By: David A. Smith
The rest of [the 300 tons of what] just vanished only to turn up a few weeks later when a Dutch freighter, flying a Liberian flag of convenience, dropped anchor in Marseilles.
– Ross Thomas, If You Can’t Be Good (1973)
If, as suggested in yesterday’s installment, non-profits that grow large become relentless hunters after new revenue sources, they must always be seeking out new life lines, and new donations.
Are you seeking out new donations?
That entails speculative activities – donor-funded speculation.
Sources referenced in this post
The Sin in Doing Good Deeds, Nicholas Kristof Op-Ed, New York Times, December 24, 2008; brown font)
The Boston Globe (January 15, 2015; black font)
The Boston Globe (January 25, 2015; pastel blue font)
Other AHI posts on non-profits’ economics and governance
Vicarage at the church of football (December 14, 2007; brick red font)
The wrong way to be a Global-South non-profit (3 parts, April 11, 2011; navy blue font)
The battle of charities’ taxation (4 parts, May 9-12, 2011; brown font)
What’s fair in non-profits’ property taxes? (4 parts, March 5, 2012; Purple font)
No business for amateur philanthropists (3 parts, November 19, 2012; forest green font)
The price of charity (5 parts, April 29, 2013; Caramel font)
4A. What is R&D?
Where should research and development (R&D) reside? For that matter, just what is R&D?
We swear it’s real; really real
It’s not addressed in either Boston Globe article, perhaps because the charities studied did not emphasize it. Yet R&D must be there, because every organization is supposed to be a ‘learning’ organization.
To take one example that popped into mind: museums.
- They have to invent and reinvent collections and exhibitions with a view to creating experiences the public finds intriguing.
- Curators do outreach to other museums to assemble thematic collections that can then become traveling exhibitions.
- New works of art may be discovered or become available for purchase, and they have to be evaluated, valued, and decisions made whether to buy them and at what price. Possible forgeries have to be sniffed out, appraised and reappraised.
- Security systems may need updating. If there’s an inadequate one, and it is junked, where is the asset writeoff reflected?
Whose cost was the loss?
Which of these are these program work? Which are R&D? On the other hand, this crude reaction may be understandable in governmental terms but I seriously doubt it is a good idea:
Additionally, the federal government recently issued new rules for how government agencies that contract with nonprofits should reimburse them for their costs.
Or take another: universities. When they aggressively recruit foreign students who’ll pay full freight, is that mission? Innovation? R&D? Overhead? Or survival imperative?
American universities are enrolling unprecedented numbers of foreign students, prompted by the rise of an affluent class in China and generous scholarships offered by oil-rich Gulf states such as Saudi Arabia.
Cash-strapped public universities also are driving the trend, aggressively recruiting students from abroad, especially undergraduates who pay a premium compared with in-state students.
There are 1.13 million foreign students in the U.S., the vast majority in college-degree programs, according to a report to be released Wednesday by the Department of Homeland Security. That represents a 14% increase over last year, nearly 50% more than in 2010 and 85% more than in 2005.
Students from China account for the largest share—331,371 of all international students, or 29%. Nearly 81,000 subjects of the Saudi kingdom are studying in the U.S. this school year, up from about 5,000 in 2000-01. Nearly three-quarters of Saudi students are enrolled in bachelor’s programs or English-language programs that precede starting undergraduate studies here.
Temporary Bostonians, many of them paying retail
Personally, I have no problem at all with foreigners studying in American universities; I think it’s a fantastic export of genuine cultural values and a great way of promoting American as an idea and ideal. I’m just unsure that doing so it a charitable purpose.
I’m dead but I wasn’t born yesterday
4B. What about risky ventures?
Closely aligned with R&D is risk: which is basically anything that might go wrong (future tense) or has gone wrong (past tense).
“There’s a visceral negative reaction to people in charity taking risks in fund-raising. But if you can’t raise money you can’t grow, and if you can’t grow you can’t solve social problems.”
Never having succeeded myself in any retail fundraising effort, I view it like the adage about advertising: 90% of it is wasted, but nobody knows which 90%.
Maybe he should have gone into fundraising
Pallotta points to the Wounded Warrior Project, a veterans nonprofit that dramatically increased revenue by investing heavily in fund-raising.
Investing in fundraising can certainly help … but it’s an outlay with no certainty of return, no reliable time horizons for its success, and minimal or no evidence that what worked in one situation will work elsewhere. (Such environments are ripe for the cult of the management guru.)
Fairly often, when I want to shake up an audience (say, government officials), I’ll cold-open my talk by asking the audience, ‘How much money do you have permission to waste?’
“We were throwing the ball really to kind of waste that play.”
Then I pause – and push them to confront why they so instinctively recoil from the question.
Never waste food … or words, for that matter!
For myself and for AHI, I’ve answered it this way:
How much money can a non-profit afford to ‘waste’?
(‘Waste’ in this case being defined as ‘spend on something that may fail ignominiously.)
An answer might be any of the following:
1. Anything that doesn’t ‘bet the farm’. Very occasionally, one must bet the farm because the farm is about to be lost; in all other circumstances, the organization needs to protect itself, so the amount of capital we can waste must be rationed.
2. Whatever I can make a business case for. At my for-profit company Recap, we are constantly innovating and experimenting, taking on hopeless causes (and sometimes rescuing them!), trying to solve intractable problems, advocating for necessary change, or simply pointing out critical problems. We can use such a flexible and unstructured approach to experimentation because we’re small and we’re self-motivated, and those doing the innovation at least have practice doing it!
3. My entire R&D budget. Many organizations create a separate R&D department, with its own budget, as a means of centralizing and prioritizing their innovation. That’s good for larger entities, where it doesn’t do to have the entire work force rushing out pursuing wills-o-the-wisp.
4. A stipulated capital pilot program. For governments, who have no formal R&D function, pilot programs are one means of giving themselves permission to experiment. (Congressional earmarks are another; they can be used for direct pilots that bypass hidebound bureaucracies.) As I said at Downing Street:
That’s part of why I like pilots — they are licenses to fail, and that license is essential.
If you cannot fail, you never risk.
If you cannot risk, you never experiment.
If you cannot experiment, you never innovate.
That experiment sure didn’t work out
At AHI, we lose money on individual actions all the time; it’s in the nature of exploration and experimentation. We give ourselves permission to lose that money in pursuit of discovery, insight, pilot programs, and potentially replicable or scalable interventions.
Where does that money get shown – in ‘failed program activity’ or ‘embarrassed overhead’ or anywhere else?
Well, where are we going to bury that decision?
4C. When does thrift become parsimony?
English is a language so rich in words that we readily distinguish thrift (economizing without loss of effect) from parsimony (economizing for its own sake, with effectiveness loss) – and yet in that language is the power to define people’s opinions before they know the facts. [Thank you, Mr. Semiotics Professor. — Ed.]
How you describe it shapes how you see it
As a result, many charities are sensitive about overhead and reluctant to spend beyond the norm.
What then is this thing called ‘overhead’?
That’s just the executive suite
And for that matter, what is the norm?
Drinking beers is the Norm
That’s left some of them with outdated computer systems and insufficient staff training, and some resort to accounting manipulations to lower or hide their true overhead costs — despite a Standard & Poor’s study showing that in the for-profit world overhead spending can run up to 50%, with the average in the mid-20s.
It’s all in the definition, and if we farm out defining to the outsiders, we substitute an uninformed (if disinterested) opinion for an informed (if self-interested) one. It’s not clear that’s a net gain.
You tryin’ to convince with that, slick?
His old company, Pallotta TeamWorks, was criticized for spending on things like advertising and six-figure salaries that ate into the net proceeds that went to charities, earning headlines like one in U.S. News & World Report: “Do Some AIDS Events Take Donors for a Ride? Expenses at Dan Pallotta’s bikeathons leave less money for the charities.”
When the issue is fundraising, there is a temptation to think, “Since it’s being paid from money we otherwise wouldn’t raise at all, who cares what the contingent cost is?”, but that presumes the organization either could not do the fundraiser itself, or couldn’t hire someone more cost-effective. Cost scrutiny is always relevant.
“If I was a donor, I would certainly raise an eyebrow” about such perks, said Kathy Postel Kretman, director of Georgetown University’s Center for Public & Nonprofit Leadership. “In a public charity, the work is mission-driven, and it is not a private business, so with that comes a certain sense of accountability to the public — and these, to me, are beyond reasonable.”
How much is it?
In other words, Ms. Kretman applies the old Potter Stewart definition of pornography – I know it when I see it – which may be accurate with respect to any particular factual case (and to illustrate that point I’ve deliberately disconnected this quote from its context).
Pallotta’s argument is steadily gaining allies. The prestigious Bridgespan Group, a nonprofit consulting spinoff of Bain & Co., published a 2009 article titled “The Nonprofit Starvation Cycle” that concluded charities persistently underfund overhead — to their detriment.
Bridgespan, one must note, is a management consultant to non-profits, and I presume that an increase in non-profits’ fundraising budget would not be financially disadvantageous to Bridgespan,
We too have to have a revenue model
[Continued tomorrow in Part 6.]