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.

The Long Haul

“I’ve just heard about a great new ______ that will solve the ______ problem!”

And so goes the optimistic, well-intentioned refrain. The blanks can be straws or a well or a hospital on a boat or a cheap rugged laptop or or or….it doesn’t matter, because the trope is the same: there’s a thing that someone has invented (usually in the West) and it will finally solve such-and-such problem for good. (And, implied, it will be quick and easy!)

I’m torn about how to react to this. There’s a version of this story that I find hugely energizing, and another that feels like a modern, techno-optimistic belittling of a faraway problem, one that creates a caricature of the problem and of the people living with it…and this is never a good thing.

On the plus side, I deeply, emphatically believe that one of the biggest opportunities in the world is to get our best and brightest minds focusing on solving the most important problems of our generation. I don’t need a toothbrush that might deliver caffeine, or “mega” and “mini” sized M&Ms (thanks Tim), or a razor with 22 blades.

But just because we (sometimes) turn our attention to the big problems in the world doesn’t mean we will flip a switch and easily solve them. That great idea may be great, but after it’s made into a great product, that product will still have to be manufactured, it will have to get through customs, it will have to survive contact with customers and distribution and dealer margins and fraud and theft and warranties and repairs…usually all of this far away from reliable sources of power, good roads, good anything that makes things easier to pull off. That’s a long-term play.

The notion that any big, thorny problem will “just” be solved by a better gizmo not only runs the risk of pouring resources into the wrong initiatives, it also belittles the problem and, in so doing, belittles the people who are struggling to live without access to safe water, to affordable, reliable power, or to decent, affordable schools.

Yes, we are desperate for breakthroughs, the kinds that leverage technology platforms to deliver better information and banking services, or ones that capitalize on and accelerate declining cost curves for solar to engineer all sorts of products in new and better ways – ways that cut the costs by 100-fold while not sacrificing quality.

But achieving these sorts of breakthroughs gets us to the starting line, not to the finish line, and anyone who tells you otherwise is either naïve or is angling for a fast buck.

Getting whatever that miraculous invention is to a few billion people is always going to be a long road, one with twists and turns and endless surprising pitfalls along the way. Navigating this road will take grit and determination and perseverance beyond the capacity of most people. Indeed, this is the “sacred trust” of leadership that Chinua Achebe speaks about so eloquently, it’s what we must look for in all leaders who are making real change in the world.

The problems they are working on are not insurmountable. Not by a long shot. But there are also no quick fixes.

Indeed, everyone I know who is changing the world is in the long-haul business.

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.

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.

10 year milestones are mushrooming

Another exciting 10-year milestone came last week: Network for Good turned 10.  My friend Katya has many credits to her name (Network for Good’s COO, the author of Robin Hood Marketing, and she writes the fabulous, must-read Nonprofit Marketing Blog) but I know her as the person who, with a simple question and a smile, made Generosity Day happen in the first place by making me realize that action was so much more important than getting the plan just right.  A huge lesson.

In Katya’s words: “Network for Good turns ten on Saturday and to celebrate, we created what else – an infographic!” Joy in an infographic = a great thing.

Some things that struck me from the graphic: in 10 years, more than half a billion dollars has been given through Network for Good ($140 million last year alone), and online giving, especially for disaster relief, is clearly going mainstream.  It’s clear that this is a trend that will continue and it’s a call to attention for all nonprofits to really understand this trend.

What I think we all need to figure out in the next 10 year is how online can transition from being a funding channel to an interactive experience that increases connection to nonprofits and accountability and transparency from nonprofits.  Obviously that is beginning to happen and it will be exciting to see where the next decade takes us.

(there’s a postscript after the infographic)

*                             *                             *                             *                             *

p.s. Since my wife is the only person in the world who will get the oblique reference in the blog title, here’s the story: years ago we had a small rental in a big Victorian house in Massachusetts, with a shared, shaded driveway that was iced over from December to May.  We had a friendly, ex-hippie neighbor with a beat-up old white car that swapped spots with us in that one-lane driveway.

The car was covered in bumper stickers, my favorite of which was: “Mycology is Mushrooming.”  I’m embarrassed to say that one still makes me laugh.

Each and every dollar

If you work at a nonprofit, as I do, you might pause and consider: each and every dollar for your organization comes from a gift.

Obvious at some level, but if you stop to think about this for a second your perspective changes.  Think of the seriousness and the intention of every donor, the dreams – small or big – they attach to the donation they have made.

I’m not at all advocating for penury for nonprofit staff; in fact I firmly believe that we need the best people to create massive change.  The problems we are working on are so important, so challenging, so complex, and pay is part of the equation in getting and keeping the best folks.

But there’s a certain humility that comes with remembering that you are working on someone else’s dime, that no matter where you are and what you are doing, you are engaged in service work thanks to the trust that someone has placed in you and in your organization.

It never ceases to amaze me that the nonprofit sector has a reputation for being less rigorous, less focused, less fast-paced, less strategic than the private sector.  First, because all the people I know who work at nonprofits put their hearts and souls into their work every day.  Second because once we’ve made the decision to do this work we have no choice but to be completely committed and to do our best work every day.

The minimum bar is to treat the money your organization spends like your own.

The higher bar is to remember that it is a gift from someone else, entrusted to you to make a change in the world.

It’s a huge responsibility.

No hobbies

People dabble in everything.  Restaurants and bed n’ breakfasts are popular semi-serious pursuits – romantic ideas right up until the moment when you’re mopping the floors or scrubbing pots with ammonia at 2am.  Then, they’re just hard work.

Of course restaurants that don’t work flame out (not 9 out of 10, which is the conventional wisdom, but three out of five in the first five years): if not enough people come through the door to buy dinner – or if you don’t manage your staff right, or purchasing right, or any other number of things – you don’t make ends meet and you’re forced to close up shop.

Nonprofit work is a sometimes hobby too, but without the floor-scrubbing to keep us honest.  So nonprofit service, philanthropy, board service or a part-time CEO role can be something we do a little bit on the side, when it’s easy and convenient (meaning: a little bit well) because, well, doing something is better than doing nothing.

It’s not though.

Doing something poorly and inattentively, especially service work, can be worse than nothing, because we’re making promises we can’t keep to people to whom too many promises have already been broken.  Real lives, real hopes, real dreams walk through our doors every day, and if we don’t treat these dreams with the respect, the seriousness, and the professionalism they deserve, we and they are better off just staying home.

We can do this just a few hours a week, do this as part of something bigger, do this in whatever way works in our lives.  But no hobbies, please.  It’s just too important.

 

Nonprofit v. For Profit

I had the chance last night to moderate a Feast Debate (#FeastOnGood) on non-profit vs. for-profit models.  Ruti Wajnberg and Jorge Vega did a great job orchestrating the evening, and it was a pleasure to host a conversation between Jo Opot, Global VP of Business Development at TerraCycle (and former Executive Director of StartingBloc) and Kate MacKenzie, Director of Policy and Government Relations at City Harvest.

With 120+ people packed into the beautiful Salt Space on West 27th Street, we set out to debate which model – nonprofit or for-profit – is better for pursuing social change (and once we quickly agreed that the answer was “it depends,” to dig into the strengths and weaknesses of each model across the very practical dimensions of fundraising, culture, revenues, getting and keeping great people, etc.)

I started the conversation by polling the audience, and of course my first question was how many people had heard of Generosity Day (couldn’t resist).  At least one third of the attendees raised their hands.  Sample bias aside, the idea that a third of people engaged in social change heard about Generosity Day and changed the way they acted for a day (and, I bet, for a long time after) just blew me away.

Then we got down to business, and I asked a bunch of questions of the audience around the biases we all carry around about nonprofit and for-profit models: with which is it easier to attract great talent; to partner; to raise money; to get things done; to create a great culture?

As Jo and Kate spoke, and as the Q&A with the audience unfolded, I increasingly realized the power our stock answers to these questions hold over us: nonprofits, the conventional wisdom goes, struggle to get “less dependent on – and beholden to – donor funding;”  we can’t compete with the corporate sector for great talent; for profits are built to scale more rapidly; and on and on and on.

All generalities hold a kernel of truth: there’s no doubt that the 501(c)3 structure creates limitations and that there are certain things (like giving employees equity) that only for-profits can-do.  But most of the perverse actions we take (as nonprofits and for profits) are not taken because of structures that keep us from behaving differently.

Take Sean Stannard-Stockton’s great post from yesterday about government crowding out philanthropy, he relates a story George Overholser tells about the need for creating an equity structure for nonprofits:

George used to be a venture capitalist and work with a venture philanthropy organization. He relates a story about how in the morning he presided over a meeting where the venture philanthropy group made a large grant to a nonprofit. Everyone was very excited and it was high fives all around with the nonprofit executives leading the cheers. The excited executive director happily pointed out that the grant met their entire fundraising budget for the year and so now they could focus on their programs.

That afternoon, George presided over a meeting where the venture capital group made a large investment in a for-profit. Again it was high fives and excitement, except this time only the venture capitalists were cheering. Looking over at the for-profit executive team, George noticed they all seemed nervous. When he asked what was wrong, the CEO said, “well, now that we have the growth capital, the pressure is on to generate revenue!”

To the nonprofit executive director, it didn’t matter if the venture philanthropy donors called their grant an “investment”. The only accounting treatment for money coming into a nonprofit is revenue. But for the for-profit, the venture capital money really was an investment. It would be booked as equity, not as revenue, and from here on out their success in generating revenue would be measured against the amount of equity they had deployed to build their business.

Sure, this is perverse behavior, but even in this stark example, there’s nothing structural keeping the nonprofit leadership from deciding to treat the large grant they just got as long-term capital, and to continue to aim for their revenue goal for the year.  Yes this might be a harder story to explain to funders (“why do you have so much cash in the bank?”), yes it would be better to have a better way to account for this within 501(c)3 reporting requirements.  But just because all of that is not in place doesn’t mean we can’t act differently.

I was surprised how much I ended up defending what was possible as a non-profit, since that wasn’t my plan going in and I don’t necessarily think being a nonprofit is the answer for most social mission organizations.  But so often “we’re a nonprofit so we can’t…” (raise a lot of money quickly, hire great people, not be beholden to grantmakers who want to impose their agenda on us, be ruthlessly accountable in everything we do) is simply a cop-out for our own bad behavior, limited thinking, and poor execution.

NextGen:Charity mini-roundup

Here’s my completely non-exhaustive and non-definitive mini-roundup of  the 2010 NextGen:Charity conference where I had the chance to speak last Thursday (with a heavy bias towards the talks I was able to attend).

Some things I’ll keep thinking about long after the conference:

  • Scott Harrison (charity:water) has a knack for storytelling, creativity, and creating a compelling message (including video) from which all nonprofits can learn a LOT.  You shouldn’t try to copy charity:water’s brand and story, but looking at what they’ve done makes it hard to accept the current (sad) state of nonprofit branding and storytelling.
  • Nancy Lublin’s (DoSomething.org) Donald Trump/MilkDuds story reminded me about gumption – that we can always go further than we think we can.
  • Scott Case (Malaria No More) is right that all nonprofits should aim to go out of business (because they’ll solve the problem they set out to solve).  This mindset will open up a world of possibilities, forcing  focus on solving the problem you set out to solve…instead of caring most about the organization you are building.   They’ve said they want to end malarial deaths by 2015.  How’s that for clear and being willing to fail? (plus this viral video wins the prize for gutsiest thing I’ve seen a nonprofit do in a while).
  • Joanne Heyman taught us how the “scarcity fallacy” (scarce resources, scarce creativity, scarce investment) limits our thinking and actions in the sector.  How can resources be scarce, she asked, if we’re a $3 billion sector with more than 1 million nonprofits employing 7% of the nonfarm employed population?
  • Jonathan Greenblatt shared insights on the big trends in our sector – mega (gifts), micro (gifts and connection, like Kiva), mobile (nearly as many mobile phones as people) and markets (growth of impact investing, B corporations).
  • Seth Godin never fails to make me smile when he pulls out his deluxe rubber chicken.  I loved his notion that all the problems that are left are the perfect ones, because all the imperfect ones have been solved.  He also posited that if you’ve never been thrown out of a fundraising meeting, then you’re not pushing hard enough.
  • Aaron Hurst demanded that companies bring as much smarts to their philanthropy as they do to their core business.  I wish I’d been surprised to learn that there’s actually a nonprofit that has a room that they’ve designated as the “painting room” – the one that corporate volunteers come to paint over and over again as their volunteer project.  Maybe if I’m extra-nice to Aaron he’ll invite me to see the room.
  • Ami Dar made a beautiful presentation about a new platform Idealist will be launching – beta in NY – to enable citizen action.  If you’re a connector in NY and this sounds interesting, you should contact Ami.  (he also made me wonder where he got that cool inverted paintbrush font.)
  • And in the closing talk, Ari Teman, one of the conference’s organizers, made me think in a new way about gratitude, made me want to read his book, Effective Gratitude for Organizations and Individuals, and made me want to think harder about the relationship between gratitude and generosity.

I heard great things about lots of the other talks, many of which I was unable to hear.  I’m told there will be videos of all the talks (including mine) available soon…I’ll keep you posted.