The idea that the vast majority of nonprofit funding should go to direct program expenses is ludicrous.  Why is there even a distinction between program and non-program expenses?  Doesn’t a nonprofit exist to deliver programs?  And doesn’t that mean that everything they do helps to make those programs better, stronger, bigger, more effective?  Why is capacity such a dirty word?

I met with a nonprofit Development Director earlier this month who has had a really hard time convincing their CEO and board to let them spend money on a donor database and some fundraising materials. Yet, at the same time the Development Director is expected to raise millions of dollars in revenue. That sounds completely crazy, doesn’t it?  But in the world in which I work that is often the rule rather than the exception. Infrastructure, capacity, fundraising, marketing, and operations dollars are somehow bad, dirty, not necessary, dismissed.

Which is why the recent article in the Stanford Social Innovation Review by Bridgespan Group’s Ann Goggins Gregory & Don Howard was such a breath of sanity-infested fresh air. If you are nonprofit staffer, board member, donor, or volunteer, I really encourage you to read the whole article.  They have studied what they call the “Nonprofit Starvation Cycle”–nonprofit organizations’ continual drive to do more and more with less and less– and come up with a path out of the insanity.

What seems like such an obvious statement, its almost a truism–”Organizations that build robust infrastructure—which includes sturdy information technology systems, financial systems, skills training, fundraising processes, and other essential overhead—are more likely to succeed than those that do not”–is so often overlooked by nonprofit organizations.   But I think most nonprofit leaders would tell you that they would love to spend money on infrastructure, that they absolutely understand the return on investment, but funders and board members have a hard time allocating money to those projects.

In their work with nonprofits at Bridgespan Group, Gregory and Howard uncovered three reasons for this inability to build capacity in the nonprofit world:

• Funders have unrealistic expectations about how much it costs to run a nonprofit
• Nonprofits need to conform to these unrealistic expectations in order to receive funding
• Nonprofits underreport infrastructure expenditures on tax forms and in fundraising materials

The end result is a vicious circle where few fund or spend money on infrastructure in the nonprofit space: “This underspending and underreporting in turn perpetuates funders’ unrealistic expectations. Over time, funders expect grantees to do more and more with less and less—a cycle that slowly starves nonprofits.”

The solution, Gregory and Howard argue, is to begin at the source of this vicious cycle: the funders.  They argue if funders can be educated about the true costs and infrastructure necessary to build organizations to solve social problems, then we can break out of this destructive cycle. I strongly agree with that. It is difficult for nonprofits to turn to the hand that feeds them and tell them that they need more in order to do more, but such conversations are absolutely critical if we are to get beyond the starvation cycle.

But funders aren’t the sole impediment. Gregory and Howard argue that nonprofits play a part in this dysfunctional view of capacity, and there are a number of things that they can do to turn things around.  Nonprofit leaders should analyze their real overhead costs and infrastructure needs, educate their boards about these real needs and then engage their board in communicating these needs with funders.  And board members are just as culpable. They must encourage nonprofit leaders to develop strategies to address their true infrastructure needs and then take responsibility for encouraging funders (often board members’ friends and colleagues) to be realistic about what is required to make the nonprofit highly functioning.

I actually think that funders are much more receptive to these capacity conversations than some nonprofits give them credit for.  My work at Social Velocity is all about organization building, and I often encourage nonprofit leaders to tell their board members and their closest donors what they really need to succeed.  I have found that those donors who really believe in an organization will understand when a compelling case that it takes resources to take an organization to the next level is put before them.

I think the bottomline is that we have to stop playing games. Stop underreporting infrastructure costs, stop telling funders its ok to ask nonprofits to do more with less, stop telling the public that direct program costs are better than indirect program costs, stop telling boards of directors that its ok to ignore infrastructure needs. It’s a difficult conversation, there is no doubt, but what’s the alternative? We all know how a starvation cycle ends.

About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. In addition to leading Social Velocity's efforts to accelerate social innovation, she is a regular contributor to Change.org's Social Entrepreneurship blog and speaks at social innovation gatherings.

Related posts:

1. Can PRIs Support Fundraising and Capacity Building?
2. Overcoming the Anti-Overhead Mindset
3. A Philanthropic Experiment in Collaboration and Capacity Building

That’s not how to raise money effectively.  To raise significant money you need to focus on impact. The messaging of impact is very different from the messaging of organizational need.  The messaging of need gets you donations.  The messaging of impact gets you investments.  And the two are very different:

Donations:

• Focus on organizational needs
• Tend to be smaller in size and shorter in length
• Are a response to an apologetic ask (the “tin cup” mentality)

Investments

• Focus on the impact (the change in outcomes) that an organization makes in the community
• Tend to be larger and longer
• Are presented as an opportunity

To raise significant, sustainable revenue, nonprofits have to move towards developing investors.  Here is how raising investments differs from raising donations:

A successful fundraiser looks for investors who share the organization’s values and theory of change, and then  demonstrates to them how the nonprofit creates that change in the community.  The organization is merely a conduit for investing in change in the community. For example, an afterschool program for at-risk children is translating dollars into positive outcomes for the children in their charge (increased student achievement, fewer high-school drop outs, lower crime rates, etc.).  If the organization were to fundraise around the organization’s needs, “Help us  reach our goal of raising $100,000 for our program,” they would raise far less than if they were to fundraise around impact, “Invest in our organization so that we can improve opportunities for children, which creates fewer burdens on our community, more contributing members, and a healthier overall community.”  The first message is about strengthening an organization, the second message is about strengthening a community.  Which is more compelling?  Which would make someone give more and continue to give if the promised impact is actually delivered?

The recession is, no doubt, a difficult time to raise money. But within this structural constraint there lies an opportunity.  By moving an organization’s messaging from need to impact, from donation to investment, there is the opportunity to raise much more money and in so doing, to deliver much more impact.

About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. In addition to leading Social Velocity's efforts to accelerate social innovation, she is a regular contributor to Change.org's Social Entrepreneurship blog and speaks at social innovation gatherings.

Related posts:

1. Social Impact Finance
2. Changing Nonprofit Finance: The Other Side of the Story
3. Financing not Fundraising