After reading our last blog post about how challenging it is for nonprofit organizations to invest in growth, a friend sent me this article from the Wall Street Journal. In it, the author argues that we need to encourage nonprofits to function more like companies or they will continue to lead a hand to mouth existence, much like many of the people they are serving.
Dan Pallotta, the author, has written extensively on this topic. Some consider his perspective a great way to maximize the impact of mission-driven organizations, while others consider his thinking heresy because it flies in the face of conventional wisdom about nonprofit management. There are several underlying principles that Pallotta uses to make the case in his recent book, Uncharitable, but they all lead to this conclusion: we are focusing on the wrong metrics when we measure the effectiveness of nonprofits, and the result is that we’re holding many of them back.
As discussed in our recent post titled Overhead: The Third Rail, many donors and funders rely on the relationship of operating expenses to overall budget as a way to gauge an organization’s efficiency. Organizations that exceed 10% are considered “top heavy” and may be passed over. Companies manage this same ratio to measure expenses and get through tough economic and competitive environments, but they also realize that growing their business requires investing in infrastructure. As the environment improves, they adjust. Their success in the marketplace depends on it. But for nonprofits, we hold fast to this standard of efficiency. The result is that attracting talent by offering competitive wages, encouraging growth by investing in infrastructure and creating awareness by marketing are all discouraged.
With these assumptions and beliefs in place, we’re in great position to keep nonprofits struggling for success. To be clear, we’d never advocate that organizations over-spend without a plan that includes an adequate return on their investments. There’s got to be a return on any investment or it’s not worth doing. Only by breaking down some of these long-held beliefs and constraints will we enable the sector to maximize their impact.
The way to change these assumptions, just like the corporate world does, is to create logical, compelling plans – making the case for why hiring a proven executive will bring the necessary skills to your organization; why investing in a more robust donor management system will enable you to manage relationships with donors more effectively; why it may be prudent to fund a marketing program that will broaden the audience and build the donor pool for your organization. A clear, thorough, thoughtful plan is important, and (here’s the key!) the plan must be widely supported and communicated.
Armed with the reasons why you are taking a risk, it’s easier for everyone to get behind the plan. If the plan is successful, everyone celebrates, and your organization’s tolerance for taking measured risks increases. Plans that don’t meet the objectives may still receive broad support if you keep everyone informed along the way. The alternative to expanding our thinking on taking a different approach to nonprofit management is status quo. The majority of organizations will continue to struggle. Is that OK? It’s certainly a mindset we have accepted over time. It’s time to try something new.
Do you know any NGOs that have charted a more risky path and won or lost?