The Business of Philanthropy - A Rant

I apologize in advance that today's posting here is going to be more of a rant than a helpful article, but I hope you will sympathize with my frustration. This comes from two articles I read yesterday that left me shaking my head, wondering if the world's gone crazy.

First, yesterday morning, I read Poor customer service at charities 'a key reason for high attrition rates', about a report released by Donor Voice called Donor Churn - How to stop it before it starts and why current approaches prevent this from happening.

Actually, I very much agreed with the thrust of the article and report, that you need to pay attention to your donors, and be responsive to their questions, before they drop you from their giving, not trying to make up after. The line that got me frustrated was this:

"Service in the non-profit sector is too often relegated to some distant corner of the organization and/or treated as a cost center."

Well, yes. It is a cost center! Donor relations is not free. The folks at Donor Voice know that - they make their living selling donor retention services to nonprofits. Not only is this not free, it is not program related either. It is overhead, and that's where my frustration lies.

With all the attention given lately to the overhead myth - the idea that looking at a nonprofit's ratio of overhead to program expenses is the best way to judge "effectiveness" - I found it baffling that this report could say their research finds donors want organizations to be more responsive to their inquiries, without mentioning that donors apparently don't want to cover the cost of that response.

If you've removed your phone number from your website to reduce inquiry calls (a finding of the report), explain why. If it was to save on overhead, say so! Or, just answer the phone, and educate your donors about the true costs of running your organization, and why your overhead is what it is.

But that article was just a minor irritation. What got me angry enough to write this rant was this:

Yesterday evening, I read the news about Lincoln Center getting set to rebuild - and rename - Avery Fisher Hall, the home of the NY Philharmonic. Fine. The hall was built in 1962 and renovated (and named) in 1973. I was built in 1961 and I could use a little renovation as well.

It turns out, however that the Fisher family isn't giving up their naming rights quietly or cheaply. While their original gift in 1973 was for $10 million, the ransom they will receive to release the Philharmonic from the deal will be $15 million (plus other perks).

Patricia Illingworth has summed up the situation perfectly:

"... Philanthropy is understood as the giving (and sometimes volunteering) for the love of humanity... The fact that the family required $15 million (plus other things) in order to relinquish their rights underscores that this is business and not philanthropy..."

The Fisher family received four decades of worldwide recognition, publicity, thanks, and kudos for their investment. Now they're also getting a 50% return on their money.

Not a bad deal for them. But what about the donors to the new hall? Who will be making the $15 million donation that won't produce a single note of music, and won't lay a single coat of paint on the rehabbed building, but will go entirely to the Fishers? Would you like to be the one making that pitch to one of your donors?

And what does that say to all of our potential donors about how our arts organizations (and other nonprofits) are being run? What does it say about how we manage our money or negotiate deals? No wonder donors are curious about our overhead rates and want to keep them low!

It's almost enough to make you want to remove your phone number from your website and stop responding to donors altogether.

Or, maybe, we could stop fearing our donors, stop babying them and trying to protect them from the realities of our world, and stand up to them when they have ridiculous demands that make a joke of philanthropy.

Top Three Takeaways from the Nonprofit Overhead Challenge

If you're not already talking about overhead, you should be, and you will be soon. Overhead, of course, is shorthand for what nonprofits spend on general management and oversight, fundraising, and membership development. In other words, anything that isn't directly mission-related programming.

Seems pretty basic, but there are often fuzzy lines between what we consider "overhead" and what we consider "programming" - a line that is not only fuzzy, but politically charged as more and more donors (individuals as well as foundations and government) are looking at our overhead-to-programming ratio as a means of judging our "worthiness."

Last Friday, I attended Stronger Together, a conference produced in collaboration by CalNonprofits, CompassPoint Nonprofit Services, and Nonprofits' Insurance Alliance of California (NIAC). Among the sessions I attended was The Nonprofit Overhead Challenge: Action Lab for Change, moderated by Jeanne Bell, CEO of CompassPoint, and paneled by Jan Masaoka, CEO of CalNonprofits, Hydeh Ghaffari, Partner, DZH Phillips, and Ann Goggins Gregory, COO of Habitat for Humanity Greater San Francisco. Here are my top three takeaways from the session:

1 - Hydeh Ghaffari: "The organizations showing 6% are playing with the numbers and the ones showing 60% need technical assistance."

Nonprofits have to educate themselves, and their staffs, about what qualifies as program, and what gets lumped in with overhead. Don't be afraid of asking your staff to complete more detailed timecards that accurately track how much time they spend in each program area, and when they are doing "general" or "oversight" work.

Learn what your true ratio is, understand it, and embrace it. You can't use a single rule-of-thumb ("14%!") to determine if your overhead is too high or too low. You need to understand the true cost of running your organization, and be able to defend when spending more on overhead is necessary to achieve growth and deliver on your mission.

2 - Ann Goggins Gregory: "Be willing to walk away from grants and contracts that have egregious reporting requirements and too strict limits on overhead. And share that reason, respectfully, with the funder."

A hard lesson - walking away from money on the table - but as a consultant I can attest to seeing many of my clients nearly ruined by contracts that cost more to administer than they were worth. Once you know what your true overhead costs are, be honest about them with your funders. If you need to subsidize a contract with other donations that cover the overhead, that's entirely fine and your choice, but you do yourself (and all of us) a dis-favor when you cover that up.

Remember, any contract that includes any Federal money (even when passed through your local municipality) has to include at least 10% for overhead. Is that enough? Consider that most service businesses run about 30-35% for their overhead.

3 - Jan Masaoka: This is important because there have been repeated attempts to pass laws saying too much overhead means a loss of nonprofit status.

In several state legislatures there have been moves (some more successful than others) to determine whether to limit tax-exempt status only to those organizations that have a low overhead. Whether or not your state has already discussed this or not, this is not a conversation that is going to go away anytime soon.

We cannot be afraid to talk to our legislators about why this is a bad idea, why overhead ratios are not the ultimate measure of a nonprofit's worthiness, and why ratios differ from nonprofit to nonprofit based on a number of factors. If we fail to act now to educate the public and the politicians, we risk losing our nonprofit status, and with it, our ability to achieve our missions.

Coincidentally, last week another collaboration was also bringing attention to the issue of overhead. GuideStar, BBB Wise Giving Alliance, and Charity Navigator released a public letter as part of their Overhead Myth campaign.

The members of the panel I attended Friday had mixed feelings about this. Many in the sector believe that the uber-focus on overhead is largely a creation of these organizations and their systems of ratings for nonprofits (particularly Charity Navigator). Jan was the most blunt, saying, "It's like the Gap saying 'Clothes don't matter, it's what's on the inside that counts'."

Jan is my former employer and a long-time associate and friend, but I'm a little more moderate in my criticism. I don't believe that they ever meant for overhead to become the single-most important measure of what nonprofits deserve funding. Still, it is undeniable that that is exactly what has happened. A study released today by the BBB Wise Giving Alliance found that "donors care more about how money is spent than results."

I have been in contact with the folks at GuideStar, offering this space for a guest blog from them about the Overhead Myth campaign. Hopefully we can present that soon, and continue this open dialogue.

How do you allocate overhead costs?

One of the clients I'm working with has always only had one budget for the entire organization. This is fine for small nonprofits that only really have one or maybe two programs, but this client has grown out of that stage, and has at least five or six distinct programs and program areas that should be broken out of that budget.

While we were working on that, the question from staff came up of, "How do we allocate the overhead costs to each program?"

There may be many more ways to do this than I am aware of (I'm a grantwriter and management consultant, not an accountant), but the three basic ways I went over with them were Dollars, Time, and Space.

Dollars: The simplest way to do your overhead calculations is by overall dollars and percentage of the budget. In this method you break your budget down by program, including administration and fundraising as an overhead "program." If your overhead is 12% of the total programs budget (full budget, less the overhead), you simply add an overhead line item to each program of 12%.

This type of calculation is easy to do in Excel or any other accounting or spreadsheet program you may be budgeting in, and looks nice and clean. It's also handy to know what your agency's overhead rate is, in case a donor or funder wants to know.

But, it's also a bit deceptive. Do all programs draw from overhead equally? Are each of your programs really requiring the same percentage of your nonprofit's overhead? If you really want to get an idea of a program's true cost to your agency (and I'd think you'd want to), you'll probably want to look at one of the other methods.

Time: In this method, you break your budget down by programs, and make an "overhead program" as you did in the previous method, but you do not divide the overhead equally. Instead, you look at the total hours each of your employees puts into each program, then determine what percentage of total hours that program demands. If a program eats up 25% of your staff's time, then it gets 25% of the overhead budget.

This method is based on the idea that if that's where all your employee's energy is going, it's probably also where the attention of management and fundraising is going as well. And, you might be surprised that a program that's only 20% of your budget is eating up 60% of your staffing hours. This method recognizes that labor intensive programs require more overhead (management, space, supplies, etc.) than other programs.

Space: This method is similar to the time method, but instead of looking at your time sheets, you look at your square footage. Figure out the percentage of your total square footage each program uses, and use that percentage to divide out the overhead. Does one program require a massive building, while another with similar staffing require only a room with a few cubicles? Then that program should take up a larger share of the overhead.

This method is based on the idea that overhead costs are often directly related to space costs, including rent, utilities, taxes, and insurance. If you own your own building, or have donated space, this might not be as important to you.

Every organization is different, and you may want to base your overhead split on a combination of Time and Space, or some other factor that I've left out in this simple explanation. For the client in question, I suggested we go by the Time method, at least in this first time breaking out the programs from the total budget.

What other ways do you use to allocate your overhead costs? Post a comment if you're doing something different than the methods I've just described.