Almost two years ago three nonprofit rating organizations launched the Overhead Myth campaign aimed at eradicating “the false conception that financial ratios are the sole indicator of nonprofit performance.” Call me an optimist, but I think it might be working. I see more nonprofit leaders and funders discussing the radical idea that overhead might not be a bad thing. We still have a long way to go, but perhaps there is progress.
The bad news, however, is that the Overhead Myth is only one of many (way too many) destructive nonprofit myths. So in this new year, let’s look at those additional myths that hold the nonprofit sector back.
As we all know, a myth is a story that everyone believes, but is actually not true. Here are the 5 most egregious myths I see in the nonprofit sector:
- Good Nonprofits Don’t Make a Profit
For some reason it is unseemly for a nonprofit to have more money than they immediately need. The best a nonprofit should hope for is to break even, and if they do run a profit, they should not be fundraising. To the contrary, a nonprofit with operating reserves can invest in a more sustainable organization, conduct evaluations to make sure their solution is the best one, recruit a highly competent staff, and weather economic fluctuations. For a donor it is far better to invest in an organization with the people and systems necessary to effectively tackle a social problem than an organization that is barely getting by. The best nonprofits are those that create a financial model that allows them the money mix (revenue, capital, reserves) necessary to make the best decisions and invest where and when they must.
- There Are Too Many Nonprofits
I’m so tired of the refrain (mostly by funders) that there are “too many” nonprofits. Does anyone complain about how many tech startups there are? This myth comes from the fact that the sector is undercapitalized which causes organizations to compete for scarce resources. So let’s fix that problem instead. To be sure, there are times when it makes sense to bring two nonprofits that address similar needs together in order to save costs, but that’s usually the exception not the rule. The process of merging two organizations is itself incredibly time-intensive and costly, and, honestly, rarely do funders invest the amount of resources required to ensure a successful merger. Every nonprofit should regularly assess their Theory of Change and how they fit into the external market place of social problems and competitors working on similar problems. If a nonprofit finds that they are no longer adding unique value to that marketplace, then they should reorganize, merge, or disband, whichever makes most strategic sense.
- Nonprofits, Unlike Businesses, Are Inefficient
This myth takes many forms: “nonprofits are too slow,” “nonprofits should sell more products or services”, “nonprofits should run more like a startup,” and the list goes on. The underlying assumption is that the for-profit world is inherently smarter, more strategic, more nimble and more effective. But the truth is that all three sectors (business, government, and nonprofit) have their stars (like Apple), their screwups (like Lehman Brothers) and the multitude in between. Inefficiency in the nonprofit sector is merely a symptom of a larger problem, which is the persistent lack of adequate capital to fund enough of the right staff, technology, systems, evaluation, marketing required to address the intractable problems nonprofits are trying to solve. Let’s talk about that instead.
- Nonprofits Are Outside the Economy
This is the myth that nonprofits are “nice to have” and make everyone feel good, but are not a critical component of our lives or our economic system. But the fact is that the nonprofit sector employs 10% of the U.S. workforce and accounts for 5% of GDP. And the number of nonprofits grew 25% from 2001-2011, while the number of businesses only grew by 0.5%. As government continues to slough off services to nonprofits, those numbers will only continue to grow. The nonprofit sector is not tangential to the economy, but rather an instrumental part of it.
- Nonprofits Have No Role In Politics
501(c) 3 organizations have long been told to stay out of politics. The myth is that charity is too noble to be mired in the mess of pushing for political change (Robert Egger has written extensively on this). But the fact is that simply providing services is no longer enough to solve the underlying problems. Nonprofits are increasingly recognizing that they can no longer sit by and watch their client load increase while disequilibrium grows. Nonprofits must (and already are) advocate for changes to the ineffective systems that produce the need for their existence.
Being mired in the demoralizing and debilitating cloak of these myths wears the nonprofit sector down. We must follow the Overhead Myth’s example and start uncovering the other myths that hold the sector back. Because the power of a myth is greatly diminished when we openly admit that the myth is only that — a myth.
Photo Credit: We Shall Overcome, Rowland Scherman, National Archives
The nonprofit sector and the philanthropy that funds it have been changing dramatically over the past several years, and there’s plenty more change to come. This month’s Social Velocity webinar, Embracing the Future of the Nonprofit Sector, will help nonprofit leaders and board members understand how the sector is changing and what they can do to keep up.
Here are some of the future trends facing the nonprofit sector that we’ll cover in this webinar:
- More Demand for Outcomes
There is a growing demand for nonprofits to 1) articulate what results they hope their work with achieve and 2) track whether those results are actually happening.
- Decreasing Emphasis on Nonprofit “Overhead”
More and more people are realizing that you can’t just invest in programs without the staff, infrastructure and fundraising to make those programs happen.
- More Advocacy for the Sector
as a Whole
The nonprofit sector has long been a fractured grouping of organizations of various sizes, business models, and issue areas. But that tide is starting to turn. We are starting to see the sector organize, mobilize and build the confidence necessary to claim its rightful place.
- Savvier Donors
Because nonprofits are getting more savvy, donors are as well. In addition to an increasing demand for proof of outcomes, donors are starting to realize that in such a stark economic environment those nonprofits that don’t have adequate infrastructure simply will not survive, let alone be able to adequately address the social problem they were organized to solve.
- Increased Efforts to Rate and Compare Nonprofits
We are increasingly evaluating nonprofits based on the results they achieve, not on how they spend their money. And to do that a whole infrastructure for evaluating and rating nonprofits is emerging and will continue to evolve as we get smarter about focusing resources on the most effective nonprofits.
These are exciting times for the nonprofit sector. This webinar will help you understand and embrace these trends.
Embracing the Future of the Nonprofit Sector
A Social Velocity On Demand Webinar
Photo Credit: Adolf de Meyer
There is something really interesting going on in the world of nonprofit advocacy. And I don’t mean advocacy for a specific cause. Rather, I’m talking about advocating for the nonprofit sector as a whole. Three new efforts underway in recent months are vying to be the voice of the nonprofit sector. And the firestorm brewing is interesting to watch.
Robert Egger kicked it off a year ago when he formed CForward an advocacy organization that champions the economic role of the nonprofit sector and supports political candidates who include the nonprofit sector in their plans to rebuild the economy. You can read my interview with Robert about why he launched CForward here. Robert’s video about the need to advocate for the nonprofit sector is below (or here if you are reading this in an email):
And then in the last couple of months there have been two similar movements to better advocate for the nonprofit sector. Dan Pallotta released a new book last month called Charity Case: How the Nonprofit Community Can Stand Up for Itself and Change the World where he announces the creation of his new entity, the Charity Defense Council, which is also aimed at advocating for the nonprofit sector, via five efforts:
- An “anti-defamation league” to respond to and rectify inaccurate reports about the sector in the media
- Big public advertising campaigns for the sector
- A “legal defense fund” to challenge unproductive laws against the sector
- Work to create a “National Civil Rights Act for Charity and Social Enterprise” to support the sector
- Grassroots organizing of the sector as a whole, including a national database of every nonprofit in the country
And then the third grand effort to advocate for the nonprofit sector comes from Independent Sector, the organization formed in 1980 to “advance the common good by leading, strengthening, and mobilizing the nonprofit and philanthropic community.” Their new report “Beyond the Cause,” which interviewed 100 nonprofit organizations, recommends the creation of a national organization (probably run by Independent Sector) to push a nonprofit agenda, costing $20 million over 4 years. For Independent Sector the key issues that such an entity would address are:
- Changes that could limit the organizations eligible for charity status
- Threats to charitable tax deductions for donors
- A need to clarify advocacy and lobbying rules for charities and private foundations
- Changes to Internal Revenue Service disclosure forms that could hamper nonprofit operations
- Burdensome paperwork and red tape involving government contracts with nonprofits
- Lack of government-financed research on the nonprofit world
While CForward seems to be largely supported in their work, both Pallotta’s and Independent Sector’s efforts are drawing fire. Phil Buchanan, president of the Center for Effective Philanthropy, writes a scathing review of Pallotta’s new book and advocacy effort and concludes that “Mr. Pallotta is selling is himself—as both the nonprofit world’s messiah and its advertising agency,” and suggests that people support CForward and Independent Sector instead of Pallotta’s Charity Defense Council.
Similarly, Pablo Eisenberg, senior fellow at the Georgetown Public Policy Institute, dislikes Independent Sector’s effort to coalesce the nonprofit sector arguing that “nonprofits will never share a broad consensus about which issues are most important. The best that nonprofits can accomplish is to strengthen their individual advocacy and lobbying activities and join with other organizations in coalitions that fight for specific policy changes.”
It is really a fascinating and multi-layered debate. I strongly agree that the nonprofit sector is often dismissed in the policies of the day. But if organizations like Independent Sector have been working to create a common voice for the sector for more than 30 years with little improvement, I’m not sure what will change. Especially if 3 separate entities are all singing different verses of the same tune. They will be competing for dollars, mind-share, and the ears of policy makers. But I am a huge advocate for fixing a broken sector, so let’s see how this all plays out.
What do you think? How do we get policy makers to recognize the importance and value of the nonprofit sector?
I’m a little late getting the June 10 Great Reads list out this month because I was on vacation. But June didn’t disappoint, with some great articles that make us think about things in new ways, from how philanthropists fund, to how “nonprofit” is defined, to how homelessness and food insecurity can be solved, to how Millennials give and much more.
Below are my ten picks of the best reads in social innovation in June, but please add what I missed in the comments. If you want to see more than just this list of 10, follow me on Twitter, Facebook, LinkedIn or Pinterest. And if you want to read 10 Great Reads lists from past months, go here.
- A new debate raged on the “old” topic of defining the nonprofit sector. Phil Buchanan at the Center for Effective Philanthropy started it off with this 6-part series on articulating the value of the nonprofit sector. And along the same lines, Mark Hecker at the UnSectored blog wrote this really thought-provoking piece about the language of social good.
- From The Atlantic comes a great article about the enormous opportunity of impact investment, “How Financial Innovation Can Save the World.”
- The on-going drumbeat to get nonprofits to advocate for their own sector in Congress gets louder with “Nonprofits Missing From Big Battles (in Congress)” and a united movement among San Francisco nonprofits to push for more city funding.
- David Henderson is easily one of the greatest thinkers in the social sector space and he takes issue with a new app designed to “solve” homelessness. His post really begs the question, “To What End?”
- Always at the ready with fantastic financial tools for the nonprofit sector, the Nonprofit Finance Fund releases a list of Top 10 Finance Essentials for nonprofits and, not to forget that the philanthropy that funds nonprofits also needs to change, they also have a list for nonprofit funders.
- In The Washington Post, Sarah Kliff explores new experiments and studies about how to solve urban food deserts.
- As a mother of two young boys I agree there is definitely something to emulating how kids play, as Philip Auerswald argues at the Harvard Business Review blog: To Innovate, Play with Pieces Off the Game Board
- The third annual Millennial Impact Report, about how the millennial generation connects with nonprofits, was released and lots of people had things to say about the data, including 3 New Truths About Millennials and How Millennials Connect, Involve and Give.
- At the Center for High Impact Philanthropy blog Jen Landres describes how philanthropists can have much greater impact by being “unsexy” in their giving.
- Decrying the over-emphasis on capital campaigns in the arts world, Rebecca Thomas and Rodney Christopher argue that “scores of organizations jeopardize the long-term vibrancy of their programs because they focus on getting the building built rather than having a healthy organization inside it.” Amen to that!
Photo Credit: Frank Starmer
In the world of social innovation, May was most definitely about innovations in philanthropy and funding of social change. From social impact bond experiments, to hybrid foundations, to impact investing, to the Giving Pledge 2.0, there was much discussion and debate about how funders of social change should and are innovating. And that is very exciting because it is not enough for social entrepreneurs to push things forward, we desperately need new financial vehicles to fund those social change efforts.
Below are my ten picks of the best reads in social innovation in May, but as always, please add what I missed in the comments. If you want to see other things that caught my eye, follow me on Twitter, Facebook, LinkedIn or Pinterest. And if you want to read 10 Great Reads lists from past months, go here.
- First up is social impact bonds (or pay for success bonds), a very exciting, new way to fund nonprofits that achieve improved social outcomes that result in public sector savings. McKinsey released a new report on the potential for social impact bonds in the US. And Minnesota is one of the first states to experiment with these bonds with a $10 million pilot. Twin Cities Business magazine explores the idea and Kate Barr of Minnesota’s Nonprofit Assistance Fund gives an overview of the idea, resources and further conversation.
- This month’s second annual meeting of those wealthy individuals who signed Bill Gates’ Giving Pledge (a public promise to give at least half of their wealth to charity in their lifetime) showed some real interest in impact investing, or using their money to make money while creating social change at the same time. Laura Tomasko argues why their interest in impact investing (both mission-related investments and program-related investments) is such an exciting opportunity. And Lucy Bernholz takes their interest in impact investing in another direction arguing that “this century’s great philanthropists should aim not just to match history’s great givers in their largess, but also in the creation of mechanisms and institutions that serve the future as well as their predecessors served the past.”
- Finally, in a very exciting move, the Obama Administration has proposed an expansion to the rules about how foundations can use program-related investments (low or no interest loans to social change organizations) and some community foundations are already getting into the game.
- And from the nonprofit side of the financial equation comes the Nonprofit Finance Fund’s effort to debunk the myths around endowments as a road to nonprofit financial sustainability.
- Financial sustainability must always be on the mind of social change organizations, as this cautionary tale from the North Carolina YWCA that had to close its doors because of poor financial management and oversight demonstrates.
- Has the drum beat against judging a nonprofit based on overhead costs gone mainstream? An op-ed in the LA Times argues that administrative costs are “no way to judge a charity.”
- At the Social Earth blog Thien Nguyen-Trung cautions against an overemphasis on growth among social entrepreneurs and instead argues for “impact offtakers” or an exit strategy for social entrepreneurs to hand off their solution to government or another larger entity instead of trying to reach scale on their own.
- And Patrick Lester seems to agree in his argument that it’s not enough to fund social change solutions: “Foundations and philanthropists need to step forward and fund not just innovation, but advocacy too–only then will our best ideas be taken to scale.”
- There were several articles about exciting, innovative approaches to solving food problems. From a $125 million loan fund for healthy food outlets in California, to urban farming in Detroit, to a very successful nonprofit grocery store in Portland, Oregon.
- In the Stanford Social Innovation Review Matthew Forti offers 6 things nonprofits should avoid in their theory of change (their argument for what they exist to accomplish).
Photo Credit: C. Frank Starmer