The Flip Side of Funding

What are we doing? Organizations are funded based on how great their development department tells donors their nonprofit is. It’s as if Amazon makes money because a group of donors believed they should, so gave them their revenue for the year. No, Amazon makes money because customers value their service and want to purchase the products they offer. We should expect the same thing of our nonprofits: deliver a product or service that people want to buy, using surveys as a proxy for payment.

That’s the accountability problem in the nonprofit world: currently, customer experience doesn’t factor into the funding process. Successful nonprofits raise money because a skilled grant writer, coupled with elaborate metrics (meals served, children tutored) and a few tear-jerking client stories convinced someone that the organization was worthy. (How can any of us resist those starry-eyed children?)

Let’s change that. If a nonprofit served 1000 at-risk teens, survey those teens to discover whether their experience was worth the money. If funding is tied to customer satisfaction, the nonprofit can be free to focus on making customers happy, instead of diverting precious resources to satisfy donor criteria. Forget about those overhead numbers, and focus on whether the money is changing people’s lives. So, let’s ask them!

I’m not suggesting that no customers are happy – in fact, many are, or nonprofits couldn’t support program fees (as an industry, roughly 50% of operating expenses). What I am suggesting is that from a macro perspective, very little of the $688 billion we give to nonprofits is spend on exactly what is needed or wanted. This doesn’t serve the people in need, donors, or even nonprofits themselves. As a former nonprofit director, it would have been much easier to receive funding based on what our customers thought, than how compelling we made our program descriptions and how rosy we made our “outcome” numbers and overhead percentages. (Trust me, everyone does this. I’ve worked at enough nonprofits large and small to know what needs to be done to get the money).

And, as an individual donor, wouldn’t it be great to see reports on the program’s effectiveness—in the eyes of their participants? Say, 70% thought the program made a difference, versus a nonprofit where only 30% thought it helped. Then it becomes an easy decision to give because you know that the program really works.

The Pesky Overhead Question

I've been asked that question a lot, too. Actually, not so much as a question but as a statement, "Oh, I only give to nonprofits that have less than x% overhead. I mean, really, the money should be going to the people being served, right?"

Well, sort of. Here's the catch... everyone (and I mean EVERYONE) fudges those numbers. Here's how.

Take nonprofit X, which has several programs. Those programs serve people, or save things, so all of their expenses are considered "direct" and are not considered overhead. However, those expenses do include staff and paper and office space, etc., because you have to have staff and paper and an office to run the program. It's not like people who work for homeless shelters are handing out money to the people they serve. No, they are providing a service TO those individuals.

So you see the problem... where do you draw the line? Only at the direct line staff? How about the manager that oversees the line staff, but is needed to provide the relationships to other nonprofits, set the strategic direction and raise money? What about the paper... if we purchase it in bulk at the main office, can we distribute and expense it at the program level and not have it count towards overhead? ABSOLUTELY!

That's what happens. To the extent possible, costs are allocated down to the program level where they don't "count" in official overhead reporting, even if that includes multiple layers of management, parceled office space, etc. (My program had to pay for my own cubicle at a nonprofit, which, of course, was considered a program expense when reported because I, as a Program Director, was sitting there).

This is where I step in and say "Forget about the overhead!" That's actually what you are paying for... your donations are going to support an organization that does great things. But to do those great things, it needs resources spent on unsexy things like staff and office space. When deciding on where to donate, instead of jumping straight for that overhead percent, I find it more helpful to look for things like their mission... does it resonate? What success stories do they publish about how their programs affect lives? Do you have friends or relatives that are affiliated with the organization? Where have I been helped in my life, and does the organization help others in a similar situation?

When you find the answers to these questions, you will have found a great place to give - something that has meaning, and resonates with your experience and values. And in doing so, you'll know that you're helping to make the world a better place... by paying for the staff (and paper!) that serves the people, animals and places you'd like to help.

What kind of donor am I?

Something to consider when giving to a nonprofit: what is most critical? Over the course of my years in nonprofit management, many people have asked what charities I support. That’s not really the point – the goal is to find a nonprofit that YOU can get excited about.

So, imagine this:

You are standing by a river, when you start to notice a bunch of kids drifting down the river... they just keep coming! What do you do?

A) Throw lifelines out to them, hop in a boat and try to get them onto shore.

B) Jump in and teach them how to swim.

C) Run upstream to find where they are coming from.

Three different, valid options. Where you gravitate says a lot about where you should give. If A, you probably want to support organizations whose mission is to “rescue”, ie, help people in immediate need or distress. These would be shelters, soup kitchens, animal rescue groups, or disaster relief organizations. If B, you like to see people become self-sufficient. You might want to consider job training programs, transitional housing, or life-skills nonprofits. And if C, you are into correcting the source of the problem—educational charities, medical research centers, or advocacy groups that try to affect policy changes.

We need all three strategies, so there are no right answers. It’s just a matter of where your passion lies, and what you think is most critical and effective.