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nonprofit overhead

What Does the Future Hold For Nonprofits?

fortune tellerThe 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

Download Now

Photo Credit: Adolf de Meyer

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Do Nonprofit Leaders Have Time to Be Bold?

hamster wheelA reader of my blog post earlier this month, From Nonprofit Scarcity to Social Change Abundance, took issue with my argument that nonprofit leaders need to be more bold. He believes that I, and others, should stop telling nonprofit leaders to chart bolder goals because nonprofit leaders simply don’t have the time or resources. I think his comments and our subsequent exchange (you can read the whole comment string here) illustrate the self-imposed limitations that hold some nonprofits back.

In his comment on my blog post, Dan Owens argues that nonprofits are not at fault for limiting their goals. Nonprofits’ very lack of resources holds them back, and it is unreasonable to try to push nonprofits to be more bold:

Nonprofits everywhere are working incredibly hard to solve some of the toughest challenges our society has to offer. Even truly great nonprofits…are stretched to capacity, and even those who embrace all the latest trends and business models cannot solve all the problems they seek to address. The money doesn’t exist, and without sustained and increased federal funding for nonprofits and those they serve, we will not be able to solve the problems we hope to achieve, including childhood hunger…Nonprofits need more resources. You’re right in saying that nonprofit leaders often design plans based upon last year’s fundraising figures. But they have very good reasons to be afraid, and to worry for the future and the clients they serve. They don’t have the freedom and money to make those “pie in the sky plans”…most nonprofit have to fight and scrap for every dollar they have, contributed, earned or applied for. And then they have to do it all again the next year. Is it any wonder they operate as they do?

But my point with the blog post, and really my point with the entire blog and Social Velocity in general, is that nonprofits have to break out of the starvation cycle of never having enough to do more. Instead of embracing the fact that the nonprofit sector is incredibly under-resourced, nonprofits must see past that and envision a future where they have everything they need to accomplish bold social change. It is the very act of turning scarcity on its head that creates abundance, as I point out to Dan:

You have clearly delineated many of the funding problems inherent in the nonprofit sector. There is no doubt that nonprofits need more resources. But the only way that will happen is if nonprofits become more bold, not just with “pie in the sky plans” (which I, by the way, think are absolutely critical) but also by being more bold with funders, government regulators…board members. My whole point with the Financing Not Fundraising series, and really this blog overall, is that nonprofits must break out of the cycle of “fighting and scrapping for every dollar they have.” That is an unsustainable scenario. Instead of accepting the shortcomings of the current funding for the nonprofit sector, let’s get bold about asking for more. But that request must be made in the name of bold goals for social change.

Still seeing the current hurdles standing in the way of bold goals in the nonprofit sector, Dan wonders if the solution might lie in separating nonprofit leaders from the day-to-day work of their organizations so that they have the time and space for envisioning true social change:

I believe one of our greatest challenges is to get those in the nonprofit sector with the real knowledge (usually EDs working on the ground) to have the time and space to work up the bold (and yes, fearless) ideas. Everywhere I have worked I have had the all-too-rare conversation with the ED or program director who can articulate the overall bold vision but cannot see how that can be achieved within the current framework and particularly without harming those they currently serve- because the disruptive innovation necessary would take resources away from current programs…I heard a great speaker recently who [had a great idea for change] but she never really had the chance to build the idea out until she took a few weeks off from her job and was able to really focus on specifics and practical considerations. Perhaps that is what we need more of — sabbaticals, and then planning to implement the bold ideas.

Again, I believe this is the wrong approach. Bold action must be part of the day-to-day work of the organization. We can no longer separate big picture strategy from the day-to-day work of the nonprofit sector. Every effort, every resource, every staff member must be engaged in the larger vision of social change. It must become part of the everyday culture of the nonprofit sector, not just the purview of the elite few at the top, or an exercise conducted a few times per year.

If we are going to truly break free of the hamster wheel and make social change a reality, we must make bold vision part of every day life in the sector.

What do you think? Do the resource constraints of the nonprofit sector stand in the way of big, bold goals?

Photo Credit: cdrussorusso

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Breaking Freeing of the Nonprofit Overhead Trap

Note: While I’m off during the holidays I wanted to provide some archive blog posts that you might enjoy. A version of this post originally appeared on the Social Velocity blog in November 2011.

It’s that time of year when donors make key decisions about their end of year giving. But a post on the Social Earth blog advising donors about questions they should ask nonprofits perpetuates thinking that actually hurts, rather than helps the nonprofit sector. The author asks “How do you know where your charitable dollars are going? Are they going to the cause you want to support or are they going to administrative and fundraising expenses?” In reinforcing old, and destructive binary thinking about program vs. overhead expenses, the author is doing nonprofits and their donors a real disservice.

The author lists 4 key questions she thinks every donor should ask of the nonprofits they consider donating to:

As various charities vie for your charitable donations, there are many questions you can ask them directly, including:

  1. How much goes to the cause? How high are their expenses?
  2. How efficient is their fundraising? What is their cost-per-fundraised-dollar ratio?
  3. Is the charity run properly? How efficient and effective is their human capital? Management team?
  4. Do they even need your money? Will your money just be lying around in their reserve?

I think questions #2 and #3 are excellent, but questions #1 and #4 perpetuate thinking that holds the nonprofit sector back.

Let’s start with Question #1: “How much goes to the cause? How high are their expenses?”

As I’ve written before, the distinction between program (or “cause”) and administrative expenses is meaningless at best, and destructive at worst. If a nonprofit organization is creating change, then everything they do is in support of that change. How can a program run if there is no financial engine (fundraising) to fund it? If there is no building or space to house it? If there is no financial management or regular audits? If there is no regular evaluation of whether the program is making a difference? How can you possibly separate “program” from “overhead?” We must move beyond this distinction and encourage nonprofits to raise (and donors to give) more capacity capital, or the money that nonprofits so desperately need to create effective and efficient organizations.

Question #4 “Do they even need your money? Will your money just be lying around in their reserve?” is equally troublesome.

This question reinforces the backward notion that nonprofits should not have a reserve fund. As I (and others) have written before, we have to get away from the nonprofit taboo that operating reserves are wrong. Nonprofits cannot plan for the future, have a sustainable financial model, experiment with program changes, take risks, or any of the other things that are absolutely necessary to creating social change, without some operating reserves. If nonprofits are continually forced to go month to month without any cushion they will never emerge as strong, sustainable organizations capable of creating lasting change.

We must move away from thinking that encourages nonprofits to scrape by without the tools and infrastructure they desperately need. We must stop measuring nonprofit performance with meaningless financial metrics and instead evaluate nonprofits on their ability to deliver change. If a nonprofit is creating real change, does the minutia of how they spend money really matter?

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How Do We Measure Nonprofit Effectiveness?

There is something exciting happening around measuring the value that nonprofits create. Several new efforts are underway to create a system for measuring and comparing how effective nonprofits are.

Just a few years ago, the only measure for a nonprofit’s effectiveness was the percent they spent on overhead expenses. If a nonprofit spent a magic 20% or less on non-program expenses they were deemed worthy of donations. This destructive way of evaluating nonprofit organizations has been losing favor over the last few years as rating agencies like Charity Navigator have recognized the need for a broader evaluation of nonprofit effectiveness. New measures have started to include outcome and impact elements.

But all of this begs the ultimate question which is how do we create a system for measuring and comparing nonprofits across the many social issues and operating models that make up the sector? Because however faulty the overhead percentage measurement was, at least it allowed a comparison of apples to apples. You could see how one nonprofit stacked up against another. But if each nonprofit organization is now creating their own theory of change, and their own outcome and impact measurements, how do we compare those to another nonprofit’s outcome and impact measures?

Enter a host of efforts to solve that very problem. One of these efforts is Markets for Good. They aim to create an infrastructure for evaluating nonprofit effectiveness based on outcomes and impact. You can watch their video explaining their efforts below, or if you are reading this in an email click here to watch the video.

And there are many other efforts to move the nonprofit sector toward measuring outcomes instead of spending practices. These include Idealistics, GiveWell, Philanthropedia among many others. But it’s not clear yet how any of these efforts will be able to analyze and compare the effectiveness of social change efforts because there are many pieces to that puzzle.

To truly be able to evaluate and compare the effectiveness of social change efforts, we have to:

  • Encourage nonprofit organizations to develop a theory of change, because you can’t measure whether an organization has created change if they have no idea what they are trying to change in the first place.
  • Give nonprofits resources with which to measure whether their theory of change is actually coming to fruition. Measuring outcomes and impact takes time and money.
  • Separate a single nonprofit’s efforts to create change from other forces working on the same social problem so that we can understand the effectiveness of a single organization.
  • Create a standardized system for comparing the ability of one nonprofit organization to create change to another’s ability to create change.
  • Connect such a system for measuring nonprofit effectiveness to systems already being created for for-profit social entrepreneurs (like GIIRS) so that those with money to invest in social change efforts can compare the social return they would get in a for-profit and/or nonprofit setting.
  • Communicate the results of those measures to philanthropic and social investors so they can make more informed, more results-focused investments, whether those be to nonprofit or for-profit social change organizations.

To me, comparing the ability of organizations to create social change is an enormous nut to crack. But it is an incredibly worthy endeavor. I applaud Markets for Good and the many other efforts working to create a system for understanding and comparing social change efforts. It will be fascinating to watch this space develop.

Photo Credit: KJGarbutt

 

 

 

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10 Most Popular Posts of 2011

As 2011 comes to a close, I wanted to provide a list of the ten most popular Social Velocity blog posts this year. Then I’m taking a break from the blog until January.

I hope you all find time over the holidays to relax, unwind and spend time with friends and family. Thank you all for reading and contributing to the Social Velocity blog this year. I really appreciate all of my readers and look forward to talking with you in the new year. Happy Holidays!

The 10 most popular Social Velocity blog posts of 2011 were:

  1. 5 Lies to Stop Telling Donors
  2. The Financing Not Fundraising Blog Series
  3. 10 Great Social Innovation Reads: November
  4. The Problem with Strategic Planning
  5. 5 Nonprofit Trends to Watch in 2011
  6. 4 Things Every Nonprofit Needs
  7. What is Social Innovation?
  8. A Step-by-Step Guide to Creating a Nonprofit Financing Plan
  9. 7 Things Board Members Can Do to Raise More Money
  10. Why Nonprofit Overhead is Destructive

Photo Credit: Charline Tetiyevsky

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Why Nonprofit Overhead is Destructive

It’s that time of year when donors make key decisions about their end of year giving. But a recent post on the Social Earth blog advising donors about questions they should ask nonprofits perpetuates thinking that actually hurts, rather than helps the nonprofit sector. The author, Tarini Chandak, asks “How do you know where your charitable dollars are going? Are they going to the cause you want to support or are they going to administrative and fundraising expenses?” In reinforcing old, and destructive binary thinking about program vs. overhead expenses, Tarini is doing nonprofits and their donors a real disservice.

Tarini lists 4 key questions she thinks every donor should ask of the nonprofits they consider donating to:

As various charities vie for your charitable donations, there are many questions you can ask them directly, including:

  1. How much goes to the cause? How high are their expenses?
  2. How efficient is their fundraising? What is their cost-per-fundraised-dollar ratio?
  3. Is the charity run properly? How efficient and effective is their human capital? Management team?
  4. Do they even need your money? Will your money just be lying around in their reserve?

I think questions #2 and #3 are excellent, but questions #1 and #4 perpetuate thinking that holds the nonprofit sector back.

Let’s start with Question #1: “How much goes to the cause? How high are their expenses?” As I’ve written before, the distinction between program (or “cause”) and administrative expenses is meaningless at best, and destructive at worst. If a nonprofit organization is creating change, then everything they do is in support of that change. How can a program run if there is no financial engine (fundraising) to fund it? If there is no building or space to house it? If there is no financial management or regular audits? If there is no regular evaluation of whether the program is making a difference? How can you possibly separate “program” from “overhead?” We must move beyond this distinction and encourage nonprofits to raise (and donors to give) more capacity capital, or the money that nonprofits so desperately need to create effective and efficient organizations.

Tarini’s Question #4 “Do they even need your money? Will your money just be lying around in their reserve?” is equally troublesome because it reinforces the backward notion that nonprofits should not have a reserve fund. As I (and others) have written before, we have to get away from the nonprofit taboo that operating reserves are wrong. Nonprofits cannot plan for the future, have a sustainable financial model, experiment with program changes, take risks, or any of the other things that are absolutely necessary to creating social change, without some operating reserves. If nonprofits are continually forced to go month to month without any cushion they will never emerge as strong, sustainable organizations capable of creating lasting change.

We must move away from thinking that encourages nonprofits to scrape by without the tools and infrastructure they desperately need. We must stop measuring nonprofit performance with meaningless financial metrics and instead evaluate nonprofits on their ability to deliver change. If a nonprofit is creating real change, does the minutia of how they spend money really matter?

Photo Credit: just_a_name_thingie

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Raising Money to Grow On: Putting the Strategic Plan in Place

Last May I launched a new ongoing blog series that profiles Social Velocity’s work with Charlotte Chamber Music, a small performing arts organization that has a big vision, but lacks the capital to get there. Charlotte Chamber Music enlisted Social Velocity’s help last Spring to create a strategic plan and a capacity capital pitch to raise the money to execute on their big plan. You can read the whole series here.

Capacity capital (or “philanthropic equity”) is the money so many nonprofits desperately need. Capacity capital is dramatically different from the day-to-day operating revenue for which nonprofits are always fundraising. Capacity capital doesn’t fund delivery of nonprofit services (beds for a homeless shelter, new productions in an opera house, books for an after-school program). Rather, capacity capital builds the organizational infrastructure of the nonprofit (technology, systems, administrative or fundraising staff, materials) that allows the organization to become more effective or grow. But you cannot simply go out and ask for capacity capital. First, you must develop a compelling, inspiring, actionable and measurable plan for what you would do with the capacity capital.

After several months of working with Charlotte Chamber Music we had a strategic plan that staff and board were excited about and invested in. But it’s not enough to have a great strategic direction and goals and objectives to get there. You have to make the plan operational. That means you have to tie the big plan to the day-to-day activity of the organization and the price tag need to get there.

The next step in the process was to develop:

  1. An annual operational plan built from the strategic plan, and
  2. A budget

To do this, Executive Director Elaine Spallone needed to create milestones for each year of the plan. She needed to articulate what had to be accomplished in each year of the plan. This allowed her to start to break the big 3-year plan into annual chunks. Once she was happy with those milestones, she created a laundry list of activities that had to be accomplished in the first year in order to hit the first milestone. Once she was happy with that comprehensive list of activities, she tied each activity to a deliverable, a deadline and a person responsible.

As Elaine said:

Creating the operational plan was intense in the time investment and level of detail required, but worth every minute spent in its creation. It is especially gratifying to check off items and see the progress made. To be fair, it can also be frustrating to realize what is not moving forward. But the good news there is that those issues are clear, and can be articulated, shared and modified.

At the same time, she needed to project revenue and expenses over the period of the strategic plan. It’s not enough to have big goals, you need to understand the price tag associated with those goals (expenses) and how the money (revenue) will flow into the organization to meet those expenses. So Elaine created a 3-year revenue and expense projection that was tied to the goals and objectives of the plan.

Once she had these two key pieces in place (annual operational plan and 3-year budget) she could begin to put some key monitoring pieces in place to ensure that the strategic plan was being executed on. These monitoring pieces are:

  • Each monthly staff meeting is tied to the deliverables of the operational plan that are due that month
  • Each monthly board meeting includes a dashboard report on the status of the goals of the plan
  • At the end of each fiscal year, Elaine will create the next year’s annual operational plan tied to the strategic plan
  • Annual employee evaluations will be tied to an employee’s performance on their part of the operational plan
  • Each annual budget will be tied to the costs of the annual operational plan

So now that Charlotte Chamber Music had an inspiring, investable strategic plan and a budget and operational plan to ensure that the plan would actually come to fruition, they were ready to go out and raise the capacity capital they needed.

In the next post in this series, we’ll talk about how we created a capacity capital pitch and a strategy for going after prospective funders.

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Financing Not Fundraising: 5 Lies to Stop Telling Donors

In part 11 of our ongoing blog series, Financing Not Fundraising, I’m talking about being brutally honest with your donors. If nonprofits are going to truly break free from the vicious fundraising cycle, they must find the courage to tell funders how it really is. And since board members are a nonprofit’s closest supporters and (I hope) donors, you need to stop telling them these lies as well.

If you are new to the Financing Not Fundraising blog series, the series is about how nonprofits must break out of the narrow view that traditional FUNDRAISING (individual donor appeals, events, foundation grants) will completely fund all of their activities.  Instead, they must create a broader, more strategic approach to securing the overall FINANCING necessary to create social change. You can read the entire series here.

If you want to learn more about how to apply the concepts of Financing Not Fundraising to your nonprofit, check out the Financing Not Fundraising On Demand Webinar Series

If you want to break free of the exhausting cycle of fundraising, a key step is to start being brutally honest with funders. Here are the top 5 lies you have to stop telling donors:

  1. X% of your donation goes to the program
    The distinction between “program expenses” and “overhead” is, at best, meaningless and, at worst, destructive. You cannot have a program without staff, technology, space, systems, evaluation, research and development. It is magical thinking to say that you can separate money spent on programs from money spent on the support of programs. Donors need to understand, and you need to explain to them, that “overhead” is not a dirty word. A nonprofit exists to deliver programs. And everything the organization does helps to make those programs better, stronger, bigger, more effective.

  2. We can do the same program with less money
    No you can’t. You know you can’t. You are already scraping by. Don’t accept a check from a donor who wants all the bells and whistles you explained in your pitch, but at a lower cost. Explain the true costs, including administrative costs, of getting results. Politely, but firmly, explain to them that an inferior investment will yield an inferior result. If they simply can’t afford the price tag, then encourage them to find fellow funders to co-invest with.

  3. We can start a new program that doesn’t fit with our mission or strategy
    Yes that big, fat check a donor is holding in front of you looks very appealing. But if it takes your organization in a different direction than your strategy or your core competencies require, accepting it is a huge mistake. Nonprofits must constantly ensure that money and mission are aligned. Otherwise the organization will be scattered in countless directions with an exhausted staff and confused donor base. Don’t let a donor take you down that road.

  4. We can grow without additional staff or other resources
    Nonprofit staff truly excel at working endless hours with very few resources. They have perfected the concept of doing more and more with less and less. But someday that road must end. Nonprofit leaders have to be honest with donors when their staff and resources are at capacity. Because eventually program results will suffer and the donor will receive little in return for their investment.

  5. 100% of our board is committed to our organization
    If that’s true, then you are a true minority in the nonprofit sector. Every nonprofit board I know has some dead  wood. Members who ignore fundraising duties, don’t contribute to meetings, miss meetings, take the organization on tangents are always present. It’s a fact that funders want to see every board member contributing. But instead of perpetuating the myth that 100% is an achievable reality, be honest with funders. Tell them that you continually analyze each individual board member’s contributions (financial, intellectual, time) and have a clear plan for addressing deficiency, including: coaching, peer pressure, training, asking for resignations. Getting to 100% is probably never realistic, it is far better to demonstrate that you are tirelessly working toward 90%.

Stop the madness. We need to stop telling funders what they want to hear and then cursing them behind their backs when they set  unrealistic expectations. Funders must be made to understand the harsh realities of the nonprofit sector if they are ever to be expected to help bring change.

If you want to learn more about applying the concepts of Financing Not Fundraising to your nonprofit, check out the Financing Not Fundraising On Demand Webinar Series, or download the Financing Not Fundraising E-books.

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