Which Comes First, The Money Or The Outcomes?

By the latest IRS figures, there are 1.7 million nonprofits in the U.S. Of that number, 100,000 (6%) take in over 90% of the revenue …with just 3,000 getting 6 out of every 10 dollars. Of the $1.5 Trillion in annual revenues pouring into the nonprofit sector, nearly 70% comes from government and the rest from philanthropy.

Five decades ago, education organizations received just 5% of the philanthropy pie while  religion received 60% with the rest dispersed to a grab bag of other charities. Today, human service charities receive less than 10% of private giving, and education with 15% is now second only to religion at 35%. Of course, much voluntary action and charitable giving in America takes place ‘off the books’ and out of sight. We don’t have a good handle on the size of it all as these tend to be private matters of the American heart.

In his recent book, Charity Case, Dan Pallotta points out that charitable giving in the US has remained virtually flat for four decades amounting to 2% of GDP per annum. Despite the explosion in the number of nonprofits, the emergence of sophisticated fund development offices within these organizations and the endless series of high profile ‘causes’ endlessly flogged by popular culture, we’re still stuck at 2%.

As has been noted by many in the current debate, increasing giving to 2.5% or even 3% would result in a great expansion in the revenue of nonprofit organizations. The question remains if that new money would produce better outcomes. For despite a tidal wave of taxpayer money flooding into human services since the days of LBJ, we’re still stuck with a poverty rate in the 12-15% range. 

So I understand the need to discuss $$$, but let's not lose sight that for the people we serve, it's outcomes.

Can The Nonprofit Sector Stop Acting Like A 'Charity Case'?

I recently met Dan Pallotta at the Social Venture Partners International conference. He wowed the crowd with the argument that if society is to demand nonprofits ‘operate like a business’ then we should free these organizations to invest in non-program activities which can increase revenue and expand programming.  It’s central to the argument in his new book Charity Case: How the Nonprofit Community Can Stand Up For Itself andReally Change the World

Pallotta is well known for having a bit of an axe to grind.  His private firm, PallottaTeamWorks, was a highly successful fundraising company managing an array of high profile bike rides and walks.   Organizing of events for AIDS and Breast Cancer in the 1990s, Pallotta virtually created an entire mass Bike/Ride industry which generated over $500 million from donors and sponsors.  An impressive feat.  However, Pallotta’s business collapsed in 2002 after a flurry of news stories questioned excessive overhead and fundraising costs (one AIDS ride raised $28 million of which only $8 million found its way to the beneficiary nonprofits) .

Six years after the collapse of his business, Pallotta published Uncharitable: How Restraints on Nonprofits Undermine Their Potential, a book which asked the question: Why are nonprofits discouraged from employing business practices such as marketing, paying attractive salaries for effective leadership, or devoting more to overhead when the return on investment is warranted?  Charity Case builds upon this theme and proposes a set of intersting if somewhat problematic solutions.

We’ve witnessed the rise of  various ‘watchdog’ agencies which inundate the public with tales of astronomical overhead and excessive salaries at nonprofits.    Such stories coming out of groups such as Charity Navigator are guaranteed to get headlines with a news starved press.  And while these types of accounts about inflated expenses and sparse funds going toward the mission of the organization garner public attention, they are not representative of the nonprofit sector.  Still, they create a ‘master narrative’ that administration is evil and that dollars should go strictly towards direct services.

Dan Pallotta

Just because something can be measured doesn’t mean it should be measured. This includes “x% going to the cause”.   It's too crude to assess the effectiveness of a gift based on how much of that donation goes toward programming. In Charity Case, Pallotta rightly revolts at this simple evaluation. A low overhead does not mean the programming is effective, a high overhead doesn’t mean it is wasteful.  After all, who remembers the overhead ratios at the March Of Dimes?  Does that make a difference since the end product was a Polio vaccine?

Yet it's easy to default to examining overhead ratios and administrative salaries because the work of assessing the real impact of nonprofit’s work is significantly harder. It takes hard work to understand a nonprofit’s programs and thus assess the true impact. It is only in this context that one can understand what operating costs are needed to be effective.

This ‘overhead’ mindset ultimately inhibits the nonprofit sector’s ability to grow because of the demand that dollars go into direct services and not administration. Yet if nonprofits cannot take risks, innovate and grow, they can never build organizations of a scale needed to address our greatest human needs.  Pallotta provides several cases which highlight how  in the face of this dilemma, the nonprofit sector is silent, defenseless, and disorganized. 

Consider the case of Roxanne Spillett, the CEO of Boys and Girls Clubs of America (BGCA).  In her eight years at the helm she doubled the number of kids in BGCA and grew chapters to almost 4,000 nationwide.  Revenues tripled over this period to $1.5 Billion.  By almost any metric you wish to apply, her record of success is praiseworthy.  That was until Senator Chuck Grassley discovered her salary/compensation neared the $1 million mark.  Congressional Committees, media attention and public outrage ensued which eventually led the BGCA Board to accept her resignation.  But never once did anyone ask whether a leader who could triple the size of a proven effective nonprofit wasn’t worth a salary equaling 0.075% of the budget.

In a political era where anyone in any business making over $250,000 is demonized as some predatory leech on society, having the added burden of working for a nonprofit meant Spillett and BGCA didn’t stand a chance in the court of public opinion.   In Charity Case,  Pallotta cites a letter he received on this subject:  "The sector has fallen into a trap we created. By focusing on what we DON'T spend, and not on what has been accomplished, we have completely missed the mark in our messaging. We are part of this problem and it's up to us to educate our way out of it." 

The nonprofit sector’s wounds are self-inflicted.  We not only verify the public’s sack cloth perception, we encourage it. This is main argument of Charity Case and it is Pallotta’s crusade to turn around the public's perception of the work of non-profits.

Thus Charity Case vividly encapsulates the issues before us. Unfortunately, as the founder of Advertising For Humanity and the Charity Defense Council, Pallotta’s solutions come off sounding somewhat self-serving. To wit:

• An “anti-defamation league” to respond to and rectify inaccurate reports about the sector in the media
• Big public advertising campaigns for the sector
• A “legal defense fund” to challenge unproductive laws against the sector
• Work to create a “National Civil Rights Act for Charity and Social Enterprise” to support the sector

Some of this is flat out redundant as there are already similar efforts underway at CForward and the Independent Sector. However, the idea that the entire nonprofit world could rally around one or more advocacy organizations is suspect.  The legendary Pablo Eisenberg, senior fellow at the Georgetown Center For Nonprofit Leadership Institute, argues that “nonprofits will never share a broad consensus about which issues are most important. The best we can accomplish is to strengthen their individual advocacy and lobbying activities and join with other organizations in coalitions that fight for specific policy changes.”

While a provocative description of the problem, Charity Case offers solutions that are flawed and unrealistic. If the public’s perception of overhead ratios and administrative salaries is faulty, a more productive effort would be to strengthen the sector’s ability to communicate the actual impact of charity work. This is what keeps donors coming back.  One suspects that if Pallotta had been able to do that back in 2002, his fundraising business could have survived the questions about overhead ratios.

The trend in publishing is to put forth volumes such as “Problem ‘X’ and What To Do About It” or ‘The Latest Outrage: Three Steps To Fix It”.  So often these books fall flat in the ‘what to do about it’ chapters and Charity Case can be categorized as such.  However, sometimes it’s enough just to vividly describe the problem, and in this Pallotta succeeds.  This makes Charity Case a worthwhile read.