Balancing the Mission Checkbook

This guest post was written by Judy Alnes, Executive Director of MAP for Nonprofits.

I was glad to be asked to fill Kate Barr’s blog shoes while she is on sabbatical. I often write pithy blogs, if only in my mind. This assignment forced me to round up some of those loose ideas and put pen to paper; or rather, fingers to keys.

It’s Time to Innovate

Social innovation is on the tip of a lot of tongues these days. Most of us in the nonprofit sector are facing the fact that financial resources will remain tight for several years. Many of us have tried to do “more with less.” We’re now awakening to the fact that it is time to do things differently. In other words, it is time to innovate.

So what is social innovation? I especially like the definition used by Andrew Wolk of Root Cause in a recent speech he gave to the Texas Governor’s Nonprofit Leadership Conference:

Social innovation is the process of developing, testing, honing, and spreading transformative approaches to pressing social issues. It is finding ways to do things better and utilize resources more wisely.

Just as important is what social innovation is not! It is not only the purview of those who are leaders of social enterprises. It’s not just for Ashoka Fellows; though they are a remarkably innovative group. In fact, innovation is a discipline that each and every nonprofit and institution needs to incorporate in its work.

Getting Started

Where do we start?

We start by nurturing the seeds of discontent most of us share that we’re not making the progress we want to make on the issues facing our communities and our world.

Next, we arm ourselves with information about innovative processes. I highly recommend two books: The Medici Effect and Blue Ocean Strategy. Then add a daily Google Alert on social innovation or on the innovations in your particular field. It is okay to copy other nonprofits’ innovations in your own organization. Take a look at www.ideaencore.com - an online marketplace of other nonprofit organization’s best practices and resources.

Inside our organizations we can form teams that work on “developing, testing, and honing” advancements in our fields. We can charge individuals with responsibility to work on the next improvements in our processes, products, and services. We can start to admire the breakthroughs being achieved in other fields and think through how those breakthroughs might translate to our own challenges.

Innovating won’t be easy. Many organizations have stretched their people thin in an effort to keep delivering services at a pre-recession level despite a decline in resources. It’s not hard to predict what will happen if we don’t get around to innovation. Our results will look a lot like they do today. As the great inventor Thomas Edison said, “there is a way to do it better - find it.”

How many of you have wanted to take a break from the pace and pressure of work and decompress? I have been given this gift in the form of a one-month sabbatical during February. After seeing the positive effects of a similar break on a friend of mine, I made the request and our board quickly agreed. While I didn’t do any other research about sabbaticals, it made instinctive sense that time away would be a good idea for both me and for Nonprofits Assistance Fund. In the year since my request, two other professional colleagues have taken one-month sabbaticals and had very positive experiences for themselves and the staff of their organizations.

Now, just in time for my break, CompassPoint released a study titled Creative Disruption about sabbaticals at nonprofit organizations. This summary of the report is affirming for my own sabbatical and for any of you who’ve been thinking about it.

This study exposes the myth that an executive sabbatical will be a chaotic disruption, finding instead that the creative disruption of a well-planned sabbatical can be productive for the entire leadership of an organization.

Organizational capacity is increased as the second tier of leadership takes on new responsibilities. Governance is strengthened as a result of the planning and learning that goes with a sabbatical process. Executive directors come back rejuvenated, with a fresh vision and innovative ideas, and tend to extend their tenure with the organization. And funders gain a deeper perspective on community needs from the feedback, networking, and innovative ideas that sabbatical alumni bring.

The report is an interesting read, including the results of surveys of executives who took sabbaticals and the interim directors who took on a new role. The subjects of the study were all recipients of funding to support sabbaticals, usually for three months.

I’m eager to see what kinds of experiences and ideas I have during the month. I’ll be kicking back for some of the time and using some of it for reading and discussions about the big issues and ideas for nonprofits in the future. (Although I can promise I will not spend all four weeks of February in Minnesota.) I started this weekend by reading an advance copy of the book Switch How to Change Things When Change is Hard by Chip and Dan Heath. The book addresses the reasons why change is so hard with a well-formed framework that makes the concepts accessible and actionable. They offer three essential components needed for change to happen:

1. Direct the Rider - clarity and direction
2. Motivate the Elephant - emotions and energy
3. Shape the Path - plan and influence the situation

The book will be released on February 16th, but you can read an extensive excerpt in Fast Company.

More reading and thinking to come, but you probably won’t hear much from me this month. We’d love to hear any comments about sabbaticals from other nonprofits - what have you done, or wished you could do?

What amount is the right size of donation for your organization? Most of us would laugh at the question and answer “$1 million, of course.” But ask again, with a dose of both reality and prudence. What is the amount that would have a long term, stabilizing impact on your organization if you could rely on annual gifts from many donors? It’s probably far, far below $1 million. It’s probably even below $1,000. Many nonprofits overshoot this number, though, chasing larger gifts and grants, thinking that bigger dollars are the answer. I’m not sure that’s ever a realistic strategy, but I think it’s too risky in the midst of the recession.

The Value of Smaller Gifts

I’m pleased that smaller gifts are drawing greater attention and wanted to highlight a few noteworthy examples. The article Save Our Ship in American Theatre Magazine describes the efforts of theaters to rebuild from financial struggles:

The hero who emerges from emergency campaigns is the small donor. Practically every artistic leader I spoke with used the words “grassroots” and recounted anecdotes about donated piggy banks. Over and over, artistic leaders said that it was not one single donor that saved them but rather many, many modest donations - gifts of $100 and $150 that added up to serious money.

The value of many, many small donations was proven on November 17th. At the end of the fundraising-palooza of Give to the Max Day, 38,778 gifts had been made totaling $14,000,406. That divides to a $361 average gift. Many of the most impressive Give to the Max Day campaigns yielded great numbers of both donors and dollars with pretty small average gifts. The organizations with the largest numbers of donors had average gifts ranging from $75 to $100. Organizations receiving the most dollars also had modest average gifts between $65 and $325.  Other examples of the power of small donations can be seen in the international response to the recent earthquake in Haiti, such as the American Red Cross raising $3 million as of 9am EST in $10 increments through a text message campaign.

In his book The Art of the Turnaround, Michael Kaiser describes the process of Alvin Ailey Dance Company’s financial recovery. He offers this advice:

Aiming to fill a deficit with one extraordinary gift is usually just a pipe dream. We need to focus on “right-sized gifts,” gifts that make sense given the budget and the profile of the organization. For the Alvin Ailey American Dance Theater, with a $6-million budget and a $1.5-million deficit, $50 was too low and $1-million was too high. At Ailey, while we did receive larger gifts, we focused our fund-raising on $1,000 gifts. Our board felt comfortable asking for this amount from friends and associates, and this was an amount that would make a difference to us.”

If you prefer to hold out hope for large gifts and grants, be aware of the risks. The Minnesota Council on Foundations just released their 2010 Funding Outlook based on a recent survey. The survey found that overall funding by Minnesota’s foundations will stay fairly level in 2010 compared to 2009, for which we should be thankful. There is wide variation, though, in the grantmakers’ forecasts. More grantmakers expect decreases in giving in 2010 than expect increases: 30 percent expect to give less compared to 25 percent who expect to give more. At least 20% of foundations expect to decrease the number of grants awarded, as well.

Keep up the grantwriting, RFP submissions, and lunches with prospective large donors. But take Michael Kaiser’s advice to heart - make the priority for 2010 to build a reliable base of “right-sized” gifts.  They really do amount to something very important.

We can all agree that 2009 has been a very tough year for nonprofits. Have any of you ever worked so hard, or navigated through more uncertainty?

While we may all be eager to leave this year behind and hope for more signs of turnaround in 2010, there have been some remarkable highlights. Here is my personal list of the top five reasons for Nonprofits Assistance Fund to celebrate 2009.

1. Real Collaboration: We learned a lot about collaborating to provide some great resources, training, and customized assistance to help nonprofits this year. Collaboration requires openness, communication, and trust. With wonderful collaborators in ArtsLab and the Resilient Organizations Fund, and a partnership with Minnesota Council of Nonprofits to develop Recession-Year Financial Leadership, I learned a new way to work.
2. Enlightened funders: The financial challenges faced by foundations has been well covered by Minnesota Council on Foundations. Many local and regional foundations have been bold and creative in meeting urgent needs to maintain services, re-imagine delivery, and energize community. Special recognition to the Pohlad Family Foundation and the Blue Cross and Blue Shield of Minnesota Foundation for launching special projects this year. And kudos to the Minnesota Community Foundation and the Saint Paul Foundation and other partners who created GiveMN. Every nonprofit needs a boost of both funds and confidence.
3. Information, Opinion, and Inspiration: I needed a lot of all three this year, and found plenty from good journalists and bloggers and from the Twin Cities extraordinary arts community. If you agree that these are important, you need to do three things - subscribe or donate to your news sources, comment on and share blog posts, and buy tickets or memberships for arts events.
4. The resilience and guts of Minnesota’s nonprofits: Wow. What else can we say about the Herculean effort and accomplishment of thousands of nonprofits this year as they helped people and communities make it through one of the toughest years imaginable. The data in MCN’s most recent Current Conditions Report tells the story of both hardship and endurance.
5. The people: The biggest celebration is for the staff of Nonprofits Assistance Fund, who revved their engines this year as never before to deliver advice, guidance, training, and crucial financing to organizations doing important work. We often talk about the good work of our clients. I celebrate the great work of Janet, Sandra, Phil, Michelle, Matt, Ashley, Amanda, Michael, and Steve. What a year.

There are other year-end lists of interest for nonprofits at Nonprofit Quarterly and PhilanTopic. As for 2010, I trust in the leadership, vision, and continued resilience of nonprofits, though I think it will be another hard year. More on that later, I’m sure.

Happy New Year.

There was a breakthrough last week for nonprofits. In a joint announcement, Guidestar and other major charity “watchdogs” made a very strong case that overhead ratios are meaningless. The phrase used in the opening paragraph says the ratio is “useless for evaluating a charity’s impact.” Read the full release The Worst (and Best) Way to Pick a Charity This Year and then copy it to share far and wide. Some of the reasons for de-emphasizing this ratio cited in the announcement will be familiar to nonprofit leaders:

• It tells you nothing about the impact the charity has on the people it’s trying to help.
• It discourages charities from investing in tools and expertise that would make them more effective.
• The rules for determining overhead costs are vague and every charity interprets them differently.

Hooray! I’ve been one of many voices speaking out on this problem for a long time, most recently in the post Donors and Overhead: Maybe They Don’t Care. This step by some of the most prominent national watchdogs, especially Charity Navigator, is huge. Ken Berger, CEO of Charity Navigator, elaborated on his own blog:

We do concur with the fundamental truth that the most critical dimension in evaluating a nonprofit has to do with achieving meaningful results.

Charity Navigator has been criticized for relying too heavily on the overhead ratio and other simplistic measures for their rating system. Berger has been blogging about their plans to shift to a more comprehensive approach, and this announcement is a breakthrough.

This feels like a gamechanger because now we can stop arguing about whether overhead is an accurate measure of charity performance. It’s not. Clearing that hurdle doesn’t get us to the finish line, though. Everyone in the nonprofit sector should cheer that the watchdogs are encouraging donors to review the impact and effectiveness of nonprofits - but how? There is not a single, simple alternative method to evaluate the effectiveness of all nonprofits. It’s essential for nonprofits to invest some time and brainpower to figure this out.

The organizations behind the press release have their own approaches:

• Consumer reviews: The personal experience approach of Great Nonprofits relies on a broad network of people who are involved with nonprofits to submit comments and ratings. Users of the website can search and browse for stories that interest or inspire them. Think of this as the Amazon reader reviews or TripAdvisor comments equivalent for nonprofits.

• Experts: Philanthropedia, on the other hand, relies on panels of experts in four different fields to pool their knowledge and assessment of which nonprofits are the “top” in effectiveness. Their “mutual funds” of nonprofits can become your vehicle for giving. In some ways this is a global, scaled up version of how we’ve used the local United Way.

• Data: GiveWell has a laser focus on reliable research and evaluation at nonprofits to support anecdotal stories or claims about impact. Read about their low opinion of the way nonprofits currently evaluate effectiveness. If better quality outcomes supported by good evidence is needed, then GiveWell will be there pushing us all.

Whatever approach you trust or endorse, get to it now. It will take us a long time reverse course for all the donors, advisers, and institutions that have used the program cost ratio as a stand-in for value. You’re going to have to offer some other data to replace it. Make it mean something. Ken Berger of Charity Navigator issued this call to action:

The nonprofit sector must get its act together and make sure it is really helping provide meaningful change in communities and peoples lives. It is life or death for many of those we serve whether we are effective or not. So let’s work together to measure, manage and deliver what is really important to make our world a better place.

I am so glad that I’m not the director of a Minnesota charter school. Imagine working in a small segment of the nonprofit sector, comprised of 150 organizations, and opening the paper to regularly find a headline announcing that your field is “out of control” or in “rough waters.” Meanwhile, you go to work every day to lead the teachers at your school and together work to educate the students whose families have chosen to enroll at your school. I wouldn’t appreciate, much less enjoy, the attention. Every report brings with it questions about whether our hypothetical school director is among those with the problems described in the news. Whatever the current condition of this individual school, they end up tainted a bit by the sheer volume of news.

In just the past week, our hypothetical charter school director has seen these reports:

• State charter schools program is ‘out of control’, reports the Star Tribune in an investigative article about the use of bonds for financing of 18 buildings for charter schools.
• The Pioneer Press reported Strapped St. Paul charter school to close midyear on the decision by the board of directors of Skills for Tomorrow school to close at the semester break because of declining enrollment.
• Last week, in Payment shift makes rough waters for charter schools Minnesota Public Radio provided background and examples of the impact on charter schools of the state’s new deferred payment schedule for all public school payments.

While each news story is accurate, it does not paint an accurate overall picture. The individual schools don’t have the chance to explain all of their plans, budgets, and curriculum philosophy to the community. I have a deep enough understanding of charter schools to respond to each with the comment that “it’s more complicated than that.” I don’t want to gloss over some very real issues with finance, leadership and governance at some charter schools, but I am trying to figure out why this small group of nonprofits is such a magnet for news, investigation, and opinion.

As some background, Minnesota was the first state in the nation to create “charter schools.” Today Minnesota has about 150 operating charter schools, with roughly half in the Twin Cities Metro area, and the remainder in Greater Minnesota. Together, these schools serve about 33,000 students. Charter schools are true public schools. They are created by state law, are funded by government, and are subject to most state laws governing public education. They cannot charge tuition and they cannot discriminate in admissions. They are subject to state graduation requirements and the mandates of the federal No Child Left Behind legislation. Structurally, charter schools are both nonprofit corporations and independent school districts.

This structure presents complexities that affect both governance and financial management. As I detailed in a previous entry, Charter school myths and realities, the reality is that the management quality of most charter schools in Minnesota is on par with the management of nonprofit organizations overall. The vast majority of charter school directors and teachers are hardworking, mission-focused, committed educators, and I thank them for their work.

For such a small group of organizations, charter schools attract an awful lot of attention, scrutiny, and criticism. As a community, we feel strongly about education and about the use of taxes and public funds. Charter schools are right in the middle of both.  The field needs to find a way to communicate their value to the community - unless they like opening the paper every day to read another report about problems.