In today’s Social Velocity interview I’m talking with Tim Delaney, President and CEO of the National Council of Nonprofits, the nation’s largest network of nonprofits.
The National Council of Nonprofits helps nonprofits identify emerging trends, engage in critical policy issues, exchange proven practices across state lines, and advance their missions through advocacy. Previously, Tim served as a partner at a large law firm (helping prosecute the impeachment of a Governor and leading the firm’s government relations practice), Solicitor General and then Chief Deputy Attorney General (leading his state to win several cases in the U.S. Supreme Court), and founder of the Center for Leadership, Ethics & Public Service (championing ethical leadership and civic engagement).
Nell: Historically, “advocacy” has been a dirty word in the nonprofit sector. Organizations have been afraid of getting into trouble with the IRS for pursuing too much lobbying behavior. But that seems to be changing. What are your thoughts on how involved in advocacy 501(c)(3) organizations can and should be?
Tim: Yes, it’s perplexing that using words like “advocacy” and “lobbying” could get a nonprofit employee’s mouth washed out with soap. But seriously, advocacy is not just a right for nonprofits that is protected by the First Amendment; it’s a profound responsibility and effective tool to advance nonprofit missions.
Nonprofits provide a way for Americans to come together to solve problems, large and small. And they often do so through advocacy: simply standing up and speaking out for something they believe. Americans came together through nonprofits to advocate successfully in securing the right of women to vote (via suffragist groups), establishing Social Security (spearheaded by Townsend Clubs), desegregating schools (leadership by NAACP), securing civil rights (Dr. King delivered his “I Have a Dream” speech and undertook much of his work as President of the nonprofit Southern Christian Leadership Conference), and so much more.
But advocacy is not just for social movements. Advocacy includes standing up for your nonprofit’s right to be paid reasonably for services it provides under a government contract. Advocacy includes telling the story of your nonprofit’s impact to a reporter. We see advocacy as the answer to one key question: who can I talk to today to advance my nonprofit’s mission?
A barrier many nonprofits run into comes from what I call the “3 As” –uninformed academics, accountants, and attorneys who advise nonprofit boards by passing along false lore that there “might be legal problems” if a nonprofit does “too much” lobbying. Nonprofit staff come back from advocacy training fired up, but boards extinguish that passion based on false lore. After hearing stories like this from across the country, we’ve decided to turn advocacy training around. The traditional approach of “it’s legal” sought to counter the false lore, yet too often it led people to focus on arcane issues more remote than the fine print on your airline ticket or apps that you never read. Therefore, we now focus on “why” advocacy is essential to mission advancement and “why” nonprofits need to be engaged at the state level to protect against government attacks on tax exemptions, nonprofit independence, and charitable giving incentives.
As part of our effort to get nonprofits past those old barriers, we’ve joined together with Alliance for Justice, BoardSource, Campion Foundation, the Forum of Regional Associations of Grantmakers, and Knight Foundation to create Stand for Your Mission, a free website that provides nonprofit board members with information they need to be effective advocates in advancing nonprofit missions.
Nell: The National Council of Nonprofits has been on the forefront of the movement to get government to recognize the importance of funding nonprofits’ indirect costs. The recent OMB ruling mandating a minimum 10% indirect rate on most government grants and contracts with nonprofits seems like a watershed moment, but 10% is still pretty low and many nonprofits don’t understand the implications or how to benefit. What are your plans at the Council of Nonprofits to continue to move this issue forward?
Tim: As you noted, the 10% of modified total direct costs is just the minimum. For tens of thousands of nonprofits, just getting to 10% will make a huge difference. In its most recent State of the Sector Survey, Nonprofit Finance Fund found that 57% of nonprofits are being paid indirect cost rates of 9% or less. And Urban Institute found that of nonprofits reporting a problem, a quarter said that governments were paying them zero for indirect costs.
Now compare those paltry sums against research from Bridgespan showing that a more accurate range is about 25 to 35%. Certainly each case is different, but being reimbursed nothing or just 5% year after year when your real legitimate costs are always higher is debilitating, eroding effectiveness. Delivering sustained impact is impossible. So getting those nonprofits up to just the minimum will enhance sustainability to make a difference in their communities.
Importantly, 10% is just the floor. If a nonprofit is properly allocating costs and documenting its indirect costs, it can receive reimbursement for whatever those costs are, whether they are 20, 30, or even 40%. Getting paid for the true costs of delivering services can reduce burdens on nonprofits to fundraise for the difference, which frees funders from having to subsidize governments and allows nonprofits to dedicate more time to missions instead of diverted to filling funding gaps.
Seeing the OMB Uniform Guidance go into effect is just the beginning and underscores the importance of nonprofit advocacy. The mere issuance of OMB’s mandate doesn’t mean that the tens of thousands of local, state, and federal employees scattered across multiple departments, agencies, divisions, and offices will follow it or apply it properly. First, they need to become aware of it (which still has not happened), then receive training (same), and apply it consistently (same). Plus, states and localities often have contrary laws and policies on their books, requiring advocacy to change them to conform. OMB’s mandate involves a giant systems change, but the federal government still has not informed the system of what is required and the need to change policies and practices to abide by it.
David Thompson and Beth Bowsky on our team have been conducting dozens of in-person presentations and webinars across the country to ensure nonprofits are aware of their rights and how to advocate for proper implementation of the Uniform Guidance. Plus, we have been working with multiple state and local government associations to spread the word, and written numerous published pieces, including an overview, “Know Your Rights … and How to Protect Them,” that highlights potential compliance challenges.
In addition, we’re creating a series of short training modules for nonprofits to better understand their indirect costs. The key is for nonprofits with government grants and contracts to stand up for their rights to fair indirect cost reimbursement and to let their local state association of nonprofits and us know when governments are not living up to their obligations. Working through our network gives a nonprofit cover (so it isn’t fighting alone and having to worry about backlash) and strength in numbers to protect those rights.
Nell: This issue is also part of the larger movement to overcome the Overhead Myth in the nonprofit sector, the idea that “overhead” (or indirect costs) are bad and should be limited as much as possible. How close are we to truly overcoming this myth both among nonprofit donors and nonprofit leaders (who often keep themselves in these handcuffs)?
Tim: We still have a long way to go. OMB’s Uniform Guidance is a huge step forward because the federal government has now expressly acknowledged that indirect costs are legitimate and necessary. The sector needed a powerful external validating voice to overcome decades of treating mythology as orthodoxy. It’s inspiring to see that many private grantmakers have now adjusted their own policies or started to re-examine their past policies that unfairly limit payment for indirect/overhead costs.
However, the anti-overhead culture is deep seated and will take a long time to root it out. That’s true on both the funding side and the nonprofit side, given the powerful disincentives against claiming full costs. Nonprofits were forced to keep overhead artificially low by underinvesting in their infrastructure, staff training, and many other necessary expenses. Until we get so-called “watchdog” groups and reporters to stop using overhead ratios as false proxies for nonprofit efficiency (and get them to stop reporting overhead ratios as if they are a problem), and until all nonprofits are communicating with donors about their impact and what it truly costs to deliver that impact, everyone will still have work to do.
Nell: In both of these areas (advocacy and overhead) and in many others, nonprofits are treated like a second-class citizen. How do we get to a place where the critical role nonprofits play in our economy and in solutions to social challenges is recognized, and nonprofits are fully supported with the tools they need to be successful?
Tim: First and foremost, nonprofits must embrace our role as the place Americans come to solve problems and resolutely assert our role as advocates for the people and our communities. We often are on the front-line of vexing social challenges, giving us front-row seats to see the problems and the solutions. Who are we to hoard knowledge of solutions that could help our fellow neighbors? With the knowledge we hold and the clout we have (10% of the American workforce), we deserve a seat at policymaking tables. We need to proudly stand up, step forward, claim our space, and speak out for government to leverage its resources to solve problems at their source.
We need to tell the full story, not just of how many people were fed or acres preserved, but also the economic impact of the sector as a whole. For instance, CalNonprofits (the state association of nonprofits in California) published Causes Count about the economic clout of California’s nonprofits, and Donors Forum (the state association of nonprofits and grantmakers based in Illinois) released research on Social Return on Investment, showing the economic and social value of dollars invested in nonprofits.
As for being “fully” supported, that’s much more difficult. According to Nonprofit Finance Fund, last year – for the second year in a row – a majority of nonprofits didn’t have the resources to meet demand for their services. That’s going to be tough to turn around, especially as many nonprofits continue to be sliced by government budget cuts. Even as studies boast that individual giving is getting back to pre-Recession levels, that doesn’t make as much of a difference as most people think. Despite the focus on individual giving, it makes up only 9.3% of the sector’s overall revenue. Foundations are an even smaller percentage: 1.9%. Government grants and contracts make up a much larger portion – 32.3% – of the sector’s revenues. That’s why our focus in this area is so important.
Photo Credit: National Council of Nonprofits
There was a great post on the Stanford Social Innovation Review blog last week that clearly articulates a dysfunction in the nonprofit sector and when recognized by nonprofit leaders and their funders could reshape the sector.
In the SSIR, veteran nonprofit leader Kristen Joiner argues that because 86% of Fortune 500 leaders are men and 70% of nonprofit workers are women “gender dynamics” often cripple the nonprofit sector:
Like the provider of old, heading off to the office for a day of work, the private sector is focused on money and profit. The nonprofit sector, as the nurturing caretaker, is charged with caring for the young, the sick, the elderly, and the poor…This creates a have-and-have-not situation, where one side holds the money and power, and the other side asks for an allowance to do their “good work,” trying to get traction but more often getting stuck in a rut created by this dysfunctional dynamic…Investors in the social sector make it difficult for nonprofits to gather the resources to measure and pivot as necessary for success. They are looking for the proverbial “good girl”—an organization that doesn’t rock the status quo, that gives them a credential to show they “care” or “contribute.”
Joiner’s argument is not a new one, in fact Robert Egger voiced it in a 2008 Chronicle of Philanthropy article, where he described how the modern nonprofit sector was born out of the gender biases of the mid-20th century:
[In the 1970s and 80s] the number of nonprofits in the U.S. exploded…[led by] tens of thousands of college-educated, stay-at-home mothers…Many of these “founding mothers” brought with them an internalized understanding of their “role”…As long as these new organizations limited their work to nurturing, feminized charity work…they were humored, and even honored. [And foundations were] often dominated by men who were charged with dispensing money made by other men. Foundations rarely awarded money that fostered independence for grantees…In these formative years, and even today, grants are primarily made to submissive organizations — those willing to jump through countless hoops, those that would not push back when confronted with short-sighted policies, and those that would make do with much less than they knew was needed to do the job right…The rules that govern our sector — indeed, the very nature of our how we view ourselves — is rooted in systemic sexism.
Although I have worked in the nonprofit sector for 20 years, this “systemic sexism” never occurred to me until I read Egger’s article a few years ago. But now I see it often. And while I don’t think sexism should become a shorthand for everything that ails the nonprofit sector, I do think nonprofit leaders, board members and funders must be more aware of the underlying forces at play, so that we can all work to overcome them.
There are several key areas where this systemic sexism results in an uneven playing field for nonprofits:
- Less Access to Capital. Businesses have access to various forms of capital (startup, mezzanine, risk), whereas nonprofits struggle to attract day-to-day revenue, let alone the capacity and growth capital they so desperately need.
- Inadequate Sales Function. In the for-profit sector, sales and marketing are a much researched, supported and heralded part of a business model because it is well understood that without sales there is no business. But in the nonprofit world, sales — called “fundraising”– is misunderstood, under-supported, and sometimes ignored by nonprofit leaders, board members and funders.
- Tighter Limits on Overhead. Although this is starting to change, nonprofits are often encouraged to spend only a small amount of money on infrastructure, administration and fundraising (overhead expenses), but for-profit companies can spend whatever it takes.
- Less Investment in Leadership. Business leaders are encouraged to invest in professional development, training, and leadership coaching, but a nonprofit leader often must figure it all out on her own.
- A Restricted Role in Politics
While businesses can spend millions on lobbying and supporting political candidates, nonprofit political action is much more restrictive.
And the list goes on. Many of the dysfunctions present in the nonprofit sector are rooted in years and years of sector inequality. If we hope to make social change more effective and sustainable, we must free the sector of these shackles.
Photo Credit: Campbell’s Soup
There was an historic victory last month in the battle to rid the nonprofit sector of the Overhead Myth. The federal Office of Management and Budget adopted new Uniform Guidance rules that when any local, state or federal agency contracts with a nonprofit at least 10% of the contract must fund the nonprofit’s administrative costs (what the government calls “indirect costs”).
This is huge because nonprofit leaders report (here and here) that government contracts rarely fund even 10% of indirect costs and many times closer to 0%. While this is a big step forward, there is still much work to do in getting nonprofits the money they need to fund the full costs of their work.
The sector is so underfunded largely because we have taught nonprofit leaders that they should keep their indirect costs as low as possible. This is such a ridiculous shackle to put on the sector.
So nonprofits and funders must move to a place where we are funding the full costs of effective operations. But that won’t happen overnight. In fact, it requires that nonprofit leaders do four key things:
- Calculate the Full Costs of Each Program
In order to tell funders and government contractors exactly how much a program costs, you need to first understand those costs yourself. And the full costs of a program include BOTH 1)the direct costs (like the program director’s salary, program materials), and 2) the indirect costs (like the percent of the executive director’s salary spent on the program, office rent and utilities devoted to the program). Bridgespan created a really nice guide to figuring out the full (direct and indirect) costs of each of your programs.
- Articulate Those Costs to Funders
Once you’ve figured out the full costs of each of your programs, you must articulate those full costs to funders (individuals, foundations, government contractors) interested in supporting your programs. Explain how you came up with the full costs of each program, why you included both direct and indirect costs, and why you need support for ALL of those costs in order to effectively run the program. If a funder balks at supporting indirect costs, explain that a program without space, leadership, evaluation, or systems would not function, let alone function as effectively as it does.
- Analyze Your Overall Program Mix
But don’t stop there. Turn this new knowledge about the financial impact of each of your programs into a strategic tool. Once you figure out what each individual program fully costs, you can compare the financial and social impact (how well it contributes to your mission) of each program to each other, like this in order to understand how well your entire program portfolio contributes to the money and mission of your nonprofit. Through this analysis you can determine what programs you should expand, which you should continue, and which you may need to cut.
- Stop Selling Your Nonprofit Short
Once you’ve figured all of this out, stop accepting less than what your nonprofit really needs. When you allow a funder to haggle their way to receiving the full product without paying the full price you are undermining your organization and your mission. If a funder can’t or won’t pay the full costs then find someone else who will, or scale back on your programs until you do. Nonprofit leaders must break out of the nonprofit starvation cycle of agreeing to do more and more for less and less. You must stop running programs, or worse, adding new programs when they are not fully funded. Be honest with your board, your staff, your funders, and yourself about what each program really costs and whether or not you have the funding to continue (or grow) those programs.
I believe the Overhead tide is really turning. Nonprofits and their funders are starting to recognize that great programs take real money. But to truly take advantage of that trend nonprofit leaders must figure out the full cost of their programs and have the confidence to ask for, and receive, the funding to cover those costs.
Photo Credit: Dave Dugdale
Almost two years ago three nonprofit rating organizations launched the Overhead Myth campaign aimed at eradicating “the false conception that financial ratios are the sole indicator of nonprofit performance.” Call me an optimist, but I think it might be working. I see more nonprofit leaders and funders discussing the radical idea that overhead might not be a bad thing. We still have a long way to go, but perhaps there is progress.
The bad news, however, is that the Overhead Myth is only one of many (way too many) destructive nonprofit myths. So in this new year, let’s look at those additional myths that hold the nonprofit sector back.
As we all know, a myth is a story that everyone believes, but is actually not true. Here are the 5 most egregious myths I see in the nonprofit sector:
- Good Nonprofits Don’t Make a Profit
For some reason it is unseemly for a nonprofit to have more money than they immediately need. The best a nonprofit should hope for is to break even, and if they do run a profit, they should not be fundraising. To the contrary, a nonprofit with operating reserves can invest in a more sustainable organization, conduct evaluations to make sure their solution is the best one, recruit a highly competent staff, and weather economic fluctuations. For a donor it is far better to invest in an organization with the people and systems necessary to effectively tackle a social problem than an organization that is barely getting by. The best nonprofits are those that create a financial model that allows them the money mix (revenue, capital, reserves) necessary to make the best decisions and invest where and when they must.
- There Are Too Many Nonprofits
I’m so tired of the refrain (mostly by funders) that there are “too many” nonprofits. Does anyone complain about how many tech startups there are? This myth comes from the fact that the sector is undercapitalized which causes organizations to compete for scarce resources. So let’s fix that problem instead. To be sure, there are times when it makes sense to bring two nonprofits that address similar needs together in order to save costs, but that’s usually the exception not the rule. The process of merging two organizations is itself incredibly time-intensive and costly, and, honestly, rarely do funders invest the amount of resources required to ensure a successful merger. Every nonprofit should regularly assess their Theory of Change and how they fit into the external market place of social problems and competitors working on similar problems. If a nonprofit finds that they are no longer adding unique value to that marketplace, then they should reorganize, merge, or disband, whichever makes most strategic sense.
- Nonprofits, Unlike Businesses, Are Inefficient
This myth takes many forms: “nonprofits are too slow,” “nonprofits should sell more products or services”, “nonprofits should run more like a startup,” and the list goes on. The underlying assumption is that the for-profit world is inherently smarter, more strategic, more nimble and more effective. But the truth is that all three sectors (business, government, and nonprofit) have their stars (like Apple), their screwups (like Lehman Brothers) and the multitude in between. Inefficiency in the nonprofit sector is merely a symptom of a larger problem, which is the persistent lack of adequate capital to fund enough of the right staff, technology, systems, evaluation, marketing required to address the intractable problems nonprofits are trying to solve. Let’s talk about that instead.
- Nonprofits Are Outside the Economy
This is the myth that nonprofits are “nice to have” and make everyone feel good, but are not a critical component of our lives or our economic system. But the fact is that the nonprofit sector employs 10% of the U.S. workforce and accounts for 5% of GDP. And the number of nonprofits grew 25% from 2001-2011, while the number of businesses only grew by 0.5%. As government continues to slough off services to nonprofits, those numbers will only continue to grow. The nonprofit sector is not tangential to the economy, but rather an instrumental part of it.
- Nonprofits Have No Role In Politics
501(c) 3 organizations have long been told to stay out of politics. The myth is that charity is too noble to be mired in the mess of pushing for political change (Robert Egger has written extensively on this). But the fact is that simply providing services is no longer enough to solve the underlying problems. Nonprofits are increasingly recognizing that they can no longer sit by and watch their client load increase while disequilibrium grows. Nonprofits must (and already are) advocate for changes to the ineffective systems that produce the need for their existence.
Being mired in the demoralizing and debilitating cloak of these myths wears the nonprofit sector down. We must follow the Overhead Myth’s example and start uncovering the other myths that hold the sector back. Because the power of a myth is greatly diminished when we openly admit that the myth is only that — a myth.
Photo Credit: We Shall Overcome, Rowland Scherman, National Archives
I love this time of year. Not just because of the approaching space for relaxation, friends and family, and great food, but more importantly because it is a time for reflection. The end of the year offers a natural analytic marker between what was and what is yet to come.
And as is my end of the year tradition on the blog, it’s a time to look ahead to what the coming year might bring for the nonprofit sector. I’ve always said when I create my Trends to Watch lists that I am less clairvoyant and more optimist. I am always hopeful that the nonprofit sector is growing more effective, more sustainable, more able to create lasting social change. That’s the trajectory that (I freely admit) I am predisposed to see.
So here are 5 things I’m really hopeful about the nonprofit sector as we head into the new year.
- Growth of the Sharing Economy
The emerging “sharing economy,” where a good or service is shared by many instead of consumed by one and managed largely through the use of social technologies (think AirBNB, Netflix, TaskRabbit and countless others), will have wide implications for the social change sector. The sector that employed “sharing” long before it was cool will need to understand this changing environment and the implications for their work. Nonprofits should figure out how to navigate this growing interest (and increasing for-profit competition) in the realms of community and goodwill. It will be fascinating to watch.
- More Focus on Crowdfunding
One element borne out of the sharing economy is crowdfunding, and there is no doubt that it is everywhere. I have written before about my skepticism. But my hope is that crowdfunding will move away from ALS Ice Bucket Challenge-like hype and become another financing tool that nonprofits can use strategically. We need to get smarter about what crowdfuding is, and what it isn’t. A Kickstarter campaign makes sense for startup and other capital needs, but not for ongoing revenue. And while Giving Days are exciting, I’d like to see more analysis of what’s new money and what is cannibalized money. There is no doubt that crowdfunding is a force to be reckoned with, I just hope we turn it into a useful, strategic tool that contributes to — not detracts from — sustainable social change financing.
- Decreasing Power of the Overhead Myth
The Overhead Myth, the destructive idea that nonprofits should spend as little as possible on “overhead” expenses (like infrastructure, fundraising, and administrative costs) was laid bare in 2013 when GuideStar, CharityNavigator and BBB Wise Giving Alliance wrote their famous Letter to the Donors of America. This year they wrote a follow up Letter to the Nonprofits of America, arguing that both nonprofit leaders and donors must stop judging nonprofits by their overhead rate and instead focus on a nonprofit’s outcomes. It’s exciting to see this most detrimental of nonprofit myths beginning to crumble, but there is still much work to be done. Not least of which is helping nonprofits articulate and measure their outcomes so that they have a more effective measure with which to replace the overhead rate.
- Growing Emphasis on High Performance
Which brings me to the growing movement for creating more high performing nonprofits. Over the past several years there has been an emerging effort to move nonprofits toward this outcomes approach to their work. The idea is that if nonprofits can better articulate and measure the social change they seek, more resources, sustainability and ultimately more change will follow. In the coming year, a group of social sector leaders (of which I am a member) will release a framework for what practices constitute a high performing nonprofit. But that is just one example of a growing emphasis in the social change sector on results.
- Greater Investment in Nonprofit Leadership
Nonprofit leaders have long traveled a lonely road with inadequate support and resources. Funders and board members often assume that a leader should go it alone, even while for-profit leaders benefit from on-going coaching, training and development. But that is starting to change. A few savvy foundations have invested in nonprofit leadership, and they are beginning to trumpet the benefits of such investments. As more funders understand why investing in the leaders of the nonprofits they fund makes sense, I am hopeful that nonprofit leadership support will become less of an anomaly. And with stronger, more effective and supported leaders comes — I firmly believe — more social change.
Photo Credit: slorenlaboy
The other day I was talking to a nonprofit executive director who was delighted because he finally convinced a reluctant board member to become board chair. Over the past year, this board member had been delinquent in his meeting attendance and fundraising requirements. But since the executive director had no other viable candidates for the chairmanship, he was incredibly grateful that this board member finally relented and agreed to become chair.
What kind of crazy is this?
Gratitude is being thankful when someone performs a helpful act. But in the nonprofit sector there is such a pervasive power imbalance that misplaced gratitude, or gratitude for acts that are actually NOT helpful, often gets in the way of real work.
If a nonprofit leader acts grateful when she should actually voice frustration or disappointment, she is cutting off authentic conversations that could result in more effective partnerships.
Nonprofit leaders could stand to be a little less grateful for:
Board Members Who Aren’t Thrilled to Serve
If a board member doesn’t want to be there, and they are making that blatantly obvious (by not showing up to board meetings, not meeting their give/get requirement, or derailing board meetings with self-serving tangents) then take them at their word. Stop thanking them for serving and instead have a conversation about their poor performance. Ask them to change or resign. Don’t be grateful that you have 15 warm bodies listed on your letterhead. Each ineffective board member takes up space that could be filled by a committed and productive member. So take a hard look at the actual performance of each board member and build a board for which you can actually be grateful.
Donors Who Don’t Fund Real Costs
There is (I hope) a growing recognition in the sector that you cannot have high-quality, results-driven solutions without the appropriate staff, technology, systems and infrastructure behind them. Not every donor is there yet – by a long shot – but when a donor wants to fund the programs they love, you need to educate them about all of the costs involved in those programs. And if they want the “program” without the “overhead,” explain that the two are inextricably bound and an inferior investment will yield an inferior result.
Superfluous In-Kind Gifts
Nonprofits cannot be the dumping ground for the things companies want to get rid of while they enjoy a fat tax write-off. If a donor wants to give your literacy program boxes of age-inappropriate books, or your food bank out-of-date Halloween candy, or your management team old, slow computers, just say “No”. You shouldn’t be grateful for something that makes your job harder. Take the opportunity to educate the potential donor about the work you do, how important it is, and the most effective ways to support that work. And if they just want the tax write off, suggest which more appropriate gifts (including money) would earn it.
An Inexperienced Fundraiser
I see this all the time. A nonprofit won’t pay a market rate salary for a high-calibre fundraising director so they recruit an inexperienced person who eventually fails. Instead of being grateful that your board will let you hire an underpaid fundraiser, or grateful that someone is willing to take the position, talk to the board about what is really going on. If you don’t make fundraising part of everyone’s job and hire someone to truly lead those efforts, you are simply setting the organization up for failure. Make your financial model a key part of your overall strategy and then hire (and pay appropriately) the right person necessary to lead that financial strategy.
Rise from bended knee with confidence in yourself, your staff, and your social change work to articulate what you really need. To be truly successful, a nonprofit leader needs a board that will move mountains, donors who fully fund and believe in the organization, and a staff that can knock it out of the park. And you get there by being honest about, not grateful for, the roadblocks in your way.
Photo Credit: Victor Bezrukov
In today’s Social Velocity blog interview, I’m talking with Jacob Harold, CEO of GuideStar, the clearinghouse of information on nonprofits. Jacob came to GuideStar from the Hewlett Foundation, where he led grantmaking for the Philanthropy Program. Between 2006 and 2012, he oversaw $30 million in grants that, together, aimed to build a 21st-century infrastructure for smart giving. Jacob was just named to the 2014 NonProfit Times’ Power and Influence Top 50.
You can read other interviews in the Social Velocity Interview Series here.
Nell: It has been over a year since the Letter to the Donors of America about the overhead myth. Where are we today in getting donors (and board members) to understand that overhead is a destructive mindset?
Jacob: I’m glad to report that the response to the first overhead myth letter far exceeded our expectations. Hundreds of articles have been written about the letter. It comes up almost every time I hold a meeting or give a talk. For at least a few people, I think it’s been a deep affirmation of something they’ve known a long time. And, indeed, many others in the field have been working on this: the Donors Forum, Bridgespan, the National Council on Nonprofits, and others.
But we also know that we have a long road ahead of us. The overhead myth is deeply ingrained in the culture and systems of the nonprofit sector. It will take years of concerted effort for us to fully move past such a narrow view of nonprofit performance to something that reflects the complexity of the world around us. But it’s essential if we want to ensure we have a nonprofit sector capable of tackling the great challenges of our time.
Nell: The Letter to the Donors of America was obviously focused on the donor side of the problem, but how do we also change the mindset of those nonprofit leaders who perpetuate the Overhead Myth in their reporting, conversations with donors and board members, etc.?
Jacob: This is a critical aspect of the challenge. Every year nonprofits send out something like one billion pieces of direct mail to donors that prominently display their organization’s overhead ratio. It’s no wonder that donors think that’s a proxy for performance—we’ve trained donors to think so!
That’s why the CEOs of Charity Navigator and BBB Wise Giving Alliance and I are currently working on a second overhead myth letter—this one to the nonprofits of America. We’re still finalizing the text, but in it we will be calling on nonprofits to be more proactive about communicating the story of their programmatic work, their governance structures, and the real costs of achieving results. And, more, we want to recruit nonprofits to help us retrain donors to pay attention to what matters: results. In the end, that means that nonprofits have to cut the pie charts showing overhead versus program—and instead step up to the much more important challenge of communicating how you track progress against your mission.
Nell: At the Social Impact Exchange Conference you announced some pretty exciting plans with the GuideStar Exchange to, in essence, create a marketplace of information about nonprofits so that the best nonprofits receive more resources. Talk a little about your plans for the Exchange, and most importantly, how you plan to bring nonprofits and donors there.
Jacob: The GuideStar Exchange is our mechanism for collecting data directly from nonprofits. By going straight to nonprofits we can build on the data we already have from the IRS Form 990. The 990 is a regulatory document, it’s not meant to offer a comprehensive view of nonprofits and their programs—that’s what we’re trying to do with the Exchange. And it also lets us get information much more quickly!
So far we’ve had great success. More than 100,000 nonprofits have shared data with us through the GuideStar Exchange and more than 38,000 have reached one of what we call our participation levels—Bronze, Silver, or Gold. But we have a long way to go if we want to approach a comprehensive view of the marketplace. So we’re adding new incentives for nonprofits to share data through the Exchange, building new ways to distribute that data through other channels and improving the user interface to make the process easier. Right now we’re collecting quantitative financial data and qualitative programmatic data but later this year we’re going to release a tool for collecting quantitative programmatic data, too.
This comes back to the overhead myth campaign. If we’re going to ask donors to go beyond the overhead ratio when considering nonprofits, we have to offer an alternative. GuideStar Exchange is a critical part of that alternative: a chance for nonprofits to tell their story in a structured way that forces them to articulate in clear terms what they’re trying to accomplish, how they’ll get there, and how they’ll measure progress along the way.
Nell: The Money for Good reports that came out a couple of years ago rather discouragingly found that the majority of donors don’t give based on nonprofit results. With the GuideStar Exchange you obviously think that is changeable, so how do we go about changing donor interest and behavior?
Jacob: Well, I had a different read of that data. It is absolutely true that the Money for Good research showed that most donors don’t give based on nonprofit results. But it also showed that a significant portion—about 15%, depending on how you cut the data—do. That may not seem like much, but that represents 30 million people responsible for close to $40 billion in annual giving. So there’s already a huge unserved market, even if it represents a small portion of the entire system of philanthropy.
And at GuideStar we see this every day. We have 7 million unique users a year. And that’s just on our website, our data was used another 22 million times on other platforms last year through just one of our distribution mechanisms. So people want data. And as we get more and more programmatic data—data that is oriented towards results against mission—I’m absolutely confident that we’re going to unlock new behaviors among donors, nonprofit executives, journalists, and others. The nonprofit sector is about to enter a new phase, and I think it’s going to be remarkable.
Photo Credit: GuideStar
Ever since last year’s release of the Letter to the Donors of America it seems there is an increasing drumbeat against the “Overhead Myth,” the idea that nonprofits must keep their overhead and administrative costs as low as possible. The fact that we are now openly talking about overhead as a myth is very encouraging.
But I think it will take a good deal of time before donors actually embrace the idea that nonprofits should stop starving their organizations of the resources they need to create and execute effective programs.
To move donors along, nonprofit leaders must lead this conversation with their own donors. Those nonprofit leaders who need more money to build a stronger, more effective and sustainable organization behind their work should educate themselves, their board members, and their donors about capacity capital.
“Capacity capital” is a one-time infusion of significant money that can be used to strengthen or grow a nonprofit organization. Capacity capital is NOT the day-to-day operating money nonprofits are used to raising and employing. Rather, capacity capital is money to build a stronger, more sustainable organization.
A nonprofit could use capacity capital in many ways, for example to:
- Plan and execute a program evaluation
- Plan and launch an earned income stream
- Create a strategic financing plan
- Hire a seasoned Development Director, or other revenue-generating staff
- Purchase a new donor database
- Improve program service delivery
- Upgrade website, email marketing, and/or social media efforts
- Launch a major gifts campaign
But raising capacity capital is not like traditional fundraising. It involves determining how much capacity capital you need, creating a compelling pitch, deciding which prospective funders to approach, and educating those prospects about the power of capacity capital. In so doing, you are not only raising the money you so desperately need, but you are also leading your part of the nonprofit sector away from the overhead myth.
The Launch a Capacity Capital Campaign Guide can show you how to raise capacity capital for your nonprofit.
Here is an excerpt from the guide…
Section 1: Create a Capacity Building Plan
You cannot raise money without a plan for how you will spend it. Funders need to be convinced that you did your homework and have a clear, actionable, measurable plan for how you will invest capacity capital dollars to result in a stronger organization that can deliver more impact.
To get there, start by answering these questions:
- What is holding our nonprofit back from doing more and being more effective?
- What could we purchase to overcome these hurdle(s)?
- If we were able to purchase these items how would we use them and over what time frame?
- What can we reasonably expect to be the changes in our effectiveness and/or impact because of these things we purchased and implemented?
With your answers to these questions, put together a plan.
Start by creating 1-3 goals around the hurdles you identified in #1 above. For example, you may have identified in #1 that you don’t have adequate staff to raise enough money to achieve your mission.
So your capacity plan goals might be:
- Create an overall money strategy to raise $450,000 per year.
- Hire a Development Director to implement the plan.
- Secure the technology and materials necessary to raise this money (database, website, etc.)
Or, if you are a much smaller nonprofit, your goals might be more modest:
- Create an overall money strategy to raise $100,000 per year.
- Train the board on their role in fundraising.
- Upgrade our website to attract online donations.
Once you’ve developed your goals, make a laundry list of activities and purchases necessary to make each goal a reality. In some cases you may need outside help to determine how to get there. For example, you may not know how to put together an overall money strategy to raise $450,000, so you may have to hire a fundraising consultant to help you create that strategy. Also note roughly how long each activity will take.
So, your list of activities with a timeline for each might look something like this:
Goal 2: Train the board on their role in fundraising
- Discuss and get buy-in from board on a fundraising training (October)
- Find a date/location (October)
- Research fundraising trainers (November-December)
- Hire a trainer (January)
- Hold training (February)
- Follow up with each individual board member on the next steps resulting from the training (March-April)
Once you have listed all of the activities to achieve each goal of your capacity plan, highlight activities that would require new purchases. Research a ballpark figure for what each one would cost and then attach that figure to those highlighted items, like this…
Photo Credit: Franklin D. Roosevelt Presidential Library and Museum