Balancing the Mission Checkbook

Last month I posted this blog asking whether charity contests like Pepsi Refresh are ultimately productive for the nonprofits that participate. The cash is great when you win, but at what cost? In this Chronicle of Philanthropy article from last year, one executive director reported that he spent 75% of his time one month drumming up votes for a contest. Now we’re learning that even all that time might not be enough to win.  According to the New York Times article New Charges of Cheating Tarnish Pepsi Fund-Raising Contest for Nonprofits some contest winners used proxy voting, mass emails and other prohibited methods. I raised the question last month about whether contests help nonprofits build relationships with donors.  If the contest is won by gaming the system, then these aren’t about building support at all. It’s just about the cash.

I have a second concern about contest-style philanthropy. Is this an effective way to pick a charity? Do we care that Pepsi’s money may or may not be going to charities or projects that will have a real impact? I don’t know enough about the organizations that won money from Pepsi in 2010, but frankly some of the descriptions are pretty vague and evidence of results is hard to find.  There’s a lot of sincere intention and quite a few competitors are startup organizations, however some appear to have been started in order to compete for funding.

The nonprofit and foundation world has been encouraging donors to seek out high-performing charities, such as in this article by Sean Stannard-Stockton. Nonprofits are working hard to evaluate, measure and communicate impact. Charity contests don’t reward nonprofits with the best results or greatest impact on clients. They reward marketing.

The traditional cumbersome foundation process probably needs a different kind of refreshing, but I have strong misgivings about throwing review and evaluation out the window.  The Technology in the Arts blog asked some good questions last summer in a post about American Express’ online giving contest.

While increased online support and a focus on technology use to reach constituents could provide benefits in this funding model, the prom queens method of distributing support should probably be left where it belongs: high school. This model has no way of insuring the best organizations reap the rewards or that the most efficient and effective programs receive funding. Popularity does not always equal quality, but it will always decide the winner in this funding model.

It’s worth noting that while the marketing department promotes their online contest, PepsiCo Foundation still makes grants the old fashioned way, with criteria including evidence of proven success in the field or scope of work specific to the request, and a method by which to measure and track impact and progress. There is a difference between marketing and traditional philanthropy. Should that matter to nonprofits that need funding to do their work? I think it should.

Want to know who’s winning the Pepsi Refresh contest? According to Mashable, the contest received 61 million votes in 2010. That’s 61 million brand impressions for Pepsi. We have a winner!

Would you consider me a supporter if I made a $100 contribution? Absolutely. What if I didn’t send money, but if I clicked my mouse a few times? If it leads to a grant, I suppose you would. Is the popularity of online giving contests redefining what it means to support an organization? If so, the change is about more than technology and delivery. Voting, a la American Idol, creates a very different kind of relationship between me, the supporter, and you, the nonprofit.

This year, Pepsi has been awarding $1.3 million every month through the Pepsi Refresh project. Nonprofits, individuals, and businesses submit ideas and compete for your online votes to win the awards. 32 awards totaling $1.3 million are granted each month in amounts from $5,000 to $250,000. This broadly promoted voting for dollars ties in with Pepsi’s brand building, similar to the Chase Community Giving Facebook campaign and the Sam’s Club Giving Made Simple contest.

Projects in the mix for Pepsi Refresh include nonprofits of all sizes, like Teach for America, which received $250,000, and small organizations such as the Boys and Girls Club of Schenectady, which won a $25,000 grant. The project is open to individuals and organizations that are either very new or loosely formed. Past winners run the gamut from Operation Sweet Dreams, which received $50,000 to provide new PJs to low-income kids, to helloCHANGE, a youth anti-tobacco campaign that won $250,000 in March. To win the monthly competition, submitted projects must mobilize forces and generate lots and lots of votes. After registering on the website, anyone can vote for up to 10 projects a day.

The communications strategy needed to win these competitions is different from what is needed for “traditional” development. In fundraising, nonprofits have learned the importance of reaching out to make a connection that will motivate a donor. For an online contest, the goal is clicks, not dollars. Have you ever been bombarded during one of these contests? An organization that I greatly admire was a finalist for the Sam’s Club grant. They sent me emails every day, and I wasn’t even eligible to vote (I’m not a Sam’s Club member). I wonder if convincing someone to take a few minutes every day for a month to click a vote button builds any kind of a lasting relationship. After voting a few times, am I likely to become a donor or volunteer? If I didn’t make a personal commitment in the form of funds, what kind of relationship was started?

On the one hand I’m happy to see good organizations receive funding. Wellstone Action! won a $50,000 grant in September for a great project with Native American leaders. I’m all for it. On the other hand, though, I prefer philanthropy that builds lasting relationships.

Charity contests are likely to continue as businesses learn how to capitalize on social networks to build their brands and web presence. How can nonprofits use them to build relationships that matter?

Wow, I was sure that something terrible had been discovered when I read these newsfeed headlines earlier this month:

• Social Enterprises Linked to Poor Performance in Nonprofits (Nonprofit Quarterly)
• Study Questions Efficiency of Charity Business Activities (Chronicle of Philanthropy)
• Report Faults Nonprofits on Service (Wall Street Journal)

Looking for the scandal, I read the stories and then read the report behind them. Nothing terrible happened, but a hot button certainly was pushed. I wonder what it is about social enterprise or other earned income ventures at nonprofits that engender such a strong overreaction.

Here’s a summary: Rebecca Tekula, PhD, from Pace University released a research study, Social Enterprise: Innovation or Mission Distraction? The study reviewed IRS 990 data for large human service nonprofits in New York with analysis of the correlation between unrelated business income, program expense ratio, and the asset to liability ratio. Based on the data and analysis, Dr. Tekula concludes that there are negative relationships between social enterprise activities and value of programmatic output as well as between social enterprise activities and financial distress.

The report, and subsequent coverage, raise some big questions for me.

My first concerns are with the data used in the report, which are premised on some assumptions and definitions. Social enterprise activity is represented by unrelated business income, which is a small component of earned income activities at nonprofits. Programmatic output is represented by the program expense ratio, notorious for being inconsistently reported. Financial distress is measured by the asset to liability ratio, which is a better measure of the nonprofit’s need for and use of leverage and commonly needed for any real estate asset.

I also take issue with the conclusions in the report. They are based purely on the statistical analysis, which Dr. Tekula acknowledges. Research reports are always built on a hypothesis and methodology. However, I think that her conclusions are overly broad. The press release about the report summarizes:

In other words, as income from side businesses went up, the share of a contributed dollar that went to actual services went down. Why? Tekula speculates that many organizations with unrelated businesses were not really investing profits in their mission-related services. Instead, profits were reinvested in the business, and losses were subsidized with funds that might have gone to clients.

There is no evidence at all, though, that the nonprofits included in the study were providing substandard or ineffective services to clients.  And there was no data included to indicate that the business operate at a loss.  So speculating that “losses were subsidized with funds that might have gone to clients” is a pretty big jump from statistical correlation based on a narrowly defined ratio.

I have an even bigger question about the sensational tone of the headlines listed above. The heading for the press release from Pace University was Study Finds Nonprofits May Bleed Their Services by Trying to Earn Money. The editors at the Nonprofit Quarterly, Social Enterprises Linked to Poor Performance in Nonprofits, and Chronicle of Philanthropy, Study Questions Efficiency of Charity Business Activities, really went for the bait with this one. There is nothing in the report data or conclusions that support the notion that the nonprofits included in the data are bleeding their services, performing poorly, or are inefficient.

What is it about social enterprise that invites this response?

There are some recurring terms that I’ve been hearing over and over in meetings, conferences, and articles intended to help nonprofits, including arts organizations, respond to the serious challenges created by the recession. From what I hear we all need to be resilient, learn to innovate, and adapt to a new normal. It sounds good, but is there some substance that we can use behind these words?

Resilience: Frankly, the people who lead and work for arts organizations have always been about as resilient as you could be, if resilience means the ability to improvise with what’s at hand and bounce back.

Innovation: How about innovation? The arts shine as innovators in creating art, but much less so on the organizational side. Most nonprofit arts organizations are structured using a management and financial model that’s been around for a long time. More and more questions have been raised about the model that will eventually lead to some more options. On his great blog The Artful Manager Andrew Taylor frequently writes about these questions including here and here. There are other interesting developments in helping arts organizations to innovate for long-term structural change. The James Irvine Foundation states that “we define innovation as instances of organizational change that stem from a shift in underlying assumptions and provide new ways to fulfill the mission.” Incremental change isn’t enough for arts organizations to confront their long-term challenges.

Adapting to the new normal: I’m not so sure that we ever had an “old normal”, or that change is a new dynamic. Regardless of the current terminology, though, arts organizations are facing deep and sustained changes to their funding sources, audiences, and role in the community. There is a lot to learn about becoming more adept at identifying the questions and leading the necessary changes. The article Leadership in a (Permanent) Crisis describes adaptive leadership as the capacity to sort out and balance the short and long term issues. Facing immediate problems, many managers will hunker down and nibble around the edges of problems.

People who practice what we call adaptive leadership do not make this mistake. Instead of hunkering down they seize the opportunity of moments like this one to hit the organizational reset button. They use the turbulence of the present to build on and bring closure to the past. In the process, they change key rules of the game, reshape parts of the organization, and redefine the work the people do.

The time is critical for many arts organizations to understand their current situation, envision the extent of changes, and learn to truly and continually adapt.

What if? Last week I was sad to read that the Harlem School of the Arts closed its doors. The school was an institution in the neighborhood for over 40 years. The news report paints a case story of their failure to adapt – years of financial, management and governance problems and attempts to address them with short-term cuts, emergency fundraising efforts, and fingerpointing. If we don’t want to see this happen elsewhere we need to learn some new approaches.

Yes, they’re the buzz words of the day, but I can’t argue with the importance of resilience, innovation and adaptive leadership.

This blog was cross-posted at Springboard for the Arts’ Springblog.

This guest post was written by Carol Berde, nonprofit consultant.

Live Heart Healthy

Have you noticed the articles that accompany tax season each year, with advice about which financial records to keep and which to toss out? That inspired a little file purging in my office, or, as I thought of it, clearing the clots out of the office arteries. One item I found (and kept) got me thinking that nonprofit organizations also have to keep their arteries clear – not just once a year, but continually.

I found notes from a philanthropy conference I attended in 2002, in which the speaker urged his audience to “get comfortable with the new reality” following the post-9/11 economic downturn. Sounds a lot like the “new normal” we hear about today, doesn’t it?

In July 2009, the Pohlad Family Foundation made grants totaling almost $5 million to more than 70 nonprofits that provide housing for the homeless, human services, and community health care in the metro area. I had the privilege of being part of the team that assisted the Foundation and MAP for Nonprofits in making these funding decisions. As Scott Russell reported in a MinnPost piece about the Pohlad initiative on August 13th last year, “waiting lists and overstretched services are commonplace” at these organizations:

Many foundations and philanthropists have focused on meeting basic needs. The federal stimulus package has helped in some cases. Yet clearly money is tight from both government and givers.

Are tight funding, waiting lists, and overstretched services the “new reality” for nonprofits working to meet essential human needs? If it is, how can nonprofits keep their arteries healthy even as they serve more people with fewer resources?

Insight into the first question comes from our review of reports six months later from organizations that received these Pohlad funds. Among other things, grantees were asked to assess whether their financial condition had changed in the last six months of 2009. Of the 68 organizations reporting, 43% said their financial condition was better, 37% said it was unchanged, and 21% said it was worse. Operational efficiencies, expense controls – often including staff layoffs and elimination of retirement contributions – and Federal stimulus funds contributed to “better” financial positions. On the other hand, changed priorities on the part of public and private funders were the chief reason for “worse” financial positions. Huge increases in uncompensated care for people without health insurance or resources to pay deductibles and co-pays was another major stress on community-based providers of health and mental health care. “While we are effectively managing the downturn, we have been less successful stemming the tide of declining revenues and changing [funder] priorities,” wrote one grantee.

This anecdotal evidence suggests to me that settling into the “new reality” or “new normal” is not a one-time event for nonprofits. Cutting budgets, the work of 2009 for many, was necessary but insufficient. Rather, keeping a nonprofit’s arteries clear is a continual process of assessment and adjustment, just as watching our diets, exercising, monitoring cholesterol, and, if necessary, taking medication is for people who want to keep their arteries healthy. Here’s a three-part prescription for nonprofits’ heart health.

1. Scan the environment – both inside and outside the organization – continually. Planning for change is preferable to being surprised. Staying ahead and in touch is an added responsibility for executive directors who are already more than busy, but it is essential in the “new normal.”
2. Monitor priorities and strategies and make course corrections. Change is happening too fast for the old-style strategic plan that was adopted and treated like a fossil to still be useful. But that doesn’t mean that the whole idea of strategic planning has become irrelevant. To the contrary, having a clear strategic direction, overarching priorities, and well thought-out goals and strategies to realize them is more important than ever. Organizations that remain effective and use scarce resources efficiently do so, in large part, because they have a plan. What’s different in the “new normal” world is that a strategic plan must be dynamic, re-calibrated every 6 to 12 months in response to progress (or lack of it) and changes in the environment in which the nonprofit operates.
3. Confront the gnarly issues. Programs rarely operate in isolation; organizational problems tend to be intertwined; and changes in funding streams often affect multiple aspects of a nonprofit. Loss of support for a particular program or service, for example, may also mean a reduction in administrative funds or ineligibility for a different funding source. Understanding each program’s true costs and financial contribution can be empowering. Data, no matter how discouraging the story they tell, often pinpoint decisions that can no longer be postponed. If most discussions in an organization end by circling back to the same complex issues, it’s time to unravel them.

We know from our personal behavior that maintaining a healthy heart takes effort and discipline; so too with nonprofits that want to be healthy. But just as there are websites and coaches for personal fitness, there are great resources on the internet to help nonprofits stay healthy. One of the best is the site you’re on now, www.nonprofitsassistancefund.org. Another of my favorites is The Bridgespan Group,  especially an article written for the Harvard Business Review, Delivering on the Promise of Nonprofits, that includes a useful matrix for analyzing mission relevance and financial contribution or cost of each program.

About Carol Berde

Carol Berde has worked with nonprofits for 30 years from both sides of the desk: a long career at The McKnight Foundation and, more recently, as a consultant to nonprofits and foundations. She can be reached at carolberde@comcast.net.

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.”