• Skip to main content
  • Skip to primary sidebar
  • Skip to footer

Social Velocity

Creating more strategic, financially savvy, and confident nonprofit leaders and organizations.

  • Consulting
    • Financial Model Assessment
    • Strategic Advising
    • Strategic Planning
  • Book
  • Clients
  • Speaking
  • Blog
  • About
    • Nell Edington’s Bio
    • Media
  • Connect
  • Tools
Home » Board of Directors » Understanding The Full Costs of Nonprofits: An Interview with Michael Etzel

May 16, 2017 By Nell Edgington Leave a Comment

Understanding The Full Costs of Nonprofits: An Interview with Michael Etzel

FacebookTweetLinkedIn

In this month’s Social Velocity interview, I’m talking with Michael Etzel. Michael is a partner in The Bridgespan Group, a global nonprofit organization that consults to nonprofits and philanthropists, provides leadership development support, and develops and shares insights — all with the goal of scaling social impact.

Since joining Bridgespan in 2006, Michael has focused on effectiveness across the full spectrum of social innovation financing, advising corporate, institutional, and family philanthropists and investors. Much of Michael’s work explores what it takes to use tools of innovative finance and impact investing to solve pressing social problems. His work and research in philanthropy also focuses on the question of what it takes to deliver results as a new approach to ending the nonprofit starvation cycle.

You can read other interviews in the Social Velocity interview series here.

Nell: In your research and writing you have focused a lot on what you call “Pay-What-It-Takes-Philanthropy,” the radical idea that different nonprofit solutions have different business models and thus require different costs and investments. This concept is so accepted in the for-profit world that it is a truism, but why is it a radical idea for nonprofit and philanthropic leaders?

Michael: It’s worth pausing for a moment to reflect on why business models and capabilities matter. Every nonprofit operates with an underlying business model and set of capabilities critical for program delivery. Failure to understand an organization’s business model frequently leads to underinvestment in core capabilities, and, as one program officer put it, “a hollowing out of civil society institutions.” We can’t have resilient, durable civil society organizations that deliver successful programs unless they operate from a position of financial strength.

As you highlight, segmentation and analysis of comparable performance data is common practice in the for-profit world. Leaders like Clara Miller, president of The Heron Foundation and former CEO of the Nonprofit Finance Fund, have long called for this kind of thinking in the social sector. But this type of comparison requires transparent and consistent data, something hard to come by. As one nonprofit executive reminded me, “If you think you can analyze a nonprofit through IRS 990 filings, you are in outer space.”

Yet, I wouldn’t say this a radical idea. Organizations like DataArts and CoMetrics show how this is possible. For example, DataArts gathers a variety of comparable revenue, cost, and performance data for arts and cultural organizations, and provides tools for reviewing that data. This provides grantees and grant makers with actionable data to inform management or funding decisions with an eye to effectiveness and efficiency. CoMetrics addresses a more diverse set of enterprises, providing software platforms and tools that enable those enterprises to collect, display, and compare financial, operational, and impact data against their peers. This bottom-up approach gathers data across organizations running the same type of business in the same field to form groups relevant for comparative assessment and learning.

Bridgespan’s preliminary analysis to date has shown that different types of nonprofit organizations have different cost structures based on their business model. Segmenting nonprofits by business model can help us compare similar organizations. When it comes to indirect costs, for example, nonprofit research labs have a median indirect cost rate of 63%, nearly two and a half times the 25% median rate of direct service organizations.

We plan to push ahead this year to refine and deepen our understanding of segmentation and how it applies to nonprofit cost structures and capital needs. Having this information will benefit funders and grantees alike when it comes to funding discussions.

Nell: You work with both nonprofit and philanthropic leaders, so you likely see both sides of this dysfunction. What do you think it will take to move the field to a place where those with potential solutions to social problems have enough and the right kinds of money to see their solutions come to fruition?

Michael: Nonprofits exist in a complicated marketplace, seeking capital from a broad range of funders. As in any marketplace, some influential market makers set the rules. The practice of setting limits on indirect costs in project grants to nonprofits/NGOs has its antecedents in the US government’s approach to funding R&D at universities during the post-World War II era. The federal government has changed practice dramatically since 1958, embracing the “fair share” approach—that federal agencies pay their fair share of true costs, including indirect costs.

Among private foundations, indirect cost rate policies have been common for decades. A RAND report from the 1980s captured the variety of policies at that time: “many foundations customarily pay full indirect cost as budgeted in a proposal. Other foundations may pay only a portion of… or specify a cap on the support of indirect costs.” More recently, our research has shown that many large foundations set a cap of 15% or lower on indirect costs. Yet, among the 20 large nonprofits we sampled, indirect costs comprised between 21% and 89% of total costs, with the median at 40%.

I offer this history because I see the indirect cost conversation changing. For decades, much of this conversation has been driven by nonprofit and NGO leaders’ concerns about caps on indirect cost reimbursement. But funders have begun to engage more deeply in this conversation over the last several years. In 2013, Forefront (formerly Donors Forum) convened a cross section of staff from smaller Midwest foundations to discuss barriers and potential solutions to funding indirect costs. In 2015, the three California Regional Associations of Grantmakers launched the Real Cost Project (now the Full Cost Project) with the dual goals of increasing the number of funders providing real-cost funding and building the skills and capacity of grantmakers.

Having philanthropic leaders at the table is important to overcoming the reality of power dynamics. In the same breath, it’s also important to see this issue for what it is—a complex systems issue. Acknowledging this complexity helps approach this issue from a place of empathy for funders that want to do the right thing, and nonprofits that want to own and manage the costs of delivering impact.

Funders have the opportunity to ask grantees their true costs of programs and to be prepared to pay their fair share of the operational and financial support it takes to deliver those programs. Meanwhile nonprofits can focus on knowing their costs and advocating for them. Funders cannot pay their fair share if grantees don’t tell them what it is!

Nell: Beyond researching and consulting on these topics, you also serve on the board of two nonprofit organizations. What has been your on-the-ground experience as a board member trying to put these concepts to practice?

Michael: Creating space for a conversation among peer board members has been important in establishing a shared understanding of the issues—and why sometimes the executive director very rightly chooses to say “no” to a grant that doesn’t cover true costs.

The reality of this “complex marketplace” also hits home—there is no one-size-fits-all solution. That puts a big burden on the executive director and finance team to effectively report and manage costs.

Photo Credit: The Bridgespan Group

Related Posts:

  • GEO Guest Post: From Uncomfortable Truths to Courageous Action
    GEO Guest Post: From Uncomfortable Truths to…
  • The Way We Do Social Change is Broken, Let's Fix It
    The Way We Do Social Change is Broken, Let's Fix It
  • Philanthropy in Troubled Times: Blogging the 2018 GEO Conference
    Philanthropy in Troubled Times: Blogging the 2018…
  • The Great Reset Requires a New Kind of Social Change
    The Great Reset Requires a New Kind of Social Change
FacebookTweetLinkedIn

Filed Under: Board of Directors, Capacity Building, Financing, Fundraising, Leadership, Nonprofits, Philanthropy, Roadblocks, Social Change Tagged With: Bridgespan Group, Donors Forum, indirect cost, indirect rate, nonprofit, nonprofit overhead, nonprofit starvation cycle, Philanthropy, Real Costs

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

Consulting Services

If you want your nonprofit or foundation to do and be more, Social Velocity can help you get there

Ready to Learn More About Working with Social Velocity?

Apply for a Consultation
Reinventing Social Change Book

Download Chapter 1 of “Reinventing Social Change”

and keep up on webinars, training and events when you sign up for the Social Velocity e-list

Featured Blog Post Topics

  • Social Changemaker Interviews

  • Smart Strategic Planning

  • Effective Philanthropy

  • Networks for Social Change

  • The New Nonprofit Leader

  • A Groundbreaking Board

  • Reinventing the Nonprofit Sector

  • From Fundraising to Financing

Recent Posts

Embracing Abundant Social Change by Nell Edgington

Social Change Leaders, Take a Leap of Faith With Me

Pink Flowers

You Don’t Have to Be Stuck in Scarcity

Free Training

Join Me for a Free Training — Your Roadmap to Abundance

Your Social Change Work Can Be So Much Easier

Your Social Change Work Can Be So Much Easier

Woman holding colorful umbrella

You Have The Power to Change Philanthropy

Categories

  • Abundance
  • Advocacy
  • Board of Directors
  • Capacity Building
  • Capacity Capital
  • Financing
  • Fundraising
  • Individual Donors
  • Leadership
  • Marketing
  • Networks
  • Nonprofits
  • Philanthropy
  • Roadblocks
  • Social Change
  • Social Movements
  • Strategy

Footer

Reinventing Social Change Book

Download Chapter 1 of “Reinventing Social Change”

and keep up on webinars, training and events when you sign up for the Social Velocity e-list

Embracing Abundant Social Change by Nell Edgington

Social Change Leaders, Take a Leap of Faith With Me

April 16, 2021

Pink Flowers

You Don’t Have to Be Stuck in Scarcity

April 8, 2021

Free Training

Join Me for a Free Training — Your Roadmap to Abundance

March 31, 2021

Your Social Change Work Can Be So Much Easier

Your Social Change Work Can Be So Much Easier

March 25, 2021

Woman holding colorful umbrella

You Have The Power to Change Philanthropy

March 19, 2021

Recent Tweets

Tweets by nedgington
  • Consulting
  • Book
  • Clients
  • Speaking
  • Blog
  • About
  • Connect
  • Tools

© 2020 Social Velocity · Privacy Policy