Measuring Nonprofits by Their Impact, Not Their Overhead

[eJP note: 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.

Today, with donors across the board zeroing in on ‘impact’ we continue the conversation on eJP. As always, comments are encouraged.]

by Naomi Korb Weiss

The next time you look to donate to a nonprofit, don’t ask about the rate of their overhead – ask about the scale of their dreams.

So says Dan Pallotta, the fundraiser/activist who this month gave a TED talk called “The way we think about charity is dead wrong.”

I couldn’t agree more, and felt compelled to apply his message to our work. (Spoiler alert.)

Pallotta positions nonprofit organizations as those that address the most critical human needs in our society – or at least, that try to. Compared to for-profits or social businesses, he posits that nonprofits are discriminated against in five key elements of their work, which necessarily limits their potential impact.

His analysis is worth watching, but for now – here is a brief summary of Dan’s claims about nonprofits and the implications that arise as a result.

  • Compensation. We have a visceral reaction to people making a lot of money by helping others, creating a mutually exclusive choice between doing well and doing good.
  • Advertising. We’re advised that advertising space should be donated and cash donations should go straight to the needy, limiting the reach of our work relative to those that employ traditional media.
  • Risk. We can’t afford to test new fundraising models (or program models!) – what if they don’t work, and all that money is lost? By prohibiting failure, we’re killing innovation – and potential scalability and growth.
  • Time. We don’t have the luxury of spending years building infrastructure to better solve social problems through scale – we must immediately address the need. But are we really solving them as well as we can?
  • Profit. The for-profit sector can attract capital for their ideas by paying profits, but the nonprofit sector has no such incentive, thus starving the sector for growth and idea capital.

All of these elements fall under that ‘demonic label’ of organizational overhead, to use Pallotta’s words.

It’s time to look at organizational overhead differently – to view it as central to our cause as well as a tool for growth.

If we’re seriously looking to address major social problems on a significant scale then we should attempt to come closer to affording the nonprofit sector these five areas of capacity.

People are often surprised to hear that we operate PresenTense on a budget of just over a million dollars. Our reach is broad – by June, 425 entrepreneurs will have tested and addressed critical areas of social impact in the Jewish community through our training, mentorship and community engagement. Over 1,500 volunteers will have supported these individuals and hundreds of organizational professionals will have been trained in innovative thinking through our PTSchool platform.

Our model works because we leverage local communities’ resources, and because we keep our own operating expenses exceptionally low. But low operating expenses means minimal fundraising infrastructure, limited capability for research and development, inadequate stewardship for volunteers and compromised organizational growth. What’s more, I would assume that these operational buckets are proportionally underfunded in larger nonprofits in our community.

Aren’t we then limiting our potential impact? And, aren’t we precluding the opportunity for longer term sustainability and growth?

We at PresenTense, like other nonprofit organizations, find we have to constantly work toward moving our budget’s cost allocations from General & Administrative to Program, because that’s the commonly expected breakdown by our community funders.

But guess what? Because the output of the social sector is so often more difficult to measure than through simple, traditional ROI measures, its success is often gauged by its quality, the talent of its people, and the numbers it reaches. If these are our measures, how can we expect to continue increasing scale and improving quality if we can’t easily invest in professional and lay development, research and development, and internal processes?

We’re at an exciting juncture within our organization, as I know so many others are as well. We’re no longer a startup; we’re supporting startups. We teach our fellows that before launching a venture, it’s critical to envision the change they see in the world, perform the market research to understand whether others value that change, and prototype and assess their idea before launching. (Sometimes, they don’t launch, because the data points them to other decisions.)

Our fellows test their ideas in their “off hours” between work or school, which often enables them to take time to set up infrastructure and to test and take risks. Wouldn’t it be powerful to show them more examples of successful nonprofits leveraging funds to employ traditional media for advertising, test new fundraising models and put more of their income toward salaries?

It is time to stop considering overhead spending ‘demonic’ and begin viewing it as an investment toward long-lasting, deep reaching impact.

Naomi Korb Weiss is Co-Director of the PresenTense Group.