Friday, September 27, 2013

Can Charities Be Run Like Businesses?

I’m finishing out my second week working with Charities Review Council, and I’m very excited to propel our mission of building up the nonprofit sector. Being relatively new to the nonprofit world, I've been spending a lot of time reading various thought leaders' takes on where the sector is going, what needs to be changed, and what practices are downright broken. One big hot-button issue right now is “the overhead ratio,” or the ratio of money a nonprofit spends on its mission versus employee salaries and other operating fees.

My colleagues here at Charities Review Council have written a great deal in our blog about the overhead ratio, pointing out that the overhead ratio is generally just a data point; it is a poor measure of a charity’s overall performance or effectiveness when taken alone.

One of the loudest champions of overhead ratio reform right now is Dan Pallotta, whose recent TED Talk illustrates how investing in leadership the way for-profit companies do can create unparalleled results in nonprofits. He goes beyond the argument that overhead isn’t an effective measure for nonprofit performance, suggesting that donors should accept charities taking on large risks in fundraising projects the way for-profit companies do. Recently, Pallotta has seen a barrage of backlash from respected leaders in the field.  

One of Pallotta's biggest critics is Phil Buchanan, president of the Center for Effective Philanthropy, who recently sounded off in opposition at Huffington Post. “Fact is, donors have a legitimate interest in understanding what proportion of their dollars ends up in the hands of for-profit fundraising professionals,” Buchanan says He worries that charities under Pallotta’s model can become “little more than shells for for-profit fundraisers.”

Pallotta argues that fundraising professionals should have every opportunity to make a fortune as their peers in the for-profit world. He promotes a meritocracy of fundraisers, where the most effective fundraisers get paid a competitive market wage. It’s easy to see how donors are wary of this mentality, especially with some of the more extreme cases of recent charity fraud—CNN reported this year that Florida-based Kids Wish Network spends less than three cents per dollar raised helping dying children and their families.  

Ken Berger and Robert Penna of Charity Navigator said in Huffington PostWe believe his message has gained tremendous popularity for one simple reason — he ultimately is arguing that charities should be held to virtually no accountability standards.” They don’t believe he has explained in enough detail how to measure the success of a charity, and whether the gains were worth the amount of donations expended.

It’s also arguable that Pallotta’s ideas on charity have become popular because of the current reality of the nonprofit landscape. Organizations have been faced with increased need and decreased funding, so it’s easy to see the appeal of a charitable model that promotes capital growth on par with for-profit companies.

As this conversation continues, debate will likely center around something along the lines of “can a charity be effective and responsible while taking greater risks and providing increased personal gains for individuals?” The answer isn’t necessarily cut and dry. The increased capacity of a charity run like a business comes with unprecedented barriers of donor trust. If Pallotta’s vision, or something like it, is ever to become a reality, it will require innovative standards of nonprofit performance that foster relationships between donors and charities. If Pallotta truly wants to change the way we think about charity, his first concern should be donor trust.  

Matt Beachey joined the council in September 2013, working on marketing and engagement. He graduated from Gustavus Adolphus College in 2010, and has since been living in the Twin cities. Matt served in AmeriCorps with the nonprofit Hunger Solutions and interned with Twin Cities Habitat for Humanity in their Marketing and Communications department. He also volunteers as the managing editor of Pollen, and as a blogger for FINNEGANS.


Kate Barr said...

I have to respond. Your post accepts Dan Pallotta's statements as the starting point for this topic, such as how he "illustrates how investing in leadership the way for-profit companies do can create unparalleled results in nonprofits." His talk does no such thing. In his talk he relies on experience at his for-profit consulting firm and speculates that if nonprofits paid much higher salaries for CEOs and development staff, and spent a lot more on advertising and marketing that they could raise much, much more money. The only measure that matters is how much money. He doesn't demonstrate, illustrate, or offer any examples of how this "business-like" approach will lead to better results, more effective solutions, or the end of poverty (which he implies is the responsibility of nonprofits.)

I acknowledge that Pallotta brought the overhead question to a broad audience. The "backlash from respected leaders in the field" isn't because he argues that overhead is not a measure of effectiveness. The backlash is to Pallotta as the standard bearer for the nonprofit sector and in particular to his singular focus on compensation and advertising expenses.

Your conclusion that the "debate will likely center around something along the lines of “can a charity be effective and responsible while taking greater risks and providing increased personal gains for individuals?” presumes that this conversation will be driven by Dan Pallotta's views and goals. I hope not. I would much rather join with the leaders of Guidestar, Charity Navigator, and Wise Giving Alliance and their campaign to dispel the Overhead Myth. The goal of the campaign is to help donors and nonprofits better understand the language and purpose of overhead and infrastructure and how nonprofits can be more effective in their work - to get meaningful results. It's important that this case goes beyond the argument that overhead isn't important. They're also pushing nonprofits to get much better at measuring and communicating the results that matter.

The final sentence of the post is the right idea. How can we as a sector maintain and strengthen donor trust by talking frankly about overhead and additional measure of effectiveness? That's not Dan Pallotta's goal, though, so look elsewhere for the messenger.

Matt Beachey said...
This comment has been removed by the author.
Matt Beachey said...

You make a good point about Pallotta's failure to dream beyond raising more money, without expounding upon how organizations simply having more money will make their programming better. It's certainly naive to think that simply throwing more money at our problems is the most effective way to solve them.

I think Pallotta neglects to "demonstrate, illustrate, or offer any examples of how this 'business-like' approach will lead to better results, more effective solutions, or the end of poverty" because he sees his role as fundraiser, not program director. He's leaving the challenge of effective use of more money to the organizations themselves. He's only trying to build the funding side of their capacity. I agree that his breathless swagger implies that his ideas are more of an ultimate solution than they really are, but I don't think he should be entirely discounted simply because he's only talking about one concern of nonprofits (revenue).

Pallotta's mission is certainly a different branch on the tree of the "overhead myth" than what GuideStar, Charity Navigator, and Wise Giving Alliance are promoting, and I should have clarified that. He hasn't brought any ideas to the table regarding better measures for effectiveness besides revenue, and he doesn't seem adequately concerned with how we can sustaining trusting relationships between donors and organizations. But I don't think that his particular methods of fundraising have to be mutually exclusive with building better measures of effectiveness.

In short, I hope other voices in this conversation are heard as clearly as his has been, and I agree that he shouldn't be seen as a beacon for the future of better philanthropy. But I think someone with a more holistic view of the sector could do great things using some of his ideas.

Thanks for pitching in on this conversation.


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