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.”

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?

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.

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.

• 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.

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.

As an example, in just the last week:

• I attended two important meetings where key participants were missing in action.
• Three training events and webinars were canceled.
• A professional associate stayed home with his son for several days.

Two days ago we had to scramble to replace the speaker for one of our own training events.  That really brought this home.

Scramble really describes the activities. There were many emails sent looking for a replacement, and the reply often was “I’m already scheduled for another training, meeting, travel…” Fortunately, a replacement was found (who did a great job) and I am grateful for the size and quality of the network of consultants in the Twin Cities.  But it’s clear that none of us have any slack in our schedules anymore. All the reductions in staff and hours in the past year have taken their toll, removing any elbow room (if there ever was any to start with).

Contingency Planning

The whole process got me thinking about contingency planning. This is going to happen again and again this year and we all need to be prepared. We have a Disaster Recovery Plan, but it wasn’t developed to address this situation. We need to have a plan for deciding when to cancel a meeting or training, when to use a backup plan, and who to call on for reinforcements. We might need to look around for some elbow room again by scaling back a little on commitments for the next few months.

How are you adjusting to more and more absences caused by this flu? Do you have a clear agreement on priorities and steps to take when you have multiple staff members all sick at once?  The Nonprofit Risk Management Center has a number of useful resources and tools, including a list of contingency planning resources and a tutorial on business continuity planning.

As with any planning process, agreeing on the priorities and responsibilities is step one. We’re starting today.

Update: Here is an H1N1 Flu Preparedness Toolkit from the National Council of Nonprofits.

The state of Minnesota (including yours truly) is celebrating a playoff berth for a plucky squad of baseball players, assumed out of the running after All-Star slugger and 2006 AL MVP Justin Morneau’s season ended on September 16th.  But contributions came from unexpected places and the Twins went 17-4, winning their last 5 games including last night’s tie-breaker.

Yesterday, looking forward to the game, I started thinking about what nonprofits could take away from this transformation. 

Put On Your Rally Cap

At Nonprofits Assistance Fund, we have been encouraging organziations to consider new ways to generate revenue and/or trim expenses to build a sustainable business model in this economy.

Morneau was a major run producer (or income source).  And even with him in the lineup, the Twins were barely hanging on.  How could the team adjust their strategy (business model) in order to be successful? 

On twitter and facebook, I asked what nonprofits could learn from this turnaround, and here are some responses:

• What about an angle on hanging in there like the Twins tied to [nonprofits] in tough times and tackling new approaches.
• That even superstars need to be surrounded by great teams for success.
• Bench strength rules. Always play hard.
• We shouldn’t be overly dependent on one [income] source.
• Lean…They run that org lean. Plus, they’re great with crisis management aka injury replacement moves.

Here are some additional takeaways:

• Use your lineup: The Twins are carrying three catchers because they think that gives them the best chance to win. What do your staff, board, and volunteers bring to the table? Take advantage of your in house skills.
• Be flexible: I think I’ve seen Nick Punto play every position.  Jason Kubel, the designated hitter,  is now playing full time in the outfield. Are there ways to be flexible with program delivery, fundraising, or communications? Are there expenses that you could defer?
• Play smart defense and don’t commit errors: Make sure that you have the systems in place in order to be successful. Good management systems can prevent and minimize some challenges.
• Swing for the fences: Other players stepped up to produce runs in Morneau’s absence.  Make your case to donors, foundations, and the community.
• Be a good sport: Take a note from Brandon Inge and Jim Leyland when things don’t go your way.  If another organization receives a sought after grant or contract, be gracious. Focus on the good work that will be done in the community, rather than your disappointment.
• Don’t give up.

One last thought, from Harvard Business’s Tip of the Day - 3 Survival Lessons from Small Business:

Planning. Plans are often outdated as soon as they come out of the printer. Small businesses tend to focus more on planning and less on plans. They watch their surroundings and act accordingly.

Let’s play ball.

This blog is cross posted at Nonprofit Harvest.

As summarized on the GEO website:

This publication highlights the financial challenges nonprofits face and the ways in which grantmakers are both improving the situation as well as perpetuating the problem.

The first section, Assessing the Problems, identifies five problem areas:

1. Restrictions on Funding
2. Misperceptions Around Sustainability and Growth
3. “Too Many Masters”
4. Onerous Grantmaking Practices
5. Knowledge Gaps

The other sections discuss Barriers to Smarter Grantmaking and Ideas for Grantmakers.

It’s impressive how in 28 pages the author distills a variety of ideas, research, and practices about the realities of financial instability faced by nonprofits. The report also provides helpful and realistic suggestions for grantmaking organizations based on practices that have already been developed and implemented by foundations.  The advice and guidance for funders is great, but this guidebook is a must read for everyone in our sector.

I’m pleased that GEO will be focusing on nonprofit finance and encouraging foundations to understand how “many prevailing approaches and practices in philanthropy can unwittingly create problems for the nonprofit sector.” Many nonprofits have experienced these unintended consequences and will welcome a dialogue on this topic.

However, nonprofit organizations also have a lot to learn from the report’s comprehensive overview of grantmaking. Misconceptions about the true cost of programs and capital needs apply equally (or more) at many nonprofits. We can’t expect a seismic shift in foundation practices and investment unless we nonprofit leaders understand and can effectively communicate what it takes to sustain ourselves.

Download this report, read it, and copy it for your board and senior staff.

What a stark contrast, then, to read The Bridgespan Group’s recent article The Nonprofit Starvation Cycle about the causes and consequences of weak infrastructure at many nonprofits:

Organizations that build robust infrastructure—which includes sturdy information technology systems, financial systems, skills training, fundraising processes, and other essential overhead—are more likely to succeed than those that do not. This is not news, and nonprofits are no exception to the rule.

The judges for the Minnesota Cup business plan competition certainly know this about business. But what would be the questions raised by a corollary panel reviewing nonprofit plans? Unfortunately, I think they would focus on overhead ratios rather than the importance of having the right systems, structure, and technology to implement the plans, along with sufficient operations and finance staff. The infrastructure that’s encouraged for growing business is overlooked (or undermined) for nonprofits.

The Bridgespan Group believes that this starvation cycle begins with funders:

Our research reveals that a vicious cycle fuels the persistent underfunding of overhead. The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit. At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations. At the third step, nonprofits respond to this pressure in two ways: They spend too little on overhead, and they underreport their expenditures on tax forms and in fundraising materials. This underspending and underreporting in turn perpetuates funders’ unrealistic expectations. Over time, funders expect grantees to do more and more with less and less—a cycle that slowly starves nonprofits.

I think that the authors describe the cycle perfectly, but you could replace the word “funders” with “boards of directors” or several other nonprofit stakeholders just as accurately. The burden of breaking the starvation cycle is shared and will require us to understand the real value of infrastructure in accomplishing mission. Start with this question: what could you achieve in the community if your organization had the structure – systems, facilities, processes, staff - that were needed for long term success? What would you need to make that happen, and how much would it cost?  For the entrepreneurs at the Minnesota Cup, their potential investors understand the importance of seed funding to build the staff and systems needed for success. We in the nonprofit world need to learn the language and incentives to advocate for infrastructure funding critical for community success.