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)
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.
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)
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?
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?
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.
Launched full-tilt, headed home: van Persie’s amazing goal
Floating over the keeper’s head
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.)
Avoid this …
… 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.
We promise we’ll think of good uses for it
[Continued tomorrow in Part 3.]