Focus on Outcomes, Not Overhead

Often nonprofit executives are so focused on keeping our budget tight that we forget to ask ourselves, are we cutting corners? What could we do if we had more money? What opportunities to better serve our beneficiaries are we missing by being so fiscally conservative?

Most long-time nonprofit leaders have a “do more with less” mindset, and have had it for so long they don’t even recognize the consequences of doing so anymore. According to the article “The Nonprofit Starvation Cycle” in The Stanford Social Innovation Review, even new nonprofit leaders have adopted this thinking, most often due to the unrealistic demands of some of their funders.

Article authors Ann Goggins Gregory and Don Howard report that the result of “doing more with less” has been a hollowing out of nonprofit infrastructure that has crippled the ability of many organizations to fulfill their beneficiaries’ needs.

Their solution? Fixing funders’ unrealistic expectations about how much it costs to run a sustainable and EFFECTIVE nonprofit organization. Unfortunately, Gregory & Howard suggest that many grantees find it very difficult to be brutally honest about how much it costs, particularly in terms of overhead expenses, to run their organization.

I not only believe that with a little preparation grantees could easily show donors the importance of not cutting overhead too low; I believe this conversation is a great opportunity not to be missed!

First, grantees must shift their own focus, and then the focus of their grant-makers, from costs to outcomes.  Gregory & Howard believe this shift is fundamental to getting away from the current culture of “low pay, make do, and do without” that has created dysfunction and low outcomes in many organizations.  I have found that the best way to successfully do this is by providing a detailed comparison of your program, it’s estimated costs and outcomes with little to no overhead and with a “lean but healthy” overhead.

When your donor sees they can either keep the overhead too low (spending X to  serve Y), or pay a little more in overhead to serve substantially more beneficiaries (spending X + 10% to serve Y x 10), they will not only pay for additional overhead, but will become a more loyal partner of your organization because together you both share the same goals.

Once goals are clear, donors and grantees should together honestly answer the question, “What will it take to deliver these outcomes consistently, or to deliver these outcomes at an even higher level of quality or quantity?”  This is where many new opportunities lie.

Explore possibilities with each other, and consider ideas and impact without the constraint of cost.  The donor may conclude that more money is needed to be most effective, or the grantee may realize there is a new option that is more effective.  Either way, it will be a partnership where both parties have participated and feel comfortable that the donor’s gift is being used efficiently and effectively.  This collaboration will not only solve your program’s overhead issue, but will show the donor they are a true partner and will further cement their ongoing loyalty to the organization!

“Outcomes, not overhead.”  This statement gets beyond the question of money and refocuses the listener on the question of results. Because ultimately, none of us, neither grantee nor donor, is in it for the lowest overhead!  We are in it for the outcomes!

The Nonprofit Sector Must Change, or Be Left Behind!

I often start my speeches or consulting sessions by stating that the nonprofit sector is broken. I’m not talking about being a little off track or needing some tweaks here and there. I am talking about smashed up and shattered to splinters BROKEN.

Consider the present social sector. Not only do we benefit from aggressive tax breaks and estate benefits that help us raise billions of dollars above and beyond any money we can make selling services and/or products like the private sector; but we also have access to human capital (in terms of free volunteers) at a level that should make our sector able to accomplish change on a scale the private and government sectors couldn’t even dream of! Yet in reality, we are significantly less effective than any other sector.

And people know this!  Many people see the potential for the social entrepreneurship movement to take over and actually leave the nonprofit sector behind. I believe our sector is extremely important in solving the complex problems of our time; but you can’t blame those who have witnessed great social change from the social entrepreneur movement, while the original social sector continues to struggle with mounting issues and low efficiency.

Most of the time I just feel bad for the nonprofit leaders who wear too many hats, work 80 hour weeks, and still are underpaid and often not respected by their own board members. Nonprofit boards are notoriously closed-minded to any change, simply because of the perceived risk that no one wants to be left responsible for. So the status quo continues to be rewarded, while those leaders who try to bring innovation and change are often replaced or disregarded.

Well the status quo simply will not work in the nonprofit sector any more. And incremental changes will no longer be enough.  I am no longer willing to allow our sector, which is made up of some of the most non strive and passionate people I know, to limp along waiting for the other shoe to drop.

This new and challenging environment – with greatly reduced funding and significantly increased need – requires that every nonprofit MUST work together because nothing short of a quantum, sector-wide change will save us. If we want to survive, and more importantly, if we want to become the sector of significant social change we were always meant to be, we must create a culture of innovation, efficiency and collaboration.

Today is a completely new day. Period.

This new day starts with every nonprofit asking themselves what they exist to change, and if they are actually creating that change (a challenge recommended by Mario Morino in his book, Leap of Reason: Managing to Outcomes in an Era of Scarcity). With limited funding and more complex problems to be solved, it is not enough anymore to just be doing good works. If a nonprofit don’t know what they exist to change, or determine they are not making the social change needed, then reviewing why you are taking limited financial and human capital is necessary. Closing or merging a nonprofit organization does not make it a failure, but utilizing limited resources without affecting change most certainly does.

If, on the other hand, a nonprofit determines that they exist for an important purpose and are creating important social change… then it is time for the REAL work to begin.

(Continued: A New Nonprofit Sector)

 

Throwing Starfish: A Philanthropic Debate

I was really moved by a recent article in the Stanford Social Innovation Review written by Rich Tafel, titled “Social Entrepreneurs Must Stop Throwing Starfish”.

Tafel begins by summarizing the beloved starfish story often told by motivational speakers: A man walking along a shore covered with washed-up, dying starfish notices a boy throwing them back into the ocean, one by one. The man says to the boy that there are miles and miles of beach and hundreds of starfish, and that he’ll never make a difference. As the boy throws a starfish back into the ocean, he says, “I just made a difference to that one.”

Tafel writes that this story epitomizes the mindset of our social entrepreneur movement—the lone hero making a difference in the life of one person by not falling into the paralysis of cynicism. The power of one.

But goes on to write that the story also represents the great failure of the social entrepreneur movement. Too often we fail to recognize the complex nature of the problems we face. We engage in linear, simplistic solutions, when lasting change requires collaborative efforts.

Action is important, but we also need to ask the bigger, strategic questions to create real solutions. In the starfish story, that would mean asking questions like: “What caused all of these starfish to dry up on the beach? What systems are at work here? Where can we have the greatest impact?”

Not only did I love Tafel’s analogy between the classic starfish story and the mindset (and possible failures) of the social entrepreneur movement, but I think it provides the clearest explanation I have seen for one of the most fundamental issues in all types of philanthropic giving today.  As a donor or funding organization, do you want to engage in classic charity where you help with immediate needs (saving the dying starfish), or do you want to create real social change that improves or solves the problem creating the need?

One problem I had with Tafel’s article was the title, “Social Entrepreneurs Must Stop Throwing Starfish”.  This implies that basic charity is bad, and I don’t agree with that.  I think both charity AND social change are necessary, I just think the donor or funding organization should understand the difference and recognize that the outcomes will depend upon which goal is chosen.

As an example Tafel wrote about an event in 2008 where thousands of starfish actually did wash up on the shores of Kent, England. Agencies and environmentalists considered weather and the possibility of disease as the cause, but after asking more questions, they found the cause was likely man-made. Dredgers, a tool fisherman use to scrape the sea floor for mussels, were almost certainly to blame, and the Marine Conservation Society (MCS) concluded that the incident was an example of overfishing. The MCS began to lobby the government “to dramatically extend its protection of the seas.”

Tafel used this example to make his point that when we confuse charity with actual social change, we often perpetuate the problem.  He believes that had the citizens of Kent organized a starfish-throwing campaign, they would have been perpetuating the problem.  Because without new fishing practices and policy, those same starfish surely would wash ashore again.

Real world problems and solutions most often require some kind of change to the rules, and that takes time. I personally don’t believe one starfish needs to die simply because the solution has not been found and developed.  Starfish throwing may not be a solution, but it isn’t a bad thing either.  Why can’t the charitable organizations throw back the starfish, while social change organizations work on the solution?  Why can’t we do both?

If the example was instead about the millions of poor elderly persons in the US, who often can’t afford medicines, shelter and even food; would we stop trying to feed, house and medicate these people because we should be instead working on a solution?  No one would argue that we have a problem in this country and need to find real solutions to better take care of our growing elderly population; but I don’t think it perpetuates the problem to take care of these people’s immediate needs.

Tafel worries that social entrepreneurs too often throw a few lucky ones back into the ocean and pat themselves on the back saying, “Well, it made it difference to that one.” That we might even frame our heroics at our annual fundraising banquet, giving the impression that we’re solving the problem.

I agree that every social entrepreneur, donor & funding organization must understand and educate others on the important differentiation between charity and social change.  We must have the courage to work within our complex systems to change the rules, but we must also help those suffering from problems yet unsolved.

Another way to frame the issue is, as a donor would you like to fund the SYMPTOMS of social problems (the dying starfish) or fund ideas on how to affect the CAUSE (overfishing).  What we must remember is that there is no wrong answer, and whatever your passion leads you to do IS the right thing.

For strategic philanthropists trying to increase efficiency and effectiveness, the complicated part is determining who does what.  Many organizations have already determined which goal they seek, and by making it clear that their mission is either charitable or social-change oriented, they making it easier for the rest of us to find what needs are left.  For instance, United Way focuses on social charity (the symptoms of problems in the system) and does a great job covering many of the basic needs within each local community.  Smaller donors who give annual gifts of $1,000 or less usually also focus on charity, because it is easier for them to see their gift make a difference.

On the other hand, more complicated social change is most often funded by private foundations or major donors.  Many private foundations around the world have tackled major issues and provided solutions that have helped millions of people live better lives.
Community Foundations that support a variety of nonprofits fund both charity and social change.  Which they fund often depends upon the foundation’s mission (which is often either donor driven or defined by certain community goals) and how, as well as how much, they educate their donors.  Tafel wrote that these foundations must take the lead by asking potential grantees what root causes, policies, rules, and systems their innovation will engage to bring lasting world change. That these simple questions will force the social change agents to find ways to create lasting change—to do more than throw starfish.

I believe that community foundations most often have a great overview of the needs of their local community.  If they have a strong United Way and/or generous community that helps those in need of charity, they can focus more on encouraging the funding of social change.  If they don’t, they may need to balance their giving more between the two.  

In terms of charity versus social change, there is no wrong approach.  The only way to go wrong is not understanding that there IS a difference… in the goal, the approach and the outcome.

Questions That Should Be Asked Before Opening a Donor-Advised Fund (DAF)

Whether you plan to open a donor-advised fund through a community foundation, national financial service institution, a public foundation or a specific charity, there are several questions you should ask before finalizing your new fund.  The questions below will not only protect your philanthropic investment, but be sure there are no miscommunications that may create problems in the donor-provider relationship later on.
Minimum contribution requirements and account balances – This is important because many donors want to make a good sized contribution once a year at tax time, and then grant from those dollars all year; but some foundations charge a heavy fee once your balance goes under a certain amount. 

Investment options – As a donor, you may or may not feel strongly about how your money is invested.  However, if you wish to grant income from your fund contributions, you will want to be sure the investments are aggressive enough to have a goal of at least a 5% return (most foundations have a return goal of around 8%, but use 5% as a conservative return amount on sustaining grants).  On the other hand, you will want to know that the investment is conservative enough that your fund will not be significantly reduced because of overly aggressive investments.

Some fund providers will offer a variety of options, so you can decide how conservative or aggressive you want your fund to be.  In this case, make sure you consider the long-term health of your fund, as well as what you want your fund to do as a whole.  Someone wanting to fund a current theatre renovation, and someone wanting to pay for community capacity building for as long as possible, will obviously have different goals in mind for their fund and how it is invested.

Donor services and access to professional expertise – this is an area where community foundations are often much stronger than the national donor advised funds run by Fidelity, Schwab and other big investment firms.  However, the service you desire will depend on your charitable goals.  For example, community foundations become very involved in their local nonprofit sector, thereby giving their donors access to extremely beneficial information on how use their funds to make an impact in their local community.  But if you are already firm on the grants you want to make, or want to make all your donations to one organization, you may prefer more limited grant expertise, lower fees and the technical capabilities of the nation DAFs. 

No matter what your goals are, make sure you ask what services and professional expertise are offered.  And if you feel you could use different or additional support… keep looking.  Chances are, there is a provider out there offering what you need.

Fees and payment schedules – Because of the wide variety of services and expertise made available to donors, fees can vary substantially.  Make sure you understand what the fees are, what they are for and when they will be assessed against your fund.  Remember you will most likely have multiple fees (i.e. investor fees, provider fees, grant fees, etc.), so be sure you understand everything.  The best option is to ask for all standard fees, processing or administrative fees and penalty fees to be provided to you in writing.  Also be sure to ask when the fees were last adjusted, and if there are any plans to increase them in the near future.  

Grant recommendations –  In other words, ask the extent to which the DAF provider adheres to donor requests, because once you write that check and you receive your tax benefit… that provider becomes the owner of those funds and they, not you, make the final decision on grants.  Now don’t let this scare you too much, because this is necessary in order for you to get your tax benefit immediately after depositing the money into your fund.  Also, keep in mind that any organization that took advantage of this policy in ANY situation that was not extremely critical and easily defendable would not be around very long (i.e., word travels fast on these sorts of things).  Plus, you have some protection as long as you have confirmed that you retain the ability to transfer the fund to another DAF Provider, which leads to the next, and probably the most important, point.

Ability to transfer the account to another institution – On this last point, I can’t emphasize the extreme importance enough of selecting a DAF that allows donors to transfer their accounts elsewhere, should the donor become dissatisfied with any aspect of the sponsoring organization’s services. This is your umbrella protection, so make sure you confirm it as a policy of this organization.  It is also prudent that donors do a simple google search on the organization, and maybe ask around if it is a local community foundation, to get a feel for their reputation.

Although DAFs facilitate a relatively unencumbered giving process, philanthropic best practices still apply. Both donors and their advisors should take care to conduct careful due diligence on potential grantees, follow-up with grantees to assess impact and strive to develop working partnerships with grant recipients to ensure that both donor and grantee needs are being met.

 

Donor-advised funds have long been a popular vehicle for charitable giving, and many in the field expect the popularity of DAFs to continue to grow as the Baby Boom generation reaches retirement.  But as the concept has grown in popularity, so have the number of options and providers. It is therefore important that both donors and their advisors understand the types of funds available and choose the ones that will best facilitate their wealth management and charitable goals. So how do you find the best donor-advised fund for your purpose and how do you find the right provider?

The first step is understanding your options.  There are four major types of DAF providers, each of which is explored below.

The Donor-Advised Fund Marketplace 

1.  National DAF Organizations – Today there are approximately 30 national organizations that sponsor DAFs. Some are the charitable arm of for-profit financial services institutions such as the Fidelity Charitable Gift Fund, the Schwab Charitable, and the Vanguard Charitable Endowment Program. Others are independent sponsoring organizations (i.e., they are not affiliated with a particular financial institution or charity) such as the National Philanthropic Trust and the American Endowment Foundation. Unlike most DAF options, national organizations are issue and geography agnostic, which is fine if a donor is set on where his/her funds will go, but can be a huge deterrent to those donors who could benefit from targeted philanthropic advice.

National funds most often appeal to donors because of their technological capabilities. Their websites allow donors to simply login and access grant activities and other national databases with relevant information about prospective grantee organizations (i.e. Guidestar and Charity Navigator).

National funds also provide fee calculators on their websites so that donors know exactly how much services will cost. The relative low cost of national funds is another reason donors choose them. Because of their large capacities, national funds charge up to 40% less than other DAF options, according to Wright-Violich, representative of Schwab Charitable.

National funds are also attractive to donors because they have the expertise to deal with complex gifts and they have the most sophisticated investment options. Donors with large accounts ($10 million+) have access to alternative investments, allowing them to customize their investment choices so that their DAFs have similar investment flexibility to private foundations.

2.  Community Foundations – There are also more than 700 community foundations that sponsor donor-advised funds, as well as hundreds of faith-based institutions. In fact, it was such institutions that originally pioneered the DAF as an alternative to the relative inefficiency of checkbook giving or the more complicated process of establishing a private foundation.  Over the years these organizations have become very technically savvy, with many offering similar online access and investment options as the national DAFs.

What really sets community foundations apart, however, is the local expertise and community commitment.  These foundations become very involved in their local nonprofit sector, thereby giving their donors access to extremely beneficial information on how use their funds to make an impact in their local community.  Many community foundations even have a grant process where local nonprofits can submit grant requests that are compliled into a “catalogue” of opportunities for donors.  For donors interested in impacting their local community, this is by far the best option, even if the cost is a bit higher than national DAFs.  This does not, however, mean all donations must go to the local community.  Donors still have the flexibility to donate anywhere in the world.

3.  Public Foundations – Public foundations typically give nationally and sometimes internationally, often focusing on a particular issue or geographic region. Their staff members usually have regional and/or issue specific expertise that they use to assist DAF holders in finding causes that interest them. For example, the Peace Development Fund houses DAFs for donors interested in creating systemic social change throughout the Americas.

4.  Other Charities – Other public charities, like hospitals and universities, set up donor-advised funds within their organizations to advance their own charitable missions.

Finding The Right Donor-Advised Fund Provider

When selecting a DAF provider, with a little due diligence donors can ensure that the organization they select is one that reflects their interests and values. After all, there are almost as many different types of DAFs as there are donors.

The main reason donor-advised funds were designed was to remove the barriers to giving, by outsourcing the administration, record keeping, and due diligence on the charities.  If you know what parts of the charitable process you want to control, what parts you want to outsource, and what you want the outcome to be, you will have the information you need to make the right choice.

How To Find The Right Donor-Advised Fund (And Why)

Benefits of Donor-Advised Funds

Donor-advised funds (DAFs)–simply defined as funds held within, and managed by, a public charity–are fast becoming THE most popular vehicle for charitable giving in the U.S. Despite the sluggish economy, the number of DAFs in the United States actually grew by 152,365 (3%) in 2009, according to the National Philanthropic Trust’s 2010 Donor-Advised Fund Report. The report shows that DAFs not only outnumber private foundations by more than two to one, but they also exceed the combined number of charitable remainder unitrusts, charitable remainder annuity trusts, charitable gift annuities and pooled income funds.

So why have DAFs become so popular?  There are many reasons why these types are so popular, with a few of the biggest reasons outlined below.

First, establishing a DAF is a relatively cost-effective way for donors to reap maximum tax benefits while supporting the causes they care about. It eliminates the complications of starting your own private foundation, provides better tax benefits and includes all of the administrative responsibilities related to grants made, reporting and record keeping and tax paperwork.  Many also include expertise in helping you make grants, follow-up services and even get your donation returned if it was not used as you required.

Often, DAFs can be set up with as little as $1,000 or $5,000. In addition, DAF holders can take a federal income tax deduction up to 50% of adjusted gross income for cash contributions and up to 30% of adjusted gross income for appreciated securities. Further, by transferring assets such as real estate or limited partnership interests to a DAF, donors can avoid capital gains taxes and receive an immediate, fair-market-value tax deduction.

In addition, DAFs are not subject to a legal minimum payout requirement, unlike private foundations which must give away 5% of their annual assets, so the donor has more flexibility in how and when he/she decides to make grants.  DAFs allow account holders to choose what information is disclosed to grantees, and therefore, donors have the option of remaining completely anonymous (a very important issue to many donors, who were unable to do this in the past).

Innovation is Alive and Well in the Nonprofit Sector

It has been well-documented that America’s unparalleled charitable spending has not led to better outcomes. This has led to calls for donors to be more actively involved with their grants, but those of us who understand the complexities involved in the nonprofit sector know that asking donors to each become educated and implement innovative strategies in each individual grant is unrealistic and frankly a bit unfair (Donors have been financially successful and now want to do their part by funding innovative programs, so the least we can do is find realistic ways to ensure their gifts are utilized well.)  This realism has bred a growing pessimism among those who believed donor action would be the only way forward.

However, there is indeed another way forward, and the good news is that we won’t have to depend on individual interventions to fix the system — or worry about them making things worse if they try. There are already management support organizations (MSO) around the country that can help nonprofits deliver better quality outcomes at a lower cost, which focus on capacity building, and where innovation is alive and well.

Understanding just how they’re accomplishing this could provide us with a blueprint for transforming the rest of the nation’s nonprofit sector.  If you are a donor, represent a nonprofit organization or a foundation, or just are interested in helping improve your local nonprofit sector.  Research your area and find out if there are any MSOs that serve your local nonprofits.  You may be able to volunteer as a professional consultant, or help them raise funds to pay for capacity building.  You may be able to inform others in your local nonprofit sector about the importance of capacity building, and how it can lead to making a difference in the lives of more people.