We need a new way to evaluate charities – Part 1

That is a major issue for Mr. Dan Pallotta. He suggests the excessive focus we as a society have on rating the effectiveness of NPOs by “overhead” ratios and our intolerance for NPOs paying market salaries are restricting organizations from getting the money to have the full impact they could have.

I read two articles by Mr. Pallotta on the same day. Please check them out.

Why Can’t We Sell Charity Like We Sell Perfume, from the Wall Street Journal.

Charities Must Battle Public Misconceptions About Overhead Costs, from the Chronicle of Philanthropy.

In the WSJ article he says:

We have two separate rule books: one for charity and one for the rest of the economic world. The result is discrimination against charities in five critical areas.

First, we allow the for-profit sector to pay people competitive wages based on the value they produce. But we have a visceral reaction to the idea of anyone making very much money helping other people. Want to pay someone $5 million to develop a blockbuster videogame filled with violence? Go for it. Want to pay someone a half-million dollars to try to find a cure for pediatric leukemia? You’re considered a parasite.

I just checked the average salaries for baseball teams. The team with the highest average salary is the New York Yankees at $6.2M per player.  The team with the lowest average is the San Diego Padres at $1.97M per player.

If you want to picture something entertaining, think of the social service organization that you are most passionate about. Consider the outrage that would arise from paying the CEO of that organization the average salary of the San Diego Padres baseball team. The furor would be deafening.

I’m not begrudging the baseball players their salary. If that’s what they can negotiate with the owners on the open market, I say go for it dude!

I hope you see the contrast to the nonprofit world though.

A second area of discrimination is advertising and marketing. We tell the for-profit sector to spend on advertising until the last dollar no longer produces a penny of value, but we don’t like to see charitable donations spent on ads.

Those are ‘bad’ dollars and have to be put in fundraising if spent to raise contributions or G&A if spent to raise volunteers.

A third disadvantage for charities is the expectation of a home run on every at-bat.

Pity the CEO that tries a fancy new fund-raising technique or major new program that is a total and complete flop. There was a chance that fundraiser could have generated tremendous contributions. That major new program, if it had worked, would have radically reduced whatever social ill is being addressed.

But it flopped. Let the Inquisition begin! The board, reporters, grantors, and the self-appointed regulators will be all over it.

A fourth problem is the time frame during which nonprofits are supposed to produce results: immediately. Amazon.com went for six years without returning a dime to investors, who stood by the company because they understood its long-term goals.

This is where that overhead ratio becomes a problem. The focus on this year’s supporting service ratio means an organization will be punished if it puts a major effort into fundraising for a few years in order to expand dramatically. If a major new program takes a few years to produce fruit, our patience wears thin.

Finally, the for-profit sector is allowed to pay investors a financial return to attract their capital. The nonprofit sector, by definition, cannot.

Intentionally growing the donor base requires effort, which means cost. But there is a payoff.

This idea that investment in growth can create growth is not theory. Fundraising consultant James Greenfield estimates that, for major gifts, every 10 cents spent on fundraising produces, on average, a dollar back. For direct-mail solicitations, the cost is 20 cents per dollar back. For special events, 50 cents. Investment in fundraising and marketing multiplies the money put into it.

It will take a few years of trying to expand the donor based before you see a really significant impact.  In the meantime the annual financial statements will not be pretty. And the punishment from the ratings agencies and grantors will likely be severe.

Next post – the action plan.

3 Responses to We need a new way to evaluate charities – Part 1

  1. […] seen variations of this idea recently: Here’s three more important questions than ‘what’s the overhead ratio?’  What is an […]

  2. […] against the critique of the charity sector by Mr. Dan Pallotta (which I’ve mentioned here and here), check out the article by Mr. Phil Buchanan at Huffington Post:  Getting the Facts […]

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