoric was often an easily-duped priest. But it is also possible that the religious impulse to give is more easily able to push past the equilibrium of 2% and to ask individuals to make even deeper financial commitments.
Yet another factor preventing giving from crossing that 2% barrier might be media coverage of nonprofits. As I quipped in an article on the subject in the Chronicle last March, borrowing from Woody Allen, the coverage is generally pretty weak—and the portions are too small. That is, the media grants the sector relatively little attention, and when it does, it seems to suffer from what New York Times reporter David Clay Johnson has called a “Madonna-whore” complex: alternating between feel-good human interest stories and stories focused on nonprofit abuse. But stories that chronicle the difficult and important work many nonprofits are doing on a daily basis—they just don’t have the journalistic juice to make it into print. As the former nonprofit beat reporter for The New York Times, Stephanie Strom, told me, “A nonprofit just doing good isn’t news because everyone knows nonprofits are supposed to do good.” This might be changing, with a number of important online journalistic ventures out there, but I think there is a deep deficit in public knowledge about what nonprofits are doing—and this deficit could sap the public’s willingness to give more.
You also have to combine this media deficiency with the general conceptual muddle that has emerged with the blurring of private and public lines of funding social welfare provision in the last half century. Not only do American givers and tax-payers have to contend with a federated system (to say nothing of international structures of governance), in which various jurisdictions take up differing responsibilities for addressing social ills and needs. But we also inhabit what political scientist Jacob Hacker has termed a “divided welfare state,” in which public and private lines of responsibility for social welfare are increasingly blurred. Obviously, there’s opportunity in this blurring. But as scholars such as Lester Salamon have pointed out, it also can represent a sort of existential threat to the nonprofit sector’s distinctive identity and mission, which in turn might be restricting American’s willingness to dig in and give more.
Finally, it’s worth pointing out another powerful strain in the American charitable tradition—the devaluation of monetary gifts themselves in favor of the “helping hand.” At the turn of the last century, even while scientific charity reformers were attempting to rationalize giving, they were also trying to preserve traditions of neighborly assistance. The fact that such assistance could not be easily quantified and rationally appraised was regarded as a mark of its worth. And in many senses, it was considered a higher form of giving than monetary contributions. That idea is still with us today; and it’s possible that by focusing too much on the 2% rate, we miss other forms of voluntarism that have had more variability and elasticity over the years.
Nell: Maribel, during the Gilded Age great wealth concentrated among a few brought large philanthropy (Carnegie, Rockefeller, etc.) but also contributed to a subsequent progressive period (as the pendulum swung back against that excessive wealth). Do you see parallels between the Gilded Age and today, and do you think we are heading for a more progressive period? And what role do you think philanthropy will or won’t play in that?
Maribel: Indeed, many late nineteenth- and early-twentieth century Americans looked at Andrew Carnegie’s and John D. Rockefeller’s wealth (and even their philanthropy) with some suspicion.
Reflecting these Americans’ anxieties, for example, the United States Congressional Commission on Industrial Relations called John D. Rockefeller Sr. and his son in 1915 to defend the independence of the Rockefeller Foundation. As many scholars have noted, the Rockefellers had established a division of economic research in 1914 within the one-year-old foundation; and a few months later, the Ludlow massacre occurred at the Rockefeller’s Colorado Fuel Iron Company where women and children died when the state militia assaulted the strikers’ tent camp.
In response, the organization decided to organize a study on industrial relations under this new division and selected a close working friend of John D. Rockefeller Jr. (William Lyon Mackenzie King) to direct it. From the perspective of the American public, it was hardly easy to trust that gilded age tycoons who had undermined the rights of workers in the process of accumulating their wealth would have the interests of the people in mind when they funded social scientific projects to study the American populace. From this perspective, the Rockefeller Foundation was the playpen of industrialists who had defined interests in society and their policy-oriented social scientific research would be—far from disinterested—an extension of those interests.
And far from ignorant of Americans’ suspicions about gilded age levels of wealth, Andrew Carnegie himself discussed it head-on in The Gospel of Wealth (1889). Aware that Americans might find socialism an attractive alternative to capitalism, for example, he pitched philanthropy as the better form of wealth redistribution.
Today as then, Americans are confronting and discussing the great influence of leading philanthropists in public policymaking and of wealth inequality more broadly. However, I am not convinced that we are necessarily heading for a more progressive period.
I say this because I don’t see contemporary Americans reflecting the same level of angst about elite philanthropy nor with the broader topic of wealth concentration. Congress isn’t questioning leading philanthropists as it did with the Rockefellers in the early twentieth century nor do leading philanthropists seem threatened by Americans’ potential voting patterns, as Carnegie had been.
One key explanation might be that these earlier Americans entertained a vastly different meaning of American democracy than their successors today. For them, American democracy promised economic opportunity (or rather, freedom from class divisions) and an equal voice over public concerns. Today, it seems that the general American public and their representatives in Congress aren’t as convinced of this definition of American democracy. With a narrower understanding of American democracy, it might simply be more difficult for contemporaries to see how wealth inequality and elite philanthropy in public policymaking are democratic threats.
Philanthropies committed to resurrecting a more progressive period might just need to focus on ways to revive this earlier (dare I say, more robust) definition of American democracy and help empower Americans to fight for it.
Photo Credit: HistPhil
In September there was some surprising good news about climate change. Yes, you read that right. We are perhaps, slowly, starting to address that problem (mind blowing, huh?). And in other news, there was a call for funders to help nonprofits become better fundraisers and some tools to help nonprofits use data in that pursuit.
Add to that concern about what digitial technology is doing to our humanness and critiques of Teach for America, proposed changes to philanthropy policy and an emerging “network” entrepreneur, and it was a very interesting month.
And if you want to see past 10 Great Reads lists go here.
- If the world of social change is getting you down, if the challenges we face seem insurmountable, look no further than the New York Magazine where Jonathan Chait sees hope in the battle against climate change. As he puts it: “The willpower and innovation that have begun to work in tandem can continue to churn. Eventually the world will wean itself almost completely off carbon-based energy. There is, suddenly, hope.” Wow.
- Writing on the Blue Avocado blog, Aaron Dorfman from The National Committee for Responsive Philanthropy takes foundations to task for wanting their grantees to be financially sustainable, but not helping them build that capacity, “Why don’t more foundations invest in helping their organizing grantees develop independent funding streams? Here – as with many issues grantees face – even a little targeted capacity-building support would go a long way.” Yes, yes, a thousand times yes!
- One of the ways nonprofits can build fundraising capacity is by learning to use their data more effectively to raise money. To help in that effort, The Chronicle of Philanthropy put together a helpful toolkit of articles and case studies.
- And speaking of fundraising, the ALS Foundation continues to amaze me. In September, they released a nice infographic to the many donors of the 2014 Ice Bucket challenge reporting where their $115 million in donations went. Great donor stewardship and transparency!
- There seems to be a growing concern about what technology is doing to our humanness. Callie Oettinger writes “While social media has made sharing easier, allowing us to connect with the rest of the world, I often think about what would happen if people stopped trying to connect with the rest of the world and instead spent their time 1) creating value and 2) sharing value, rather than…creating crap and sharing crap.” And MIT professor Sherry Turkle released a new book, Reclaiming Conversation that argues we must “acknowledge the unintended consequences of the technologies to which we are vulnerable [and] make corrections and remember who we are — creatures of history, of deep psychology, of complex relationships, of conversations, artless, risky and face to face.”
- A new series launched at The Washington Post about the newest buzz phrase in the world of philanthropy, “effective altruism.” This is the idea that you should “optimize your donations to ensure that they are as “high-impact” as possible.” It is a fascinating and controversial idea.
- To counter the hype about “social entrepreneurs,” Jane Wei-Skillern (who wrote one of my favorite articles ever about networked nonprofits), David Ehrlichman, and David Sawyer introduced a new concept they call “network entrepreneurs.” As they put it, “Where social entrepreneurs often struggle to scale their own organizations despite heroic efforts, a network entrepreneur’s approach expands far beyond the boundaries of their own organization, supporting peers and partners across sectors to solve the problem. Not surprisingly, the potential for impact increases exponentially when leaders leverage resources of all types—leadership, money, talent—across organizations and sectors toward a common goal. And as a result of this work, we celebrate the change-generating network itself above any single person or institution.”
- I know I keep talking about how much I love the new History of Philanthropy blog, but this month was a perfect example of the tremendous value they bring the social change sector when Jeffrey Snyder explained how old and new philanthropy to support K-12 education differ. Fascinating. And it’s particularly interesting in light of Dale Russakoff’s new book that describes how Facebook founder Mark Zuckerberg’s $100 million donation to Newark public schools in 2010 hasn’t accomplished a whole lot.
- And that wasn’t the only educational reform effort that came under fire in September. Samantha Allen of the Daily Beast chronicled a growing chorus of critiques of Teach for America.
- Philanthropic visionary Lucy Bernholz released a list of proposed changes to philanthropy policy that will keep up with changing times. As she put it: “It’s time to recognize that the tax code is no longer the fundamental policy frame shaping philanthropy and nonprofits…it should be obvious that tax privilege is only one factor that Americans consider when thinking about using their private resources for public benefit…The tax code was the 20th century policy infrastructure for philanthropy. Digital regulations will provide the scaffolding and shape for 21st century associations and expression — aka, civil society.”
Photo Credit: Evan Bench
I was speaking to a group of nonprofit leaders recently about how to Move from Fundraising to Financing, and when I came to the part about events, the room went predictably quiet. Looks of shock shot around the room. Events are so ubiquitous in the nonprofit sector, how could I possibly say they have little financial value? It was heresy.
For the most part, when you factor in the direct (food, venue, invites, entertainment) and indirect (staff, board and volunteer time) costs of an event, you either break even (best case) or lose money (worst case). The error many nonprofit leaders (board and staff alike) make is looking only at the gross revenue of an event (“We made $50,000!”) as opposed to the net revenue (“After factoring in expenses, we actually only made $20,000 on that event…”) and the cost to raise a dollar (“Whoa, it cost us $1.50 to raise $1.00 at that event!”).
Because it was a group of nonprofit leaders, they remained polite despite their disbelief (God love them!). But they did argue with me, and here is how I responded to each of their refutations:
“Board and staff time aren’t event expenses.”
The argument is that since staff salaries are a fixed expense and board (and other volunteer) time costs nothing, you shouldn’t include these items as event expenses. But you absolutely should. Every resource a nonprofit has (especially board and staff time) is limited. When you ask a board member to spend 20 hours volunteering to put on and attend an event, that is 20 hours of their time you can’t use in other (more profitable) ways. This is the idea of opportunity costs. As a nonprofit leader you want to make sure you are putting each resource to its highest and best use.
“Even if an event isn’t financially profitable, it raises awareness.”
I know I’m on a “raising awareness” rampage lately, but an expensive and time consuming activity like an event should never have such a vague goal guiding it. Awareness is not a real, tangible financial result. Awareness does not equal action, and it certainly doesn’t equal money. An event attendee’s vague sense of having had a good time quickly dissipates. Instead of trying to raise awareness, create a real strategy for getting in front of and encouraging action from your target funders.
“But our event builds our brand.”
Building your brand is about as meaningless as raising awareness. Forget the marketing jargon, the word “brand” is just a fancy word for what people think of your organization. I know this is blasphemy, but it simply doesn’t matter what people who are not in your target audience(s) think about your organization. In reality you only want to “build your brand” among those you are specifically targeting. So segment the market, figure out your target audiences, and then find cheaper, more specific ways to get them to act.
“We use events to connect with major donors”
Yes, now you are on to something. Let me be clear, I’m not saying that you should never host events. To the contrary, there absolutely are times when events make sense. When events are mission-focused, free to attend, and focused on cultivating and/or stewarding current or potential major donors (individuals, foundations, corporate leaders) they can make a lot of sense. But ONLY if you follow up with attendees on a one-on-one basis to further invest them in the organization and eventually ask them to contribute or renew their contributions. And ONLY if you don’t charge them to attend so that you can ask them for a bigger, and more meaningful gift down the road.
I stand by my claim: nonprofit events are not efficient fundraisers. Do the math on your events and see if they generate a positive cost to raise a dollar. If not, you should restructure or abandon them. But don’t continue doing something you hope is making money when it isn’t.
Photo Credit: Graham-Killers
In the nonprofit world there is often a disconnect between funders of nonprofits and their understanding of the fundraising activity necessary to secure their gifts. Funders (and board members) rarely understand how critical fundraising is, how it works, and what’s required to do it well.
But in the hope that greater understanding leads to better actions, I’d like to offer 7 of the most important things funders (and really the sector as a whole) should understand about fundraising:
- Nonprofits Must Fundraise or Perish
It seems so obvious, but so many in the nonprofit sector act as if fundraising can be ignored or shuffled to the side. Board members hate to do it, and foundations refuse to fund it. But let’s be clear. Without a strategic, sophisticated mechanism for bringing regular revenue in the door there is no organization and certainly no social change. Fundraising must happen, and it must happen effectively in order for a nonprofit to survive and thrive. So funders (and board members) do not have the luxury of saying they don’t want to talk about, think about, or fund fundraising efforts.
- There is a Sector-wide Lack of Fundraising Knowledge
Because fundraising has for so long been ignored or sidelined, most nonprofit leaders and their board members don’t have sufficient fundraising experience or training. And neither do funders. There hasn’t been enough research into the fundraising discipline broadly and little investment in educating nonprofit leaders about how to do it well. The end result is that few people know how to crack the fundraising nut.
- Every Nonprofit Has Two Customers
Part of the solution to cracking that nut is understanding that unlike for-profit entities, nonprofits have two (not just one) set of customers. Nonprofits provide products and/or services to the first customer (“Clients”), but “sell” those services to the second customer (“Funders”). Therefore “sales” in the nonprofit world is much more complex than it is in the for-profit world. Yet for-profit businesses can spend much more money on their sales and marketing staff, training, systems and materials than a nonprofit is allowed to spend on fundraising.
- It Takes Money to Make Money
So in order to do fundraising well nonprofits must invest in their fundraising function (planning, staff, training, systems, materials). Those nonprofits that develop a strategic financial model that is fully integrated with their mission and core competencies will be more sustainable and more effective at creating social change. So nonprofit leaders must start asking for the money necessary to build effective financial models.
- Sustainability is a Funder’s Problem Too
And funders must start providing it. Funders often want a nonprofit to demonstrate financial sustainability, but those same funders won’t invest in the capacity necessary to create that sustainability. Instead of just pointing out the sustainability problem, funders must become part of the solution. Funders should step up to the plate to help nonprofits create a capacity building plan and then provide capacity capital (along with other fellow funders) to build a more sustainable organization that will survive once a funder is gone.
- Earned Income is Not a Solution
But a more sustainable organization does not mean one based on earned income, or selling a product or service. Nonprofits will always be subsidized, at least in part, by private and/or public contributions. By definition, nonprofits exist to address a failing in the market economy (i.e. not enough food or jobs). Thus, those failings will never be overcome purely by market forces. So while earned income is something every nonprofit should explore, it is not right for every organization and will never become 100% of a nonprofit’s revenue model. So don’t confuse sustainability, which means a longterm financial model, with earned income.
- Nonprofit Leaders Fear Funders
Let’s just be honest. A funder is providing much needed resources to a nonprofit and that automatically creates a power imbalance. Until we figure out a way around that inherent dynamic, funders must limit the hurdles they put in the way of nonprofit leaders and instead give them the financial runway to make their social change vision happen.
Let’s face it, without money there is no social change. But the knowledge, experience and infrastructure necessary to generate enough money is woefully short in the nonprofit sector. That could change if funders lead the way toward more investment in strategic, sustainable financial models.
Photo Credit: 401K Calculator
There are many misconceptions about fundraising. One of which is that there is a magic bullet out there (the perfect event, a connection to a celebrity) that will create a financial windfall. Often in the nonprofit world board and staff members so despise fundraising that they desperately search for a shiny object to make it all go away.
But the reality is that fundraising is an ongoing affair. Financial sustainability comes from a strategic financial model, a piece of which often includes loyal, committed donors who passionately believe in your work. And you create that by finding donors who share your view of a social problem and then creating a compelling fundraising ask to convince them to invest.
A Message of Impact does this by describing how your nonprofit creates social value and why a donor should partner with you in creating that value.
Adding to the growing library of Social Velocity Slideshare presentations, below is the How to Create a Compelling Fundraising Ask slideshare, which describes the process for developing your nonprofit’s Message of Impact.
Instead of spending board and staff time trying to dream up the next ice bucket challenge, find a connection to the biggest celebrity, or invent the next must-attend gala, use that effort to create a Message of Impact that will create a cadre of donors who will support you over the long haul.
Take a look.
In today’s Social Velocity blog interview, I’m talking with Ann Goggins Gregory, Chief Operating Officer at Habitat for Humanity Greater San Francisco where she oversees programs, the social enterprise called the ReStore, HR and Operations.
Previously, Ann was a Senior Director at the Bridgespan Group, where she led the organization’s work on organizational learning; managed consulting engagements with human services, education, and youth-serving nonprofits; and spearheaded research efforts on a variety of nonprofit management topics. She remains a Senior Advisor to Bridgespan on issues related to the starvation cycle.
You can read other interviews in the Social Velocity Interview Series here.
Nell: You and your colleague Don Howard are in some ways the catalysts behind the Overhead Myth campaign because of your seminal article, The Nonprofit Starvation Cycle in the Stanford Social Innovation Review back in 2009. How far have we come since that article? How prevalent is the starvation cycle today and what can we do to move beyond it?
Ann: “The Nonprofit Starvation Cycle” names what I consider to be a fundamental truth: “Organizations that build robust infrastructure…are more likely to succeed than those that do not. This is not news, and nonprofits are no exception to the rule.” For decades, researchers and practitioners have argued that low overhead does not equate with efficiency and efficiency, in turn, does not equate with effectiveness.
We are seeing (productive) focus and movement now versus five or ten years ago, yet that starvation cycle is still an entrenched issue. On a positive note, the Overhead Myth campaign has been critical in communicating with donors directly and empowering nonprofits to communicate with “back up.” Though I have mixed feelings about some of the messages in Dan Pallotta’s video, it elevated paradoxes of how costs are treated in the social sector. We’ve also seen targeted efforts to help funders and nonprofits address cost-related issues together. Even the federal government is trying to shift practice: the Office of Management and Budget issued guidance requiring that nonprofits receiving federal funding receive a minimum of 10% indirect rate, or they can negotiate a rate. If this guidance is followed, it will be a major policy win.
Yet we have a long way to go. Talking about terminology isn’t scintillating, but it’s critical to breaking the starvation cycle. Overhead costs aren’t the same as indirect, yet we conflate them. General operating support and capacity building—often seen as ways to help break the cycle—aren’t the same thing. Many nonprofits do not know the full costs associated with their programs, and many funders don’t understand nonprofit finance. Bridging the skill gap on both sides of the equation is critical.
Moreover, a single figure like the overhead rate is appealing because it makes comparison easy. Until nonprofits have better ways to communicate outcomes, we will continue to battle against the simplicity of a ratio. Finally, power dynamics between funders and nonprofits inhibit change; candidly, there aren’t strong forces pushing on philanthropy and government to change their practice. In the absence of such change, nonprofits are understandably worried about shifting their stance on overhead if their competitors do not (I do think there are steps that any nonprofit can take, though).
Nell: Part of what keeps the starvation cycle alive is that it is being fed, as you so clearly point out in your SSIR article, by both funders and nonprofit leaders. One of the things you were working on at Bridgespan was the Real Talk About Real Costs series of nonprofit leader and funder conversations. How effective was it to bring nonprofits and funders together to talk about these issues? And is that potential solution to the starvation cycle scalable?
Ann: Real Talk about Real Costs, sponsored by the Donors Forum with Bridgespan as a partner, brought together 300 leaders from nonprofits and philanthropy to wrestle with what good outcomes really cost. The event built upon a nine-month Community of Practice focused on “tackling the overhead challenge.” This interview has more about how Donors Forum decided to put the cost issue front and center. Another such effort is slated to begin in California in 2015.
In watching funder-nonprofit “mixed company” interactions, I was struck by how many funders expressed dissatisfaction with the grant-making status quo, yet frustrated that foundation trustees did not feel the same way. And I noticed how uncomfortable both funders and nonprofits were about having a tough conversation about full costs. At the event, we gave participants a role-reversal case study where a fictitious grantee and grant-maker had to discuss the terms of a grant; nonprofit attendees acted the part of the program officer and vice versa. In feedback surveys, the majority of comments focused on the discomfort and lack of knowledge they felt in talking about costs. Finding more ways for nonprofits and funders to wrestle with cost issues together would go a long way to building empathy and skills.
I don’t see a single scalable solution, but what feels most scalable as a starting point is a fundamentally different approach to communicating about costs: on websites, in collateral, and in conversations between nonprofit and funder. I believe that most funders can still make restricted grants without making unrealistic demands about how the funds are spent. For instance, what if funders asked “what type of capacity will you need to deliver on this grant?” vs. “what is the overhead for this project?” What if funders moved away from prescribed budget templates that don’t align with how nonprofits think about their resources? Even these seemingly small steps would go a long way to empowering nonprofits to communicate differently. Below I share a few specific ways I think nonprofits can help break the cycle.
Nell: The starvation cycle is just one example of the many ways we hold the nonprofit sector to a higher standard than we do the for-profit sector (costs for R&D, marketing, infrastructure, technology are taken as a given in the business world). Why does that discrepancy exist and how do we overcome it?
Ann: Overhead in the for-profit world—sales, general and administrative costs as a percentage of total sales—is 25% across all industries and 34% for service industries. The cruel irony of holding nonprofits to a much tougher standard is that donors often say that they do this because nonprofits ought to “run more efficiently, like a business.” Most people don’t know the overhead of businesses because profitability matters more.
Unlike businesses, nonprofits can’t report results in a single figure that makes apples-to-apples comparisons easy. One way to overcome this challenge is to move toward highlighting outcomes. I don’t mean standardizing outcomes (although efforts like Perform Well are very powerful), and I don’t mean doing away with financial indicators entirely. I mean moving from touting our overhead to sharing our program results. In an ideal world, nonprofits would be able to share not only their outcomes but also the costs associated with producing them.
I know this doesn’t happen overnight. Starting immediately, I would love to see more funders speak out in support of—and actually fund—these investments. And nonprofits have a role to play in shifting the conversation: by sharing for-profit overhead as a way to challenge assumptions; by taking down the overhead pie chart and other “we’re lean!” messaging from websites; and using systems like the Guidestar Exchange to share our goals and strategies in our own words.
Nell: You recently left the consulting/thought leader side of the sector (as a senior director at The Bridgespan Group) to work in the nonprofit trenches as COO of Habitat for Humanity Greater San Francisco. What are you learning as you work to turn theory about overcoming the starvation cycle into action inside a nonprofit organization?
Ann: I am learning that it is doable and reminded that it is hard. In the last few months, we have taken down the efficiency statement on our website (“87 cents of every dollar goes to helping families…”) and will soon to replace it with statements of outcomes we see for Habitat homeowners. We walked away from a $100K+ funding opportunity because the grant would have allowed a maximum of 10% for indirect costs, and we estimated that the compliance costs alone would have been 2-3 times that. The grant’s focus aligned well with a nascent program, so it was a tough decision.
Under our finance team’s leadership, we also implemented a time tracking system. We now have better information on how people spend their time and can compare actual versus what was allocated in the budget. We learned, for instance, that in the last quarter we spent more time on G&A than we’d projected. This makes sense: this summer a small team of board and staff, including myself, negotiated a lease for a new office space, then transitioned to managing the move out- and move-in process. I don’t think anyone would say that was a waste of time; finding a space that met our budget in the San Francisco real estate market has been a challenging but important task.
Next on the list is an internal conversation about Charity Navigator and the way we promote our four-star rating on our website. It will be a healthy debate. On the one hand, I appreciate the focus on accountability and transparency, and I’d be naïve if I thought we hadn’t received donations from donors who use these ratings. On the other hand, I have deep reservations about Charity Navigator’s financial health methodology, particularly in that it penalizes nonprofits with higher overhead regardless of context. If we invest to support our growth—spending time finding a new office in a tough market, or upgrading our HR systems to find and retrain the best staff—we ought not to feel embarrassed about that, nor be penalized for it.
I am fortunate to work with a board and staff who are open to these changes and debates. My hope is that our experiences can serve to keep my perspective about the starvation cycle grounded and productive.
Photo Credit: Habitat for Humanity Greater San Francisco
In today’s Social Velocity blog interview, I’m talking with Jacob Harold, CEO of GuideStar, the clearinghouse of information on nonprofits. Jacob came to GuideStar from the Hewlett Foundation, where he led grantmaking for the Philanthropy Program. Between 2006 and 2012, he oversaw $30 million in grants that, together, aimed to build a 21st-century infrastructure for smart giving. Jacob was just named to the 2014 NonProfit Times’ Power and Influence Top 50.
You can read other interviews in the Social Velocity Interview Series here.
Nell: It has been over a year since the Letter to the Donors of America about the overhead myth. Where are we today in getting donors (and board members) to understand that overhead is a destructive mindset?
Jacob: I’m glad to report that the response to the first overhead myth letter far exceeded our expectations. Hundreds of articles have been written about the letter. It comes up almost every time I hold a meeting or give a talk. For at least a few people, I think it’s been a deep affirmation of something they’ve known a long time. And, indeed, many others in the field have been working on this: the Donors Forum, Bridgespan, the National Council on Nonprofits, and others.
But we also know that we have a long road ahead of us. The overhead myth is deeply ingrained in the culture and systems of the nonprofit sector. It will take years of concerted effort for us to fully move past such a narrow view of nonprofit performance to something that reflects the complexity of the world around us. But it’s essential if we want to ensure we have a nonprofit sector capable of tackling the great challenges of our time.
Nell: The Letter to the Donors of America was obviously focused on the donor side of the problem, but how do we also change the mindset of those nonprofit leaders who perpetuate the Overhead Myth in their reporting, conversations with donors and board members, etc.?
Jacob: This is a critical aspect of the challenge. Every year nonprofits send out something like one billion pieces of direct mail to donors that prominently display their organization’s overhead ratio. It’s no wonder that donors think that’s a proxy for performance—we’ve trained donors to think so!
That’s why the CEOs of Charity Navigator and BBB Wise Giving Alliance and I are currently working on a second overhead myth letter—this one to the nonprofits of America. We’re still finalizing the text, but in it we will be calling on nonprofits to be more proactive about communicating the story of their programmatic work, their governance structures, and the real costs of achieving results. And, more, we want to recruit nonprofits to help us retrain donors to pay attention to what matters: results. In the end, that means that nonprofits have to cut the pie charts showing overhead versus program—and instead step up to the much more important challenge of communicating how you track progress against your mission.
Nell: At the Social Impact Exchange Conference you announced some pretty exciting plans with the GuideStar Exchange to, in essence, create a marketplace of information about nonprofits so that the best nonprofits receive more resources. Talk a little about your plans for the Exchange, and most importantly, how you plan to bring nonprofits and donors there.
Jacob: The GuideStar Exchange is our mechanism for collecting data directly from nonprofits. By going straight to nonprofits we can build on the data we already have from the IRS Form 990. The 990 is a regulatory document, it’s not meant to offer a comprehensive view of nonprofits and their programs—that’s what we’re trying to do with the Exchange. And it also lets us get information much more quickly!
So far we’ve had great success. More than 100,000 nonprofits have shared data with us through the GuideStar Exchange and more than 38,000 have reached one of what we call our participation levels—Bronze, Silver, or Gold. But we have a long way to go if we want to approach a comprehensive view of the marketplace. So we’re adding new incentives for nonprofits to share data through the Exchange, building new ways to distribute that data through other channels and improving the user interface to make the process easier. Right now we’re collecting quantitative financial data and qualitative programmatic data but later this year we’re going to release a tool for collecting quantitative programmatic data, too.
This comes back to the overhead myth campaign. If we’re going to ask donors to go beyond the overhead ratio when considering nonprofits, we have to offer an alternative. GuideStar Exchange is a critical part of that alternative: a chance for nonprofits to tell their story in a structured way that forces them to articulate in clear terms what they’re trying to accomplish, how they’ll get there, and how they’ll measure progress along the way.
Nell: The Money for Good reports that came out a couple of years ago rather discouragingly found that the majority of donors don’t give based on nonprofit results. With the GuideStar Exchange you obviously think that is changeable, so how do we go about changing donor interest and behavior?
Jacob: Well, I had a different read of that data. It is absolutely true that the Money for Good research showed that most donors don’t give based on nonprofit results. But it also showed that a significant portion—about 15%, depending on how you cut the data—do. That may not seem like much, but that represents 30 million people responsible for close to $40 billion in annual giving. So there’s already a huge unserved market, even if it represents a small portion of the entire system of philanthropy.
And at GuideStar we see this every day. We have 7 million unique users a year. And that’s just on our website, our data was used another 22 million times on other platforms last year through just one of our distribution mechanisms. So people want data. And as we get more and more programmatic data—data that is oriented towards results against mission—I’m absolutely confident that we’re going to unlock new behaviors among donors, nonprofit executives, journalists, and others. The nonprofit sector is about to enter a new phase, and I think it’s going to be remarkable.
Photo Credit: GuideStar
Ever since last year’s release of the Letter to the Donors of America it seems there is an increasing drumbeat against the “Overhead Myth,” the idea that nonprofits must keep their overhead and administrative costs as low as possible. The fact that we are now openly talking about overhead as a myth is very encouraging.
But I think it will take a good deal of time before donors actually embrace the idea that nonprofits should stop starving their organizations of the resources they need to create and execute effective programs.
To move donors along, nonprofit leaders must lead this conversation with their own donors. Those nonprofit leaders who need more money to build a stronger, more effective and sustainable organization behind their work should educate themselves, their board members, and their donors about capacity capital.
“Capacity capital” is a one-time infusion of significant money that can be used to strengthen or grow a nonprofit organization. Capacity capital is NOT the day-to-day operating money nonprofits are used to raising and employing. Rather, capacity capital is money to build a stronger, more sustainable organization.
A nonprofit could use capacity capital in many ways, for example to:
- Plan and execute a program evaluation
- Plan and launch an earned income stream
- Create a strategic financing plan
- Hire a seasoned Development Director, or other revenue-generating staff
- Purchase a new donor database
- Improve program service delivery
- Upgrade website, email marketing, and/or social media efforts
- Launch a major gifts campaign
But raising capacity capital is not like traditional fundraising. It involves determining how much capacity capital you need, creating a compelling pitch, deciding which prospective funders to approach, and educating those prospects about the power of capacity capital. In so doing, you are not only raising the money you so desperately need, but you are also leading your part of the nonprofit sector away from the overhead myth.
The Launch a Capacity Capital Campaign Guide can show you how to raise capacity capital for your nonprofit.
Here is an excerpt from the guide…
Section 1: Create a Capacity Building Plan
You cannot raise money without a plan for how you will spend it. Funders need to be convinced that you did your homework and have a clear, actionable, measurable plan for how you will invest capacity capital dollars to result in a stronger organization that can deliver more impact.
To get there, start by answering these questions:
- What is holding our nonprofit back from doing more and being more effective?
- What could we purchase to overcome these hurdle(s)?
- If we were able to purchase these items how would we use them and over what time frame?
- What can we reasonably expect to be the changes in our effectiveness and/or impact because of these things we purchased and implemented?
With your answers to these questions, put together a plan.
Start by creating 1-3 goals around the hurdles you identified in #1 above. For example, you may have identified in #1 that you don’t have adequate staff to raise enough money to achieve your mission.
So your capacity plan goals might be:
- Create an overall money strategy to raise $450,000 per year.
- Hire a Development Director to implement the plan.
- Secure the technology and materials necessary to raise this money (database, website, etc.)
Or, if you are a much smaller nonprofit, your goals might be more modest:
- Create an overall money strategy to raise $100,000 per year.
- Train the board on their role in fundraising.
- Upgrade our website to attract online donations.
Once you’ve developed your goals, make a laundry list of activities and purchases necessary to make each goal a reality. In some cases you may need outside help to determine how to get there. For example, you may not know how to put together an overall money strategy to raise $450,000, so you may have to hire a fundraising consultant to help you create that strategy. Also note roughly how long each activity will take.
So, your list of activities with a timeline for each might look something like this:
Goal 2: Train the board on their role in fundraising
- Discuss and get buy-in from board on a fundraising training (October)
- Find a date/location (October)
- Research fundraising trainers (November-December)
- Hire a trainer (January)
- Hold training (February)
- Follow up with each individual board member on the next steps resulting from the training (March-April)
Once you have listed all of the activities to achieve each goal of your capacity plan, highlight activities that would require new purchases. Research a ballpark figure for what each one would cost and then attach that figure to those highlighted items, like this…
Photo Credit: Franklin D. Roosevelt Presidential Library and Museum