In this month’s Social Velocity interview, I’m talking with Kathy Reich. Kathy leads the Ford Foundation’s BUILD initiative both in the United States and in 10 global regions. BUILD is an essential part of the foundation’s strategy to reduce inequality, a strategy arising from the conviction that healthy civil society organizations are essential to driving and sustaining just, inclusive societies. To that end, Kathy guides Ford’s efforts to implement sector-leading approaches to supporting the vitality and effectiveness of institutions and networks that serve as pillars of broader social movements.
Before joining Ford in 2016, Kathy was director of organizational effectiveness and philanthropy at the David and Lucile Packard Foundation, where she led a cross-cutting program to help grantees around the world strengthen their strategy, leadership and impact.
You can also read interviews with other social changemakers here.
Nell: You recently moved from the Packard Foundation to the Ford Foundation in order to launch their BUILD initiative, which is all about strengthening organizations. What are your goals with this new initiative and what successes have you seen so far? And what are you finding in terms of the areas where nonprofits need most help?
Kathy: The Ford Foundation has two big goals in mind for BUILD. First, we want to foster a measurably stronger, more powerful set of civil society organizations and networks working to address inequality around the world. Second, we aim to build understanding within the Ford Foundation, and ultimately throughout the field of philanthropy, about how strengthening key institutions can advance social justice.
The foundation has committed $1 billion over five years to BUILD because we believe that the fight against inequality needs resilient, durable, and fortified civil society institutions. Individuals and ideas also are critical, but the key role of institutions as drivers of sustained social change is a core, and sometimes overlooked, aspect of social justice work.
Each of the BUILD grantee organizations and networks will receive five years of support, at levels higher than what they have historically received from the Ford Foundation. Much of this support will be as flexible as we can legally make it; most grants will include generous general support. The remainder of each BUILD grant will provide support for nonprofit organizations and networks to strengthen their strategies, leadership, management, and finances. Each BUILD grantee will develop and then implement its own institutional strengthening plan. Although Ford Foundation staff will consult on drafts of these plans, the grantee will be “in the driver’s seat” in determining their institutional strengthening priorities and how best to address them.
So far we’ve made about 90 BUILD grants, and honestly it’s a bit early to say how well they are working. We do know where organizations are planning to spend the money. The vast majority of BUILD grantees, 79 percent, are choosing to strengthen their core operations, investing in areas such as financial management, fundraising, communications, evaluation, and HR. About two-thirds also are investing in strengthening capacities critical to social justice work, such as legal, research, network building, and advocacy. Close to half are investing in strengthening their strategic clarity and coherence, 36 percent are investing in leadership development and governance, and 32 percent are choosing to deepen their organizational commitments to diversity, equity, and inclusion.
It’s important to note that BUILD is not the Ford Foundation’s only investment in strengthening nonprofit institutions. BUILD is part of FordForward, the Ford Foundation’s multi-pronged effort to make philanthropy part of the solution to inequality in a deep and lasting sense. In addition to BUILD, two other aspects of FordForward focus on strengthening nonprofits. The foundation is giving more general support grants across all program areas, with a goal of making general support our default type of grant whenever possible. We also are increasing overhead rates on project grants to a minimum of 20 percent, to more adequately address the indirect costs of executing projects and programs.
Nell: This is a pretty innovative approach to capacity building, how do you plan to share what you learn with other funders and with the sector overall?
Kathy: We’re planning a robust evaluation and learning strategy, although we’re really just getting started. Our hope is to share some early findings by year’s end. We’ll be focusing on three sets of key questions throughout the five-year initiative:
- Do BUILD grants work? Do the organizations and networks that receive this funding become stronger and more durable over time? And if so, what if any impact does that have on the organization’s effectiveness?
- If the BUILD approach works, what about it works? Is it the general operating support, or a specific kind of organizational strengthening, or something else?
- Have we changed the way we do business at Ford, moving away from one-year project grants in favor of larger, more flexible grants?
Along with our evaluation and learning plan, we’re also developing a communications strategy to share what we learn with the field and engage in dialogue with others. We’ll be publishing evaluation results, speaking at conferences, and making active use of social media.
Nell: Both the Ford Foundation and the Packard Foundation are rare funders in that they are very committed to creating strong nonprofit organizations through heavy investment in capacity building. Do you think philanthropic and government funders are starting to follow your lead? Or what will it take to make that happen?
Kathy: Well, we certainly hope they are! It’s important to acknowledge that capacity building grantmaking is not new; in launching BUILD, we’ve learned from and appreciate the work of leaders in this field like the David and Lucile Packard Foundation, as well as the William and Flora Hewlett Foundation and the Evelyn and Walter Haas Jr. Foundation.
Over time, we hope that the ranks of capacity building funders will grow. We hope that BUILD will influence other donors by contributing to the evidence base that nonprofit capacity building works—that stronger, more durable, and more resilient organizations and networks are more effective at achieving their missions.
We also hope to contribute to the evidence base about what kinds of capacity building work best for organizations and networks of different types and sizes, working on different issues in diverse geographies. That’s a tall order, but one of the great things about being a global funder and being able to invest significant resources in BUILD is that we’re able to try this grantmaking approach with a broad range of institutions.
Nell: The Ford Foundation made a very public move two years ago to focus their efforts on fighting inequality. But that goal has arguably become harder given the political winds. How does a foundation like Ford navigate achievement of their desired impact in a potentially more difficult external environment?
Kathy: The Ford Foundation has worked in the U.S. and around the world for more than 70 years, and we’ve seen a lot of upheaval during that time. We’re acutely aware of the challenges facing our work, but we’re moving ahead with optimism and with what my boss Darren Walker calls “radical hope.”
BUILD is a big part of that hope. I believe strongly that in uncertain times, a BUILD approach to grantmaking is one of the smartest choices a foundation can make. By giving our grantees multi-year general operating support, we are giving them the resources and the flexibility to pivot their work quickly in the face of new realities. By also giving them thoughtful and flexible institutional strengthening support, we are enabling them to invest in their own leadership, strategy, management and operations at a time when they have to be at the top of their games.
Photo Credit: Ford Foundation
Last week I led a planning call among the panelists on the “Supporting Nonprofit Sustainability” session I am moderating at April’s Center for Effective Philanthropy conference (which I described in an earlier post). One of the panelist suggested that we start the session by defining what we mean by “nonprofit sustainability.”
As we started to discuss this, it quickly became apparent that some of us had different definitions of “nonprofit sustainability.” And indeed, in the social change sector more broadly there is a long list of definitions of nonprofit sustainability.
Sometimes people use “nonprofit sustainability” to mean nonprofits moving away from private philanthropy and becoming self-sufficient through earned income sources (the sale of goods or services). I don’t believe that that is ever possible. Nonprofits are often borne as a response to a disequilibrium that the market created (income inequality, racial injustice, failing education). So it is rare that a nonprofit can figure out a way to make the market pay for something that it created. The vast majority of nonprofits will never be fully self-sustaining through earned income efforts; rather they will always be subsidized by non-earned sources, like philanthropy and government.
Others define “nonprofit sustainability” as the ability to attract multi-year, unrestricted funding. While that would be a positive step, foundations are largely the only nonprofit funding source able or willing to make unrestricted, multi-year commitments. Government funding is never unrestricted, and individuals rarely make multi-year commitments. And even if all foundation funders made these commitments, foundation funding only ever totals 2-3% of all of the revenue flowing to the nonprofit sector. So that’s not a big enough piece of the pie to ensure nonprofit sustainability.
Still others talk about “nonprofit sustainability” as having a diversified revenue stream. It may make sense for some nonprofits to focus on one or two revenue streams if that’s where their core competencies lie. So it is not a foregone conclusion that revenue diversification fits every nonprofit business model.
And other people define “nonprofit sustainability” as understanding and funding a nonprofit’s full costs, including direct and indirect costs. While this is absolutely a part of nonprofit sustainability, I don’t think it tells the whole story.
Therefore, none of these definitions of nonprofit sustainability satisfy me. They are either two narrow, too unrealistic, or inaccurate.
My definition, then, is:
Nonprofit sustainability occurs when a nonprofit attracts and effectively uses
enough and the right kinds of money necessary to achieve their long-term outcome goals.
So to break that down, nonprofit sustainability includes these elements:
Knowing Your Long-Term Outcome Goals
To be sustainable, a nonprofit must articulate the long-term outcomes that they are ultimately trying to accomplish (through a Theory of Change). You cannot hope to be sustainable if you can’t articulate why you exist and what you ultimately want to accomplish as a social change organization.
Having a Strategy to Achieve Those Goals
And you won’t achieve those outcomes (and be sustainable) if you don’t have a long-term strategy to get there. The strategy doesn’t have to be set in stone — it should be malleable as internal and external circumstances change — but it should ultimately guide your course to achieving those outcome goals.
Effectively Using Enough Money
But its not enough to simply plan for the future, you must then figure out what staff, board, volunteers, systems, technology, marketing, and other resources you need to bring your strategy to fruition. You must articulate the business model you will employ, and the corresponding money required, to realize your long-term outcome goals. And I don’t mean the band-aid version — I mean what it will really take to achieve the long-term outcomes you seek.
Attracting the Right Kinds of Money
But it’s also not enough to figure out what it’s going to cost. You have to figure out the other side of the money equation, which is how to bring that money in the door. A smart financial strategy attracts money that is the right fit for your organization. You have to be strategic (not reactive) about how money flows to the organization (fundraising, government grants, earned income). It might be that you focus solely on private sources, or you may have a mix of government and earned sources. But your financial model must align with your core competencies and your mission.
Nonprofit sustainability means that a nonprofit board and staff know what they want to accomplish, develop a smart strategy and business model, and use money as a tool to make it happen.
But nonprofit sustainability should not be up to just nonprofit leaders to figure out. Anyone who wants to realize social change (the government, private funders, social change leaders) must advocate for and support more sustainability in the sector. It must be a larger conversation. I hope that conversation grows far beyond the CEP conference in April.
Photo Credit: Philip Taylor
Note: With a current political climate which is arguably more challenging for many nonprofit social change efforts, I believe (along with many others) that now is the time for nonprofits to move more actively into advocacy. But many nonprofit leaders don’t know how to get started. So I asked the expert on all things nonprofit advocacy — Tim Delaney, President & CEO of the National Council of Nonprofits — to write a guest post describing how nonprofit leaders can move into advocacy. Here is his post.
Given the new realities at the state and federal levels of governments, nonprofit leaders (board and staff) are recognizing that nonprofit advocacy is more important than ever before. They suddenly feel compelled to engage in advocacy. Yet many admit privately that their advocacy know-how has either atrophied or never gotten off the ground. As we witness a re-birth of interest in nonprofit advocacy, this article offers initial steps along a pathway to effective advocacy.
Nonprofit advocacy is a lot simpler than most people realize, with easy steps involving the heart, mind, body, and soul.
Care. The very first step in advocacy is to care deeply about something. For nonprofits, this means caring about your organization’s mission. When you really care, then you will see the barriers blocking your way … and be motivated to remove or overcome those barriers to advance the organization’s mission. Consider this mom who worried that she would be ineffective as an advocate, yet when motivated to protect her child’s safety, she championed changes to federal and state laws.
Know you are not alone. If you start to get weak of heart, know that you are part of a community that includes more than one million organizations, employs ten percent of the American workforce, and contributes billions to the economy. Your nonprofit’s mission is unique, but your organization is part of an expansive ecosystem of nonprofits working in every community across the country. We are all stronger if we honor the Three Musketeers’ motto of “All for one and one for all, united we stand, divided we fall.”
Realize that you are already advocating. People sometimes fret that they don’t know how to advocate. But it’s so easy that first graders do it! So do you, every day. Did you share an update with your nonprofit’s stakeholders (such as donors, board members, or reporters) recently, so they know about the impact your organization is having in the community? Congratulations, you are already advocating! We like to say that the definition of advocacy is answering the question, “Who can I talk to today to advance my nonprofit’s mission?”
Lean into the news to stay informed. It’s too late for action when reading that the Governor signed a bill to regulate nonprofits or the city council voted to pass an ordinance to tax nonprofit property. Nonprofits need to pay attention to the news so you’re ready to speak up for your communities. To help nonprofits make sense of the swirling policy issues in Washington, DC, we wrote this analysis in the Chronicle of Philanthropy identifying six sector-wide issues that we foresee impacting all nonprofits in the coming months. Your local state association of nonprofits can help keep you up-to-date on what is happening, and you can subscribe to our free policy newsletter, Nonprofit Advocacy Matters.
Focus. One danger of paying attention to the news is most people suddenly will see multiple things that motivate them to action. Yet there is only so much time in each day. When taking the Heart Step of identifying what you deeply care about with your nonprofit’s mission, define and then refine the topics on which your nonprofit agrees in advance that it will devote some of its limited resources to advocate for or against. Reduce that in writing as part of your Public Policy Agenda. (Here’s a link to our Public Policy Agenda, which you can use as a rough draft to start your own.)
Work smarter, not harder. The old Fram oil commercials used to say, “You can pay me a little now … or a whole lot more later.” So it is with advocacy. If you invest a little time now to lift your voice instead of sitting silently while your local government imposes new taxes on nonprofits, then you can avoid the added burden of trying to raise additional money. If government contracts impose mindless administrative burdens and costs, then you can either keep paying people to do wasteful acts or band together with other nonprofits to ease the burdens of government and nonprofits. Our hallmark as nonprofits is that we solve community problems. Advocacy is a powerful leveraging tool to do just that.
Take the (h) election. Sometimes called the best, easiest, and cheapest (free!) insurance in America, filling out IRS Form 5768 can simplify life for most 501(c)(3) charitable nonprofits advancing their missions through advocacy. Taking the “(h) election” doesn’t cost anything, and gives many benefits for nonprofits.
Build relationships. The poet’s line that “no man is an island” underscores not only a universal interconnectedness that feeds our souls, but also a basic tenet of advocacy: relationships are fundamental. You will be more effective when those you are advocating already trust you and know the impact your nonprofit is having. Whether you are advocating to a potential funder or to an elected official (or a member of their staff), relationships matter. Take the time now, before you have a distinct ask to make, to make friends before they are needed. They will come in handy later, for you and for them. Even without further advocacy, informing officials of the work your nonprofit is doing can pay dividends as they consider proposals down the road.
Stand for Your Mission. No matter who is in office or which party is in control, nonprofits can’t afford to sit silently on the sidelines on issues that affect their ability to serve their community and advance their mission. The nonprofit community is at its strongest when every nonprofit, and every person associated with that nonprofit, raises their voice. To help board members in particular, check out this website on steps your nonprofit can take to stand for your mission.
Use Your Voice. Advocacy takes many forms. You can write or call your representatives or attend a Nonprofit Day at the Capitol. You can make a video demonstrating the effects (or potential effects) of an issue. Even social media has become a part of the advocacy toolkit. Read more stories of nonprofit advocacy in action to learn about the other ways you can engage.
Be a Team Player. Nonprofit advocacy is a team sport. Most funders and nonprofits focus on their narrow issue area. But some policy issues affect all nonprofits and thus require collective action. The current federal attempt to erode trust in nonprofits and foundations by removing or weakening the 60+ years of protection against politicizing nonprofits during elections, and local attempts to impose taxes, fees, or payments in lieu of taxes (PILOTs), are attacks on all nonprofits.
Be Vigilant. My football coach used to say, “Keep your head on a swivel,” meaning always be on the lookout, watching everything on the field. Public policy is even wilder than football because it’s played on a three-dimensional chess board, with activity happening up and down the local, state, and federal levels of governments and across the executive, legislative, and judicial branches. While many want to focus on the new President, the White House is only one source of policy action. Federal legislative priorities this year will likely flow down to hit the states to implement. Domestic spending cuts are a near certainty, and with states currently receiving, on average, 30 percent of their revenue from the federal government, it’s important to see the interconnections. The White House might dominate the nightly news, but life is lived at the local level and not in faraway DC.
Just as Plato wrote that “necessity is the mother of invention,” policy threats can spark inspiration for advocacy action. Although dismayed by the cause, I’m heartened by hearing how many nonprofit leaders are now seeing the value and power of advocacy. Let this be the re-birth of nonprofit advocacy, which is deeply rooted in our collective DNA.
Photo Credit: National Council of Nonprofits
Whew, are you as exhausted as I am? As I said last month, with the January inauguration of President Trump, it seems we moved into hyper drive. And February didn’t slow down a bit. From debates about the right political role for nonprofits, to advocacy in new areas like science, to efforts to reinvent journalism, to new grassroots organizing campaigns, to new ways to think about marketing in the nonprofit sector, there was a lot going on in the world of social change.
Here is my pick of the 10 best reads in the world of nonprofits, philanthropy and social change in February. If you want a longer list, follow me on Twitter @nedgington. And check out past months’ 10 Great Reads lists here.
- A big contributor to the exhausting pace is the daily onslaught of new and shocking pronouncements from the Trump administration. One with a potentially huge impact on the nonprofit sector was Trump’s call for an end to the Johnson Amendment, which limits the election-related activity of nonprofits. Many argued that this would be a destructive development for the sector, from limiting the collaborative position of the sector, to moving philanthropy away from social change and toward politics, to contributing to an elimination of the charitable tax deduction, to increasing dark money contributions to political campaigns. But others disagreed arguing that repealing the Johnson Amendment would level the playing field with for-profits. As always, the HistPhil blog gives some much needed historical perspective on the issue.
- Another victim of Trump’s ire in February was the news media. Journalism has been struggling for years amid falling advertising revenues and a changing digital landscape. But it seems the Trump administration may just be the impetus the industry needs to reinvent itself. As Jeff Jarvis argued: “Now we reinvent journalism. Now we learn how to serve communities, listening to them to reflect their worldviews and gain their trust so we can inform them. Now we give up on the belief that we are entitled to act as gatekeeper and to set the agenda as well as the prices of information and advertising. Now we must learn to work well with others. Now we must bring diversity not just to our surviving newsrooms — which we must — but to the larger news ecosystem, building new, sustainable news services and businesses to listen to, understand, empathize with, and meet the needs of many communities.” And Nieman Lab hosted a conversation among journalists and editors from The New York Times, The Wall Street Journal and The Huffington Post about the future of journalism. And Democracy Fund launched a cool new project, the Local News Lab, aimed at making local news more sustainable.
- In these uncertain times where many nonprofits are feeling under attack, advocacy has become a more important tool than ever. Writing in the Stanford Social Innovation Review, Jim Shultz offers some guiding questions for developing your nonprofit’s advocacy strategy.
- And speaking of new levels of advocacy, while scientists once strived to remain separate from politics, some scientists are finding themselves in the political arena just by investigating areas at odds with the Trump administration, like climate change. And some scientists created a network of scientists who could offer temporary space to U.S. scientists stranded overseas by the immigration ban.
- The Johns Hopkins Center for Civil Society Studies released a new online database that lets you slice and dice data on the U.S. nonprofit economy. Fascinating.
- Some nonprofits have enjoyed dramatic donation and follower increases as a result of the election. One of these, the ACLU has developed a pretty impressive social media strategy and plans for a much larger ground game. Similarly, Planned Parenthood is using their increased support to develop their grassroots organizing efforts.
- All of these efforts to resist the Trump Administration got David Brooks thinking about resistance movements throughout history and which might be most applicable now.
- Taz Hussein and Matt Plummer offered a wakeup call to social change leaders who think they don’t need to generate demand for their social change work: “It’s time [nonprofits] and their funders heed business findings on increasing noise in the marketplace and the need to make any new offering, even a life-saving one, stand out. In other words, they need to pay what it takes to actively drive demand.”
- And speaking of marketing in the nonprofit sector, Ann Christiano and Annie Neimand argued that nonprofits needs to stop “raising awareness” and instead create strategies for changing behavior: “Because abundant research shows that people who are simply given more information are unlikely to change their beliefs or behavior, it’s time for activists and organizations seeking to drive change in the public interest to move beyond just raising awareness. It wastes a lot of time and money for important causes that can’t afford to sacrifice either. Instead, social change activists need to use behavioral science to craft campaigns that use messaging and concrete calls to action that get people to change how they feel, think, or act, and as a result create long-lasting change.” Amen!
- Writing on the PhilanTopic blog, Kyle Crawford argued that chatbots — computer programs that conduct a conversation via voice or text — have a real role to play in social change, and nonprofits should become early adopters of this new technology.
Photo Credit: Max Pixel
It amazes me how many nonprofit leaders form their organizational strategy, their fundraising pitch, or their program model inside their nonprofit’s own walls. In order to be successful, you must understand the market in which you operate. And in order to understand it, you must go investigate it.
It is a simple fact that nonprofits must compete for funding, for clients, for volunteers, for staff, for board members, for mindshare, for policymaker will and commitment. So you must understand the market in which you work – what’s happening out there and how you fit in.
Ongoing market research can help you understand how your clients and potential clients think, what your funders want now and in the future, what your competitors and collaborators are doing and where they might be going, and how the very problems you exist to solve might be changing over time.
And there is another huge benefit to this data gathering — it forces you to expand and strengthen your network, because in the very act of finding out what’s happening outside your walls, you will forge new and deeper connections with others out there. So while market research should definitely be part of your long-term strategic planning process, it is also something you should continue to do on at least an annual basis.
Market research is where you test the assumptions baked into your work. You are seeking to find the answers to questions like:
- How are the efforts of other groups in our space changing over time?
- How are these other groups funded?
- What are their program delivery models?
- What are their plans for the future?
- Where are there opportunities for alliance?
- How do they define the social problems they are working on?
- What other social, technological, economic, demographic, political, regulatory shifts are happening outside our walls that might affect the problem(s) we are working on?
Of those people or groups you are trying to influence or benefit (like your clients) find out:
- What are the demographic (age, gender, race, ethnicity, income, etc.) characteristics of these groups?
- What are their psychographic (attitudes, interests, goals, etc.) characteristics?
- How can we best reach them and change their attitudes and/or behavior?
- What specific subsets of these populations can we have the greatest impact on?
- How might our various funding streams (government, earned income, private donations, etc.) change over time?
- What might our current or future funders want in the future?
- What appeals to them about our solution?
- What appeals to them about alternative solutions?
Before embarking on any market research, think through questions like these and figure out which are most applicable to your situation. This becomes your market research list.
Then determine how you will find the answers to those questions. Very few nonprofits can afford a comprehensive market study, so it will likely be up to your staff to do the digging. This can include activities like:
- Web research on your competitors, collaborators, funders.
- One-on-one interviews with current and potential funders, collaborators and competitors, experts in your field.
- Surveys of your current or potential clients, members, influencers, funders, volunteers.
- Review of existing research on the social issues on which you work.
And don’t assume that you will do this type of market research only once. Rather, you want to make it a regular part of operations (at least annually, if not more often), so it shouldn’t be overly burdensome. Make it easy and interesting for you and your staff to get beyond your walls and better understand the market in which you work.
Armed with new and ongoing knowledge about your market, you will be better able to design effective programs, attract additional support, articulate your nonprofit’s unique value, grow your network, and much more. So get out there!
Photo Credit: Ministry of Information Photo Division Photographer, Wartime Social Survey
In this month’s Social Velocity interview, I’m talking with Hilda Polanco. Hilda is the founder and CEO of FMA – Fiscal Strength for Nonprofits, a consulting firm that helps nonprofits and foundations develop the fiscal capacity they need to fulfill their missions, including stronger operations and fiscal management, improved foundation grant-making capacity, and increased staff financial knowledge.
In addition to leading FMA, Hilda serves on the NYC Human Services Coalition’s special commission to study the closure of high-profile human services organizations. She was a founding member of the selection committee of the New York Nonprofit Excellence Awards and has served as an adjunct professor at Columbia University’s Department of Health Policy and Management, as well as on the faculty of the Donor’s Forum of Chicago.
Nell: Your career has been about strengthening the financial capacity of the nonprofit sector. Why do you think nonprofits struggle so much with financial sustainability?
Hilda: All businesses struggle with sustainability, as it turns out, but in the case of nonprofits, there are several additional challenges: I think of these challenges as follows:
- Missions that compete with the business model for attention, creating an unclear vision of what it costs to deliver services and what the revenue and expense drivers are to delivering these services.
- A lack of focus on the balance sheet, and instead a focus only on annual operating results
- An insufficient focus on longterm financial planning
- A lack of common understanding of the meaning of sustainability, among nonprofits and the funders that support them
Mission-driven leaders who are so important to the nonprofit sector are not often motivated by the “business” of delivering services. They care about the issues, the causes, the communities. As a result, they may not understand what a nonprofit’s business model is, or they may have absorbed a popular mistaken notion about nonprofits — that they should not strive to preserve surpluses. In order to be sustainable, an organization needs to understand its revenue and expense drivers and strive to strengthen its financial position over time.
An additional challenge is pricing. This is commonly subsumed under a discussion of “overhead,” but that term conceals some of the details of the problem. Organizations will face challenges to their sustainability if they are pursuing work or lines of business without fully understanding the cost when compared with what funds they are raising. Where there is a gap between what they raise and what it costs to perform the work, a “structural deficit” takes hold. A structural deficit is not one you can cure with a targeted fundraising appeal –as you could, say, to replace your roof or buy a new school bus. A structural deficit is one that persistently drains resources from the organization until the underlying problem is corrected. It’s a roof that, by design, will collapse every single year.
Having a focus on the balance sheet means having a focus on establishing healthy reserves. We drill our clients constantly on their Liquid Unrestricted Net Assets (or LUNA, for short). LUNA describes an organization’s available reserves for addressing strategic opportunities or unexpected expenses. They appear on the balance sheet. Too many organizations reckon their financial standing by simply comparing income and expenses for a given year. They need to look at a balance sheet. A strong balance sheet allows a leader to address the organization’s future needs. A weak balance sheet creates uncertainty. And this raises the issue of capital. There are several ‘kinds’ of capital—funding that is raised or preserved for different uses, for growth or innovation, for example.
It’s not just nonprofit leaders who need to understand this. Foundation program officers, major donors, and all buyers of nonprofit services need to share in this viewpoint, to arrive at a common understanding of what nonprofit sustainability looks like. The market for nonprofit services is sort of unusual in that we expect the funders, as much as the nonprofit leaders—to be self-reflective about their role in the transaction.
Funders should not expect their grantees to deliver quality services without understanding the full cost of the enterprise. And sometimes, they need to engage in a substantive discussion about business models so they can come to a shared understanding. Funders can have a different conversation with grantees, even if they are only funding a project. The conversation should not be just about what they are “buying”, but also about the organization’s overall capacity. Rather than focusing exclusively on this moment, the question should be “How can we be sure that you will have the capacity to achieve your target outcomes over time?”
What should they be doing to remedy the situation? This isn’t easy to solve. In many ways, it goes against how we think about our roles in a buying and selling relationship. Think about how strange this is: If you value the service your local coffee shop provides, it would be like prodding its owner to charge you more for your coffee so they could stay in business and serve the community who counts on that coffee each and every day!
Of course, the future is unknown. Sustainable nonprofits need to be planning for at least a two year horizon. Decisions made this year will have an impact on future years and preparing for those future years is much more effective with a longer horizon to strategize, rather than pretending that life happens in one year increments in isolation from the following year. For example, new hires, raises, multi-year grants that may come to an end in the coming year. These are all examples of business assumptions that should be taken in the context of their impact on future operations. More broadly, an organization must revisit its financial model over time, understanding what may have changed in the funding ecosystem or what competing organizations are doing.
Nell: There are two parts to financial sustainability: bringing money in the door and then using that money effectively. There have been some strides toward changing cultural norms around how nonprofits use money (with the Real Costs project and the Overhead Myth campaign), but what about on the bringing money in the door side? How do we get smarter about that?
Hilda: Efforts to raise funds for “services” have created a tendency to raise money for particular programmatic activities, rather than for the mission and outcomes of the organization as a whole. When an organization can articulate its target outcomes, and know what financial resources will be required to achieve these, the conversation can shift to an investment in the organization’s vision, rather than the purchase of specific activities. These are requests for investments of capital.
We see a growing trend in capital campaigns lead by a “funder prospectus” – a vision for the organization’s outcomes, with a request for investment in these outcomes; a way to focus the conversation differently. And with a funder prospectus, multiple funders can come to the table to support a common strategy – rather than create parallel strategies to suit the goals of the funder, rather than the goals of the organization. These campaigns can be for the sustainability of current operating levels, or the funding for growth.
Another issue to keep in mind is the concentration vs. diversification strategic conversation. There are a lot of consultants advising nonprofits to diversify their revenue sources, and not put “all their eggs in one basket.” This can be good advice under some circumstances, but it is not a one-size-fits-all solution. Diversification sometimes means building a much more complex—and potentially fragile—business model. For many organizations, concentrating on one revenue source can help focus, strengthen, and build the business model. For example, the skills and capacity to successfully raise funds from foundations and corporations is different from special events, major donors, or government grants. Without sufficient activity in each, the business model may not be able to support the required levels of diverse skill sets. It is somewhat of a balance – a diverse revenue strategy means a diverse skill set and capacity to succeed; often not found in a common staff position or limited organizational infrastructure.
And lastly, there is the need to balance between raising funds for current operations, vs. raising funds for new and “innovative” programming. Here’s where the “shiny object syndrome” can undermine an organization’s sustainability. The Development Director is excited about new programs, but the organization isn’t raising the necessary funds to cover core programming. Years ago, an Executive Director I know lamented to me: “If I hear ‘innovation’ one more time, I’m going to lose my mind. What happened to tried and true?” This notion of balance need not be confined to the leadership of an organization. Indeed, in healthy and sustainable organizations, this sense of balance is shared across the organization. The development team and program leaders should, effectively, understand the organization’s financial model just as much as the finance team. It is particularly important for development leaders to be able to articulate a coherent and compelling financial story of the organization as a whole, not just respond to the new ideas a funder may be focused on.
Nell: What role does research to understand what works and what doesn’t play? There seems to be a dearth of research in the sector about effective financing models. Do you agree with that assessment? And if so, how do we change that?
Hilda: I agree that there’s not much research, and there should be more.
And the first step toward research is sharing knowledge and lessons learned as these are happening rather than waiting for longer term research and evaluation. We need to build more of a shared understanding of the universe of possibilities. For example, what are Program Related Investments (PRI’s)? We hear about PRIs from time to time, but what are some early lessons learned? Who is making them effectively? More esoteric investments like Social Impact Bonds have made a splash, but there’s little understanding of the risks organizations take on by accepting this type of investment and the lessons learned in getting them off the ground.
Funders who are funding in a more holistic way can help the sector by educating other funders about it. Can a foundation make an investment in an organization’s operating reserves rather than operations? What does that look like?
Funders who are willing to experiment and share their experiences can play an important role here.
Photo Credit: FMA
A few weeks ago I wrote a post on a controversial topic, “How to Remove a Troublesome Board Member.” As I wrote in the post,
Of the many taboos in the nonprofit sector, the taboo against asking bad board members to resign is one of the most destructive. Instead of encouraging ineffective or meddling board members to move on, nonprofit leaders often show misplaced gratitude for those errant board members continuing to take up space.
Because it is such a taboo idea, I predictably received several emails, Tweets and comments in response to the post. The most thoughtful of which was from Tom Klaus, who wrote:
Like anyone who has ever led a nonprofit, I’ve wanted to make changes to my board to make everything run a lot better, and I can sympathize with the folks for whom your blog is intended. What I’d like to hear, though, are your thoughts on the legal and ethical aspects of a nonprofit leader making such changes to board.
In most states, the by-laws of a nonprofit organization establish the board of directors as the legal entity upon which the organization is established. The ED or CEO is typically not also a member of the board of directors, in my experience. Hence, there is a legal conundrum facing the leader. He or she may not have legal standing to make the changes to the board you are suggesting in your blog. Now, this is not to say, of course, that nonprofit leaders don’t try to do it anyway; only that doing so might provide the grounds for board members to significantly challenge and even release the nonprofit leader.
The ethical challenge this presents, I believe, is this: Is it ethical for a nonprofit leader to try to change the makeup of the group that hired her or him?
I think the most difficult governance challenge in a nonprofit organization is achieving the delicate balance between the power of the ED/CEO and the power of the Board of Directors. I’m sure we’ve both known organizations that have done this remarkably well, and they become high performing, heartily sustainable, and wildly successful in their work. I’m sure we’ve also both known organizations that just can’t seem to get the balance right.
One of my clients is like this latter. Over the years they have continued to fluctuate between too much power in the hands of the board and too much power in the hands of the ED/CEO. These are among the most unproductive times for them, of course. Just curious about your thinking on this.
Tom raises an excellent point. The nonprofit board of directors are and should be charged with the legal authority to hire and manage the nonprofit executive director. However, that does not mean that they are the only ones to possess the power to make changes in the leadership of the organization. It is important to understand that both board members and executive directors possess power but very different types of power.
In the 1950s two social psychologists, John French and Bertram Raven, defined a new way to think about the kinds of power people possess. They classified six bases of an individual’s social power:
- Reward Power is based on a person’s ability to give rewards
- Coercive Power is based on a person’s ability to give punishments
- Referent Power is based on a person’s ability to make others want to model his/her behavior
- Legitimate Power is based on a person’s official title or role
- Expert Power is based on a person’s expertise
- Informational Power is based on a person’s possession of specific content
Instead of the Legitimate Power that board members enjoy because of their legal title of “board member,” I was referring in my previous blog post to the Expert Power a nonprofit executive director can employ.
A nonprofit’s executive director possesses tremendous expertise in (to name a few):
- The mission, program delivery and results
- The organization’s strategy and goals
- The organization’s day-to-day work
- The skills, experience, networks needed on the board
- The resources (potential funding, strategic alliances) available to the organization
The most effective boards are those which are led by the Legitimate Power of the board chair and her committee chairs, paired with the Expert Power of the executive director. Because the reality is that as a group of volunteers who have many more pressing items on their to do list, a board of directors rarely functions at their best when left to their own devices.
Therefore the executive director can and should play a critical role in helping the board leadership to assemble the type of board that will help move the mission forward. This includes:
- Helping the board to analyze the board skills, experience and networks necessary to deliver on the strategic plan
- Identifying potential new recruits to fill those gaps
- Helping to structure the board to be most productive
- Meeting one-on-one with board members annually to determine where and how they can be most helpful to the mission
- Working with the board chair to hold board members accountable and ask them to resign when necessary
While the nonprofit executive director does not have Legitimate Power because, as Tom rightly points out, she serves at the behest of the board of directors, she can and should wield Expert Power to help assemble and manage a board that can be instrumental in the nonprofit achieving it’s mission and being sustainable.
To learn more about how to do that, download the 10 Traits of a Groundbreaking Board book.
Photo Credit: 24×7 Photo
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