donate

ReThinking Not-for-Profit Donation Percentages

Humanitarian Comments (26)

Over the past decade, many donors have demanded more transparency from not-for-profit organizations as to how they use their resources. It’s becoming more commonplace for organizations to highlight or even market their percentage breakdowns of spend on donations received. Overall, I’m glad to see the shift towards more fiscal transparency.

But…

Yes, there’s a but…

I think this has also created unrealistic expectations, skewed perspectives, and a myriad of problems for organizations. Knee jerk reactions and platonic thinking (i.e., a belief that there is one ultimate way to think or do something) has led to many organizations dwindling in viability and some even closing its doors. Yes, it’s complicated and public perception is often king. It’s interesting to see how many organizations wear their percentages as a badge of honor… “We give 100% to…”, “We only use 15% for…”, etc.

Organizations like charity: water, who give a 100% of their public donations to their projects, have set the bar really high for others. The truth is that charity: water has worked incredibly hard to develop a separate donation stream to fund its staffing and operations. They’ve gone the extra mile to make sure they can keep all of their public donations focused on their initiatives.

Not every organization is or should be charity: water. In fact, I doubt that charity: water would ever say that they have “the” model for donations. In other words, percentage designations can and should vary by organization. Very few organizations will be able to pull off what charity: water has been able to do.

So, what percentage of donations should you use for an organizations initiatives versus operations?

Here are some initial thoughts and questions to consider as you determine this number:

  • Do you have a fiscal plan or a fiscal wish? As foundational as this may sound, every organization is a business. It needs an actual plan with real numbers. I meet far too many people who overlook fiscal planning and choose to be romanticized by the false nobility of “working with less”. It’s no wonder that many organizations today will not be around in 10 years. Most businesses would never survive on the percentage breakdowns of many organizations. Why should organizations think they are any different? I personally would rather give to an organization that has higher overhead if it means they will be around years from now to continue their impact.
  • Don’t play the comparison game and educate us. Each organization is different and comes with a set of unique needs to accomplish its mission. Take time to transparently educate your supporters about what it is you’re actually doing and what it’s going to take to fulfill your mission. Be upfront and help us donors understand how much you need and why. If it’s significant work, we’ll get on board. Don’t make up numbers that will prevent you from sustaining and scaling your efforts long term because you were fearful of being compared to other organizations. In many cases, it’s lack of good storytelling and clarity that kills support.
  • Take time to learn from others. Some organizations get stuck in their strategy because they choose to be inwardly focused. Take time to reach out to other organizations as well as your donor base (In my opinion, this is one of the greatest underutilized source of ideas for organizations.) to learn about best practices. It’s tragic how often organizations don’t turn to the rich source of wisdom they have right around them. The minute you start thinking that you’ve got it all figured out is the moment you start being irrelevant. Stay humble and keep learning.

Are you a leader of an organization or a donor to an organization? I’d love to hear your thoughts on this.

Pin It

» Humanitarian » ReThinking Not-for-Profit Donation Percentages
On May 31, 2012
By
, , , , ,

26 Responses to ReThinking Not-for-Profit Donation Percentages

  1. Andrew Means says:

    Alone, overhead is one of the worst ways to evaluate an organization. We don’t do this in any other part of our economic lives. I don’t consider the CEO’s salary when I buy a laptop or lunch. I consider the quality of the product and its expense. If I value the product more than it costs then I buy it.

    In the nonprofit sector there is a fundamental break between the consumers of the product (program recipients) and those that bear the cost (donors). Since there is this disparity donors want to at least make sure their money isn’t “wasted”. The easiest thing to look at is overhead expenses. But its possibly the worst thing to examine.

    Overhead ensures that the rest of the money is being spent efficiently.

    We need to move away from our fascination with overhead and start asking questions about impact. When we make a donation, the product we are buying is impact. It’s change somewhere. Yet many donors don’t think this way. It’s a shift that has to occur because it will prop up bad nonprofits and send good, impactful ones out of business.

    • Charles says:

      Well articulated Andrew…yes, totally agree…we need to start asking more questions about impact.

  2. Thoughtful. As someone who among other things runs a nonprofit and has worked with others, I am surprised how ready donors tend to be to go along with the gamesmanship that plays out in fundraising. Matching gifts, special funds, last-minute end-of -year appeals, and the %ge game, are all artifices of one kind or another, often of dubious honesty. Were I a major donor, I would want nonprofit execs to take a poly and be cross-examined as they inform me about their needs.

    This worries me less than perhaps it should since donors do indeed go along with it. But much of it amounts to a fictitious presentation of the truth, a kind of reality TV.

    Back to your point, Charles: integrity in spending and giving is better maintained by benchmarking and all-round transparency than the naive idea that I can give to a cause that has no overhead.

    • Charles says:

      Well said Nigel. Love the poly & cross-examination :)

      I’m hopeful that donors will see beyond percentages and invest in organizations that really do make impact.

  3. Rob Morris says:

    A much needed and thoughtful post Charles! Thank you. You are not alone in your thinking. Intelligent and well informed donors are increasingly questioning old models of evaluating charities. (based solely on percentages). Even charity watch dog groups like Charity Navigator have been expanding their thinking and evaluation criteria to include looking at transparency, accountability and impact.
    Would you rather give to an org that has 90% program and 10% admin/fundraising ratios but who have ineffective, substandard programs (because they HAVEN’T spent the money on hiring great people, putting great systems in place, etc.); or… give to an org that may have higher admin/fundraising costs, but have really effective programs and deep impact because they HAVE spent money on hiring great people…etc.?

    There is a great book by Dan Pallotta called, “Uncharitable: How Restraints on Nonprofits Undermine Their Potential” that addresses this shift. The comments about this book on Amazon are worth a read and informative in and of themselves:

    http://www.amazon.com/Uncharitable-Restraints-Nonprofits-Contemporary-Perspectives/dp/1584659556/ref=sr_1_1?s=books&ie=UTF8&qid=1338483911&sr=1-1

    Also check out these insightful posts regarding the same subject:

    http://goodintents.org/bad-donor-advice/overheads-at-fast-food-restaurants

    http://goodintents.org/choosing-a-charity/dont-choose-a-charity-based-on-administration-costs

    http://www.ssireview.org/blog/entry/kony_2012_and_our_capacity_to_evaluate_public_charities

    Thanks again Charles for your insight!

  4. Angelique Kepshire says:

    When solicited for donation, unless I know people involved, I’ve checked with Charity Navigator for their analysis understanding that they did not focus on impact until more recently. From their website…

    “Up until recently, our rating system was solely focused on a financial analysis of charity’s performance. However, we are now revamping the rating system methodology (the new system is called CN 3.0) from a one to a three dimensional rating system. We recently expanded our rating criteria from our traditional one dimension – financial health (CN 1.0), to a second dimension – accountability & transparency (CN 2.0). We are now testing a third dimension – results (CN 3.0). The results dimension will count for the largest portion of the total rating score once it goes live.”

    As a donor and someone who works for a non-profit, this seems hopeful for sustaining those orgs that will provide the most benefit in the long term. I’d be interested in learning how they will be analyzing results (CN 3.0).

  5. Becky Straw says:

    As someone who worked at c:w for three years – I think it was helpful in terms of our own marketing and creating buzz, but perhaps hurtful in terms of moving the nonprofit sector forward. The goal should be to educate donors about impact. I’d rather see donors ask great questions about wanting to give to “what’s most-effective” than get caught-up in giving because they think it’s great that their money won’t pay my salary.

    Favorite book: Uncharitable by Dan Palotta

    Thanks Charles!

    • Charles says:

      So good to hear from you Becky! Means a lot that you would chime in. Love the emphasis on educating donors about impact…good stuff.

  6. Peter Drury says:

    I care deeply about this topic, Charles, and I commend you for raising it.

    One required reading I assign in the graduate classes I teach in Nonprofit Management and Fundraising (U of Washington in Seattle) is this: The Nonprofit Starvation Cycle in the Stanford Social Innovation Review (2009): http://www.ssireview.org/articles/entry/the_nonprofit_starvation_cycle/

    In our organization ~ A Child’s Right ~ I am often overheard saying “overhead is like cholesterol: there is good overhead, and there is bad overhead ~ the key is knowing the difference.”

    What I mean to say is that much overhead is crucial: Exhibit A is the audit! That is overhead. Should we penalize an organization for having an audit, as if that is “wasteful”? Exhibit B is professional development! Should we penalized an organization for keeping its staff trained and updated in best practices? I think not. Exhibit C is office space, telephones, electricity, computers, websites… are these “overhead” expenses somehow at cross purposes with an effective organization?

    I am grateful you spoke up. I have strong feelings on this topic. And I do believe a day is coming soon when we’ll understand overhead differently than we used to. Dan Palotta is raising this question well, also.

    All the best, Charles… Thanks for your GREAT work and leadership.

    Peter

  7. James says:

    I hope the BBB reads this and adjusts their attitudes. Great thoughts! Comparing a charity the size of the one I work for and one like Red Cross is an apples and oranges situation. Mission, scope, capacity. So many variables.

  8. Karen Yates says:

    I perked up when I saw this post on Twitter, Charles. Having worked for several international non-profit organizations I absolutely agree the comparison game is unhealthy and dangerous.

    I have noticed a direct correlation between low overhead percentages and poor donor care. In the organizations that had reasonable overhead percentages, in my opinion they did a better job initiating the donor into a partnership (relationship) as a ministry participant. The ones with low overhead had many one time gifts from zealous and interested donors that did not stick around because they were not honored as they should have been (prompt and proper receipting, feeding the cow as much as milking, gracious and professional responses to questions/concerns, etc). All of that takes time and cannot be underestimated when it comes to the life of an organization.

    On the flip side I do believe that some donors might have lower expectations when they support an organization with low overhead. One organization I worked for was so frivilous most materials, website, videos, was mediocre. Part of the climate of that organization was their frugality and the donor loved them for it. Donors didn’t expect the Oscars. They were happy with Sundance.

    • Charles says:

      Thanks for your note Karen. I appreciate your insight into the possible correlation between overhead and donor care. Also, interesting note about donor expectations…think there’s some truth to that.

  9. Peter Drury says:

    Another key thought on this I’d like to share: Overhead exists within the context of an organization’s life cycle stage.

    For example, a brand new nonprofit (much less for profit business) in its earliest years must focus greatly (if not exclusively) in fundraising and management activities. In the first 3-5 years of an organization’s life, it is not at all uncommon for this to be the primary focus. Picture in particular an organization with facilities and capital needs (like a museum, a school, a nature preserve, a research center) and the point becomes clear. The work of raising money and establishing excellent management systems is (a) essential, and (b) will make future spending more effective. A dollar today will allow a dollar in the future much more greatly leveraged.

    The same can certainly be true for business: Ask Amazon.com why they weren’t profitable for their first seven years! Because they knew that if they invested wisely and built things for scale, they would make it up in the long run. They certainly had performance benchmarks all along ~ but overhead and profitability weren’t among them. Why not? Because they weren’t appropriate for the life cycle stage.

    There’s more on this… and I love all the great comments above… great convo!

  10. Kevin H says:

    As a finance professional for nonprofit I agree with your suggestions but I also know that our organization could grow activities 30% or more without increasing overhead. And the duplication of services by non profits also needs a thorough review,e.g. denominations are famous for planting competing churches in the same African village. What we need are leaders of nonprofits to honestly review their operations because there is a baseline of overhead that is needed to operate a nonprofit as our friends in the federal and state governments are guaranteeing guys like me (and themselves) employment. Organizations that are too small should be shut down and divert the funds to a similar organization with excess overhead capacity. Or concentrate in a few geographical areas or services to gain efficiencies. Hard decisions but best for the industry.

    • Charles says:

      Some interesting thoughts…I do see organizations collaborating more on services which definitely will cut overhead. Also, I’m hearing more about organizational mergers of late.

  11. Thanks for drawing attention to this important topic, Charles.

    It is attractive to be able to communicate to the large majority of your donor base that 100% of their donations go directly to programs, but when you do that you also have to ask a specific group of donors to designate 100% of their giving to overhead. It’s like saying to a certain group “You pay our overhead so we can tell the rest of our donors that 100% of their money goes to programs”.

    In that process there is a subtle communication to the large majority of an organization’s donor base that they shouldn’t value the administrative aspect of the work being done. And this could, unintentionally, undermine the important administrative work being done by that organization and other organizations. I have incredible respect for c:w and I’m amazed at how this model works for them, but their model seems to be one that is not sustainable for most nonprofits.

    I agree that way too much focus has been placed on which model a nonprofit follows and not enough on the impact that is being made through its work. It’s encouraging to read the comments from people and organizations I have great respect for and to see that a shift is happening with Charity Navigator and other groups.

    Thanks agin for the post, Charles, and for all the great resources everyone has shared. I want to take Peter’s class too! Any plans on writing a book, Peter?

    • Charles says:

      Thanks Bill for your note. I agree. charity: water has a unique model that they are able to sustain (with its own set of challenges). I’m grateful for them risking and choosing to create new ways of thinking. Other organizations will have to create a system that works for them. Contextual customization must take precedence over mimicking.

  12. Eric Stowe says:

    Great topic, and one we discuss quite a bit internally. I think of this from a slightly different angle.

    Most sectors (water, agriculture, housing, global public health, etc) are tired of years of continual failures or lack of scalability/replicability. This frustration has spawned tons of course corrections and, ultimately, deep innovation. The problem, though: innovation costs money. Most specifically, real innovation requires people who are stellar, rather than mediocre (mediocrity got many of those sectors in trouble to begin with). Now, those talented people need stability in employment and security in benefits; they require competitive salaries and an environment that promotes their professional development; they need an office that functions and systems that operate reliably.

    In my org’s case, I want to hire only people smarter than me for their respective positions. And if we are to truly scale up to provide long-term change and not flicker out like thousands of other NGOs, we need talent. We need innovation. We need creativity and we need an environment which nurtures all of those things collectively.

    Can you imagine Google or Pixar or Apple continually churning out any products worth a damn in an environment where their employees were barely paid, they had no benefits, their computers were a decade past outdated, their offices were closets, and everyone was tasked with juggling multiple and totally disparate jobs concurrently- all for the sake of saving money? Or worse, out of fear that their funders wouldn’t understand why those costs were necessary?

    I am not suggesting exorbitant salaries and lavish offices, and I certainly don’t believe raising funds for talent is easy. But I also don’t believe one has to live a life, and work in an office, of destitute poverty simply to work at an NGO that serves people in those same conditions. The normal Charity Navigator mentality would assume we should and would dissuade donors from supporting us if we didn’t.

    Crazy.

    E

    • Charles says:

      Really well articulated Eric. Innovation does require strategic investment. I’m a firm believer that finding good talent is a great way to invest in an endeavor. You do get back what you pay for (in most cases).

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

« »