Just over 2.1 percent of gross domestic product — or $354 billion — was donated to charity in the U.S., according to 2014 estimates. And the stakes for nonprofits are higher than ever.
In 2016, philanthropy is big business, and donors want to see impact. Websites like Charity Navigator and GuideStar act as independent watchdogs of the industry and compare nonprofits based on the breakdown of their expenses in program, administration and fundraising- categories, with high marks given to organizations that boast low administrative and fundraising expenses.
This measurement structure isn’t bad, per se, but applied in a vacuum can have a devastating effect on the very social good that it is designed to support.
If the end goal is to serve broader community needs through community investment, then the paradigm needs to shift. In the for-profit business model, the end goal is to have a profit at the end of the year, and organizational success is measured by that margin of profit. Tools like creating an exceptional product, good marketing strategies and investing in a strong sales force all are used to meet that end goal. In good times and bad, the successful for-profit business budget reflects an investment in these tools, because it is these things that drive sales and meet the company’s end goal — to make a profit.
In the nonprofit sector, the goal is the mission of the organization. Organizational success should be measured by how the nonprofit serves its mission. That seems simple, but often is not.
Take, for example, a hypothetical charity in my local community whose mission is to end childhood hunger. The nonprofit boasts 90 percent of its funds are used for programming, 7 percent for administration and 3 percent for fundraising. The organization works with an annual budget of $300,000 per year and serves 100 hungry children. The overhead is low, allowing the organization to serve as many children as possible. The donors laud that 90 cents of every $1 they donate directly feeds a hungry child. In the current framework, this is a successful nonprofit.
But not so fast. Let’s reflect on the organization’s mission to end childhood hunger in the local community. There are 1,000 hungry children in the community, and the nonprofit only has the resources to serve 100 of those kids. Is that truly success? Are they ending childhood hunger?
Now shift the paradigm. What if we changed the investment of resources? First, they increase administration expenses to 14 percent of the budget. They invest in new computers for staff to better track how the organization is buying and using supplies, so they can now buy food cheaper, and purchase a new, energy-efficient refrigerator and have less waste. They start a marketing campaign educating the community about the need and the root causes of childhood hunger, which helps other nonprofit and for-profit companies to look at solutions to those root causes. And second, they increase fundraising expenses to 6 percent of the budget. With additional staff time dedicated to fundraising, they increase the organizational budget to $600,000. With all these changes, they can now serve meals to 350 hungry children and, through new advocacy efforts, there are now only 900 children who need services. They spend a lot more of every dollar on administration and fundraising now, but have increased the end impact from 100 children to 450 children.
In the big business of philanthropy, we need to dig deeper to really effect community change. Use business metrics to measure success, but use the right metrics. In the for-profit model, we invest in administration and sales to sell our products, and success is measured by our profit at the end of the year. Likewise, in the nonprofit model, don’t measure the success of a nonprofit organization solely by its investment in programs versus administration and fundraising. Instead, ask the question, how are these tools being used to achieve the organization’s mission?