Balancing the Mission Checkbook

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.

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’m convinced that the reason that people care about the overhead ratio of charities is because we keep telling them that it’s important. I have an announcement to make: I am a donor to quite a few nonprofits, and I don’t care what percentage of their budget is spent for overhead. I think that a lot of donors would agree.

Yet, in another article advising us about charitable giving, 5 Tips on How to Stretch Your Charitable Dollars published in the New York Times online published by the AP and picked up by the New York Times and other newspapers, overhead is (once again) emphasized:

Tip #2: EXAMINE CHARITIES CLOSELY. Do the same due diligence on your donations that you would your investments or your business…
Pay especially close attention to the overhead. Anything above 9 to 14 percent is out of line and signifies that too much money goes to staff or office space and not enough to the beneficiaries, according to Stephanie Risa Stein, managing director of New York-based Philanthropic Capital Advisors LLC.

Here’s my soapbox

I agree that it’s wise to “Do the same due diligence on your donations that you would your investments or your business.” But when I review an investment opportunity, I review based on the expected criteria for a successful business – profitability, market share, and returns. I don’t review their overhead and management costs. So why would overhead be the criteria for a charity?

I’d like to re-write this “tip.”

EXAMINE CHARITIES CLOSELY. Do some due diligence on charities before you donate, just as you would for an investment or business opportunity. Pay especially close attention to how successful the nonprofit has been at achieving its mission. Do they provide information about how effective their programs are and what impact they have on the people and communities that they serve? Do they have a way to measure and communicate progress and/or success?

I put these two types of “due diligence” to the test with five Minnesota nonprofits that I have supported in the past. I looked at the 990s on Guidestar and found that their overhead ratios ranged from 5% to 17%. Then I looked up web sites and annual reports. Here’s what I (a donor) care about:

• St. Stephen’s Human Services provided food and shelter to 6,000 very poor adults and children
• CommonBond Communities houses 7,850 residents in quality affordable housing
• Admission Possible had a 99% success rate in students admitted to college
• Ten Thousand Things presents astounding theater to people in homeless shelters and prisons
• Minnesota Fringe Festival creates connections for audiences and artists that’s the envy of theater communities in many other cities (the 2009 festival starts this Thursday).

Which of these has the “best” overhead ratio?

I don’t care.

I care that they are effective nonprofits that can tell donors what they do and why it matters. Why would a donor rather examine overhead? Before someone jumps on this point, I agree that 90% on fundraising is completely unreasonable, but that kind of organization can’t demonstrate real results anyway. So can we stop using overhead as the primary criteria for donors – please?

One positive comment about this article – Rich Cowles, Executive Director of Charities Review Council is quoted with good advice for donors about budgeting and planning their giving. Nice national recognition of the Council’s good work and solid reputation.

How can you appeal to donors at a time when costs and demands for services are increasing? How about a letter or email detailing your line by line budget increases? Probably not – because what it costs to provide services isn’t compelling. It’s what results from the services that makes the case. By results, though, I don’t just mean a nice story or picture. I mean results. I’ve been reading and hearing more and more frequently about measuring, quantifying, and communicating the results of nonprofit programs, but somehow we (as a nonprofit community) still seem to be coming up short in public perception.

Once again, a study reports that public confidence in charities is declining. Less than 20% of respondents expressed the highest level of confidence in charities’ practices in using financial resources or in managing programs and services. This annual survey, conducted by Professor Paul Light from NYU’s Wagner School of Public Service, was recently summarized in The Chronicle of Philanthropy. Professor Light was the speaker at Charities Review Council’s Annual Forum in Saint Paul last week. After summarizing the survey results and trends, he focused on two key factors related to confidence. The essential question about confidence, he said, is whether or not the public (and your donors) believe that charities spend their money wisely. Not about what line items are in your budget, or how much is spent on program vs. management – the concern is whether money is spent wisely to accomplish something of value. The second, parallel question is how a nonprofit conveys and demonstrates their value. What benefits occur because of your program? Harlem Children’s Zone’s annual report, for example, is full of data about results, progress, and success. The data demonstrates that money is spent wisely because the results are so real. Professor Light repeated his mantra several times – measure something!

In late November, I wrote an entry about the deluge of year-end appeals for individual contributions. As promised, I kept all the solicitations we received at my house between Thanksgiving and December 31. Here’s my report. We received 66 solicitations for funds in the mail from 55 different organizations (we got more than one each from nine organizations). The nonprofits range from arts, housing, international relief, youth and health care. I know why we’re on some of the mailing lists while others baffle me. My best guess is that I know someone who knows someone who volunteers or is on the board of directors. As I said in November, we responded with a check to a select number of the requests and put the others aside. I saved them all in a show box.

The most interesting way to analyze them, I decided, was to categorize the appeals into four types.

• First, and most compelling to me, were the thirteen requests that told a great story about their work.
• Second are the nine appeals that shared clear numbers and statistics about services and impact – numbers of meals served, children taught, small business financed, etc.
• There is a third group that I call “neutral”. These seventeen letters describe the organization and their work but fail to tell a story or to give much detail.
• The last category – ten letters – are the needy letters. “We need money to pay our rent!” “We face cuts in our budget without you!” “We can’t get enough in grants!” This type of request might make the case for some people but it doesn’t work for me. I want to know what the nonprofit does, not about how bad off they are.

The Chronicle of Philanthropy reported that 2006 was a good year for fundraising, with some organizations exceeding their goals. Anecdotal reports indicate that giving from IRA accounts made possible by tax law changes in August 2006 account for some of the surge, as well as a strong stock market and economic stability. The tax law change is a short-term opportunity so learn about it from Independent Sector for 2007 fundraising. Recent research conducted by Harris Interactive for the Wall Street Journal revealed that 83% of Americans donated to a charity in the last 12 months. These reports are good news for everyone who understands the role that nonprofits play in the community and the world.

I also wrote in November about recent research and trends in donor relationship management. Donors want to have more say about how they hear from organizations they support and what kind of information and solicitations they receive. I was pleased that three of the letters offered us some choices about communications, and one was clearly customized based on our attendance at a specific performance. Now I need to get back to all the other organizations and either get off their lists and save them some postage or start the kind of relationship that I – the donor – want to have.

The annual deluge of year end requests for contributions has begun in earnest. I received four letters at home yesterday, two at work, and three emails.

One of the letters and emails were from the same organization.

I think this year that I’ll make a stack of them and do an analysis after the holidays are over. I will certainly respond to some of them with a check, but others will not get more than an annoyed glance. Annoyed is the operative word. Like most people, my husband and I have a number of organizations that we support regularly because we are committed to their work, believe they are well-run and have a meaningful impact. There will be many other requests, though, from organizations either no connection to our lives, our issues, or our interests. But we’re still on their list – again and again and again. An article in the November 23, 2006 issue of the Chronicle of Philanthropy called “The Vanishing Donor” really struck a nerve with me. The article addresses the high donor dropout rate experienced by many organizations – donors will make one or two gifts and then disappear from the list.

But the biggest reason by far for the loss of donors is that many of them are just as angry as Ms. Medicus about the number of mailings they receive and other aggressive fund-raising tactics, experts say.Even so, most charities that rely heavily on direct-mail and telephone appeals have been slow to change how they interact with new donors, says Penelope Burk, a Chicago fund-raising consultant and author of Donor-Centered Fundraising: How to Hold On to Your Donors and Raise Much More Money.“It is difficult to transition out of the old system to a new one that is better for the times,” but the need for change is long overdue, says Ms. Burk, who has conducted in-depth research on 250 donors to determine what they want from charities and why they stop giving. Charities, she says, “are now in a state where the entire country is over-solicited and donors have hunkered down, looking for ways to get out from under these negative aspects of fund raising.”Donors tell Ms. Burk and other researchers that they are asked for money too often, provided with only token acknowledgments of their gifts, and offered little meaningful information about how their money was used. Donors also complain that they are not given sufficient choices about how a charity communicates with them. (November 23, 2006 Chronicle of Philanthropy).

Join a live discussion with researcher Penelope Burk on December 4th for more on this topic.

The research findings and recommendations were music to my ears:

• Ask donors what method of communication they prefer and how frequently they want to hear from you.
• Put effort into learning what your donors want from you. Do they want information about an issue, information about activities, or simply a thank you letter?
• Reduce the frequency of solicitations.
• Finally, thank your donors personally and sincerely.

I’m going to keep my stack and report back after the holiday. I’m also going to contact the organizations that we do support and invite them to have a different kind of relationship with us – a relationship that fits our preferences and needs. Next year I’ll take that into consideration when it’s time to write the checks.