This morning I glanced at an article that started with this quote:
"Dan Pallotta created two huge charity initiatives - AIDS Rides bicycle journeys and Breast Cancer 3-Day events. These initiatives raised $108 million for HIV/AIDS and $194 million for breast cancer. Both had their best years in 2002 … and then Pallotta’s nonprofit went out of business.
In the final session of TED2013, Pallotta shares why that happened: Major sponsors pulled out following a slew of bad press over the idea that his organization was investing 40% of their gross into recruitment and customer service."
There's a tension today for nonprofits. We're told to "act like a business," but on the other hand, we're told to keep our overhead to a minimum, and as many dollars as possible in programs. In fact, there are websites set up where donors can go, just to see what percentage of an organization's dollars are in administrative overhead. Measuring programming dollars to administrative dollars is one way to help donors know their dollars are productive, and also serves as one demonstration that funds are not being misused. And yet, using this ratio as the barometer of good management can be short-sighted, and can prevent an organization from reaching its full potential.
In an economic environment where nonprofits are called upon to step up to the plate as governments reduce services, at the same time donor and funding dollars are shrinking, it absolutely behooves an organization to think more like a business. I find myself advising organizations to look at their special skill sets through new eyes. Ask "how can you 'sell' something you are good at to create new revenue streams?" For example, if you're a drug rehab organization, why not offer classes to social workers, psychologists, school counselors, police and others in working with addicts? This is a skill you have, and you can purvey it into a revenue stream that can be spent any way the organization needs to spend it.
That example is fairly straightforward and doesn't require much money. Just a few extra hours of staff time to do the training, and whatever it costs to advertise your training events. But other ideas may require an upfront investment of capital. Take, for example, a botanical garden I consulted for. They raise, sell and even patent plants that thrive in their local geographical area. Their plant sales have been so popular that the organization has to purchase plants from other sources to satisfy the demand. Plants they grow themselves cost pennies. Plants they purchase for resale cost dollars. If this organization could increase the size of their propagation beds, they could change the cost:revenue picture for their plant sales by quite a bit. But doing so would require a large infusion of upfront cash in building and planting materials, and human time. The organization felt it could go to a major donor and ask for a one-time investment that, leveraged into this project, would create an on-going source of revenue. But it would also shift their administrative to program dollars ratio for "the worse" for a year or two.
If nonprofits are to succeed like a business, where there is a solid, mission-driven reason to do so, they need to be given the latitude to spend money on research, on pilot programs, on hiring good people, on investment in ideas with a down-the-road payoff. All items that cost more in overhead than conventional wisdom allows. This tension between acting like a business and presenting the conventional low overhead image is something that the nonprofit "industry" needs to spend more time talking about, and educating board members, funders and donors.