Buying Solutions Instead of Efficiency

At a recent conference I attended, Antony Bugg-Levine, CEO of the Nonprofit Finance Fund, bravely took another stab and debunking the nonprofit overhead myth.

Antony’s simple framing was that we – as nonprofits, as funders, and as partners to both – need to decide which question we should be able to answer:

Question 1 is, “Are you efficient at delivering your programs?”

Question 2 is, “Are you effective at turning funding into results?”

Further paraphrasing the example Antony gave, he described two conversations a funder could have with a homeless services organization. In the first conversation, the funder asks the service provider, “If I give you this money, will you, in fact, put in 10 more beds to the homeless shelter, as promised?” Alternately, the funder could ask, “If I give you this money, will you make a dent in the homelessness problem?”

It’s easy for us to smile and nod and say, “Oh, but of course, it’s question 2!” but that is not how we behave. “Don’t waste my money” is the prevailing message coming from most funders who demand “accountability,” a conversation that often ignores the distinction between efficiency and effectiveness.  And most social sector organizations are all too willing to play the game, communicating back, “Look! I’ve done what I told you I would do!”

This is such a low bar and is so fundamentally disappointing.

And while it’s easy to point fingers at funders who “just don’t get it” or at social sector professionals who either can’t be trusted to aim higher (so why are you funding them?) or who aren’t able to explain exactly how they are in fact delivering results (again, why are you funding them?), the truth is that the only way we get out of this dance is if we all truly pull up a seat to the table and do real work together.

The real work of deeply understanding the problem.

The real work of exploring what it would take to make progress on that problem.

The real work of recognizing that our organization, no matter how great we are at what we do, is probably not going to make much progress alone.

The real work of pulling together the people and organizations who could make some progress if they found the right ways to work together.

The real work of being honest about what we do and don’t know, about what part of the problem we are trying to chip away at right now, and about what success would look like now and in the future .

As we have these much deeper, more honest conversations, it will become clear that things like how much an organization spends on fundraising and management (aka “overhead”) could either be excellent or terrible proxies for judging the organization’s effectiveness.

For example, imagine you really, truly understand the problem you’re working on and discover, together, that you’ve got all the answers but are $100 million short of being able to make the change you’ve been trying to make. In that case, a massive investment in fundraising, or in a partnerships strategy, could be the single smartest thing you could do.

Or, imagine that you discover that what looks like an expensive and inefficient services model is actually a conscious strategic choice on the part of a nonprofit to focus on the hardest cases because that’s where they can make the most difference.

The list of examples goes on and on.

It’s time to stop talking about overheads and ratios, and it’s also time to stop talking about how efficient we are at doing what we said we would do.

We must hold ourselves to the much higher standard about turning money into solutions and about creating results, not activity.  The people you aim to serve will thank you for it.

Everyone a fundraiser

A colleague of mine – someone who has never been a formal part of Acumen’s fundraising team but who has done a good deal of fundraising  – said that a series of recent meetings with new donors reminded her of what it means to raise money.  She said:

The act of fundraising changes you, it changes your perspective.  When you sit there and look someone in the eye, it forces you to do two things.  First, you have to have your story straight: what are we doing and why, what are the details, how do all of the pieces hold together?  More important, though, is the sense of accountability you have to that donor when you’ve had that conversation.  You’ve made a promise to them, and knowing that changes you and makes you want to work harder than ever to deliver for them.

Exactly.

There’s something real about face-to-face, personal fundraising that I don’t experience anywhere else – not online or with social media or crowdfunding platforms, not in institutional fundraising or grant-writing (even in situations where you have strong personal relationships).  When someone gives their personal money, when someone sits down and writes a personal check to your organization, it creates a deep connection.  If you choose to see it and experience it, that sense of accountability can be internalized – first for you and, over time, into your organization.  In that personal connection and experience, you have the chance, long after that meeting, to transform yourself into an agent for that donor – not literally to do everything they would do (because they’ve given to you because of what you do and know, because of the perspective and professional judgment you bring to the table) but to give them a seat at the table, an important spot in your mind and in your heart.

Our opportunity is to have everyone who does this work be a fundraiser.  Not their full-time job. But why would we pass up the opportunity to get at least a glimpse of the sense of ownership, discipline, and, yes, obligation it creates?

The Overhead Myth

The founders of the three largest charity watchdogs in the US have penned a letter and started a campaign to debunk the overhead myth.  Between Dan Pallotta’s outstanding TED talk this year – with nearly 2 million views and counting – and this move by Art Taylor (BBB Wise Giving Alliance), Jacob Harold (GuideStar), and Ken Berger (Charity Navigator), we might just be at the beginning of the end of the tyranny of “low overheads = well-run charity.”

Quoting from the new website, http://overheadmyth.com:

The letter, signed by all three organization’s CEOs, marks the beginning of a campaign to correct the common misconception that the percentage of charity’s expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is, on its own, an appropriate metric to evaluate when assessing a charity’s worthiness and efficiency. The nonprofit sector, which all three organizations provide information to and about, has too often erroneously focused on overhead over the past few decades, which has starved nonprofits from investing in themselves as enterprises and created what the Stanford Social Innovation Review calls, “The Nonprofit Starvation Cycle.”

I don’t yet know the details of the aforementioned campaign, but it’s high time we had one.  My hope is that the campaign provides donors and funders rules that are as simple as the “low overhead” mantra has been, because we won’t debunk one simple, easy-to-follow orthodoxy unless we replace it with another.

The challenge, of course, is that solving big problems is hard, complex, and nuanced.  Nevertheless, my bet is that the most successful version of this campaign will result in simple mantras and a few short checklists, as well as focused advocacy with the big foundations, institutional donors, and signatories of the Giving Pledge.

I’m excited to see this unfold, and to support the effort.  As a start, here’s the full text of their letter, which you can endorse here.

To the Donors of America:

We write to correct a misconception about what matters when deciding which charity to support.

The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as “overhead”—is a poor measure of a charity’s performance.

We ask you to pay attention to other factors of nonprofit performance:  transparency, governance, leadership, and results.  For years, each of our organizations has been working to increase the depth and breadth of the information we provide to donors in these areas so as to provide a much fuller picture of a charity’s performance.

That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management.  In most cases, however, focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance can do more damage than good.

In fact, many charities should spend more on overhead.  Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs.  These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).

When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.”  We starve charities of the freedom they need to best serve the people and communities they are trying to serve.

If you don’t believe us—America’s three leading sources of information about charities, each used by millions of donors every year—see the back of this letter for research from other experts including Indiana University, the Urban Institute, and others that proves the point.

So when you are making your charitable giving decisions, please consider the whole picture.  The people and communities served by charities don’t need low overhead, they need high performance.

Thank you,

Art Taylor
President & CEO, BBB Wise Giving Alliance

Jacob Harold
President & CEO, GuideStar

Ken Berger
President & CEO, Charity Navigator

Leverage or control

Ever funder, rightly, loves “leverage,” as in “each dollar I put in brought in another four dollars of additional funding.”

What’s not to love?

Except of course that getting leverage means you’re giving up control.  There are more folks around the table, more great ideas being kicked around, and, yes, more expectations and priorities to manage.

All good, unless you’ve decided that doing it your way is more important than getting it done.

Your choice.

Deep and abiding respect for…

…the philanthropists who, along with you, make it all possible.

The philanthropists who dare to dream of a different, better world.

The philanthropist who decides, when she doesn’t have to, to do something, not just to talk about it.

The easy thing to do is to badmouth fundraising, to slight it in some way, to say that you’re above it or say that you respect it but you don’t know how to do it and you don’t really want to do it. It’s easy to say that it’s someone else’s job – because how important, how strategic, is it really?

It’s easy to, quietly and behind closed doors, gripe about how hard fundraising is…and then to chuckle about how difficult some donors themselves are…and then to slide down the slippery slope all the way down to a lack of real, deep, abiding respect.

Without that respect, you’re a terrible fundraiser. Without that respect, change doesn’t happen. Without that respect, you don’t get the chance to meet and learn from the incredible philanthropist who combines exceptional success and accomplishment with off-the-charts humility.

Without that respect, you don’t get to change, they don’t get to change, the world doesn’t get to change.

Dan Pallotta at TED

I had the privilege of attending the TED conference last week – a bounty of new ideas, optimistic predictions, and insightful reflections on the world today and the world as it could be tomorrow.

The most challenging and exciting talk for the nonprofit sector was by Dan Pallotta, author of Uncharitable and Charity Case.  Dan made a name for himself creating the then-ubiquitous AIDS and breast cancer walks and rides – these events raised $108 million and $194 million for charity, respectively, according to Dan’s numbers.  Dan’s pitch, which he has been making for years but never as clearly or effectively as he did last Friday, is that we are never going to solve the world’s toughest problems if allow the prevailing orthodoxy to rule in the nonprofit sector and in the minds of the philanthropists who fund them.

Dan Pallotta at TED

Dan Pallotta speaking at TED (Photo: James Duncan Davidson)

Dan has been a lightning rod in the nonprofit sector for more than a decade because he has been such a vocal, unabashed voice for change.  He was fully transparent about this, starting his talk explaining how challenging and frustrating it was when his company was shut down because of the backlash that came when it became clear that putting on the rides/walks used up a big portion of the funds that people raised – despite the nearly $300 million net raised for these charities.

The two most controversial points Dan made in the talk were about nonprofit pay and fundraising.  On nonprofit pay, the line I found most memorable was, “You can make $50 million in a year selling violent video games to kids and they put you on the cover of Wired magazine; but if you make $500,000 as a nonprofit executive director working on solving some of the world’s toughest problems they will run you out of town.”  Indeed.

On fundraising, Dan’s big point is that if you can take a philanthropic dollar and turn it into $10 or $100, then it is absurd not to do so and even more absurd for a philanthropist to feel like you are wasting her money when you spend it in this way.

What I love about Dan’s talk is the conversations it forces us to have, ones that get to the heart of what philanthropy is, why people give, and what it will take to make real change in the world.

To me the conversation starts with a basic question: do you think that the people who work for nonprofits are adding value; or, put more technically, is the amount of good they create – in terms of the problem you’d like them to solve – greater than they amount that they are paid.  (Ironically, it’s easiest to figure out this question when you analyze a person on the fundraising because you can easily quantify the funds she raises against how much she costs the organization.) If you don’t feel like nonprofit organizations/their staff add value, then it’s easy to conclude that the organization itself should take up as few resources as possible.

Philosophically, one wants as much ______ (money, water, chickens, anti-malarial bednets) to land in the hands of the needy recipients as is humanly possible, and so one wants a nonprofit sector whose only role is to do the minimum possible to make those ________ (things) end up in others’ hands, and to eat up as little as possible of each donated dollar to make that happen along the way.

At the other end of the spectrum, if you believe that there’s a thorny set of problems that haven’t yet been solved in the world, then we need the most highly capable, intelligent, hard-working, long-lasting people on the planet to solve those problems.  So making sure one has the tools to get and keep the best people becomes vital and, more importantly, one quickly understands the limitations of a worldview that says that those people are “overhead” (a.k.a. something to be minimized.)

Of course the world does not exist in black and whites.  Development professionals who live in gated communities in multi-million dollar homes, separated by barbed wire fences and Range Rovers from the people they ostensibly are in the business of serving – well that’s obviously hugely problematic.  So the message isn’t “more pay is better.”  We need some basic checks in the system or it’s never going to work.  At the same time we need to ask ourselves whether the system we have today is oriented towards “efficiency” (which itself is elusive) at the expense of effectiveness: I could easily waste very little of your money but never actually manage to solve the problem you ultimately hope to solve, by shoveling 90 cents out of every dollar into direct aid but never change the system that created the need for aid and charity in the first place.

While we know there are no easy answers we cannot pass on asking the tough questions, on having an out-loud conversation about whether this system we have built is actually working. Because many think it is.  A philanthropist I spoke with after Dan’s talk told me that he found the talk to be very troubling: Dan, he said, does not understand the mindset of the philanthropists at all and he completely missed the mark.  “If I find a startup that I believe in,” this philanthropist said (I’m paraphrasing), “I’m happy to put up some risk capital in the knowledge that it might succeed or it might fail.  But when I dip into my philanthropic pocket, I want the charity to treat that capital as precious, to spend it wisely, and to make sure as much of it as possible goes to those in need.”

“….treat that capital as precious…” is the key phrase there.  Guard it, protect it, mete it out carefully and cautiously and be sure you don’t make any mistakes as a steward of that capital.

“So,” I asked, “I absolutely can understand that you want nonprofits to careful with your money.  But where do they go for risk capital?  Or investment capital?”

Unfortunately we couldn’t finish that conversation, but I feel better equipped to have it thanks to Dan’s talk, thanks to seeing Dan’s outrage at how backwards the system we created is, thanks to statistics like the one Dan shared that, since 1970, while only 144 nonprofits have grown to more than $50 million in annual revenues, more than 46,000 for-profits have crossed that threshold. Put another way, a new non-profit is less than 1/300th as likely than a new for-profit to grow big enough to have enough scale to really matter, to have enough scale to figure out what they are doing and have some heft to actually solve a problem.

That doesn’t feel right.

What it feels like, what Dan is saying is that we’re asking nonprofits to take on the toughest problems in the world, problems that the private and the public sector still haven’t managed to solve, and to do it with one hand (“you can’t spend money to make more money”) and one leg (“you can’t use my donation as risk capital”) tied behind our collective back.

Dan’s talk isn’t online yet but you can see a more detailed summary of it on the TED blog.

How do you find a great Head of Development?

I’ve been asked this question a lot, and was asked it again the other day by the CEO of a growing, successful nonprofit, so here are some thoughts.

First, let’s clarify who’s asking the question and what this means about what they’re looking for.

For a long time I’ve argued on this blog that the nonprofit sector has radically misunderstood what fundraising means, what fundraising jobs are, and, consequently, how to staff the fundraising (“development,” whatever) department.  To recap: it’s not separate from “the real work.”   It is core to your strategy, to who you are, and to how you deliver on your promise to the world.

There’s a lot of talk about what “traditional fundraising” is and isn’t, and whether in the brave new nonprofit world in which we live, we need to re-imagine fundraising (yes) and what a fundraiser looks like and does (probably).

I think part of the reason we’ve ended up walking down the wrong path is because professional fundraising was born in a university setting – which unfortunately is a poor model of what most nonprofit fundraising is really like.  Referring to the 2-by-2 matrix below, I’d describe university fundraising squarely in the bottom-left corner: “existing constituency” and “primarily execution.”  That is, there is an established constituency (alumni) with an existing ties to and strong relationships with the university, and the role of the professional university fundraiser is largely to execute on a set of giving targets for this constituency.  University fundraising for really big donations can certainly drift to the top left corner of the matrix – think new chairs, new fields of study, new departments – but by and large the ability of the Development team to regularly and significantly impact the overall university strategy in the short- to medium-term will, in most cases, be limited because of the sheer size and scope of the institution.

Contrast this with the world of the startup / growing nonprofit: it has no constituency and its strategy and aspirations are evolving, expanding, taking sharp turns.

Suddenly it’s obvious that you’re looking for a different set of skills than what’s needed in a big, established institution.  An organization in the top-right corner is mobilizing resources against an idea with no defined constituency in place, and it is going through a period of its evolution in which there will be a constant interplay between the financial resources that can be mobilized, the promises made to funders and the overall organizational strategy.

So how do you find a successful top-right corner fundraiser?  There are no simple answers, but I think that this role is different enough from the traditional nonprofit fundraising path that you don’t need to put “demonstrated track record” on the top three list of things you have to see (great if it’s on the list, but you have to decide in advance if the absence of that disqualifies folks.  I’d say it doesn’t).

This is a terrifying notion if you don’t know what you are looking for, so I put together this list of things I’d be on the lookout for when scouring those non-traditional resumes:

  • You want someone you want to be with, someone who has both the gumption and drive to get the first meeting and who is consistently interesting, personable and engaged enough that he’ll consistently get the second meeting.
  • You want someone who cares deeply about your organization’s mission, who has a personal reason for being there
  • You want someone who can tell the whole story of the organization, who can dive in and across the organization and get into the weeds with folks, but who naturally thinks in and talks in terms of narrative.  The person absolutely doesn’t need to be (and won’t be) an expert in everything you do, but they have to have the intellectual facility and curiosity to get their hands dirty.
  • Inevitably you will want someone systematic, because when you have a few people (your team) managing a lot of donor relationships, you’ll need to build some sort of systems to make the whole thing work.  The level of sophistication of these systems will vary, but if you want to build something lasting for your organization, you’ll need to build more than your funding base and your funds raised – you’ll need to build out HOW you do this in the long term.
  • Gumption (whoops I’ve said that twice now…maybe I should say it a third time), fearlessness, drive and passion go a long way
  • Obviously they have to be articulate
  • And finally, if you’re looking for nontraditional cues that might indicate success, you might look for people who have an element of performance / “it’s showtime” in their background.  This could be artistic, athletic or even military, but some element of: “the lights are on…now go!”