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
As I mentioned earlier, I am building a video library of topics that can spur discussion among your board and donors. So, to add to that library, today I’m talking about why we need to get over overhead.
Traditional wisdom is that nonprofits should keep “overhead” (administrative, fundraising, systems, technology, staffing) costs as low as possible. This is a really destructive idea, and we need to move beyond it. But we will only get there if nonprofit leaders across the country start having that conversation with their board members and donors. Because if we can move beyond overhead, we will have a much stronger, more effective nonprofit sector.
The transcript of the video is also below. And you can view all of the Social Velocity videos on the Social Velocity YouTube channel.
To learn more about getting over overhead and raising capacity building dollars for your nonprofit, download the Launch a Capacity Capital Campaign Guide.
Hi I’m Nell Edgington from Social Velocity. Today I want to talk about why nonprofit board members and donors need to get over overhead.
So overhead is the idea that nonprofit organizations can separate what they spend on programs and services, the mission work of the organization, versus what they spend on infrasturucture, staffing, systems, fundraising function, administrative costs. All of those things in the second bucket are typically considered “overhead.”
Now overhead, I think, is a very meaningless distinction in the nonprofit sector, and we need to move beyond it.
It’s meaningless because you can’t have exceptional programs and services if you don’t have solid staff behind them, if you don’t have evaluation systems to figure out if you are making a difference, if you don’t have a fundraising function to bring the revenue in the door to make those programs and services operate, if you don’t have the infrastructure, the technology, all of the things that you need to make those programs and services run well.
We also need to get over overhead because if you think in terms of overhead as a nonprofit organization you will not seek, nor will you attract, the funding to invest in infrastructure, the funding that so many nonprofit organizations desperately need, the funding for capacity building, for strong staff, for great technology and systems, for evaluation programs, etc. If you think in terms of overhead you are going to keep those costs as low as possible and you won’t try to bring the money in the door to support your capacity as an organization.
Finally, we need to get over overhead because if as a nonprofit organization we are measuring our work in terms of how much we spend on overhead and keeping that as low as possible, we are not measuring our work based on whether we are actually making a difference, whether we are actually creating social change. And we need to move to a place where we are evaluating nonprofit organizations based on their results, based on the social change and the outcomes that they are achieving, not how they spend their dollars.
So those are the reasons I think overhead is very destructive in the nonprofit sector, and I hope that you will talk with your board and donors about how we need to get over overhead. Good luck!
Crowdfunding is quickly becoming the new shiny object in the world of social change. From Giving Days, to new giving platforms, to lots of articles and studies (here and here to start), it seems that crowdfunding is everywhere lately.
I’m all for innovations in the funding of social change, but I’m not convinced that crowdfunding is really creating anything fundamentally new.
Under “crowdfunding” I include efforts like Kickstarter where a creative effort (a film, art exhibit, library) can garner small investments from a large number of people. And I’m also including Giving Days, at the city and national level, where nonprofits try to raise as much money as possible in a 24-hour online “event”. What these efforts all have in common is they raise money, from a large group of people, over a short period of time.
I earned my fundraising chops working public television pledge drives, one of the earliest “crowdfunding” efforts. The technology was different (TV screens and telephones, instead of CRM systems and social media), but I’m not sure much else is.
So I would like to see us separate what is potentially exciting about crowdfunding from what is just hype. To help in that effort, I offer some questions:
How much is truly new money?
It’s unclear to me how much new money crowdfunding brings to social change organizations. For example, nonprofits participating in Giving Days encourage their annual donors to give on that specific day so that Giving Day dollars are higher. But that’s not new money. True innovation in social change funding comes from efforts to grow the 2% pie – giving as a share of America’s Gross Domestic Product has stayed at 2% for the last 40+ years. I’m not convinced that crowdfunding uncovers money that would not have otherwise ended up somewhere in the nonprofit sector.
How many new donors are being retained?
The point of crowdfunding is that it’s a one time deal. There is a message of urgency that encourages donors to give NOW. So the numbers on a specific Giving Day or with a crowdfunding campaign may be good, but is the funding sustainable? Are nonprofits or social change organizations actually growing their donor base? Are they able to go back to these investors later and encourage them to give again? And if the funding isn’t sustainable, is it really worth the effort it took to get it?
Is crowdfunding reinforcing the “Overhead Myth”?
The destructive idea that donors shouldn’t support nonprofit “overhead“, or administrative costs, is slowly dying, but crowdfunding might just be bringing it back to life. Nonprofit crowdfunding darling charity:water has been taken to task for reinforcing the idea that 100% of the dollars they raise go “directly to the field”. And crowdfunding projects are often specific and “sexy,” which means that the money is not being raised for boring things like the staffing, technology, and infrastructure that most organizations desperately need. Are we perpetuating the overhead myth by encouraging donors to give to specific projects, instead of to overall issues, organizations or teams?
What’s the return on investment?
A lot of time and effort can go into crowdfunding campaigns. If the benefits are shortlived, donors aren’t retained, and the majority of the funding is not new dollars, while the costs (staff and board time, technology investments) are high, then what is the true return on investment? I’m not arguing that it can’t be positive, but I would like to see more critical analysis about it, both at the aggregate and the individual organization levels.
I hate to be a Debbie Downer, but I’d like us to dig a bit deeper to understand what the real effects of crowdfunding are so far and what it’s true promise is. If there is already research out there that can answer some of these questions, please let me know in the comments below.
Photo Credit: SeedingFactory.com
Ever since last year’s Letter to the Donors of America from GuideStar, Charity Navigator, and BBB Wise Giving Alliance there has been a growing movement to debunk the “nonprofit overhead myth,” the notion that donors should evaluate nonprofits based on the percent they spend on “overhead” (fundraising and administrative) costs.
More and more articles (a most recent one here) are cropping up explaining the overhead myth and highlighting donors who overcame it. And even fundraising journal Advancing Philanthropy is devoting their entire Spring issue to the topic.
But at the same time we have very obvious examples of the continuing strength of the overhead myth. The latest is nonprofit darling Charity:Water, which is often held up as the gold standard of innovative fundraising and nonprofit strategy, claiming that 100% of their donations go “directly to the field.” And thus the overhead myth lives on.
Will we ever be rid of the idea that nonprofits can somehow achieve a nirvana where very little (or no) money goes to boring things like salaries, technology, infrastructure, fundraising, leadership development, planning, R&D?
I wonder if we could gain more traction by talking less about the negatives of an overhead myth and talking more about the positives of nonprofit organization building.
For example, one of the things that is often considered “overhead” and rarely gets funded is nonprofit leadership development. But in the for-profit sector, leadership development is viewed as an incredibly important and worthy investment. According to a recent article by the Foundation Center, the business sector spent $12 billion on leadership development in 2011, 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.
And leadership development can have such a positive return on investment. A stronger nonprofit leader can:
- Recruit, train and manage a more productive and effective staff
- Engage a more invested board of directors
- Use money and other limited resources more strategically
- Open a nonprofit to bigger and better networks
- More effectively manage to outcomes
- Create an overall more highly performing nonprofit
So what if we refocused the overhead myth discussion on the power of nonprofit organization building? Beyond leadership development, investing in nonprofit organization building means money for things like: talented, effective fundraising staff; smart long-term planning; performance management systems; effective technology.
At the core, organization building is about creating a smart, strategic nonprofit that can actually realize the outcomes it was set up to achieve. Organization building can make the difference between a nonprofit that is just getting by and a nonprofit that is actually solving problems.
Photo Credit: liquidnight
It was really hard to narrow down to 10 great reads this month. People wrote some really compelling (even more than usual) things in October. And some longer pieces in particular were quite thought-provoking. Some asked searing questions like “Is arts innovation really innovative?” and “Is increasing income disparity making us less empathetic?” and “Can philanthropy fix our broken democracy?” And that’s just a start. Lots to think about.
Below are my picks of the 10 best reads in the world of social innovation in October. But please add what I missed in the comments.
- The conversation about the overhead myth, the destructive idea that nonprofits should be evaluated based on how much they spend on overhead (fundraising and administrative expenses), still rages on. First Paul Hogan from the John R. Oishei Foundation reframes the argument to include general operating and program support. Then Heather Peeler from GEO reports on a panel at a recent gathering of Social Innovation Fund grantees and grantors discussing what funders can do to build more sustainable organizations. And Julie Brandt writes a ringing endorsement of the overhead myth movement arguing that “Donors need to focus on evaluating charities based on leadership, transparency, governance, and results.”
- But lest you think that everyone agrees, Tiziana Dearing raises some good points about nonprofits not yet having the necessary resources or tools to boil outcomes down to short term ratios or ratings. As she says, “Everyone has more work to do.”
- There were some great examples of nonprofits using social media in interesting ways. From the Social Media BirdBrain blog comes 4 Best Examples of Nonprofit Video Storytelling and from the HubSpot blog, 10 Nonprofits That Are Totally Nailing Pinterest Marketing.
- And speaking of innovatively using media to move social change forward, this infographic on America’s school dropout problem demonstrates a concise and compelling way to explain a complex problem.
- Part of the potential solution to America’s education problems might lie in new science. An interesting new school within Zappos CEO Tony Hsieh’s Las Vegas Downtown Project is using neuroscience to teach children in new ways.
- If you really want to unpack the buzz around “innovation,” particularly in the arts, take a look at this really interesting, thought-provoking 6-essay series at Culturebot questioning innovation and the arts, what’s working and what isn’t. It is well worth your time and is guaranteed to make you think.
- On the Idealist blog, April Greene wisely counsels those entering the social change space, that if you want to pursue your dreams, don’t tell your mother. Such good advice, ha!
- Richard Eisenberg provides some really interesting analysis of recent data and what it tells us about how generations approach giving differently.
- Writing in the New York Times, Daniel Goleman worries that the widening income gap may be creating a widening empathy gap because “social distance makes it all the easier to focus on small differences between groups and to put a negative spin on the ways of others and a positive spin on our own.” Very scary.
- President of the MacArthur Foundation, Robert Gallucci writes a passionate plea that philanthropy help fix a quite broken (as particularly evidenced in October’s federal government shutdown) American political system.
Photo Credit: ekelley89
There is a growing drumbeat lately (for starters here, here and here) that nonprofits must be more bold. I couldn’t agree more and have argued that nonprofit fear and small thinking sometimes hold them back. But it is becoming increasingly obvious to me that if we want to get better at solving social problems, we have to ask philanthropist to be more bold too.
And I’m heartened to see this conversation starting to emerge. The Letter to the Donors of America, the Donor Forum’s Real Talk About Real Costs effort, Dan Cardinali’s request that philanthropists fund the “unsexy” work of nonprofit capacity building, Rebecca Thomas encouraging funders to support nonprofit resilience, and Ben Powell’s idea that philanthropy provide more start-up capital all add to the philanthropy reform discussion. I love it!
But I want to see the idea that philanthropy can be so much more move beyond talk.
There is a huge disconnect between what nonprofits really, truly need to solve social problems and how funding currently flows. We are locked in a chicken or the egg scenario where often a nonprofit working to solve a social problem encounters some major capacity constraints. For example, a nonprofit doesn’t know how to:
- Create a sustainable financial model
- Effectively grow their solution
- Structure their board and staff for success
- Strategically filter opportunities
- Engage key outside elements in the change effort
And quite often they don’t know how to move past these capacity constraints.
At the same time, philanthropists may recognize that a grantee is encountering some significant hurdles, but doesn’t know how (or is unwilling) to invest in overcoming those hurdles. So the constraints remain unmoved.
But what if nonprofits and philanthropists could start working together to move those hurdles?
What if instead of getting in the way, philanthropists started paving the way?
Philanthropy could provide the critical infusion of the right kind of organization-building money at the right time thereby allowing a great solution to grow.
To me, that’s bold philanthropy.
But how do we get there? Philanthropists need to change in some fundamental ways:
Move to Impact
Just as we are increasingly asking nonprofits to move to impact, philanthropists need to do the same. Instead of tracking outputs (# of grantees, $s given), foundations need to start tracking whether their investments result in change to 1) their grantees and 2) the problems those grantees address. Just as we are starting to ask nonprofits “To What End?” we need to ask funders the very same question.
Help Diagnose the Constraints
Once philanthropists start getting clear about what they want to change and whether their investments are actually resulting in change, they need to become cognizant of the hurdles standing in the way of that change. And I will tell you that there are some almost universal hurdles in the nonprofit sector (lack of management expertise, poor leadership development, board disengagement, financial instability). So if a philanthropist really wants to see change to a social problem, he needs to get clear about what those he is investing in need to make that change a reality.
Invest in Removing Those Constraints
But it simply is not enough for funders to recognize that those they fund have very specific and tangible organizational needs. Those funders then must put their money where their mouth is. More philanthropists need to invest in building stronger, more effective, more sustainable solutions. They need to provide more capacity capital, money to build an effective, sustainable nonprofit that can grow impact.
We have only scratched the surface on what philanthropy can do to solve social problems. But I am optimistic that we can fundamentally change philanthropy so that it increasingly provides the capacity capital the sector so desperately needs.
Photo Credit: Jeffrey Beall
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