Robbins on Pallotta on The Overhead Myth

Dan Pallotta, Dreams, Overhead and Accounting

By Dani Robbins
Re-published with permission from nonprofit evolution blog

Have you seen Dan Pallotta’s TED Talk entitled “The Way We Think About Charity is Dead Wrong?” It challenges us to question the way the public thinks about nonprofits and also the way we think of ourselves.

He says the right question is to ask “about a nonprofit’s dreams.”  The wrong question is to ask about a charity’s overhead.  Overhead is not the enemy.

Overhead including part of the CEO’s salary, the fundraising & support staff, the facility, utilities and the equipment in the administrative offices supports the provision of programming.

Organizations that have minimal overhead also have minimal capacity. Overhead is a part of growth, and challenging a non-profit’s ability to increase overhead comprises their ability to grow program services.

I’d also add that non-profits, like the rest of the world, get what they pay for.

While many nonprofit leaders are exceptional at getting goods and services pro-bono (read: free), it is hard to find excellent leaders to work for free. Some have the financial luxury to be able to do that – and that is wonderful – but most of us don’t.  As such, I love Pallotta’s point about our society not wanting to pay a lot of money for people who are helping other people, but having no problem at all with people making a lot of money not helping people.

The other part of the overhead issue is this:  It’s sometimes an accounting choice. 

I used to have a Board member who said “There’s cash and there’s accounting.” 

If you have a non-profit who books their CEO’s salary across the programs (based on a time study that reflects how much time they actually dedicate to programming) it will look like appreciably less overhead than the one who doesn’t. Even though the first CEO probably makes more than the second.

If you ask the question about overhead and don’t ask any follow up questions, you won’t get the right information.  And any question that doesn’t get you the information you seek isn’t the right question.

Pallotta’s illustration of someone who really cares about hunger yet chooses against becoming a non-profit leader and ‘takes a huge salary working for a for-profit company and then gives $100,000 to a hunger charity, becomes a celebrated philanthropist and Board member of that charity supervising the person who became the CEO, while still making multiples of that CEO’s salary’ is brilliant!

He goes on to challenge us to “ask about the scale of their dreams; how they measure their progress toward those dreams and the resources they need to make those dreams come true.” Also brilliant!

I once heard someone say that to raise a million dollars you need to have million dollar dreams. The guardian angels who will fund your agency in full, no questions asked, are far and few between. As such, some questions for your consideration:

• Do you have million dollar dreams?
• Does your non-profit have a generous, or even reasonable, compensation package for the staff?
• Can you communicate your organization’s impact?
• Do you challenge the status quo?

For Board members and community leaders: Are your expectations for non-profit staff different than your expectations for your own staff?

Culture change is hard and so is changing the world.  Let’s start asking the right questions, getting the right answers and allowing our non-profits to dream.  Let’s fund the dreams that improve our communities!

As always, I welcome your experience and insight.

Ending the “overhead myth” is everywhere

For the last few years, I’ve come across snippets and whispers from non-profit thought-leaders about how we need to help donors change their views about evaluating a non-profit organization based on how little it spends on administrative and fundraising costs. It was mentioned in polite conversations. A few bloggers were chattering about. I even saw it on a website owned by a charity watchdog group.

Then a few years ago, Dan Pallotta published a book titled “Uncharitable,” and this discussion emerged from the shadows of the non-profit sector. For the last few years, everyone I know has been engaged in this discussion or pieces of it such as:

• Executive compensation
• Marketing & advertising
• Risk aversion
• Return on investment for donors
• Spending on today versus tomorrow

The overhead myth has been building momentum for a few years now. I even jumped on this bandwagon a year ago with the following series of blog posts:

• DonorDreams blog: “Does your non-profit make a difference? Americans don’t think so!“
• DonorDreams blog: “Why is the non-profit sector hamstrung?“
• DonorDreams blog: “Stop thinking. Stop planning. Start doing!“

AND THEN IT WENT VIRAL . . .

A few weeks ago I received an email from a dear friend of mine with a link to “Letter to the Donors of America” from the BBB Wise Giving Alliance, Guidestar and Charity Navigator. The letter was simple and straightforward. It asked donors to please stop looking at overhead when making charitable contributions. It was a case for support document. Pure and simple!

After this first email from a friend, I received another and then another. I started to see bloggers tackle the subject, and then non-profit agencies started talking about it on their websites. Before long, it was all over social media and everyone in my circles was talking about “the overhead myth“.

For the record, I’ve always thought that the idea of using overhead to evaluate a non-profit organization’s worthiness was silly for two reasons:

1. Through the magic of accounting, every smart executive director keeps at least one eye on what donors consider the “percentage of overhead” and tweaks their allocation formulas to keep that percentage where it needs to be. So, this number really means nothing. It never has and never will.
2. When I am purchasing goods and services, I never hold for-profit companies to this standard. When I hired a marketing firm to help me during the start-up phase for The Healthy Non-Profit LLC, I didn’t look at how much money they spent on administration, executive compensation or their advertising budget. Heck no! I looked at the quality of their work. As a donor, I like to invest in organizations whose programs are having impact regardless of how much they pay their executive director.

I’ve been asked by some readers of this blog to write something about the “overhead myth“. As flattering and tempting it is to weigh-in on a compelling subject like this, I’m going to use some self-restraint and decline. (Surprising? I know!)

Why?

Have you see how much has already been written out there? OMG!!! Everyone with a blog, website, Facebook page, and Twitter account has jumped on this bandwagon.

I’m will use the remainder of my space to post links to those other blogs, websites, etc. If you are very interested in this topic, please click your heart away.

• The Overhead Myth website: “It is Time to Move Beyond Overhead“
• Bloomerang: “The Most Important Statement in the Nonprofit World in the Last Decade“
• Nonprofit Association of the Midlands: “Help End the Overhead Myth“
• The Rebecca Gordon Group: “Tackling the Overhead Myth — An Upcoming Blog Series“
• Philantech: “Financial Ratios for Nonprofits — The Overhead Myth“
• Huffington Post: “How a TED Talk Destroyed the Charity Overhead Myth“
• Nonprofit Quarterly: “The Overhead Myth“
• Sasha Dichter’s blog: “The Overhead Myth“
• Sidekick Solutions: “Value Can Unlock the Nonprofit Overhead Myth“
• Childfund International: “End the Overhead Myth”
• Jazi: “End the Overhead Myth“
• And this list is just the tip of the iceberg. If this doesn’t quench your thirst, then go to Google and click-click-click.

Your thoughts?

Let’s start a discussion using the comment box attached to this DonorDreams blog post.

I personally don’t think anything is going to change as a result of this “overhead myth” campaign push.

I think donors are set in their ways. I believe Dan Pallotta was right about the Puritan influence on our culture. I don’t think “culture” and “values” and “habits” are easy to change. AND I think talk is cheap.

In the comment box below, please tell me why you think I am right or why I am wrong.

Here’s to your health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC
www.thehealthynonprofit.com
erik@thehealthynonprofit.com
http://twitter.com/#!/eanderson847
http://www.facebook.com/eanderson847
http://www.linkedin.com/in/erikanderson847

How much money should your non-profit have in reserve?

Identifying blog topics can be hard. Sometimes you find a comfort zone and ideas flow freely. Other times, it is next to impossible and the writers block is crippling. So, I love it when readers sometimes email me on the side and suggest topics.

Yesterday, a reader did exactly that when she emailed me with the following request:

“Do you take requests?  If so,  I would love to hear your take on social service agencies that have more than 6 months of money on hand and the impact of that on fundraising.”

When I first read that email, I planned on squirreling the topic away for one of those days when topic ideas are difficult to come by. However, there was something about this topic that possessed me. I opened up a few Google searches, read a few white papers and blog posts, and found myself whipping out this post.

First, let me start with a very direct response to the question posed by the reader.

I have worked with a disproportionately large number of small non-profit organizations. Organizational capacity for these agencies is always an issue and the amount of cash on hand is typically very small. So, I’ve always advocated to CEOs and their boards that they put plans in place to build operating reserves equal to three to six months.

Only one client to my recollection every worked with more than a six month operating reserve, and I don’t think it impacted their fundraising efforts. If I were to speculate as to why that was, I think the explanation is simple . . . that agency did an excellent job with donor communications and made their case as to why operating reserves of that size were important.

Setting this one example aside, I do generally believe that building large operating reserves larger than 6 months or one year causes problems with donors. I say this because of everything Dan Pallotta writes in his book Uncharitable and how donors hold the non-profit sector to a different standard than the for-profit sector.

In his book, Pallotta talks eloquently about how for-profit corporations are rewarded by investors for generating profits, banking cash and growing organizational capacity. He contrasts this point with how donors punish non-profit organizations for doing the same thing.

For actual examples and a better explanation, I encourage you to read his book. I promise that it will be an eye opening experience. Additionally, you’ll likely walk away from the exercise and find yourself muttering the words: “Damn Puritans!”

In my clicking around and Googling, I found a number of interesting facts including:

• Charity Navigator reserves its top ratings for organizations with 12 or more months of working capital.
• The Nonprofit Finance Fund reported in its 2012 State of the Sector Survey that only one-fifth of survey respondents said they felt their donors were comfortable talking about operating reserves.
• In 2011, more than three-quarters of non-profit organizations had less than 4 months of expenses in operating reserves (60% reported less than 4 months and 28% reported one month or less).

I strongly urge you to click-through and read more startling statistics on this and similar subjects at:

• Executive Service Corp, “How Much in Reserve Funds Should Your Nonprofit Have?“
• Nonprofit Finance Fund, “2012 State of the Sector Survey“
• Nell Edgington’s Social Velocity blog, “A Financial Taboo Nonprofits Must Get Over“

I want to thank the reader who suggested this blog topic because they have caused me to change my thinking on this topic. From now on, when agencies ask my advice on what they should strive towards with regards to building an operating reserve, I plan on telling them . . .

12 months or more! ! ! !

With this Big Harry Audacious Goal (BHAG), the next words out of my mouth will be . . .

“Create a strong case for support or prepare to incur the wrath of donors.”

For those of you who don’t think this is possible, please take a moment to think about why that much cash on hand is important to your organization.

• Many agencies are using their operating reserves as cash flow cushions as they wait for their accounts receivable from government grants. (Believe it or not some states are six to 12 months late in paying their bills.)
• It is a sign of financial health to have operating reserves of this size.
• One of the lessons learned from the recent economic recession is that larger rainy day funds are a necessity and not a luxury.
• Stuff breaks and your organization needs to be in a position to fix the roof or replace a HVAC unit without running off to donors with an urgent case for support that sounds like a crisis or fire drill.

My advice to anyone who cares to hear it is:

1. Set a goal to increase your operating reserves to 12+ months
2. Work with the Finance Committee to develop a plan to achieve this goal (Yes, it will likely be a plan that spans many years). Perhaps, include in your plans to use a portion of your operating reserves to invest in organizational capacity building once certain targets are achieved.
3. Work with the Resource Development Committee to write a case for support that supports these actions.
4. Don’t hide from donors. Get out there and start talking to them. Weave the talking points from this new case for support focused on increasing reserve levels into your stewardship efforts. Donor engagement and education is the key to success.

So, I’m curious how many of you think I’m crazy? How big are your reserves? How big would you like them? What do your donors say about your reserves? Please use the comment box below to weigh-in on this discussion.

Here’s to your health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC
www.thehealthynonprofit.com 
erik@thehealthynonprofit.com
http://twitter.com/#!/eanderson847
http://www.facebook.com/eanderson847
http://www.linkedin.com/in/erikanderson847

Stop thinking. Stop planning. Start doing!

Tuesday’s post “Does your non-profit organization make a difference? Americans don’t think so!” introduced one of the main points in Dan Pallotta’s book Uncharitable, which is that non-profit organizations are under-resourced thus have a difficult time driving results and change. Pallotta argues that the reasons for too few resources are cultural, attitudinal and legal. Yesterday’s post explored what this author believes is at the heart of the non-profit sector’s dilemma. Today, we’re talking about what to do about all of this.

I must admit that Uncharitable was a page turner for me. The more I read, the more I found myself thinking: ” Hmmm . . . I wonder how he suggests we overcome that challenge.” So, words cannot express my disappointment when I got to the chapter where solutions seemingly would be forthcoming and read the following:

“Some readers might expect that in this final chapter I would suggest some dramatic statutory re-engineering — the end of the entire not-for-profit tax-exempt classification or something on that scale. But that is to put the cart before the horse. Even sweeping and fundamental statutory revisions are of secondary importance to changing the way we think about charity.”

After putting the book down and drowning my disappointment in another cup of coffee, I decided to embrace this anticlimactic end to Pallotta’s book. In the final analysis, he is right. Of all the obstacles in the non-profit sector’s way of embracing capitalism and a free-market approach to charity, almost all of them are attitudinal and behavioral barriers and very few of them are structural (e.g. laws and regulations).

At the beginning of every chapter, Pallotta starts it with an inspirational quotation designed to summarize the content of that chapter as well as inspire thought on the part of the reader. One of the quotations was from John Kenneth Galbraith:

“All successful revolutions are the kicking in of a rotten door.”

From this thought, I take my inspiration for today’s blog post. Since most of this rotten door can be kicked in by changing our beliefs and actions, I thought I would share a few of my thoughts on what typical non-profit organizations can start doing to revolutionize the non-profit sector and embrace capitalism and free market solutions to solve our resource challenges.

Engage donors in this discussion

Penelope Burk tells us to become more donor-centered in our approach to fundraising. Her point of view is centered around the donor, and I think it provides the starting point for this revolution.

There is nothing stopping you from forming an Oprah-inspired book club with your most influential donors. Buy a copy of Dan Pallotta’s book Uncharitable for each of them. Meet with them after reading each chapter. Facilitate a conversation about what it means and what they think your agency should do about it and what it means for their personal approach to charitable giving.

Budget for a profit

There is no law that says your non-profit organization can’t make more money than it spends each year. Stop building budgets that don’t include profit. My suggestion is that you set aside 10 percent of your annual revenue every year for the rest of your agency’s life.

What should this money be used for? Well, that is a discussion for your board of directors to have. So, facilitate it! Some possible ideas include: building a rainy day fund (because you know that storm clouds are always on the horizon), saving for future project, or investing in capacity building and organizational development projects. The sky is limit, and board members need to engage in this conversation to make it realistic and plausible.

Use the power of the markets

In addition to building a rainy day fund with your excess profits, every non-profit agency should have an endowment strategy. Investing money with the intent of creating another revenue stream stemming from investment income has been a non-profit best practice for a very long time. Use capitalism and the capital markets to generate money for your mission.

You don’t need millions of dollars to start an endowment. You can start small and make it a policy or practice to reinvest your earned income back into the endowment.

Yes, of course . . . create a stand along investment committee and set-up policies to guide your agency. This can all start happening tomorrow if you just put your mind to doing it. No one is stopping you.

Follow in Pallotta’s footsteps

Dan Pallotta founded Pallotta TeamWorks. His for-profit company created, planned and implemented the world-famous AIDS Rides and Breast Cancer 3-Day events. His company netted hundreds of millions of dollars for the expressed purpose of funding non-profit organizations.

Form a strategic alliance with other non-profits in your community and look at starting a for-profit company with the intent of running a few high-profile special events. This for-profit event planning and management company would not be constrained by rules and laws that strangle your current efforts.

If you are thinking that Pallotta TeamWorks ended up failing and this is a crazy idea, I encourage you to think again. Sure, Pallotta’s company failed, but it left behind an impressive blueprint. I am suggesting that you are smart enough to engage other non-profit professionals and volunteers in your community to review this case study and use those things that work as well as fix those things that didn’t work.

In the back of the book, there is an entire chapter titled “Case Study — Pallotta TeamWorks“. Is there any harm in pulling a group together, reading the case study and talking through questions associated with ‘What if”?

Pallotta has, of course, started up a new for-profit company focused around the points he makes in his book. Click here to learn more about the company he calls “Change Course”.

Many more ideas and your thoughts

Since most of Pallotta’s proposed revolution is rooted in attitudinal and behavioral change, the sky is the limit. He suggests that you start compensating your employees better and attracting more qualified applicants. He suggests investing in advertising. He proposes removing charity watchdog group logos from your letterhead and website.

Like Saturday Night Live’s character Stuart Smalley used to say: “I’m Good Enough, I’m Smart Enough, and Doggone It, People Like Me!” You and your volunteers and your fellow non-profit professionals and their volunteers are smart enough to come up with many more ideas on how the non-profit sector and your agencies can utilize the power of capitalism to monetize your mission.

So, stop thinking about it and start taking some baby steps towards doing it!

Please scroll down and share one idea or thought that you’ve had while reading the last few days worth of blog posts. Let’s engage in doing some brainstorming and start a revolution.

Here’s to your health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC
www.thehealthynonprofit.com
erik@thehealthynonprofit.com
http://twitter.com/#!/eanderson847
http://www.facebook.com/eanderson847
http://www.linkedin.com/in/erikanderson847

Why is the non-profit sector hamstrung?

Yesterday’s post “Does your non-proft organization make a difference? Americans don’t think so!” introduced one of the main points in Dan Pallotta’s book Uncharitable, which is that non-profit organizations are under-resourced thus have a difficult time driving results and change. Pallotta argues that the reasons for too few resources are cultural, attitudinal and legal. Today, I’ll share with you what this author believes is at the heart of the non-profit sector’s dilemma.

Executive Compensation

If you are a capitalist, then you understand that people are motivated by their self-interests (unless they are Mother Theresa). Money considerations are at the heart of many of these decisions, which hamstrings the non-profit sector because it operates on a completely different wage standard.

For-profit corporations are allowed to pay handsome sums of money for performance, but non-profit employees are expected to work for sacrificial wages. When a non-profit organization is seen by its donors and supporters as paying its executive director too much money, there is almost always a backlash because of this cultural belief that people should not benefit from their “good works”.

This is, of course, hypocrisy and Pallotta does a nice job of calling it out by pointing at the Campbell Soup Company. This food company profits from the sale of its product to soup kitchens and homeless shelters, but those same non-profit organizations cannot pay a competitive wage to its employes. Yes, hypocrisy!

The end result is simple, the for-profit sector cleans the non-profit sector’s clock when it comes to attracting the best and brightest talent and labor. These people go on to amazing jobs in banking, investments, sales, and business. They don’t put their talents to work trying to solve homelessness, cancer or the academic achievement gap.

Marketing & Advertising

For-profit companies invest heavily in advertising. Why? Because it works! It creates demand for products where there was once no demand. In fact, most for-profit corporations will continue to buy advertising until the incremental benefit is zero.

Non-profit organizations rarely buy advertising to build their brand and create demand for donors to invest in their case for support. Typically, when you see non-profit advertising, it is a public service announcement which means it was donated by the cable company or newspaper. It also usually means that you’re up way too late at night because many of those freebie ads are buried during times of low viewership.

Yes, there are exceptions to this rule. I assume that organizations like St. Jude Children’s Research Hospital and the American Society for the Prevention of Cruelty to Animals (ASPCA) pay for some of their amazing advertising. However, most organizations don’t and won’t because donors see it as a waste of their dollars. They generally won’t support it because they want to see their contributions go directly into mission-related activities rather than capital acquisition.

Severe risk aversion

For-profit companies can and do take risks. Sometimes, they take amazingly crazy risks and come close to taking down the entire global economy. Non-profits on the other hand rarely, if ever, take risks.

Economists tell us that “risk” is a necessary ingredient to generating profits and capital, which means it will always be difficult for non-profits to generate the necessary money to fund their mission.

For example, many non-profit organizations would shy away from starting a new special event fundraiser if they were told that the ROI in the first few years will be under 50 percent. Many for-profit corporations would jump at such an opportunity, but charity watchdog groups and donors frown upon this practice and call it wasteful.

Now versus later

Non-profit organizations spend much of their money in the same year they receive it. It is very much a “hand-to-mouth” approach. Why? Donors don’t want to see their contribution squirreled away for a rainy day or used to leverage future capital. Donors want to see their donations put to immediate use by feeding someone who is hungry now or helping a child with their homework today.

Sure, there are agencies who build endowments and have healthy reserve funds, but this is the exception and not the rule.

Return on investment

When you give your money to the bank or buy stock from a company, you expect a monetary return in the form of interest or hopefully a capital gain. However, no such return exists when you give money to a non-profit organization. In addition to laws forbidding key stakeholders from profiting, the idea of making money on a charity is frowned upon by out society.

For-profit companies have the stock market where they can access capital. Non-profits have no such mechanism.

According to Dan Pallotta, these cultural and structural obstacles are what plague the non-profit sector and contribute to its ineffectiveness. I was only able to scratch the surface of his arguments in this limited space, which is why I encourage you to buy his book. While I don’t necessarily agree with all of Dan’s arguments, I do appreciate that he challenges my belief system and causes me to think a little deeper on these issues.

Tomorrow, I will review a few of the ideas that Dan puts out there as solutions.

So, what do you think about the foundational arguments that I outlined today from Dan’s book? Agree? Disagree? Are you angered? Whatever you are thinking or feeling, please scroll down and share with the rest of us by using the comment box below.

Here’s to you health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC
www.thehealthynonprofit.com
erik@thehealthynonprofit.com
http://twitter.com/#!/eanderson847
http://www.facebook.com/eanderson847
http://www.linkedin.com/in/erikanderson847

Does your non-proft organization make a difference? Americans don’t think so!

While driving around doing some errands yesterday, I was listening to sports talk radio WSCR 670 AM in Chicago. One of the radio hosts was talking about how teachers make a difference in people’s lives. He knew this to be true because his mother is a teacher and every year countless high school and college kids return home, visit their favorite teachers, and tell them so.

The radio host went on to share that he used to have doubts about the impact his work has other people’s lives; however, his opinion recently changed after one of the station’s listeners emailed him. The listener was diagnosed with cancer and needed to complete a rigorous chemotherapy regiment to find his way back to health. While that treatment path is a tough road to hoe, the listener scheduled his treatments during the this radio host’s show and credits him with getting him though some very tough times.

It dawned on me that many of us strive to make a difference in someone’s life or the world around us. In fact, I think it is at the core of the human condition and the non-profit sector, which got me thinking . . .

Does your non-profit organization make a difference?

I am currently reading Dan Pallotta’s book — “Uncharitable” — and it has been challenging my non-profit belief systems. In a nutshell, he argues that the non-profit sector is extremely under-resourced and constrained by laws and cultural beliefs that don’t apply to for-profit corporations. As a result, non-profits are seen as ineffective and are in many instances actually ineffective.

Does that sound overly harsh and upsetting? In the opening pages of his book, he eggs his critics on and encourages all of us to take a look around the non-profit sector and our community and ask questions such as:

• Why do things seem to stay pretty much the same?
• Why have our cancer charities not found a cure for cancer?
• Why have our homeless shelters not solved the problem of homelessness?
• Why do children still go hunger on the streets of America?

While Pallotta ends up blaming the system (not the people in the system) and points to the lack of resources, apparently many Americans aren’t as charitable and Pallotta points that out by sharing the following information from various opinion surveys:

“A study released in 2008 by Ellison Research showed that ‘most Americans believe non-profit organizations and charities are not financially efficient enough in their work.’ A 2004 Brookings Institution study found that ‘nearly one out of three respondents expressed little or no confidence in charitable groups, and only 11% said they believe that charities do a very good job of spending their money wisely.’ Seventy percent of people surveyed in a 2008 NYU study said that charities ‘waste a great deal’ or a ‘fair amount’ of money.”

As the radio show host said yesterday, all of us wake up every morning and strive to make a difference or at least make our lives matter. Pallotta posed some tough questions, but they aren’t out-of-bounds. The surveys cited by Pallotta paint a stark picture of what many Americans think of the non-profit sector, which includes your non-profit agency. In this context, it should come as no surprise that the average annual donor turnover rate in America hovers around 50%.

So, how do you know that you and your organization is making a difference? How are you sharing that with your donors and your community? Are you seeing any difference in your donor loyalty rates? Please use the comment section to tell us what you’re measuring to prove everyone wrong. Or are you having a hard time getting out of bed in the morning because you aren’t finding that sense of satisfaction and fulfullment from your non-profit job?

Over the next few days, I will share a few more observations from Dan Pallotta’s book “Uncharitable;” however, I encourage everyone to buy a copy of the book. It will make you mad, but I think it is healthy to have your beliefs challenged every now and again.

Here’s to your health!

Erik Anderson
Founder & President, The Healthy Non-Profit LLC
www.thehealthynonprofit.com
erik@thehealthynonprofit.com
http://twitter.com/#!/eanderson847
http://www.facebook.com/eanderson847
http://www.linkedin.com/in/erikanderson847