For many years, the Charities Review Council has maintained a Use of Funds standard that calls for no more than 30% of expenses on admin and fundraising combined. In that time, we too have seen nonprofits make short term decisions not in their long term best interests in order to meet the standard, or in order to feed the charitable giving monster that rewards minimal admin and fundraising costs.
We have developed a new set of standards—currently in preliminary form and are seeking public input on our smartgivers.org website. Included is a shifted Use of Funds standard that takes into account the many good points made in this article and the fact that there is no standardization in how nonprofits categorize indirect costs. Many nonprofits, funders and individual donors participated in the development of this standard.
The proposed new standard allows a program ratio of 60% - 100%, but asks nonproifts with ratios in the 60%s or 90%s to provide an explanation to donors about why they’re not in the 70%-90% “sweet spot”, as some consider it. At the same time, we’ll be offering the donor public things to think about when evaluating the nonprofit response, including the fact that there is no one ideal balance point for all nonprofits—or even for the same nonprofit in different years. We see it as an opporunity to inform donors and funders about the perils of underfunding organizational infrastructure.
Very good work Bridgespan. We really must reinvent funding frameworks and administrative decision making behaviors. The scarcity mentality continues to lead many non-profits down the road towards ineffectiveness—short cuts never work. hope someone takes this up as a serious set of work that needs to be done.
This is a well-argued point, and an issue that is commonly understood by executive directors of many nonprofit organizations. It leaves out one additional factor that keeps this practice active - and that is the guidance that individual donors (often a critical base of reliable donors that are needed to sustain small to mid-sized nonprofits) receive from sites like Charity Navigator and others - who rank nonprofits by the percentage of their funds used to deliver programs - in other words the percent of funds NOT used for infrastructure and administration….
A nonprofit whose administrative costs are reported to be above 15-20% risks losing significant individual contributors. So more than just the large foundations need to modify their standards and evaluation criteria if this situation is to change.
This article strikes at the heart of the problem that plagues the nonprofit sector - acute AND chronic underinvestment in organizational capacity, which has engendered a culture of downgraded expectations. This results in, among other things, extraordinarily high staff turnover - resulting from low salaries, no benefits, understaffing, and minimal supervision and training - which in turn translates into program quality that is lower than it needs to be. Yet, when this topic comes up around a table of nonprofit leaders, the general response is to shrug and say, “Yeah, yeah - we KNOW it’s a problem, but that’s just the way it is [with nonprofits].” Then someone trots out the tired joke, “Yeah, nonprofit jobs - the hours are long, but the pay is low.” And, because many of the people on the receiving end of this lower-than-it-needs-to-be program quality lack a strong political voice, this is allowed to go on. Great article.
I agree with Barry that this problem extends well beyond large Foundations and should also be addressed by individual donors and sites like Charity Navigator. In fact, I think this problem has already been recognized by many Foundations and that more information/education needs to be provided to individual donors if we are really going to change the system.
Exactly! I kept whispering “Amen!” to myself as I read this article. These are things that anyone who’s worked in the sector knows to be true, but having realy numbers and a course of action make this article a real treasure. At the Nonprofit Technology Network, we see how nonprofits short-change their infrastructures every single day, and it’s disheartening. But I agree that it’s really up to us to change the paradigm. Managed a post about our experiences here: http://nten.org/blog/2009/08/24/maybe-we-have-ourselves-blame.
A major part of the problem is governance. Too many charitable boards have bought into the historic metrics promoted for many years by United Ways (less than 10%—are you kidding!?) and self-appointed charity rating services. Like with other governance issues boards need to have their historic perceptions challenged. My foundation has stopped considering restricted funds because they often come with “overhead” limits—sometime “0”. But those who want their funds restricted without administrative expense also want accountability, transparency, reporting, etc., etc. Get real. If you ran a business like that, you’d be out of business. This article does a great job of making the case for change. Everyone should share it with their Board members.
Great article – thanks for pointing out that the need for adequate infrastructure is critical for many reasons, but primarily because unless nonprofits have the tools, training and time to manage performance, they will not be able to achieve the outcomes they intend for their clients, the very purpose of their existence.
For too long, people (not just the general public; foundation and nonprofit staff as well) have assumed that no matter what we do, some good – however modest – will result. Unfortunately, that is not true. Unless performance is managed well, services could have unintended negative consequences or, more frequently, simply be ineffective. Consider the opportunity costs of ineffectiveness (resources could have been spent in better ways), but also the possibility that ineffectiveness can equal harm if services fail to prevent negative outcomes (e.g. HIV, violence).
It’s time for the focus of the conversation to move away from the nonprofits and onto the people who need their services. THEY need nonprofits to spend reasonable percentages on overhead so they can spend what they need to spend on the tools, training and time to manage performance and ensure that people benefit as intended. And the nonprofits need to be funded for it. I couldn’t agree more with your statement that funders need to shift their focus from costs to outcomes.”
Thanks for an excellent contribution to this conversation. Now, let’s see some action from funders.
This has been my mantra since beginning my consulting practice many years ago but more so now as times are so very hard all around.
I am excited and find it a hopeful statement that SSIR published this articule. There are many funders/donors who do really ‘get this’ particularly when it comes to “capacity building” but that is matched often by a need to see ROI. Facilitating transition or improvements to services etc. is a long tail but if the provider is without that internal strength then the outcomes can’t begin to evolve.
Business acumen and practices are always critical to any organization’s practices, being more accountable and transparent is dictated by the (c)3 status at the very least but this article does drive home that if general operating support is part of the supporter’s approach (even a formulaic 8-12% each donation) then we avoid a significant M&A;historical moment in the sector due to such starvation.
Educating donors is the key that underscores mission and expanding comprehension of your work will always take repetition and time. It has always puzzled me why we comprehend letting portfolios grow when investing or saving but when it comes to contributing to a nonprofit organization people want to see quick results?
When you have organizations like Charity Navigator driving organizations so hard to spend their donor dollars on programs and not overhead and infrastructure in order to get that infamous 4 star rating, it makes funding for technology solutions difficult. I’ve been at this NPO tech gig for over 10 years now and it’s like pulling teeth to get grant dollars and program allocations put towards infrastructure. I’m with Holly Ross - Amen. NPO need to treat the investment of technology just as for profit organizations do.
I too believe this is a great article. I am also in agreement with Ingvild and am an advocate for organizations to build infrastructures which includes tools and systems to manage their performance. A system of self correction which involves tracking progress towards success and adjusting programs practices to promote program outcomes. Ultimately, as a result, it is the clients who are better off. This should be a priority; however, most nonprofits cannot afford it or sustain it so let’s stop placing restricting limitations on nonprofits that are being responsible and managing performance and then we will be well on our way to demonstrate effective, positive change in our communities.
Our Piece of the Pie (OPP), in Hartford CT. manages performance, because we see it as an obligation to our clients; it has helped us improve services, and it has helped us with funders. We have made a huge investment in building this infrastructure and work at its longevity with unrestricted and administrative revenues. Here at OPP there is a culture of continuous improvement so we always strive to be smarter and make enhancements to the way we render services, collect data, and measure outcomes. An example of this is that over the past few months our Chief Operating Officer, myself, and an external consultant have been working together researching and analyzing our service model to make enhancements. We have added benchmarks, indicators and measurement to inform and ensure the intentional outcomes of our clients. We have quantified movement along Pathways, (OPP’s Service Model). To be strategic, accountable, transparent and reporting, as Steve said above, can not be accomplished if funders do not want to pay administrative expenses. So yes it’s time for funders to change their traditional ways and do something about this.
It is worth noting for federal grants and agreements that organizations can have negotiated indirect cost agreements that are applicable agency-wide. The organization negotiates an indirect cost rate with one agency, called the cognizant agency, based on specific and reproducible calculations, i.e. which costs count as indirect costs. That negotiated rate can then be cited in applications to any other federal agency. The rate is adjusted each year, so changes in the organization’s costs can be accounted for. It would be great if foundations would adopt a similar policy.
Nonprofit organizations with robust infrastructures also underreport their overheard costs, particularly as they seek evermore funding to sustain their overall organizational—as opposed to single program—growth due to the ineluctable rise of fixed and variable operating costs. In other words, organizational growth cannot always be correlated with increased capacity and, as a consequence, restricted funding often goes to overhead even if the funder forbids it. While all organizations have a responsibility to demonstrate fiscal transparency, this is an issue that reinforces the need for more unrestricted funding, provided, of course, that organizations stick to their stated missions.
During my short tenure with my agency, i have focused much on infrastructure and so glad i did. Some funders and elected officials, however, are constantly scrutinizing our overhead costs. This is a great article to help enlighten them. We all need this reinforcement so that we don’t feel guilty about maintaining our standards of quality service through a strong infrastructure! Excellent work Bridgespan!
The Fall 2009 issue has two excellent feature articles that promote new perspectives, strategies and opportunities for philanthropists, both individual and institutional – “Catalytic Philanthropy” and “The Nonprofit Starvation Cycle.” Each makes a compelling case for reform and renewal in philanthropy. On one hand, a philanthropist can be a catalyst of systemic change by focusing diverse actors on a key problem or obstacle. On the other hand, a philanthropist can build capacity in the non-profit sector by providing realistic financial support for organizational infrastructure. Both are sorely needed, so I hope these will become compatible rather than competitive trends.
However, these two articles could be interpreted to offer fundamentally inconsistent advice for philanthropists – focus on the cause not the organization vs. focus on the organization not the cause. Taken together they lead to powerful results. Taken separately they create conflict that prevents results.
“Catalytic Philanthropy” has another unexamined implication. I hesitate to make this point, because I fully support the author’s thesis, and I know too well that an author cannot communicate effectively and still cover all the possible angles. But this angle is really too important to ignore—the wealthy and successful have disproportionate and unaccountable power to influence the course of society. “Catalytic Philanthropy” encourages use of this power without sufficient reminder that a person of wealth and success in one sphere of society or business does not necessarily have better information or analysis of social ills and their causes. So his or her power to champion a particular theory of change by marshalling diverse actors with relevant expertise, influence and money is not necessarily a good thing for the larger social, economic and ecological systems. In principle and in fact, the catalytic philanthropist’s power to act on his or her own theory, especially when sheltered by unassailably good intentions, is a fundamental threat to inclusive, pluralistic, democratic society. Why? Because he or she is not accountable to the normal checks and balances that produce broadly acceptable compromise.
I am as impatient a social activist as any, but I have been humbled enough (and humiliated enough) by my own ignorance to exercise due caution. I have to listen carefully to and even be accountable to competing theorists of change. Wealthy and successful people often haven’t been made so painfully aware of their own ignorance. “If I were king of the world” is an interesting thought experiment, but most of us would not want to live with the consequences of those experiments turned into real life. Perhaps I make too much of this “remote” threat from the wealthy and successful philanthropic catalyst, but a threat unnamed is all the more dangerous.
Christopher Dunford
President
Freedom from Hunger
Davis, California
This is an excellent article that is germane to some very interesting efforts underway in the Bay Area. There are foundations, cities and counties that are stepping up to provide training, technical assistance, and capacity building funding to their nonprofit community. These efforts are a result of the belated recognition that most of the governmental organizations cannot deliver vital social, educational, environmental, and arts services without a healthy nonprofit community. Unfortunately, given the recession, there is an ambivalence to this help and a sense that the nonprofits got themselves into this mess and need to expend more effort to solve the problem.
While I agree that the nonprofit agency bears some significant responsibility to report what it actually does (or should) cost to deliver quality services and outcomes, the article clearly points out that the power differential makes nonprofits reluctant to go out on limb with the truth. It seems, however, that nonprofit coalitions and trade associations could more safely take this issue up on behalf of the sector.
One of the other respondents mentioned that philanthropy could engage in something like the federal indirect cost rating for nonprofits - and I might add could recognize the rates established by the feds when nonprofits have gone to the trouble of getting such a rating. This would go a long way to using a common set of measures to acknowledge the infrastructure needs of nonprofits.
Nonprofits acting alone are not quite as helpless as “The Nonprofit Starvation Cycle” suggests.
Nonprofits can skip the beggar-your-neighbor strategy of trumpeting competitive “efficiency” ratings based on simplistic financial ratios
published by self-appointed oversight organizations. They can omit the sleazy pandering to donors that’s buried in the claim from heavily sponsored galas (true in only the most technical of senses) that “100% of your donation” goes to the charitable purpose. They can answer with greater candor when prospective donors ask “What do you need to get the job done?”
True, major funders have the upper hand in one-on-one negotiations. No doubt challenging the terms in an RFP after it’s been published is a losing cause. But working together through state associations and professional groups, nonprofit leaders could issue louder calls for sanity without incurring personal jeopardy - and do a good thing for themselves and for their hard-pressed colleagues even if change is slow to come.
It’s hard to say which is more corrosive: rotten infrastructure or pressure to prevaricate. Nonprofit leaders should not be asked to do
their work under such distracting burdens. Every foundation staffer or government official who reads Gregory and Howard’s article should ask themselves what they might do to change these damaging practices. And so might every nonprofit development officer, executive, or board member.
If we are looking at other ways funders (private and public) contribute to the starvation cycle, there are three ways that have not yet mentioned:
1) funders who refuse to pay for a variety of costs (rent, food, transportation, etc) that are integral to program success.
2) funders who insist on matching funds expressing the notion that “if the contractor really wants to provide these services they should be willing to provide matching resources”.
3) contracts that do not provide COLA’s which means that a contract that would have covered the cost of providing the services initially requires an ever-growing fundraising burden in subsequent years.
And finally we all experience pressure to “prove” that funds have been spent to greatest impact, and have continued to raise requirements for non-profit sector partipation in evaluation activities without increasing resources to cover those additional costs.
Dan Pallotta at Harvard Business School writes about this all the time. The percentage spent on programs vs. admin/fundraising is just a very simple breakdown that everyone can understand. That is further pounded into society as the mark of a successful charity by “evaluation” groups such as Charity Navigator. But that’s just it, its too simple a solution. The organization I work for has a four-star ranking on CNav and to be honest, 90+% of our first-time donors pick us because we have the highest rating (we are a small disease-specific organization in a sea of large national disease-specific organizations). We embrace (and then some) our four-star status and I will not lie, we market the heck out of it. The economic recession caused us to tighten our belts a little in 2008 and spend slightly less on programs than in previous years. This will undoubtedly cause our ranking to drop on CNav and I expect that we will get calls from previous donors who are upset by this. We are worried that the drop in ranking will coincide with a drop in our donations. Not only that, we participate in the state and federal employee charitable campaigns, most of which require that you have an overhead of no more than 25%. It’s EVERYWHERE and in EVERYTHING we do.
Spending millions more on programs than fundraising/admin does NOT necessarily make your programs more effective. We, as nonprofit leaders, need to re-evaluate how we evaluate ourselves. CNav makes it simple and easy to at least find a charity that isn’t spending all its money paying its people or throwing lavish parties, but this article is correct, it forces us to go bare bones in order to compete. I am also pleased to hear the rumors that in 2010 CNav will begin to measure a charity’s effectiveness and it will certainly be interesting to see how they are going to do that. Basically what we need here are multiple measures of “success” and “effectiveness” in order to get a truer picture of whether or not we are worthy of a donor’s $50. Overhead is simply too simple.
This has gotten to the point that many nonprofits just flat out lie about their allocation between G&A, Fundraising and Programs. They adopt the mindset that “all work is on behalf of programs” so they allocate based on a methodology that seems reasonable TO THEM. They simply shift all their G&A and much of their fundraising into Program expense categories and, IF they get an audit, their auditor doesn’t question the reasonableness because GAAP standards do not exist at such a granular level. It is up to the judgment of the nonprofit and, because it’s to their advantage to shift toward a high ratio of program spending, they allocate many admin costs aggressively to programs. I’ve seen more than a few 990’s with about $7 of telephone expenses in the fundraising column and 70% of their funding comes from contributed sources. Come on. Of course, they do this to their own disadvantage because it becomes more difficult to manage your cost structure when your assumptions are delusional.
In my consulting practice I have seen many boards and executive directors make checkbook management kinds of choices recently—not strategic ones. One of the many areas they cut was in development. The irony is that the cost of raising a dollar is going up and this at a time when people are clamoring to be more, not less, involved in the work of nonprofits.
You may have seen one of the stories or research report about the decline of department stores that describe that it was not the economy that hurt, but that instead they had neglected things customers wanted including, among other items, “having helpful people staffing the store.” As a result these stores lost ground with the affluent customers - the ones they need the most. Imagine if Apple cut back the staffing in its stores as a “cost saving measure”? If you have been in an Apple store lately, you have had to fight the crowds—but there always seems to be someone ready to help. They are thriving.
Cutting development (the customer service and marketing side of nonprofits) will likely result in the same troubling effects in terms of contributions both today and in the future. Such “cost saving” cuts will have negative ripple effects for years to come. Despite the dramatic emotional opening presented by economic shock, many nonprofits then failed to connect with their donors who now had an even greater vested interest in the success of those nonprofits; instead they looked inward, cut expenses, and are quietly prayed for a miracle. For most, there will be no miracle: too many of their donors will have moved on to do other things and invest their time and money differently.
I wish I could share this article with people around me.
We are under three years old, work almost entirely with volunteers. We have an excellent vision and great ideas, but I cannot hire the ideators because salaries are regarded with the same disdain as overheads. How will I run programmes without full-time people? How will I retain competent full-timers without paying them a living wage if not their full-market value?
And while we don’t work out of a car, we work out of one room in my home, which means everyone can’t be here together, and I cannot actually seat full-time staff. I might be able to rustle up rent, but how will I pay for utilities, etc? What kind of research centre are we without a library where people can sit and read?
Now there’s also the impact assessment thing. People want to know what impact we are going to make. Fine, I can cook up something, but the reality is, unless I know what my human resources are going to be, I cannot realistically tell you whether my programmes will cover three schools or thirty.
I re-tweeted the link to this, but I wish I could do more to make this research available to many.
Coming from a small non-profit which started out just serving people a basic need which is food, it can be overwhelming just to do your job which is to serve the people in need. I understand the need for transparency and it should be required. Although I could use a paycheck, that is not why I do the work nor the volunteers who work along side of me. I have been questioned over and over again why I am not able to take a paycheck and the truth is all the money we receive we do our best to buy more food. Plain and simple but there are many foundations who don’t believe me. I have to sign an affidavit to prove it is true. Then as we received funds from the community, everyone asked for a 501c3. So we incorporated. Then we were denied many funds because we were not audited. So we did an audit. Now what? Still no funding. We still struggle day to day to meet the huge growing demand of people needing food. All of the information and record keeping is time consuming so that is I can’t write grants either. Very few people want to work for free and I can’t blame them, otherwise, they are standing in line with the many others who we serve. But my heart is filled with joy to serve. I can only do what I can do and go to sleep at night knowing I was honest with my overhead, scrimping along the way and blessed to serve those who need serving. My co-laborers feel the same. And every week, we do it all over again. Most of us start this way….and most of us should end this way. Perhaps I am simple minded but I am glad to hear of others at least understanding how I can learn to communicate better to foundations or the individuals who donate to us. We do not have any government funding, our desire is to be part of a solution to a bigger problem. Thanks to those that contribute these articles. I learn more and more every day.
Great Article! The mentality of pressuring non-profits to maintain low-operating cost comes from donors’ and would-be donors’ disillusionment with non-profits that spend too much on overhead or overtly steal funds (or somewhere along the continuum). But now the pendulum has swung in the other direction, and an organization might end up with a large grant or donation but no means to put it to work, thus opening the door to fund manipulation, the very thing that the funders were trying to avoid.
The tightening of the belt on overhead is a faulty solution to a problem that could be helped by greater transparency, fund tracking, and public awareness.
So many organization think they can’t afford automation but at the same time spend countless hours with spreadsheets and paper reports. They also end up with inconsistent intake processes and data that is often useless. I definitely feel that an investment in case management automation makes a big difference for non-profits of all sizes.
Many non-profits actually do under-invest in infrastructure and over-head: it’s not necessarily a matter of under-reporting to funders the true cost of overhead. The starvation cycle often begins internally, through Board members expectations of low overhead. This perspective can be self-serving, in that it conveniently takes Board members “off the hook” for fundraising to help support the costs of delivering quality services. The result is poor service quality and reputation, burned-out staff, etc.
Perceived high admin costs stops many people from donating money to charities, hence creating a vicious cycle. For organizations that rely on goods for their daily operations, there is help. Gooddler, is a platform that allows existing and potential donors to purchase specific gifts, which will be shipped directly to the intended recipient. http://www.gooddler.com Check it out.
I need advice: Our 501c3 holds small social events that are affordable to the attendees ($25 a person) and the net goes to other charities (we change the beneficiary each event). How do you announce funds raised vs funds donated to the beneficiary? We had a recent beneficiary email a thank you for the donation, with a comment that we need to correct our website announcement as the amounts were different.
I think the admin of this website is genuinely working
hard in favor of his web site, for the reason that here every material is
quality based information.
Dah, Any “Professional” who has operated a thriving - real- not for profit organization understands-knows and would agree with what is being said. All too often, however, these articles are preaching to the choir. The real issue is public perception - opinion and a “long, long, long” time ago donors were sold on the idea-concept that donated funds should be directed to program NOT administration and the belief at the time was that the more dollars directed to “Program” the more “effective"the Program. Donors, foundations and government included must be educated to the need for strong -supportive/administrative services, otherwise the Program doesn’t happen. I came into this field in 1964 just after a couple very high profile charitable scandals which clearly set the tone for these misguided notions and soon after any not for profit “worth their salt” were boasting of their low overhead, anything over 10% was viewed as criminal..thus the birth of a foolish, and wasteful, concept. Education, education,education is what is needed.
why don’t non-profits spend more time on gift ideas. people don’t tend to be of any help because of the lack of proper organizations, or lazy enough to to participate in such organizations. But we all know that gifts can make an impact, and with gift cards you are not tied with any boundaries. we need great gift ideas perhaps. http://ssir.org/articles/entry/good_news_nonprofit_gift_cards_expected_to_boom_this_holiday_season
Great work! This is a great conversation that all non-profits need to have with funders. The idea that you would shoestring an issue that you find so important that you are willing to invest in it is crazy. Thanks
Many non-profits actually do under-invest in infrastructure and over-head: it’s not necessarily a matter of under-reporting to funders the true cost of overhead.
COMMENTS
BY Rich Cowles
ON August 21, 2009 07:47 AM
For many years, the Charities Review Council has maintained a Use of Funds standard that calls for no more than 30% of expenses on admin and fundraising combined. In that time, we too have seen nonprofits make short term decisions not in their long term best interests in order to meet the standard, or in order to feed the charitable giving monster that rewards minimal admin and fundraising costs.
We have developed a new set of standards—currently in preliminary form and are seeking public input on our smartgivers.org website. Included is a shifted Use of Funds standard that takes into account the many good points made in this article and the fact that there is no standardization in how nonprofits categorize indirect costs. Many nonprofits, funders and individual donors participated in the development of this standard.
The proposed new standard allows a program ratio of 60% - 100%, but asks nonproifts with ratios in the 60%s or 90%s to provide an explanation to donors about why they’re not in the 70%-90% “sweet spot”, as some consider it. At the same time, we’ll be offering the donor public things to think about when evaluating the nonprofit response, including the fact that there is no one ideal balance point for all nonprofits—or even for the same nonprofit in different years. We see it as an opporunity to inform donors and funders about the perils of underfunding organizational infrastructure.
BY Reynolds-Anthony Harris
ON August 22, 2009 08:56 PM
Very good work Bridgespan. We really must reinvent funding frameworks and administrative decision making behaviors. The scarcity mentality continues to lead many non-profits down the road towards ineffectiveness—short cuts never work. hope someone takes this up as a serious set of work that needs to be done.
BY Barry Horwitz
ON August 23, 2009 02:27 PM
This is a well-argued point, and an issue that is commonly understood by executive directors of many nonprofit organizations. It leaves out one additional factor that keeps this practice active - and that is the guidance that individual donors (often a critical base of reliable donors that are needed to sustain small to mid-sized nonprofits) receive from sites like Charity Navigator and others - who rank nonprofits by the percentage of their funds used to deliver programs - in other words the percent of funds NOT used for infrastructure and administration….
A nonprofit whose administrative costs are reported to be above 15-20% risks losing significant individual contributors. So more than just the large foundations need to modify their standards and evaluation criteria if this situation is to change.
BY Horsnell
ON August 24, 2009 07:03 AM
This article strikes at the heart of the problem that plagues the nonprofit sector - acute AND chronic underinvestment in organizational capacity, which has engendered a culture of downgraded expectations. This results in, among other things, extraordinarily high staff turnover - resulting from low salaries, no benefits, understaffing, and minimal supervision and training - which in turn translates into program quality that is lower than it needs to be. Yet, when this topic comes up around a table of nonprofit leaders, the general response is to shrug and say, “Yeah, yeah - we KNOW it’s a problem, but that’s just the way it is [with nonprofits].” Then someone trots out the tired joke, “Yeah, nonprofit jobs - the hours are long, but the pay is low.” And, because many of the people on the receiving end of this lower-than-it-needs-to-be program quality lack a strong political voice, this is allowed to go on. Great article.
BY Carrie Varoquiers
ON August 24, 2009 01:10 PM
I agree with Barry that this problem extends well beyond large Foundations and should also be addressed by individual donors and sites like Charity Navigator. In fact, I think this problem has already been recognized by many Foundations and that more information/education needs to be provided to individual donors if we are really going to change the system.
BY Holly Ross
ON August 24, 2009 03:49 PM
Exactly! I kept whispering “Amen!” to myself as I read this article. These are things that anyone who’s worked in the sector knows to be true, but having realy numbers and a course of action make this article a real treasure. At the Nonprofit Technology Network, we see how nonprofits short-change their infrastructures every single day, and it’s disheartening. But I agree that it’s really up to us to change the paradigm. Managed a post about our experiences here: http://nten.org/blog/2009/08/24/maybe-we-have-ourselves-blame.
BY Steve Delfin
ON August 25, 2009 02:54 PM
A major part of the problem is governance. Too many charitable boards have bought into the historic metrics promoted for many years by United Ways (less than 10%—are you kidding!?) and self-appointed charity rating services. Like with other governance issues boards need to have their historic perceptions challenged. My foundation has stopped considering restricted funds because they often come with “overhead” limits—sometime “0”. But those who want their funds restricted without administrative expense also want accountability, transparency, reporting, etc., etc. Get real. If you ran a business like that, you’d be out of business. This article does a great job of making the case for change. Everyone should share it with their Board members.
BY Ingvild Bjornvold
ON August 26, 2009 10:12 AM
Great article – thanks for pointing out that the need for adequate infrastructure is critical for many reasons, but primarily because unless nonprofits have the tools, training and time to manage performance, they will not be able to achieve the outcomes they intend for their clients, the very purpose of their existence.
For too long, people (not just the general public; foundation and nonprofit staff as well) have assumed that no matter what we do, some good – however modest – will result. Unfortunately, that is not true. Unless performance is managed well, services could have unintended negative consequences or, more frequently, simply be ineffective. Consider the opportunity costs of ineffectiveness (resources could have been spent in better ways), but also the possibility that ineffectiveness can equal harm if services fail to prevent negative outcomes (e.g. HIV, violence).
It’s time for the focus of the conversation to move away from the nonprofits and onto the people who need their services. THEY need nonprofits to spend reasonable percentages on overhead so they can spend what they need to spend on the tools, training and time to manage performance and ensure that people benefit as intended. And the nonprofits need to be funded for it. I couldn’t agree more with your statement that funders need to shift their focus from costs to outcomes.”
Thanks for an excellent contribution to this conversation. Now, let’s see some action from funders.
BY Margaret Egan
ON August 26, 2009 09:12 PM
This has been my mantra since beginning my consulting practice many years ago but more so now as times are so very hard all around.
I am excited and find it a hopeful statement that SSIR published this articule. There are many funders/donors who do really ‘get this’ particularly when it comes to “capacity building” but that is matched often by a need to see ROI. Facilitating transition or improvements to services etc. is a long tail but if the provider is without that internal strength then the outcomes can’t begin to evolve.
Business acumen and practices are always critical to any organization’s practices, being more accountable and transparent is dictated by the (c)3 status at the very least but this article does drive home that if general operating support is part of the supporter’s approach (even a formulaic 8-12% each donation) then we avoid a significant M&A;historical moment in the sector due to such starvation.
Educating donors is the key that underscores mission and expanding comprehension of your work will always take repetition and time. It has always puzzled me why we comprehend letting portfolios grow when investing or saving but when it comes to contributing to a nonprofit organization people want to see quick results?
BY Michael Sola
ON August 27, 2009 12:04 PM
When you have organizations like Charity Navigator driving organizations so hard to spend their donor dollars on programs and not overhead and infrastructure in order to get that infamous 4 star rating, it makes funding for technology solutions difficult. I’ve been at this NPO tech gig for over 10 years now and it’s like pulling teeth to get grant dollars and program allocations put towards infrastructure. I’m with Holly Ross - Amen. NPO need to treat the investment of technology just as for profit organizations do.
BY Kimberly Williams-Rivera
ON August 27, 2009 12:58 PM
I too believe this is a great article. I am also in agreement with Ingvild and am an advocate for organizations to build infrastructures which includes tools and systems to manage their performance. A system of self correction which involves tracking progress towards success and adjusting programs practices to promote program outcomes. Ultimately, as a result, it is the clients who are better off. This should be a priority; however, most nonprofits cannot afford it or sustain it so let’s stop placing restricting limitations on nonprofits that are being responsible and managing performance and then we will be well on our way to demonstrate effective, positive change in our communities.
Our Piece of the Pie (OPP), in Hartford CT. manages performance, because we see it as an obligation to our clients; it has helped us improve services, and it has helped us with funders. We have made a huge investment in building this infrastructure and work at its longevity with unrestricted and administrative revenues. Here at OPP there is a culture of continuous improvement so we always strive to be smarter and make enhancements to the way we render services, collect data, and measure outcomes. An example of this is that over the past few months our Chief Operating Officer, myself, and an external consultant have been working together researching and analyzing our service model to make enhancements. We have added benchmarks, indicators and measurement to inform and ensure the intentional outcomes of our clients. We have quantified movement along Pathways, (OPP’s Service Model). To be strategic, accountable, transparent and reporting, as Steve said above, can not be accomplished if funders do not want to pay administrative expenses. So yes it’s time for funders to change their traditional ways and do something about this.
BY Clifford Duke
ON September 16, 2009 08:43 AM
It is worth noting for federal grants and agreements that organizations can have negotiated indirect cost agreements that are applicable agency-wide. The organization negotiates an indirect cost rate with one agency, called the cognizant agency, based on specific and reproducible calculations, i.e. which costs count as indirect costs. That negotiated rate can then be cited in applications to any other federal agency. The rate is adjusted each year, so changes in the organization’s costs can be accounted for. It would be great if foundations would adopt a similar policy.
BY vinylhero
ON October 6, 2009 12:11 PM
Nonprofit organizations with robust infrastructures also underreport their overheard costs, particularly as they seek evermore funding to sustain their overall organizational—as opposed to single program—growth due to the ineluctable rise of fixed and variable operating costs. In other words, organizational growth cannot always be correlated with increased capacity and, as a consequence, restricted funding often goes to overhead even if the funder forbids it. While all organizations have a responsibility to demonstrate fiscal transparency, this is an issue that reinforces the need for more unrestricted funding, provided, of course, that organizations stick to their stated missions.
BY LAURA
ON October 12, 2009 01:39 PM
During my short tenure with my agency, i have focused much on infrastructure and so glad i did. Some funders and elected officials, however, are constantly scrutinizing our overhead costs. This is a great article to help enlighten them. We all need this reinforcement so that we don’t feel guilty about maintaining our standards of quality service through a strong infrastructure! Excellent work Bridgespan!
BY Center for Social Innovation
ON October 28, 2009 05:11 PM
The Fall 2009 issue has two excellent feature articles that promote new perspectives, strategies and opportunities for philanthropists, both individual and institutional – “Catalytic Philanthropy” and “The Nonprofit Starvation Cycle.” Each makes a compelling case for reform and renewal in philanthropy. On one hand, a philanthropist can be a catalyst of systemic change by focusing diverse actors on a key problem or obstacle. On the other hand, a philanthropist can build capacity in the non-profit sector by providing realistic financial support for organizational infrastructure. Both are sorely needed, so I hope these will become compatible rather than competitive trends.
However, these two articles could be interpreted to offer fundamentally inconsistent advice for philanthropists – focus on the cause not the organization vs. focus on the organization not the cause. Taken together they lead to powerful results. Taken separately they create conflict that prevents results.
“Catalytic Philanthropy” has another unexamined implication. I hesitate to make this point, because I fully support the author’s thesis, and I know too well that an author cannot communicate effectively and still cover all the possible angles. But this angle is really too important to ignore—the wealthy and successful have disproportionate and unaccountable power to influence the course of society. “Catalytic Philanthropy” encourages use of this power without sufficient reminder that a person of wealth and success in one sphere of society or business does not necessarily have better information or analysis of social ills and their causes. So his or her power to champion a particular theory of change by marshalling diverse actors with relevant expertise, influence and money is not necessarily a good thing for the larger social, economic and ecological systems. In principle and in fact, the catalytic philanthropist’s power to act on his or her own theory, especially when sheltered by unassailably good intentions, is a fundamental threat to inclusive, pluralistic, democratic society. Why? Because he or she is not accountable to the normal checks and balances that produce broadly acceptable compromise.
I am as impatient a social activist as any, but I have been humbled enough (and humiliated enough) by my own ignorance to exercise due caution. I have to listen carefully to and even be accountable to competing theorists of change. Wealthy and successful people often haven’t been made so painfully aware of their own ignorance. “If I were king of the world” is an interesting thought experiment, but most of us would not want to live with the consequences of those experiments turned into real life. Perhaps I make too much of this “remote” threat from the wealthy and successful philanthropic catalyst, but a threat unnamed is all the more dangerous.
Christopher Dunford
President
Freedom from Hunger
Davis, California
BY Tim Tabernik
ON November 9, 2009 09:59 AM
This is an excellent article that is germane to some very interesting efforts underway in the Bay Area. There are foundations, cities and counties that are stepping up to provide training, technical assistance, and capacity building funding to their nonprofit community. These efforts are a result of the belated recognition that most of the governmental organizations cannot deliver vital social, educational, environmental, and arts services without a healthy nonprofit community. Unfortunately, given the recession, there is an ambivalence to this help and a sense that the nonprofits got themselves into this mess and need to expend more effort to solve the problem.
While I agree that the nonprofit agency bears some significant responsibility to report what it actually does (or should) cost to deliver quality services and outcomes, the article clearly points out that the power differential makes nonprofits reluctant to go out on limb with the truth. It seems, however, that nonprofit coalitions and trade associations could more safely take this issue up on behalf of the sector.
One of the other respondents mentioned that philanthropy could engage in something like the federal indirect cost rating for nonprofits - and I might add could recognize the rates established by the feds when nonprofits have gone to the trouble of getting such a rating. This would go a long way to using a common set of measures to acknowledge the infrastructure needs of nonprofits.
BY Putnam Barber
ON December 17, 2009 06:12 PM
Nonprofits acting alone are not quite as helpless as “The Nonprofit Starvation Cycle” suggests.
Nonprofits can skip the beggar-your-neighbor strategy of trumpeting competitive “efficiency” ratings based on simplistic financial ratios
published by self-appointed oversight organizations. They can omit the sleazy pandering to donors that’s buried in the claim from heavily sponsored galas (true in only the most technical of senses) that “100% of your donation” goes to the charitable purpose. They can answer with greater candor when prospective donors ask “What do you need to get the job done?”
True, major funders have the upper hand in one-on-one negotiations. No doubt challenging the terms in an RFP after it’s been published is a losing cause. But working together through state associations and professional groups, nonprofit leaders could issue louder calls for sanity without incurring personal jeopardy - and do a good thing for themselves and for their hard-pressed colleagues even if change is slow to come.
It’s hard to say which is more corrosive: rotten infrastructure or pressure to prevaricate. Nonprofit leaders should not be asked to do
their work under such distracting burdens. Every foundation staffer or government official who reads Gregory and Howard’s article should ask themselves what they might do to change these damaging practices. And so might every nonprofit development officer, executive, or board member.
Putnam Barber
Idealist.org
Seattle
BY Cally
ON January 4, 2010 08:21 PM
If we are looking at other ways funders (private and public) contribute to the starvation cycle, there are three ways that have not yet mentioned:
1) funders who refuse to pay for a variety of costs (rent, food, transportation, etc) that are integral to program success.
2) funders who insist on matching funds expressing the notion that “if the contractor really wants to provide these services they should be willing to provide matching resources”.
3) contracts that do not provide COLA’s which means that a contract that would have covered the cost of providing the services initially requires an ever-growing fundraising burden in subsequent years.
And finally we all experience pressure to “prove” that funds have been spent to greatest impact, and have continued to raise requirements for non-profit sector partipation in evaluation activities without increasing resources to cover those additional costs.
BY Lindsay
ON January 22, 2010 02:24 PM
Dan Pallotta at Harvard Business School writes about this all the time. The percentage spent on programs vs. admin/fundraising is just a very simple breakdown that everyone can understand. That is further pounded into society as the mark of a successful charity by “evaluation” groups such as Charity Navigator. But that’s just it, its too simple a solution. The organization I work for has a four-star ranking on CNav and to be honest, 90+% of our first-time donors pick us because we have the highest rating (we are a small disease-specific organization in a sea of large national disease-specific organizations). We embrace (and then some) our four-star status and I will not lie, we market the heck out of it. The economic recession caused us to tighten our belts a little in 2008 and spend slightly less on programs than in previous years. This will undoubtedly cause our ranking to drop on CNav and I expect that we will get calls from previous donors who are upset by this. We are worried that the drop in ranking will coincide with a drop in our donations. Not only that, we participate in the state and federal employee charitable campaigns, most of which require that you have an overhead of no more than 25%. It’s EVERYWHERE and in EVERYTHING we do.
Spending millions more on programs than fundraising/admin does NOT necessarily make your programs more effective. We, as nonprofit leaders, need to re-evaluate how we evaluate ourselves. CNav makes it simple and easy to at least find a charity that isn’t spending all its money paying its people or throwing lavish parties, but this article is correct, it forces us to go bare bones in order to compete. I am also pleased to hear the rumors that in 2010 CNav will begin to measure a charity’s effectiveness and it will certainly be interesting to see how they are going to do that. Basically what we need here are multiple measures of “success” and “effectiveness” in order to get a truer picture of whether or not we are worthy of a donor’s $50. Overhead is simply too simple.
BY David
ON January 31, 2010 05:27 PM
This has gotten to the point that many nonprofits just flat out lie about their allocation between G&A, Fundraising and Programs. They adopt the mindset that “all work is on behalf of programs” so they allocate based on a methodology that seems reasonable TO THEM. They simply shift all their G&A and much of their fundraising into Program expense categories and, IF they get an audit, their auditor doesn’t question the reasonableness because GAAP standards do not exist at such a granular level. It is up to the judgment of the nonprofit and, because it’s to their advantage to shift toward a high ratio of program spending, they allocate many admin costs aggressively to programs. I’ve seen more than a few 990’s with about $7 of telephone expenses in the fundraising column and 70% of their funding comes from contributed sources. Come on. Of course, they do this to their own disadvantage because it becomes more difficult to manage your cost structure when your assumptions are delusional.
BY Carrie Roberts
ON February 8, 2010 03:39 PM
Absolutely concur!
BY KEVIN JOHNSON
ON April 30, 2010 05:00 PM
In my consulting practice I have seen many boards and executive directors make checkbook management kinds of choices recently—not strategic ones. One of the many areas they cut was in development. The irony is that the cost of raising a dollar is going up and this at a time when people are clamoring to be more, not less, involved in the work of nonprofits.
You may have seen one of the stories or research report about the decline of department stores that describe that it was not the economy that hurt, but that instead they had neglected things customers wanted including, among other items, “having helpful people staffing the store.” As a result these stores lost ground with the affluent customers - the ones they need the most. Imagine if Apple cut back the staffing in its stores as a “cost saving measure”? If you have been in an Apple store lately, you have had to fight the crowds—but there always seems to be someone ready to help. They are thriving.
Cutting development (the customer service and marketing side of nonprofits) will likely result in the same troubling effects in terms of contributions both today and in the future. Such “cost saving” cuts will have negative ripple effects for years to come. Despite the dramatic emotional opening presented by economic shock, many nonprofits then failed to connect with their donors who now had an even greater vested interest in the success of those nonprofits; instead they looked inward, cut expenses, and are quietly prayed for a miracle. For most, there will be no miracle: too many of their donors will have moved on to do other things and invest their time and money differently.
BY Swarna Rajagopalan
ON June 28, 2010 06:18 AM
I wish I could share this article with people around me.
We are under three years old, work almost entirely with volunteers. We have an excellent vision and great ideas, but I cannot hire the ideators because salaries are regarded with the same disdain as overheads. How will I run programmes without full-time people? How will I retain competent full-timers without paying them a living wage if not their full-market value?
And while we don’t work out of a car, we work out of one room in my home, which means everyone can’t be here together, and I cannot actually seat full-time staff. I might be able to rustle up rent, but how will I pay for utilities, etc? What kind of research centre are we without a library where people can sit and read?
Now there’s also the impact assessment thing. People want to know what impact we are going to make. Fine, I can cook up something, but the reality is, unless I know what my human resources are going to be, I cannot realistically tell you whether my programmes will cover three schools or thirty.
I re-tweeted the link to this, but I wish I could do more to make this research available to many.
BY Michelle Hensley
ON September 14, 2011 06:00 PM
Coming from a small non-profit which started out just serving people a basic need which is food, it can be overwhelming just to do your job which is to serve the people in need. I understand the need for transparency and it should be required. Although I could use a paycheck, that is not why I do the work nor the volunteers who work along side of me. I have been questioned over and over again why I am not able to take a paycheck and the truth is all the money we receive we do our best to buy more food. Plain and simple but there are many foundations who don’t believe me. I have to sign an affidavit to prove it is true. Then as we received funds from the community, everyone asked for a 501c3. So we incorporated. Then we were denied many funds because we were not audited. So we did an audit. Now what? Still no funding. We still struggle day to day to meet the huge growing demand of people needing food. All of the information and record keeping is time consuming so that is I can’t write grants either. Very few people want to work for free and I can’t blame them, otherwise, they are standing in line with the many others who we serve. But my heart is filled with joy to serve. I can only do what I can do and go to sleep at night knowing I was honest with my overhead, scrimping along the way and blessed to serve those who need serving. My co-laborers feel the same. And every week, we do it all over again. Most of us start this way….and most of us should end this way. Perhaps I am simple minded but I am glad to hear of others at least understanding how I can learn to communicate better to foundations or the individuals who donate to us. We do not have any government funding, our desire is to be part of a solution to a bigger problem. Thanks to those that contribute these articles. I learn more and more every day.
BY Susan
ON September 12, 2013 11:36 AM
Great Article! The mentality of pressuring non-profits to maintain low-operating cost comes from donors’ and would-be donors’ disillusionment with non-profits that spend too much on overhead or overtly steal funds (or somewhere along the continuum). But now the pendulum has swung in the other direction, and an organization might end up with a large grant or donation but no means to put it to work, thus opening the door to fund manipulation, the very thing that the funders were trying to avoid.
The tightening of the belt on overhead is a faulty solution to a problem that could be helped by greater transparency, fund tracking, and public awareness.
BY Robert Longley
ON January 4, 2014 10:41 AM
So many organization think they can’t afford automation but at the same time spend countless hours with spreadsheets and paper reports. They also end up with inconsistent intake processes and data that is often useless. I definitely feel that an investment in case management automation makes a big difference for non-profits of all sizes.
BY Craig King
ON February 15, 2014 10:59 AM
Many non-profits actually do under-invest in infrastructure and over-head: it’s not necessarily a matter of under-reporting to funders the true cost of overhead. The starvation cycle often begins internally, through Board members expectations of low overhead. This perspective can be self-serving, in that it conveniently takes Board members “off the hook” for fundraising to help support the costs of delivering quality services. The result is poor service quality and reputation, burned-out staff, etc.
BY Galina Fedorova
ON September 5, 2014 01:15 PM
Perceived high admin costs stops many people from donating money to charities, hence creating a vicious cycle. For organizations that rely on goods for their daily operations, there is help. Gooddler, is a platform that allows existing and potential donors to purchase specific gifts, which will be shipped directly to the intended recipient. http://www.gooddler.com Check it out.
BY Marsia Powers
ON September 10, 2014 03:44 PM
I need advice: Our 501c3 holds small social events that are affordable to the attendees ($25 a person) and the net goes to other charities (we change the beneficiary each event). How do you announce funds raised vs funds donated to the beneficiary? We had a recent beneficiary email a thank you for the donation, with a comment that we need to correct our website announcement as the amounts were different.
BY Waldo
ON October 16, 2014 11:47 AM
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hard in favor of his web site, for the reason that here every material is
quality based information.
BY David Paradine
ON August 21, 2015 11:27 AM
Dah, Any “Professional” who has operated a thriving - real- not for profit organization understands-knows and would agree with what is being said. All too often, however, these articles are preaching to the choir. The real issue is public perception - opinion and a “long, long, long” time ago donors were sold on the idea-concept that donated funds should be directed to program NOT administration and the belief at the time was that the more dollars directed to “Program” the more “effective"the Program. Donors, foundations and government included must be educated to the need for strong -supportive/administrative services, otherwise the Program doesn’t happen. I came into this field in 1964 just after a couple very high profile charitable scandals which clearly set the tone for these misguided notions and soon after any not for profit “worth their salt” were boasting of their low overhead, anything over 10% was viewed as criminal..thus the birth of a foolish, and wasteful, concept. Education, education,education is what is needed.
BY ian
ON May 18, 2016 04:34 PM
why don’t non-profits spend more time on gift ideas. people don’t tend to be of any help because of the lack of proper organizations, or lazy enough to to participate in such organizations. But we all know that gifts can make an impact, and with gift cards you are not tied with any boundaries. we need great gift ideas perhaps.
http://ssir.org/articles/entry/good_news_nonprofit_gift_cards_expected_to_boom_this_holiday_season
BY Steve Saunders
ON November 1, 2016 01:39 PM
Great work! This is a great conversation that all non-profits need to have with funders. The idea that you would shoestring an issue that you find so important that you are willing to invest in it is crazy. Thanks
BY cnc machining centers
ON November 16, 2017 07:40 PM
Many non-profits actually do under-invest in infrastructure and over-head: it’s not necessarily a matter of under-reporting to funders the true cost of overhead.