Dan Pallotta’s provocative TED Talk has received a lot of attention in philanthropic circles. Since seeing the video and sharing it with friends and colleagues, I’ve had several conversations with non-profit leaders who see Pallotta’s thesis as a breakthrough because it challenges so many long-held beliefs about what charitable work should look like. But others have pushed back a bit, particularly on the topic of non-profit overhead.
Over the course of 20 years, I’ve seen many examples of charities ratcheting down their administrative and fund-raising expenses to levels that make it difficult to operate and impossible to grow. And it’s common for donors to look at financial ratios as a key indicator of how well managed an organization is. Consider that most of the charity evaluation entities use these ratios as their primary indicator in calculating their scores. To my knowledge, none look at social benefit and program outcomes. But, to Mr. Pallotta’s point, should financial ratios serve as the primary lens through which we view the worthiness — or effectiveness — of a charity’s work?
A charity cannot be evaluated using the same method one would incorporate to evaluate a mutual fund. The outputs are different. It’s perfectly reasonable to judge a financial instrument based on ratios and financial performance, where “performance” is obviously profit. But with charities, the output is not cash. The output is progress. And that is the metric that gets very little — if any — attention from those keeping score. (Click here to read Clara Miller’s article on this key difference.)
For years, I recognized that — as a fund-raiser — my department and I were all part of the “overhead.” And I’d be lying if I didn’t confess that it sometimes gave me a bit of a complex. It look many years, and many conversations on the topic, to finally reconcile the issue in my head. You might assume that given my profession I would be the first to defend any dollars spent in growing revenue. But long before Charity Navigator, Guidestar, and other charity rating organizations even existed, the standards were already very high with respect to controlling administrative and fund-raising costs. My personal breakthrough on the topic came when I needed to advise staff on how to respond to questions on the subject. It went something like this…
“Everything we do, every person we help, and every success we realize depends on the basic elements of this organization. Nothing is possible without our people (salaries), systems (technology), administration (human resources, management, accounting) and infrastructure (facilities, vehicles). On its face, it may not seem like a very compelling place to direct your philanthropic dollars. But if a donor understands that our ‘overhead’ is truly the foundation upon which every meaningful thing we do is built, suddenly it becomes a very wise place to invest a gift.”
For me, that is Mr. Pallota’s point, and the reason his presentation resonated with me so much. My inspiration over the course of my career has been driven by dreams and aspirations around making things better for those in need. And my experiences with donors have shown me that they are inspired to give for the same reasons. That’s not to say that charities shouldn’t be prudent stewards of every dollar given to them, or that donors don’t have a right to expect non-profits to manage their resources wisely. But it’s important to remember that none of us are inspired to act or give based on financial ratios. For charities to succeed in solving problems, we need to, in Mr. Pallota’s words, “ask about the scale of their dreams.” After all, those dreams belong to all of us.