Note: In April I will be moderating a panel at the Center for Effective Philanthropy Conference about what funders can do to support nonprofit sustainability. To promote that panel and the conference, the Center for Effective Philanthropy asked me to write a post for their blog, which is reprinted below. You can see the original post at the CEP blog here.
Among the many myths that pervade the nonprofit sector, the Overhead Myth is perhaps the most destructive. It is the erroneous idea that nonprofits must keep their fundraising and administrative costs cripplingly low, which leads to anemic organizations that are not as effective as they could be.
In fact, the disparity between the nonprofit and for-profit sector in investment in strong organizations is striking. As just one example, research from the Foundation Center found that in 2011, the business sector spent $12 billion on leadership development, whereas the nonprofit sector spent $400 million. Or, viewed another way, businesses spent $120 per employee on leadership development, whereas the nonprofit sector spent $29 per employee.
But the reality is that nonprofit organizations are no different than for-profit organizations in terms of overhead. Last summer a Bridgespan study analyzed the indirect costs of 20 different nonprofit organizations and found, not surprisingly, that overhead rates vary greatly depending on the business model and industry of a given organization (just as it does in the for-profit sector).
Some nonprofit, philanthropic, and government leaders are recognizing that we must move beyond the Overhead Myth and start building stronger nonprofit organizations. This is partly due to the Overhead Myth campaign, launched in 2014 by GuideStar, CharityNavigator, and BBB Wise Giving Alliance with their famous “Letter to the Donors of America” and follow up “Letter to the Nonprofits of America,” which argue that nonprofit leaders and funders must stop judging nonprofits by their overhead rate — and instead focus on a nonprofit’s results. So the idea is that instead of evaluating the effectiveness of a nonprofit organization based on how it spends money, funders would move to evaluate the effectiveness of a nonprofit based on the results it achieves.
This campaign has gained some traction. The federal government and some local governments have moved to increase the indirect costs paid to nonprofits, which means more money for things beyond direct program costs.
But unfortunately, we are far from overcoming the Overhead Myth. An article just this month in Philanthropy Daily extoled the virtues of the Salvation Army because “the most effective nonprofits are those with lean management. The Salvation Army is a constructive example of an effective charity with very low overhead.” And a recent article in Forbes profiled five nonprofit leaders advising other nonprofit leaders about how to keep overhead costs low.
There is still much work to be done in recognizing the need for and investing in strong, effective nonprofit organizations.
Which is where progressive funders, like those who will be attending the 2017 CEP Conference in Boston in April, come in. If a critical mass of funders could start supporting nonprofits to create strong and effective organizations, we could perhaps overcome the Overhead Myth once and for all.
But what does that look like? In my mind, funders can lead the effort to eradicate the Overhead Myth by:
- Working with their nonprofit grantees to uncover the full costs of their work. Instead of hiding or severely limiting non-program costs, nonprofit leaders must fully analyze, report on, and fund ALL of the expenses necessary to achieve results.
- Uncovering the capacity constraints that impact their grantees. Funders must actively work with their grantees to determine what is standing in the way of building stronger, more effective organizations — and then fund the solutions to those hurdles.
- Moving from program-specific funding to unrestricted, general operating support of the organization.
- Investing in the revenue-generating functions of their grantees. It takes money to create mission, so we need more investments in sustainable financial models, which includes (among other things) smart plan development, recruitment of effective revenue-generating staff, and training of board members on their role in the financial model.
The good news is that there are already funders who are doing these things. For example, there is the collaboration of California grantmakers who lead the Real Cost Project aimed at helping grantmakers understand “what it would take to fund the real costs of the organizations they support — that is all of the necessary investments for a nonprofit organization to deliver on mission and to be sustainable over the long term.”
So to help move this conversation and work further, I will be moderating a breakout session at the 2017 CEP Conference titled “Supporting Nonprofit Sustainability,” where Jacob Harold, president and CEO of GuideStar, Vu Le, nonprofit blogger and executive director of Rainier Valley Corps, and Pia Infante, co-executive director of The Whitman Institute, will be discussing how foundations can start advocating for and investing in stronger, more effective nonprofit organizations.
If nonprofits and those who fund them could overcome the Overhead Myth once and for all, it could be a watershed moment for social change. It would be the point at which we move from a nonprofit sector that is just trying to get by to a nonprofit sector that is armed with the people, infrastructure, and systems necessary to deliver on lasting social change.
I hope you’ll join us for what promises to be an exciting conversation.
Photo Credit: Mike Baird
It’s that time of year again, where we take a look back at the year drawing to a close, and forward to the year ahead. We all know that 2016 was rough (and if you want to wallow for a minute or two, check out John Oliver’s cathartic send off to 2016).
But I am ever the optimist, so I’m hopeful that 2017 will be better. In particular I think the upheaval of this year provides an opportunity for social change to mobilize. So 2017 could be an interesting year to watch.
Below are what I predict (hope) will happen in 2017. But I make no promises.
- An Expanding Definition of Equity
As philanthropy continues to agonize over the presidential election and what it means and what philanthropy missed, I think there may be a reckoning that philanthropy’s growing interest in equity and inclusion must expand to include those in the rural, working class who feel they’ve been left behind. Whether this means increased philanthropic investments in “red” America, it remains to be seen, but I believe philanthropy will seek to understand how they might help to heal a divided nation.
- Greater Use of Networks and Movements for Social Change
There is no doubt that social change must cross organizational boundaries in order to become systemic, so nonprofits will (I hope) increasingly recognize that they must break down their walls and become more networked in order to achieve their goals. From social movements like #BlackLivesMatter and the widespread networks working on LGBTQ rights, social change leaders will increasingly recognize that they cannot go it alone. There will be more organized efforts to marshal resources toward larger social change.
- Growing Recognition Among Millennials of the Role of Institutions in Social Change
But networks and movements are not enough — institutions also play a critical role in social change. And Millennials in particular tend to be anti-institution — we saw their distaste for political institutions in their low voter turnout rates in November’s election. So those Millennials pushing for reforms will need to figure out how to connect their movements and networks to the requisite political and social institutions.
- More Nonprofit Advocacy
Continuing to be squeezed by shrinking government dollars and a challenging political environment, nonprofits will increasingly recognize the need to embrace advocacy as a social change tool. Formerly worried about jeopardizing the legal status of their organization, nonprofit boards and staffs will become more willing to take the risk and work to help policymakers and their influencers understand the need for their social change work.
- More Analysis of What Nonprofit Financial Sustainability Requires
This one is truly optimistic, I know, but I really believe that the discussions about the Overhead Myth and funding a nonprofit’s real costs will give way to a larger conversation (and research) around what it takes to create financial resilience in the nonprofit sector. Funders and nonprofit leaders are slowly starting to recognize that they must invest in financial models in order to be successful. So I’m hopeful that there will be a growing body of research into what works and what doesn’t, more case studies about nonprofits that have found financial sustainability, and a growing push to wield the money sword in the nonprofit sector.
Photo Credit: James Vaughan
Today I am continuing my on-going blog series on the 7 Pillars of the Performance Imperative. The Performance Imperative was released last year as a north star for the nonprofit sector by the Leap Ambassadors, of which I am a member. Pillar 4, about sustainable financing, is obviously my favorite since I am arguably obsessed with nonprofit financial sustainability.
You can also read about Pillar 1: Courageous, Adaptive Leadership, and Pillar 2: Disciplined, People-Focused Nonprofit Management, and Pillar 3: Well-Designed and Implemented Programs.
I believe it is absolutely critical that a high-performing nonprofit organization have a smart strategy for attracting and employing money effectively. Because without a sustainable financial model there is nothing else — no mission, no performance, no social change.
You can download the detailed Performance Imperative here, but here are the highlights of Pillar 4: Financial Health and Sustainability. In a nonprofit that exhibits financial health and sustainability, the board and staff:
- Take charge of their organization’s financial destiny. They articulate the value they deliver and develop overall financing strategies, tightly aligned with their mission, to support and sustain it.
- Establish strong systems for financial stewardship and accountability throughout their organization.
- Build and participate in budget processes that are oriented toward achieving results.
- Share their financial results transparently with key stakeholders regularly.
- Treat fund development as a strategic function that requires focus, management, capital, and specialized skill sets.
- Operate with margins that allow them to build their balance sheet.
- Understand their organization’s cost structure.
- Use financial models to make clear and transparent the organization’s financial condition and predict how it will end the year.
In other words, high performing nonprofit leaders understand, embrace and use money as a tool to achieve social change. They create a robust financial model that articulates true costs and creates a strategy to attract enough and the right kinds of money, engage board and staff in making that model a reality, is transparent with outsiders about the model, and above all uses money strategically. In short, a high-performing nonprofit finances, instead of fundraises for, the social change they want to create.
I want to be very clear, however, that financial sustainability does not mean, as some people sometimes confuse it, that a nonprofit moves away from philanthropy and toward earned income, which is somehow more sustainable. This is a fallacy in thinking that nonprofits can somehow be market-driven. Because nonprofits exist to remedy a disequilibrium in the market economy they will always have to be at least somewhat subsidized, by government, philanthropy, or both. Therefore, financial sustainability in the nonprofit world means creating and executing on an overall financial strategy that allows a nonprofit to effectively deliver on outcomes.
FLY (Fresh Lifelines for Youth), a nonprofit that works with teens in the juvenile justice system to break the cycle of violence, crime, and incarceration, is an example of Pillar 4.
Here is their story, as Christa Gannon, FLY’s Chief Executive Officer & Founder explained it to me:
Three years ago we were extremely fortunate to be a grantee of Edna McConnell Clark Foundation’s PropelNext initiative to help organizations prepare for growth and scale. At the same time as a grantee of our local and sophisticated foundation funder Tipping Point we participated in a comprehensive training on ensuring that our financial and development practices were aligned and consistent with best practices.
Through these two initiatives we had the privilege of learning a great deal and working with outstanding consultants who created the space for us to step back and productively ask ourselves what was working and what could work better for us as we grew. We brought these findings to our board, worked with the consultants to update and refine our practices, created new dashboards, and brought consultants to board meetings and committee meetings to help us elevate our line of sight and institute new ways of being.
We began these efforts with the help of a long-time employee who helped lead our financial efforts for over 7 years (now going on 10 years!). We elevated his role (creating a position for a Director of Finance and Operations), had our consultants provide some coaching and guidance and invested in his capacity to learn, grow, and lead. Additionally, during this time we brought on a new COO with a great deal of financial acumen who helped this process a great deal. It allowed me to take a critical step back from finance to allow new approaches to take hold and grow.
We revamped our monthly financials, our CEO dashboard, and our dashboard for the board. Additionally we created a new budget-building process which includes a multi-year budget (expense and revenue) forecast and straw budgets. We also changed our internal practices for how we managed temporarily restricted net assets. In previous years when we received grants/gifts off fiscal year cycle (and many are) we would hold those funds and spend them down in the latter half of their cycle, which often meant the grants spanned two fiscal years. This created a great deal of extra work and challenges for our team. We modified this process, which has resulted in an increase in net unrestricted assets available to us as we grow and scale.
One challenge we’ve realized in this process is that we have been so extremely cost conscious and frugal that we have unintentionally built a financial model that relies on staffing structures that cannot be maintained as we grow and scale while ensuring the highest quality services that our clients and community deserve.
As these challenges became apparent to us, we have taken critical steps such as reducing case-load ratios for line staff, adding critical positions to support talent recruitment and development, finance, fundraising, evaluation and learning, etc.. To support this capacity building we are investing in our fundraising ability, engaging our board even more in their role to help garner financial resources, and allocating more of my time to strategy, fundraising, and board development.
We have always felt incredibly grateful for the opportunity to help steward the generosity and strategic thinking of our investors, foundation and corporate supporters, and government partners into the world. As our systems for how we tackle financial management have changed and improved that attitude of gratitude has remained.
What has changed for us, however, is a desire and intention to simplify how we think about and manage our funds such that our processes are clear, straight forward, and understandable by all involved without undue explanation or re-education in meeting after meeting (both board and staff). Our efforts to be cost-conscious, thoughtful, and prudent inadvertently led to systems and processes that made our work more complicated and time consuming than it needed to be. In part this reflected my mindset and efforts as founder. It required me to let go and not white-knuckle our financial approach; trust the team, systems, and consultants; and realize that the approach that got us to this point in the organization’s history would not be the best approach to get us to the next milestone.
We are very mindful that the work we do and the population of young people we serve is not a top priority for many philanthropists. As a result, we take every investment very seriously and are very clear that it means a kid gets a chance to become so much more than their past mistakes.
For us, financial investments are life changing for our clients. We may be the only chance they get, so we want to ensure we deploy each resource to its highest and best use.
Photo Credit: FLY
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
I’m really excited to announce today’s launch of the Performance Imperative. The Performance Imperative is a detailed definition, created by a community of nonprofit thought leaders, of a high-performance nonprofit. The hope is with a clear definition of high-performance we can strengthen nonprofit efforts to achieve social change.
As we all know, we are living in a time of growing wealth inequality, crumbling institutions, political divides, and the list of social challenges goes on. The burden of finding solutions to these challenges increasingly falls to the nonprofit sector. So “good work” is no longer enough. We need to understand — through rigor and evidence — which solutions are working and which are not.
The Performance Imperative was created by the Leap Ambassadors Community, a network of 70+ nonprofit thought leaders and practitioners of which I am a member. The group emerged from the 2013 After the Leap conference, which brought nonprofit, philanthropic and government leaders together to create a higher-performing nonprofit sector. The group is determined to lead the fundamental, and critical, shift towards a more effective nonprofit sector.
The Performance Imperative defines nonprofit high performance as “the ability to deliver—over a prolonged period of time—meaningful, measurable, and financially sustainable results for the people or causes the nonprofit is in existence to serve.”
The Performance Imperative further describes seven organizational pillars that lead to high performance:
- Courageous, adaptive executive and board leadership
- Disciplined, people-focused management
- Well-designed and well-implemented programs and strategies
- Financial health and sustainability
- A culture that values learning
- Internal monitoring for continuous improvement
- External evaluation for mission effectiveness.
Each one of these 7 pillars is fully explained in the Performance Imperative.
Over the next several months I will write a blog series that digs into each of these 7 pillars to understand what each one means for a nonprofit organization and to examine case studies of how other nonprofit leaders have approached the pillars. And next week on the blog I’ll interview one of the founders of this movement toward high performance.
Although the Performance Imperative is targeted toward $3M+ nonprofits, it can also be a benchmark upon which any social change nonprofit can measure itself. Nonprofit boards and staffs can use the Performance Imperative as a north star to guide their journey toward higher performance.
The critical necessity of a high performing nonprofit sector is clear. We no longer have the luxury of benevolent good works that sit aside the business of our country. Now is the time to find solutions that really work and develop the leadership and sustainability to spread them far and wide.
As Mario Morino, founder of the Leap Ambassador Community has said, “If we don’t figure out how to build high performing nonprofits, nothing else matters. This is the last mile. Our nation depends on it.”
I’ve recently witnessed some behavior from nonprofit leaders that made my jaw drop:
- A board chairman convinced the rest of his board to turn away a donor who wanted to give the nonprofit a significant amount of money to fund organizational capacity (strategic planning, coaching, fundraising training) because he felt the nonprofit already knew how to do the work internally for free.
- An executive director who was really struggling with wrangling her board and developing a strong financial model bravely asked a close foundation donor for advice and support. When the foundation offered to fund some leadership coaching, the executive director rejected the offer for fear her board would think she didn’t know how to do her job.
- A board charged their nonprofit’s Development Director with increasing revenue in a single year by 30%. When she asked for a donor database to help more effectively recruit new and renew current donors the board said “No” because they felt she should already be able to do that without the aid of new technology.
More often than not it is nonprofit donors who hold back efforts to build stronger, more sustainable nonprofits by not providing enough capacity capital. I talk about that all the time (like here, here and here).
But sometimes, and more shockingly, nonprofit staffs and boards stand in their own way.
It takes courage for a nonprofit leader to admit that she doesn’t know how to do something and needs help. I am reminded of a fascinating interview I heard on NPR earlier this fall with Leah Hager Cohen who recently wrote the book, In Praise of Admitting Ignorance. She describes the freedom that comes from admitting when you simply don’t know how to do something. That moment of honesty can lead to transformation, as she says, “I think those words can be so incredibly liberating…They can just make your shoulders drop with relief. Once you finally own up to what you don’t know, then you can begin to have honest interactions with the people around you.”
I would love to see nonprofit leaders take this advice to heart. Once you have the courage to admit (to your board, to your donors, to your staff) that you don’t know how to do everything, you just might finally get the help you so desperately need.
Nonprofit leaders have been given the Herculean task of: developing and managing effective programs, managing a diverse and underpaid staff, crafting a bold strategic direction, creating a sustainable financial model, wrangling a group of board members with often competing interests, and recruiting and appeasing a disparate donor base. All with little support along the way. It is easy to see why the position of nonprofit leader is such a lonely one.
So instead of continuing to bear that enormous burden, take a step back and admit that you simply don’t know how to do it all. You need help, guidance, advice, support, organization building. If you are lucky enough to have funders, board members or others outside the organization that want to help, admit (to yourself, to your board, to your donors) that you need that help. And don’t let anyone (including, and especially, yourself) stand in your way.
If you’d like to learn more about the leadership coaching I provide nonprofit boards and staff click here, and if you’d like to schedule a time to talk about how I might help move your organization forward, let me know.
Photo Credit: Wikimedia
I’ve had a lot of great questions about the upcoming Financing Not Fundraising E-Course for nonprofit leaders. So I created a video that breaks the e-course down and explains exactly how it will work.
The Financing Not Fundraising E-Course is an excellent opportunity for nonprofits stuck in the starvation cycle to figure out what they can do to more effectively raise money and then create a plan for a more sustainable financial engine. The registration fee is per organization, so if you would like your executive director, development director and a board member, for example, to participate, they all can for one fee. You will just simply appoint one person as representative of the organization to participate in the coaching calls, and the others are free to “listen in” and help you with each step along the way.
The total time commitment over the course of two months is approximately 10-15 hours, which includes the webinars, coaching calls, Google Hangouts and homework assignments.
This E-Course is truly an investment in the future of your organization. By making the investment of the time and cost you will transform the money engine of your organization and recoup that investment many, many times over.
I’m delighted to announce that I’ve just released the Financing Not Fundraising, 2012 E-book. This e-book is the second in the Financing Not Fundraising e-book series. While the Financing Not Fundraising, 2011 E-book laid out the basic elements of the Financing Not Fundraising approach, this new e-book, a compilation and expansion of blog posts in the Financing Not Fundraising blog series from 2012, goes deeper into the concept.
We are living in a new reality. And the old rules of nonprofit funding simply no longer apply. Those nonprofits that take a big step back and create a smart strategy for bringing enough money in the door to achieve their mission are the ones that will survive and thrive in this new environment. In creating that strategy they are moving to finance, instead of fundraise for, their organizations. And the result is a stronger, more effective, more sustainable organization with excited, energized, empowered board, staff and donors.
The 25-page Financing Not Fundraising, 2012 E-book expands on the basic elements of the Financing Not Fundraising model and helps those nonprofits that are ready to start moving away from fundraising to really dive into this new approach.
Here are the elements in this second level of Financing Not Fundraising:
- Stop Fearing Money
- Connect Money to Your Strategic Plan
- Fix Your Fundraising Plan
- Jump Start Your Board
- Align Executive and Development Directors
- Get Real With Your Donors
- Abandon Ineffective Fundraisers
- Kiss That Endowment Dream Goodbye
- Reinvent the Capital Campaign