Supporting Innovation Not Stagnation

June 13, 2012

Several years ago, a toxic trend began to take hold where giving to nonprofits was concerned. Unfortunately that trend continues today. What this means, especially in the era of the Great Recession, is that excellent organizations that are making a real difference in lives and communities are stymied. And honestly, no corporate executive would tell you it is an appropriate way to run a business. What is it?

Project Only funding.

Perhaps it took root as more donors began to give but didn’t understand what it takes to run an effective nonprofit. Or maybe it was in response to some bad or incompetent apples running nonprofits. I’m not sure. The result, sadly, is that a large number of donors and foundations began to insist that their donations and grants only go to specific projects or programs out of a fear their funding wouldn’t have impact. More and more we saw that no money was to be directed toward management or general operations. This means no money for rent, electric bills, audits, or key staff implementing the core mission activities that may not be directly involved with the special project. It also means no support for exploration or innovation – think corporate R&D. Rather, you can think of it as the “nonprofit starvation cycle” a phrase coined by the folks at Bridgespan.

A few years ago I saw the futility of this approach firsthand during a workshop on how to read a potential grantee’s audit.  Audits are expensive. For a New Jersey organization with a budget between $800K and $1 million, a good audit will cost at least $8,000. If the group gets a lot of government funding it could be far more. The workshop presenter talked about the importance of a solid audit for all donors doing their due diligence. During the workshop, a foundation program officer was complaining about the poor quality of the audits they receive from grantees.  A few minutes later that same program officer spoke proudly about how the foundation only provides project support and does not allow any of its funding to be used toward indirect costs or general operating. That means zip for the audit costs. I pointed out the correlation between the two and suggested perhaps the foundation might want to start allocating at least some of a project grant to be used toward the organization’s indirect costs.

So, how much of a nonprofit’s budget should be spent on management, general operations and fundraising? The truth is that it depends on the organization.  Regardless of what anyone will tell you, there is no set guide or percentage. There can’t possibly be. Even some of the charity “watchdogs” have acknowledged the limitations of trying to assign percentage ratios to an overall organization’s total budget.

Charity Lookup

And now here in New Jersey we have Charity Lookup – a new “smart phone app” released by the New Jersey Division of Consumer Affairs a few weeks ago. If you haven’t checked out this new resource I encourage you to do so. The app is tied to the financial reports that nonprofits of a certain size must file annually with NJ Charities Registration. These aren’t detailed reports, especially when compared to reviewing an organization’s full IRS Form 990 on, but it does let you know if the organization is current in its reporting to the State of NJ. This is an important signal for any donor. If the nonprofit is not current, donors will want to get a full explanation before funding.

But, as our colleague at the Center for Non-profits pointed out in its statement after the release: “the app reflects the Division’s continued bias that all administrative, fundraising and overhead expenses are somehow inherently ‘bad’ and in no way contribute to a charity’s good work.”

Where Watchdogs Fall Short

You see, what the app doesn’t do is help a donor understand the impact the nonprofit is having and its success in meeting its mission. This is the recurring challenge with all the watchdog sites that we have. Charity Navigator, Guidestar, Wise Giving Alliance—they all provide information that is helpful in understanding the validity of a charity BUT that data are just part of a much larger puzzle. None of them illustrates whether an organization is achieving the outcomes it seeks. None of them shows how the group is doing in pursuing its core mission activity. A few have announced that they are working to incorporate some element of impact more fully into their metrics. Unfortunately, many of these efforts are either lacking in specifics or are very much in their infancy.

Even more frustrating, despite implicitly acknowledging the shortcomings of doing so, some of these sites continue to propagate the idea that effectiveness is determined by the percentage of money spent on programs versus management or fundraising.  In fact, Charity Navigator just released its annual list of cities with the “highest performing” nonprofits based on their criteria of budget allocation and transparency of financials. One has to ask: how can you determine a high performing nonprofit when the only criteria being considered are the budget allocations and how much financial information is posted on the organization’s website? Shouldn’t performance and effectiveness be tied to how many students are ready for college or the workforce? Or how more people now have access to healthy food? How about audiences that experience an acclaimed performance that inspires?

Invest in Infrastructure

Every corporate leader will tell you that investment in the business’ infrastructure is essential and even critical to achieving the business’ core goals. That is no different whether the business is tax-exempt or a for profit corporation. For a nonprofit that means investing in its core mission. It is time to focus on the outcomes rather than arbitrary spending percentages that rarely have any correlation to the quality and impact of the work.

Nina Stack is President of the Council of New Jersey Grantmakers, the statewide association of more than 120 funding organizations working in New Jersey. She also serves as Chair of the Forum of Regional Association of Grantmakers, a 33-member network serving more than 4,000 foundations, corporations and other donors across the country.