There’s big money in charity: Part 5, Competitive-pay analyses

March 31, 2015 | Boston, Charities, Competition, Governance, Housing, Impact, MEEs, NGOs, Nonprofits, Overhead, Speculation, Theory, US News | No comments 139 views

By: David A. Smith

[Continued from yesterday’s Part 4 and the preceding Part 1, Part 2, and Part 3.]

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.

kirk_marta

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)

Chronicle of Philanthropy (August 15, 2013; cobalt-blue font)

Chronicle of Philanthropy (August 15, 2013; humble 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?

van_gogh_authenticated

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?

gardner_suspects

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.

foreign_students

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.

wary_seneca

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%.

john_wanamaker

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?’

butler_interception

“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.

mom_recoils

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.

pete_carroll_play_call

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? 

russell_wilson_pete_carroll

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.]

semiotics

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’?

space_shuttle_overhead

That’s just the executive suite

And for that matter, what is the norm?

cheers_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.

tommy_lee_eyebrow

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.”

kathy_kretman

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,

bridgespan

We too have to have a revenue model

[Continued tomorrow in Part 6.]

There’s big money in charity: Part 4, We need top performers

March 30, 2015 | Boston, Charities, Competition, Governance, Housing, Impact, MEEs, NGOs, Nonprofits, Overhead, Speculation, Theory, US News | No comments 111 views

By: David A. Smith

[Continued from Friday’s Part 3 and the preceding Part 1 and Part 2.]

A third of the wheat disappeared into the black market the same day that it was unloaded.

– Ross Thomas, If You Can’t Be Good (1973)

Yesterday’s installment of this multi-part post on non-profit overhead established that for many larger, retail-oriented non-profits, the apex executive (regardless of notional title) is principally a fundraiser, and often a coddler of donors, and the donor-coddling is a monthly, yearly, decadal job that consumes one’s personal life, and one’s home life.

Sources referenced in this post

The Sin in Doing Good Deeds, Nicholas Kristof Op-Ed, New York Times, December 24, 2008; brown font)

Chronicle of Philanthropy (August 15, 2013; cobalt-blue font)

Chronicle of Philanthropy (August 15, 2013; humble 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)

This makes family stability, and by extension housing, not just a convenience or perquisite of office but an element employee effectiveness as essential as sleep.

3D. A non-profit career usually requires having a stable home life

From observation and personal experience, I’ve concluded that dedicating oneself to non-profit work requires having a stable and financially secure home environment.  Something about providing for one’s family (even a family of two) is so embedded in people’s desires that money doesn’t substitute for it.  So, in Vicarage at the church of football, I profiled Stanford University’s commitment to provide affordable housing to its head coach (at the time, a fellow named Jim Harbaugh – whatever happened to him, anyway?) and his assistant coaches.

Malcolm Rogers, outgoing director of the Museum of Fine Arts, received a $60,096 annual housing allowance, according to the museum’s latest tax filing. It was part of a total compensation package worth $906,897.

malcom_rogers_mfa

Family housing is a backbone of the US military’s commitment to service members, and workforce housing is a priority for governments around the world.  And housing, unlike other benefits, must be place-based, so it’s common for big place-based non-profits to eliminate a potential deal-breaker by offering both the place and financing for it:

At the Clark museum, Peter Willmott, the recently retired president of the museum’s board of trustees, said paying for half of the director’s home helped persuade Conforti in 1994 to move to the Berkshires from Minneapolis. The Clark also uses the property to host events.

peter_s_willmont

Investing in the president’s home is investing in the museum’s revenue

As I’ve posted before, you are what you live in; when one is recruiting an executive with a family to move to a new location, replicating the quality of home life is a powerful factor in persuading the family to join him or her in the move.

In 2013, Monroe received a $1.2 million mortgage from the museum to buy a new house, replacing a $200,000 mortgage he had received for a different home in 1993, according to tax records. He made $723,174 in 2013, the latest year reported.

In terms of incentives and perks, financing never bothers me, because it’s the safest investment the place-based non-profit can make.

In addition, the Clark wrote smaller mortgages for five other executives to encourage them to live in Williamstown, where housing costs are higher than in other nearby towns. Executives who receive such loans are generally expected to repay them at a market rate of interest.

“We try and help people live in the town, as opposed to miles away,’’ Willmott said. “We’re building a world-class institution here, and to do that we need top performers in these management jobs.”

Financing a key employee’s primary residence is the ultimate employer-assisted housing (and the university can take direct-deposit of payments), it uses the university’s credit or cost of borrowing to add value for a target employee, it builds employee loyalty and increases retention expectations, and it likely holds its value and can be reused for the next fundraiser when the current one leaves or retires.  As I put it in 2009:

Start with three facts:

 

1. People want to own homes. 

2. Owning a home decreases labor mobility. 

3. Employers value loyalty and longevity of service. 

Mix them together and you have the formula for a cluster of initiatives known broadly as employer-assisted housing – which, in part because of the housing policy innovation inversion, is a movement without leadership, a concept without a structure.

Place-based and acquisitively expansive non-profits are naturals for employer-assisted housing, especially using the institution’s financial resources to become a lender to its employees:

The Clark Art Institute in Williamstown paid director Michael Conforti [Who’s retiring August, 2015 – Ed.] nearly $920,000 in 2013 and also co-owns with him a $1 million home in the western Massachusetts town, according to the institute’s tax filing.  About half the original $510,000 mortgage sits on the museum’s books, along with a $36,563 loan for home improvements.

michael_conforti

That’s a lot for Williamstown.

At the same time, do we want people in the sector who make their decisions solely on monetary criteria?  Or ones who compare one non-profit to another solely by money?  Doesn’t that suggest the fundraisers are ‘ethical mercenaries’ who are simply going where the money is?

“Pallotta’s offering the illusion of saving the world while enriching yourself, the perfect combination for our times,” says Michael Edwards, a senior fellow at Demos, a public-policy organization.  “It’s disastrous for civil society and the hard work we have to do together to solve our problems.”

3E. Fundraising can become disconnected from impact

As a non-profit becomes larger, as the fundraising machine becomes ever more effective and the revenue flows become ever more reliable, impact can be zeroed out of the equation, or taken for granted with no periodic testing or examination.  The syllogism is as seductive as it is simple:

We need money to have impact.  If we’re raising money, people are validating our impact.  Therefore the more money we’re raising, the more impact we’re having – by definition!

Elizabeth Keating, a specialist in nonprofit finance who teaches at Boston University, said that even with a relatively small number of highly competitive arts jobs available, there is an amping-up effect that happens with compensation, not unlike in the for-profit sector.

“It’s sort of become the game you play in the corporate setting — if you really want me, I’m going to get you to put as much on the table as you’re willing to put,’’ she said.

Are those the people we want running non-profits?  What about thrift?

thrifty_lifestyle

How good is the pay?

4. Non-profits must abjure gluttony

For a for-profit, the public interest does not require oversight of its thrift; its shareholders do that (or should, anyhow) out of their rational self-interest.  But when an institution is non-profit, receipt of a cluster of publicly conferred benefits (deductibility of charitable contributions, exempt from income taxes, often exemption from real estate taxes) imposes on the non-profit a public duty, both in what it does (as stated in its articles of incorporation, and required to have a charitable purpose, often “relieving the burdens of government”) and whether it does so efficiently. 

kernels_popped

Sometimes the truth just pops up

Ken Berger, president of the watchdog group Charity Navigator, says there are “kernels of truth” in Mr. Pallotta’s messages.  “But when you look under the surface,” he adds, “he becomes an apologist for anybody doing anything without accountability.”

ken_berger_charity_navigator

No apologist for anybody doing anything without accountability

A non-profit is under a moral duty, if not a legal one, to show that in addition to impact it is slenderizing its non-programmatic work.  Impact alone is not enough:

Pallotta praises the Wounded Warrior Project for not being “a slave to that fund-raising ratio” and dismisses its detractors as short-sighted.

But when a non-profit both grows and grows its impact, is the increased organizational heft muscle or fat?  And has that growth arisen by expanding the universe of donors, diverting donor market share from other worthy causes, or even cannibalizing revenues from less-costly but less-marketing-savvy competitors?

georgie_best

Every successful brand has the Best overhead

Critics, however, accuse [the Wounded Warrior Project] of squandering donations on expensive marketing and high salaries; its fund-raising and administrative costs total more than 40% of its expenses, according to Charity Navigator, which evaluates nonprofits.

Though it may not be a cause in itself, excess overhead is unquestionably a symptom of non-profit wrongheadedness, whose elements I first dismantled wrongheaded non-profits by focusing on Louise Ciccone’s exercise in personal ego-branding, in The wrong way to be a Global-South non-profit:

A non-profit social enterprise or Mission Entrepreneurial Entity is a charity joined at the hip to a business, and the two elements are non-convertible – strength in one cannot make up for weakness in the other. 

 

Madonna_malawi

One raised fist = guaranteed success?

Ms. Ciccone at one of two ceremonial bricklayings for her proposed school

 

That’s why so instructive is this tale of a foray by the entertainer Madonna (Louise Ciccone), who sought to do good only to do harm, because she did so many things wrong – spending money foolishly and too fast, going for the visual vaporware instead of the demonstrated impact, boasting before doing, and generally treating the aspirations of both donors and beneficiaries as acts in a circus. 

On the other hand, while excessive overhead is both sin and a path to sin, inadequate overhead can be parsimony as righteousness, starving one’s way to virtue:

Tellingly, the do-it-yourself legal website Nolo advises that when it comes to how much nonprofits should spend on operating expenses, “You have two choices: you can spend as much as you need, or as much as looks good.”

There are no good answers, one some less bad than others.

Basically, the federal government’s new rules broaden the definition of reimbursable expenses to include certain overhead costs. Overhead spending, the Office of Management and Budget now says, can be a necessary expense that “supports the fundamental operations of the organization.”

Perhaps something will be learned by dissecting overhead into its component parts.

anatomy_lesson_tulp

You have to peel away the surface

[Continued tomorrow in Part 5.]

 

There’s big money in charity: Part 3, To court donors

March 27, 2015 | Boston, Charities, Competition, Governance, Housing, Impact, MEEs, NGOs, Nonprofits, Overhead, Speculation, Theory, US News | No comments 127 views

By: David A. Smith

[Continued from yesterday’s Part 2 and the preceding Part 1.]

The first shipment of food was 300 tons of wheat destined for the bellies of the citizens of one of those countries on the west coast of Africa that had just shrugged off a couple of hundred years of British colonial rule.

– Ross Thomas, If You Can’t Be Good (1973)

As we discovered yesterday, non-profits that scale become businesses, and among their core businesses – a core activity of any business – is revenue generation, yet when the business is a certain kind of non-profit, revenue generation takes on a different character: fundraising from the public.

new_gym_floor

Because without your money, we’d have to spend ours on something else

Sources referenced in this post

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)

A friend of mine is a university president.  Fundraising is endless, as is its corollary, donor coddling.

The separate [housing] benefit endures at other institutions. MFA spokeswoman Karen Frascona said Rogers receives a housing allowance in part because he is expected to do museum-related entertaining in his home.

Fundraising entails a family effort, especially a spousal effort.  The spouse must be there, to greet the donors’ spouses, to stand in for the fundraiser, to provide tag-team relief or second-man-in-the-booth color commentary and validation of the fundraiser or the cause (“I’m no expert, but from what I’ve seen up close …”)

christopher_bratton_art

If I’m standing in front of it, you can be sure it’s art

At the affiliated School of the Museum of Fine Arts, president Christopher Bratton’s $335,591 compensation in 2013 included $15,288 for entertaining at his home, according to school spokeswoman Amanda Karr –

And that, I presume, is just the direct cost – all those hors d’oeuvres and crackers and white wines would have been billed directly to the museum.

– and a $2,288 school membership to the exclusive St. Botolph Club in Back Bay.

sargent_carolus_duran

Exhibited in 1888 at the St. Botolph Club: john Singer Sargent’s Carolus Duran.

Again, we can presume that the Museum picked up his monthly tabs (as it should).

Bratton also received a $200,000 mortgage through the MFA and a bridge loan to cover his relocation expenses. These benefits are in line with common practices at colleges and universities, Karr said.

The financing was “in response to increasing at-home entertaining demands” associated with a major fund-raising campaign, museum spokeswoman Whitney Van Dyke said.

whitney_van_dyke

A day spent fundraising is a long day that adds up to a long week.  Fundraising at home is a virtual necessity, and as such it’s both a benefit (a nice place) and an imposition (strangers in the house at all times). 

The Boston Symphony Orchestra includes summer housing at Tanglewood as part of managing director (“endowed in perpetuity”) Mark Volpe’s $698,805 in compensation.

Tanglewood is way far west – at least two hours’ drive from Boston.  It makes perfect sense to accommodate Mr. Volpe and his whole family out there for the summer.  Its beauty is a beneficial feature that in no way negates the housing’s necessity.

The benefit, whose cost is not specified, is “for the convenience of the BSO,” according to its tax filing in 2013, and is not subject to taxes.

Mark Volpe

No bucks, no Beethoven

The symphony pays for Volpe’s wife to travel with him to court donors and raise funds. He drives a 2008 Audi A6 provided by the BSO.

For those who are dedicated to it, the job is demanding, even destructive. Neil Rudenstine, who served at Harvard’s president for a decade during which the university was undertaking a gargantuan and eventually successful fundraising campaign, was widely understood to have suffered from nervous exhaustion (“something like a nervous breakdown”) from the overwork.

rudenstine_harvard

Worn down by fundraising? Rudenstine at Harvard

In the nonprofit sector, the overhead debate has become increasingly vigorous, in part because of the push to measure charities’ efficiency. But “what’s different about what Dan and the Charity Defense Council are doing is they’re trying to take this out on the street,” said Rick Jakious, [then] chief executive of the Massachusetts Nonprofit Network. “They’re going on the offense, and they want the donor who maybe has given a couple hundred bucks or even 20 bucks to an organization to think about this, as well.”

jakious

Though Mr. Pallotta makes an intriguing case, he may possibly be the wrong messenger – self-interested, self-promoting, self-serving.

Daniel Borochoff, the president of Charity Watch, which rates nonprofits, said the “dark side” of Pallotta’s pro-overhead campaign is that “the fund-raising companies love him. He’s a hero for them.”

daniel_borochoff

Aside from boosting their market share, Mr. Palotta is also boosting his for-profit business – which happens to be in the design and execution of capital-raising campaigns.

3B.  A non-profit can run out of beneficiaries/ customers

It’s our habit in this business space to avoid the word ‘customer’ and instead refer to the people who gain from the non-profit’s work the beneficiaries, or sometimes the people we serve.  Perhaps due to my decades in the investment banking/ consulting arenas, I don’t use those turns of phrase – I call them customers.  And I call them that in part because they pay our bills – maybe not directly, but because they are those who inspire the people who do pay us – governments, development finance institutions (DFIs), foundations.  Of course I could call the DFI or the foundation our customer – and often I do – but at the same time, I also call the end consumer the customer.  It’s a way of thinking and an awareness of what we’re actually doing, because some of the work we do benefits the payer but not the actual customer; and we try to stay away from that work.

For many non-profits, the separation between payer and beneficiary widens and widens, and if the non-profit cannot show it is capturing enough of what it calls the beneficiaries, then it cannot capture donations from those it calls donors – and when that happens, the non-profit is a donation-collection machine with no purpose in life, or a machine with no revenue.

So, when the customers dry up, the non-profit has to compete harder to take them away from other non-profits – as in American universities today.

student_loan_debt

27% delinquency not so good

Now [Mr. Pallotta] is taking his argument to the masses. Along major roadways in the Boston area, including the Southeast Expressway, Interstate 95, Interstate 495, and Route 1, the Charity Defense Council — its motto is “We fight for the people who fight for the people” — recently put up billboards that read, “Don’t ask if a charity has low overhead. Ask if it has big impact.”

One can well imagine that in such cases, the withering non-profit can pin ever more of its hopes on the golden-tongued fundraiser as the magic elixir that will give life to it and not its competitor.

magic_elixir

Buy me and your revenue, if not your impact, will be revived

3C. Executive talent

The executives so recruited – those who are used to wining and dining, not being wined and dined – would be less than fully human if they didn’t gradually come not only to enjoy the attention but believe they deserve it. 

They are not only well-paid, but many receive an array of generous perks — housing allowances, home loans, club dues, and free travel for spouses. One was awarded a quarter-million dollars in retention bonuses. Another is reimbursed for his children’s college tuition.

They would also be less than fully effective negotiators if they didn’t charge each new non-profit whatever the market will bear – or, if they’re being wooed away from one non-profit to work for another, if they didn’t expect to be better off financially in the new perch than they were in the old one.  So if the previous job offered a freebie, the new job must either offer the same or make it up in kind.

Howard Messing, chairman of the Museum of Science board of trustees, said the offer of tuition payments was made to help lure Miaoulis from the Tufts School of Engineering, where he was dean from 1993 until 2003. At Tufts, where tuition, room and board now costs $61,000 a year, his two daughters’ educations would have been free.

howard_messing_mit_73

Valuing education, even that of his CEO’s children: Howard Messing, MIT ‘73

“We’re very happy with Ioannis’s performance, and we don’t think he’s overpaid in general, and it was tough to get him to leave his academic career and come to the museum,’’ said Messing, the chief executive of a medical technology company in Westwood. “It was an investment that was worth the money.”

Messing said covering tuition [for Mr. Miaoulis’s two daughters] — and paying the taxes on that benefit — was less expensive for the museum than boosting Miaoulis’s salary because [at Tufts, Mr. Miaoulis’ daughters could attend free and] the payments will end when his children finish school.

miaoulis_bu

Sending your daughters to college is easier if you’re the college president

The Peabody Essex Museum in Salem often pays for longtime [Since 1993 – Ed.] chief executive Dan Monroe’s wife to travel with him, and also covers his taxes on that compensation.

pem_dan_monroe_wife_catherine_wygant_monroe

Traveling at length apart from family becomes a hardship

Traveling for business is an activity whose attraction wanes as the years pass and the frequent flyer miles mount.  When one is young, it’s glamorous, stimulating, even thrilling.  As age sets in, children arrive, families expand, or the trips compress into business-class commando raids – fly in, find hotel, speak/ confer, fly home – if one cannot always be at home, at least one can bring some of home along.

[Continued next week in Part 4.]

There’s big money in charity: Part 2, Few would thrive

March 26, 2015 | Boston, Charities, Competition, Governance, Housing, Impact, MEEs, NGOs, Nonprofits, Overhead, Speculation, Theory, US News | No comments 150 views

By: David A. Smith

[Continued from yesterday’s Part 1.]

It was finally decided that since I was a budding historian it would be nice if I made a historic record of the first shipment of Food for Peace from the time that it left Baltimore with appropriate fanfare to when it entered the bellies of those whose hearts and minds it surely would win to Democracy’s side. I suppose everyone was still a bit naive back in 1961.

– Ross Thomas, If You Can’t Be Good (1973)

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A Charity Defense Council billboard along the Southeast Expressway.

In yesterday’s Part 1, using as its seed capital an unwitting diptych of Boston Globe articles, one extolling the importance of charities spending enough on themselves to be robust and aggressive in fundraising, the other ever-so-gently chastising other charities for possibly over-rewarding their executives, we met successful self-promoter Dan Pallotta, who shows his genius for naming things in his choice of advocacy organization: the Charity Defense Council, implying that charities need a defense, and that a wise council of the elders came together to defend them.

council_elrond

Middle-Earth philanthropy stands on the brink of destruction

Sources referenced in this post

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)

cdc_banner

Ah, but is this a problem of reality, or of perception?

But if 70% of Americans think charities waste money (Mr. Pallotta’s citation, not mine), is that a problem of Americans’ perception, or one of reality?

gruber_stupidity

Call if the stupidity of the American donor if you like

2B. What is their ‘business’ or ‘program activity’?

Non-profit is a tax designation, it’s not a business model.

– Wise advice provided to me multiple times over the course of building AHI

Any business enterprise has five essential functions:

The business enterprise simplified

Five essential functions

1. Business development and contracting.  The activity of obtaining business to do.  This is true even of non-profits that give things away for free; you still have counterparties and even if they pay no cash, they have to value what you are providing them, and they should be called customers.

2. Line work.  Doing the organization’s work with customers – products, services, and direct customer support.

3. Staff support for line work.  Assuring that those doing the line work have the tools and systems they need to do the work; information technology (IT); of these, IT

4. Management, administration, and governance.  Deciding what the organization will do, assuring that it is done and properly documented and tracked, and making sure the organization follows applicable rules, other people’s or its own.

5. R&D.  A business that doesn’t keep exploring and experimenting soon stagnates, after it stagnates it declines,

What is left after these five functions are paid for – that is, all revenues minus all of the foregoing costs – represents the organization’s operating profit or loss (usually more properly called ‘cash flow’).

While governance and compensation are challenging issues even in for-profits, for non-profits they are doubly so, because in non-profits the customer (who chooses the service or product, uses it, and benefits from it) is not necessarily the principal payer for the service (whom we may call the ‘benefactor’).  For non-profits, if customers cannot pay the marginal cost, then impact is entirely dependent on increasing the total number of benefactors – and that means ‘fundraising’ or ‘getting people to give you money’ is often a core activity, the essential part of business development and contracting.

Even if those are the functions, how do they translate into people and salaries?  How is the people’s time allocated, both by activity and by classification?

Charity watchdog groups have historically said nonprofits should spend no more than about one-third of their budgets on overhead, and ideally below one-quarter, and use the rest for charitable programs and services.

It’s by no means apparent how to think about these issues, but here’s a way definitely not to think about them, and that would be by law or regulation:

There is no legal limit on how much nonprofits can spend on fund-raising and administrative costs, which typically include legal services, accounting, and office management

2C. Is management ‘overhead’ or ‘program activity’?

All right – then where does the CEO sit?  At AHI, which is tiny in people (but mighty in impact!), as Founder/ CEO I’m in all five of those functions, so how should we allocate my cost?

hunger_games_volunteer

Ah, but what are you worth?

[Full and personal disclosure: AHI does not pay me.  I donate all of my time to it.  So in AHI’s case my ‘cost’ is lost-opportunity, not out of pocket. – Ed.]

Management, like goal-scoring in soccer, looks easy and quick when done by experts.

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Launched full-tilt, headed home: van Persie’s amazing goal

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Floating over the keeper’s head

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It looked easy when Robbie did it

Management is essential, and curiously, it can be understood only by doing it.  It can take a lot of time or just a little time.  It draws from all your experience and nobody ever gets it 100% right.  Whatever you decided yesterday, there will be something new to decide today … and whatever it is that you have to decide won’t be quite like whatever you decided yesterday or even three decades ago.  And its value correlates only imperfectly with its cost.

Is it overhead or program activity?  Darned if I know.

3. Non-profits compete … and the most-in-demand talent is usually paid the most

In the non-profit realm, we all talk about collaboration, but the reality is that we compete:

  • For donor funding/ contract dollars.
  • For customers/ beneficiaries, and projects they can succeed upon.
  • For capable, motivated, and knowledgeable executives and staff.

 (At AHI, we bend over backwards not to compete gratuitously – my longstanding motto is “All fly balls are caught; no outfielders run into other outfielders.”  Even with that, some things drop and some are just collissions.)

outfielders_collide

Avoid this …

popup_drops

… and this too

Competition is fantastic when harnessed; it’s fantastic when all the players are fairly successful.  But when there are more players than there is business to do, more operating costs than visible grant possibilities, more entities losing money than those making it, competition turns more ruthless.

And for big non-profits, there is never enough market share, because there is always more competition.

3A. Pure fundraisers are paid as if they were commission salespeople

Fundraising is sales, and the commodity being sold is ego-boost: ego boosted by virtue, by wallet size, by worthiness of the cause, by visibility (there’s a reason university and hospital buildings have names carved into them), and by personalized, sustained flattery.  It may be ignoble, but it’s human, it works, and those who can do it are paid big bucks:

Pallotta rails against the [parsimonious] mindset and is an evangelist in his belief that if charities increase overhead spending, especially on executive compensation and fund-raising, they could bring in more money to do more charitable work.

After all, he said, few for-profit ventures would thrive, let alone survive, without ongoing internal investments.

Ah, but is fundraising R&D or investment in plant or facility?  I think not.  It’s investment in expected receivables. 

harvard_fundraising

We promise we’ll think of good uses for it

[Continued tomorrow in Part 3.]

 

There’s big money in charity: Part 1, Not corporate chieftains?

March 25, 2015 | Boston, Charities, Competition, Governance, Housing, Impact, MEEs, NGOs, Nonprofits, Overhead, Speculation, Theory, US News | No comments 170 views

By: David A. Smith

[I wrote a report about how] some Madison Avenue sharpies ripped off the Office of Economic Opportunity. That one I entitled, “Poverty is Where the Money’s At.”

– Ross Thomas, If You Can’t Be Good (1973)

Profit is normally the premium one pays for competence, but are all profits equal? 

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Malcolm Rogers, outgoing director of the Museum of Fine Arts, received a $60,096 annual housing allowance, according to the museum’s latest tax filing. It was part of a total compensation package worth $906,897.

Are all uses of profit equal?

Sources referenced in this post

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)

To judge by human society, the answer is No, some profits are better than others, when they are earned by non-profits, or in the loftier term that they themselves prefer, ‘not-for-profit organizations’ – but does that aspirational self-chosen status and its implied altruism give them a free pass on their operations?

free_pass

I’m a non-profit, let me through!

It’s conventional wisdom in the world of charitable giving: Good nonprofits spend as little as possible on overhead. Donor dollars, the thinking goes, are best spent on a nonprofit’s charitable mission, not on administration and fund-raising

To Dan Pallotta, that’s ludicrous.

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I condemn conventional non-profit thinking

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In that case, I condemn the money-grubbing non-profits

As the head of a rebellious Cambridge nonprofit called the Charity Defense Council, Pallotta has insisted for years that nonprofits should adopt a more corporate model of doing business.

im_overhead

Some non-profits spend money on me so I can get you to spend money on programs

That includes spending more on themselves, an expense traditionally viewed by donors and watchdog groups as wasteful.

Aside from ‘waste’ being a normative concept (like greed, it’s something others do and we condemn because we never do it), there are non-profits and non-profits – and that makes everything fairly complicated.

1. A non-profit is a business stapled to a beggar

Nearly all the non-profits in my experience are in some way or another mission entrepreneurial entities; they produce products and services, which they make available to the public either free or at lower prices than pure economics would require them to charge. 

And unlike Mee’s that grew out of a profitable activity and discovered purpose along the way, non-profits started with the mission and invented the enterprise as a form of sustainable and scalable delivery.  But the intangible infrastructure of an expanding organization costs money, so nearly all non-profits have their begging bowl out all the time.

begging_bowl_procession

We’re just trying to sustain our business model

“We’re trying to educate people on the notion that maybe the question they’ve been asking all along is the wrong question,” said Pallotta, who contends that nonprofits could do even more charitable work if they spent more on overhead.

Ah, could they do more, because could they raise more? 

“These organizations have no idea how much money they’re leaving on the table by restricting their fund-raising budgets,” said Pallotta, who also makes his pro-overhead argument in his books “Uncharitable” and “Charity Case” and in a widely watched TED Talk.

                                                                                                                              

Or has the organization inverted its priorities, where their essential activity isn’t relieving the world’s ill but fundraising?  For those non-profits where it is, is the ‘product’ that they are selling actual results … or simply the ability to feel good about oneself for having provided a gift to someone less fortunate than oneself? 

james__brown_feel_good

I gave money, and I feeeel good!

I knew that I would!

2. Non-profit business come in multiple types with multiple revenue profiles.

Non-profits come in almost as many types as do people, with as many different target customers, theories of impact, financial profiles, endowments, and revenue sources as people have.  And some of them are anything but poor:

top_endowments

More valuable than Jordan or Latvia top ten endowments (as of 2009)

harvard_returns

Some downs, some ups, but more money coming in all the while

The executives on the receiving end of these benefits are not corporate chieftains.

Actually, they are corporate chieftains – just chieftains of non-profits.

Instead, they run some of the Boston area’s most prominent nonprofit arts and cultural institutions.

In putting together its compensation-investigation story, the Globe articles conspicuously omitted any of the big-business non-profits, like hospitals and universities, which are the real money machines.

harvard_donations

Reaping a billion a year in donations: Harvard’s fundraising

At the Museum of Science, for instance, president Ioannis Miaoulis earned $509,265 in the year ended June 2013, and his compensation included money to pay for his two children to attend Tufts University, according to a disclosure deep in the museum’s annual tax filing.

As we’ll see, that particular item is less questionable than it looks.

ioannis_miaoulis

“There’s a good reason for the children’s college payments”

2A. Types

When we think of ‘non-profit’, these run an enormous gamut, from the tiniest and most clueless to the largest and most imperial.  Among them are:

Community-based non-profits.  Many of these are community organizations, started by people motivated to do something good in their locality.  Their staff is often volunteer, part-time, underpaid, or all three; their professionalism waxes and wanes; they are often one executive-director elopement away from insolvency – and however effective they may be, they are at least adorable.  Often they stumble into real estate development, and some of them become boutique affordable housing developers.

Distribution non-profits.  These entities give something away to deserving customers who seek it out.  Among other things, Planned Parenthood of Massachusetts offers free anonymous reproductive health telephone counseling.  The Pine Street Inn houses the chronically homeless.  Heifer International gives poor people cows.

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The real deal: CARE, Berlin, 1949

Donation-magnet non-profits.  Some non-profits are so well known that they are magnets for donations, especially when disaster strikes.  CARE began in 1945 as the Cooperative for American Remittances to Europe; the American Red Cross, Habitat for Humanity International, all have fantastic brands whose capitalized value runs into the billions, and who are the immediate recipients of millions and more of donations whenever a disaster strikes anywhere in the world.

h4h_la

A great brand

Patron’s-legacy non-profits.  Many are the patrons who established foundations; a previous century’s robber barons become the current century’s philanthropists: Ford, Rockefeller, MacArthur, Kellogg are giving way to Omidyar, Soros, and Gates.  These entities are in the business of giving out money to others who in turn will make impact with that money.

Political non-profits.  Quite a few think-tanks with a political bent have decided they are best served by donning the mantle of charity, the better to receive donations in addition to grant-for-task and other forms of direct consulting, among them Brookings, Cato, the Center for American Progress, and Heritage.

Ralph Alswang Photographer www.ralphphoto.com 202-487-5025

We’re altruistic opposed to those who oppose progress

Imperial non-profits. For some non-profits, real estate is core to their mission.  So churches own tax-exempt property (some of which they want to close, sell, or close and then sell), universities are always in acquisitive modes (often clashing or sparring with the cities in which they are located), and hospitals are cathedrals of medicine seeking always to grow larger and more technological.  These entities are conglomerates that own multi-billion-dollar asset portfolios, and are always looking to pick up new property adjacent to their main footprint, and to remove it from the tax rolls even if via a PILOT agreement.

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And all tax-exempt

Even this superficial and doubtless incomplete listing shows that non-profits come in many different shapes and sizes, and most importantly for our purposes, with many different approaches to the eternal question: how do we keep paying for the things we need to do?

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Can’t talk now, I’m off to save the world

[Continued tomorrow in Part 2.]