The Built-in Risk of Growth in Government-funded Nonprofits

Original Website: https://nonprofitquarterly.org/2017/03/23/built-risk-growth-government-funded-nonprofits/

March 18, 2017; Detroit Free Press

Government grants and contracts have a pattern of fueling unsustainable organizational growth by rarely funding all of the costs associated with the contracted program and service. Yet, one of nonprofits’ main functions is to provide services the state is otherwise obligated to provide. Responsible nonprofit leaders need to fully articulate program costs and improve evaluation systems, thereby providing long-term dependable services.

Recently, the Greening of Detroit laid off all of its 26 employees and temporarily shut down operations. According to its last published IRS Form 990 return, in 2014, the nonprofit organization had a budget of over $4 million and over 200 employees. Over its 16-year history, it has planted tens of thousands of trees, replacing a large number lost to Dutch elm disease. The organization plans to restart programs in April once funding resumes.

At its peak, the organization had employment training and urban agriculture programs as well as tree-planting activities. Much of its work was fueled by youth and volunteers and the majority of its funding was programmatic government grants. Unfortunately, this structure didn’t provide for the administrative or overhead costs necessary to fuel a healthy organization.

The Nonprofit Quarterly has written many articles chronicling the unsustainable growth of diverse nonprofit organizations. Often, this stems from decisions to accept government grants that barely fund the program, staffing, and equipment and not the space the program is housed in. Lacking the funds for utilities, supervisory, administrative, and overhead costs, organizations have little margin to fund activities to develop other, less restrictive funding and earned income revenue streams. Without other healthier revenue streams, the nonprofit has few options when government funds are late, disrupted, or ended.

Another trap is the belief that using volunteers doesn’t cost money. Volunteer activity may be free, but the identification, training, and supervision of volunteers are not. Without funding to support volunteers, many will become frustrated, and more staffing will be needed to replace the ones that leave.

These decisions create a propensity to continue these untenable government contracts. After all, how can nonprofits argue the contract is insufficient when they have a history of accepting it as full programmatic funding? Additionally, leaders and staff perceive it as a responsibility to provide the services outlined in the organization’s mission and not as creating a dangerous unsustainable precedent. These conditions create an environment where burnout and insufficient staffing become the norm.

Greening’s solution is to develop fee-for-service landscaping opportunities for condominiums and other large landowners. Hopefully, the new earned income revenue stream will be up and running before the federal government guts the Great Lakes Restoration program that’s responsible for funding Greening’s tree planting program.

What Does It Take to Grow a Nonprofit? Teamwork and Capital

Original Website: https://nonprofitquarterly.org/2016/11/29/take-grow-nonprofit-teamwork-capital/

November 16, 2016; Stanford Social Innovation Review

Although not always an indicator of impact and sustainability, nonprofit growth is a constant focus of philanthropic leadership. A recent study of over 200 organizations found three common attributes among nonprofits that were able to efficiently make the leap from idea to $2 million budget: strong teamwork, effective outcome evaluation system, and access to capital.

The field-based study began in September of 2016 by Kathleen Kelly Janus, a lecturer at the Stanford Program on Social Entrepreneurship. The study’s team examined more than 200 organizations, distributed among those with budgets under $500,000, between $500,000 and $2 million, and over $2 million. The organizations’ missions were diverse; leaders were asked to describe their work by choosing from multiple categories (and could choose more than one). The top three were education, with 48 percent surveyed; 26 percent with youth-based focus; and 23 percent community development missions. (Thirty-one percent chose “other” as one of their tags.) On average, organizations reached the $500,000 milestone in ten months but needed an average of 16 months to double their budgets to $1 million. On average, organizational growth from $1 to $2 million took a similar trajectory.

Since many articles focus on the personality of an organization’s leader as a key element of organization growth, the study began by examining the CEO/Executive Director. It found a wide range of actual job descriptions, but a key responsibility for organizations of all sizes is fund development. Interestingly, as organizations grow, the amount of time leaders spend in fundraising tasks increased from an average of 26 percent for organizations under $500,000 to 30 percent with budgets over $2 million. Study authors also noted a shift from CEO focus on program development for organizations under $500,000 to people management for organizations over $2 million.

Instead, the first characteristic of organizations achieving substantial growth was having a strong team of leaders to support the CEO/Executive Director. An effective team allowed the CEO to focus on capital instead of program. Connected to creating the team was the talent to avoid “bad hires” and purge them quickly when mistakes are made. Often, a strong team was not only made up of staff but key board members. Overall, the study found that “the lack of a high-functioning team can pose significant risks” to organization growth.

The second essential element was a focus on outcome evaluation. The study found that organizations with robust outcome tracking systems could decrease the time to reach the $2 million mark by as much as five months. The study also made a connection between effective evaluation structure and the ability to obtain a large catalyzing grant quickly.

The final element, access to capital, was often linked to the other two elements. Organizations with board members with connections to foundations or individual wealth were able to use their access to facilitate growth. Additionally, organizations with effective evaluation programs were able to discuss their clear program outcomes with funders, leading to more attention by larger foundations donating significant catalyzing grants.

Antony Bugg-Levine from the Nonprofit Finance Fund described in 2012 a key differencein the distinct types of capital essential for organizational growth:

Pay attention to the difference between “buy” money that pays for services and “build” money that enables an organization to invest in its long-term sustainability. As with any business, organizations need to balance both, and this balance shifts as they scale. Funders need to know whether their grantees need build money or buy money and how to be effective buyers and builders.

Overall, organizations of all sizes struggled to raise essential funds and it remains the number one challenge of growth. This is true even for organizations with “a fair degree of earned income,” as the report claims.

At the end of the study, authors identified three opportunities for funders to help organizations scale: fund leadership coaching, aid in building evaluation programs, and refer grantees to other funders in your network.

Get SMART: The 4-Step Science of the Viral Fundraising Campaign

Original Website: https://nonprofitquarterly.org/2017/02/16/get-smart-4-step-science-viral-fundraising-campaign/

February 13, 2017; Phys.org and Nature: Human Behaviour

Creating an effective social media plan is essential for nonprofits and for profits alike. One question leadership often asks is how an organization can engage supporters on the different platforms and, more importantly, translate this engagement into increased financial support. Recently, we have watched the fire-building and war-chest-building effects of the efforts launched on behalf of the ACLU and Planned Parenthood. Ambassadors and advocates often start these on behalf of a trusted organization.

New research from the University of Cambridge studied successful campaigns like the Ice Bucket Challenge. Back in 2014, millions of people were dumping buckets of ice water over their heads. The campaign, known as the Ice Bucket Challenge, gained media attention and increased awareness of ALS, or Lou Gehrig’s disease. In just eight weeks, it raised $220 million worldwide—13 times the amount raised throughout 2013—thanks to videos of President Obama, Bill Gates, Leonardo DiCaprio, and many more celebrities and ordinary people. All of these efforts raised public familiarity of the disease and led to it becoming the fifth-most-popular Google search for all of 2014.

Clearly, this was a short-term success that produced some great medical advances, but the long-term financial impact was not as significant. The majority of ice bucket donors did not renew their donation the following year, although donations remained around 25 percent higher than the year before the challenge took place. Equally important, the average age of the organization’s donors dropped from 50 to 35—an exciting outcome, since gaining the attention of millennials is challenging but essential for long-term viability.

Efforts to renew and duplicate the campaign have largely failed, leading to research by Dr. Sander van der Linden from the University of Cambridge to explore and attempt to pinpoint a recipe for success. Dr. van der Linden, writing in the journal Nature: Human Behaviour, refers to these campaigns as viral altruism or the “altruistic act of one individual directly inspires another, spreading rapidly like a contagion across a network of interconnected individuals.”

Through his research, Dr. van der Linden identifies four principles, or SMART criteria, of a successful campaign. People engaged in the campaign use social media to reach out to their social networks; that’s the S of SMART. The viral campaign captures people’s attention and makes them feel good. The M represents the moral imperative to act. A successful campaign develops from a story displaying need rather than dry statistics. The person receiving this message is captured by the story or image and compelled to act and share it within their network to receive affective reactions (AR). The clearer, simpler, and more emotional the act, the more likely it will be shared. The more involved the act is, the greater and more lasting the impact, but it lessens the likelihood people will participate.

The T of successful campaigns is the final and most challenging criterion. To realize change, the social media campaign must transform the act from a quick click-and-share to a social movement. Indeed, many campaigns encourage people to compete and win rather than support the cause. These flashy campaigns create interest because of the number of people participating but soon bust since the campaign only lasts as long as the person is acting. Instead, campaigns are often more successful if their growth develops rather than explodes.

Campaigns turn into movements if the act or campaign is connected to the mission. To create lasting engagement, a successful campaign internalizes a new personal deeper action or norm within the people sharing. In the case of The Ice Bucket Challenge, it is estimated that only one out of four videos mentioned ALS, and even fewer (one in five) said they made a donation. But, those that mentioned the organization were five times more likely to give. Additionally, when the organization attempted to restart the challenge in 2015, the donations garnered from it were less than one percent of 2014’s levels.

Deliberately building successful campaigns is rare. Instead, most viral campaigns stem from a single act outside of the organization. Successful nonprofits use their communications plan to connect and build on these campaigns to create lasting change.

The 16 Ways Your 990 Informs on You

Original Website: https://nonprofitquarterly.org/2017/02/23/sweet-16-990-return-says/

February 19, 2017; Denver Post

Every year, nonprofit organizations must submit their informational returns to the IRS in the form of a 990 or 990-EZ. Although these forms are sent to the IRS, they are also available to the public on a number of websites, including GuideStar. Additionally, nonprofits are required to provide them upon request. Given the competitive funding environment, philanthropic organizations should see the 990 as an opportunity to promote their work to potential donors.

Recently, the Nonprofit Quarterly offered a webinar identifying pitfalls and red flagsnonprofit organizations can avoid when filling out their returns. In that webinar, Chuck McLean of GuideStar discussed the areas within the form where the IRS, reporters, and donors tend to look to determine whether or not a nonprofit is on the up-and-up. McLean also explained that the facility all interested parties have in interpreting these reports and red-flagging them in terms of potential problems should be a wakeup call to nonprofits. Quite simply, he said, these are arguably your most public-facing documents and they grow ever more accessible—so why aren’t you paying much attention to them?

The webinar was meant to serve as a guide to improving both the reporting and the actual behavior of the nonprofit. In some cases, problems lie in the substantive issues you are accurately reporting, in which case the form can act as a reminder to the board to make changes. In others, it’s the sloppiness and the disregard of the form itself that are at issue.

Bruce DeBoskey, a philanthropic strategist with the DeBoskey Group, recently described the Form 990 in the Denver Post as a “treasure trove” of information for potential donors. This is particularly true when donors examine it over multiple years. In his excellent article, DeBoskey identified 16 areas of interest:

  • Current tax status
  • Mission statement
  • Revenue received and from what sources
  • Internal expenses, including program, accounting, management and fundraising expenses
  • External fundraising expenses
  • Legal and accounting expenses
  • Net assets and cash reserves
  • Investments
  • Use of program-related investments
  • Identity (and salaries) of board members
  • Salaries of key employees
  • Key programs as well as expenses associated with each program
  • Significant changes in financial condition
  • Conflicts of interest among professional and staff leadership
  • Important governance policies and practices that demonstrate use of best practices in nonprofit management
  • Lobbying activities

Many of these areas are financial in nature, but others, as you will note, describe the management processes and the heart of the organization and its work. Yet, these sections in particular are rarely utilized to their full potential.

One of the first sections of the 990 has a place for the nonprofit to provide its mission. Although the form offers adequate space, many nonprofits provide only a cursory mission statement. Taking the time to provide a more accurate and complete mission educates potential donors on how the organization’s overall services remedy a critical need. Additionally, a strong mission statement sets the tone and encourages donors to continue their examination instead of flipping to the next return.

The 990 also has a section where nonprofits can describe their major programs. The webinar outlined the IRS’s expectations for this section, including numerical outcomes and short- and long-term goals. Using this space to its full potential is particularly important for nonprofits with more complicated programs and services, but few make the effort to provide this type of information.

Another area that rarely receives attention from nonprofit leaders is the board and key staff listing. It is not uncommon for nonprofit leaders to forget to give their tax preparer an updated list of board members. Without an updated list, donors comparing multiple years may be apprehensive over the lack of transition or overly concerned if the board list on the website differs substantially from the one in the last available 990.

In many instances, the picture shown by the financial sections of the 990s is incomplete. For example, consider organizations receiving multiyear grant disbursements, transactions with related or “interested persons,” or the case of embezzlement. The 990 provides specific sections to comprehensively explain these situations to the IRS and potential donors.

Finally, the 990 asks if the nonprofit has policies related to whistleblowers, conflicts of interest, and document retention and destruction. Although they are not required, these are best practices. Not taking the time to develop and execute these policies can be a signal of a looming catastrophe, or at minimum a lack of attention to good governance.

By the way, foundations, too, are required to fill out a Form 990, one which includes a complete list of grants—critical information for nonprofits seeking funding.

Patents and Profits in a Public Setting: Who Should Benefit Financially?

Original website: https://nonprofitquarterly.org/2017/08/07/patents-profits-public-setting-benefit-financially/

July 21, 2017; The Conversation

Writing for The Conversation, Shobita Parthasarathy explored the ethical corners of the relationship between nonprofits, such as “universities and other nonprofit research institutions,” and patents. She asked, “Are they really operating in the public interest when they wield their patent rights in ways that constrict research? Or when potentially lifesaving inventions are priced so high that access is limited?”

She protests that though the public partially underwrites nonprofit discoveries via tax breaks, it isn’t seeing a lot of benefit in return.

Universities are very often the locus of research projects that require patents and many such projects get other types of public support as well, including government grants. In some cases, there are private corporations in the mix as well.

The gene-editing technology called CRISPR is among the latest university discoveries with the potential to earn the institution possessing the patent millions of dollars. It is also an example of the expenses universities are incurring to develop and protect their innovations. UC Berkeley first reported the gene-editing technology in 2012; two years later, in 2014, Broad Institute of MIT and Harvard received a “special expedited” patent. A dispute over ownership rights ensued, with Broad winning the expensive legal dispute and patent. (Back in AprilNPQ looked at the implications of the Broad case with regard to whether the Institute was upholding its duty as a nonprofit to act in the public good.)

The potential value of the CRISPR patent is an anomaly. Companies are not interested in most of the patents universities hold. At the same time, higher ed is spending millions on Technology Transfer Offices, responsible for applying for, protecting, and selling patents. For example, legal fees for institutions with Technology Transfer Offices increased from $50 million to $335 million between 1993 and 2014, with the average school spending $2 million. With costs so high, it is no surprise a 2013 Brookings Institution study, “University Start-Ups: Critical for Improving Technology Transfer, found 84 percent of these institutions didn’t generate enough revenue to cover the Technology Transfer Office costs.

There are two different types of patents corporations can purchase from universities and colleges. The first is the exclusive right to produce a product. These patents are the most lucrative for the institution. The second is a non-exclusive right, allowing multiple producers of a potentially lifesaving product. As universities fall farther and farther in the hole, the desperation to reap as much as possible and sell the exclusive patent to the highest bidder increases. Additionally, unlike grants and other project-based funding sources, revenue from patents can be spent throughout the institution.

Universities argue that since the revenue is invested back in the schools, these activities fit within their nonprofit status. But others disagree, since only a small number of institutions reap the majority of patent dollars, and in the case of prescription drugs, the expenses often increase health costs, limiting those who can benefit. A famous example is the AIDS drug Zerit, developed by Yale researchers in 1998. The patent was bought by Bristol Myers Squibb, who eventually sold the drug at a price unaffordable to developing nations where demand was most critical. Eventually, the school and company bowed to government pressure led by Doctors Without Borders, and Yale students created a generic version, dropping the price by 96 percent. These developments led to Universities Allied for Essential Medicines (UAEM). The organization is a network of university students advocating for institutional responsibility to improve access to public health goods. Currently, the organization has 100 chapters in 18 countries across the world.

Harvard is one of the few schools following UAEM’s lead. With its huge endowment, it can afford to accept smaller compensation for its patents.

As Parthasarathy writes, “I argue that nonprofit institutions can and should do better. At a moment of spiraling drug costs and declining trust in our science and technology policy institutions, they must develop a more sensitive and systematic way of thinking about the public interest in their intellectual property strategies.”

She proposes at least one requirement in intellectual property governance committees to help ensure that society benefits from the patenting and licensing practices of tax-exempt institutions.

Suppose researchers at a nonprofit research institution develop a drug that treats opioid addiction. The drug would clearly have major societal benefit, since it could save some of the 500,000 Americans the disease is projected to kill within 10 years. An intellectual property governance committee could recommend that the institution negotiate only nonexclusive licenses on the drug—in turn fostering research, competition and lower prices. In addition, the committee might advocate a narrowly written patent to encourage related innovation.

Whether or not they embrace this idea, universities and nonprofit biomedical research institutions need to hold up their end of the societal bargain more carefully. If they don’t, they’re likely to face greater controversy and even more questions about whether they really deserve their special status.

Creatng Earned Income

Thanks to a drop in government funding, increased competition for private grants, and the explosion in large galas, nonprofit’s are expanding their search for new consistent revenue sources. Often this search leads to the exploration and development of earned income opportunities. If successful, the organization becomes more stable by developing and controlling a proportion of its own revenue.

Nonprofits generating earned income act similar to a business. After all, a nonprofit develops a successful earned income stream by creating and selling a product or service. To develop a product the consumer needs/wants, leaders research the market and identify their niche.

There are three different types of earned income strategies. The first is a fee for service model where the service is an integral part of the organization’s mission, for example hospitals and daycares. The second is an effort the organization develops solely for the purpose of earning income. The third is a hybrid of the two types.

Although many nonprofits are focused on earned income opportunities, nonprofits have been developing them for centuries. One of the most ubiquitous is the resale store. The first resale store was developed at the turn of the 19th Century by Goodwill Industries. The Goodwill resale store provides training for its clients as well as sells donated reused clothes and household goods. Goodwill uses the store to provide job training and then helps the client find employment. Once that client finds permanent employment elsewhere, another client takes their place at the Goodwill store.

Today there are thousands of nonprofits with resale stores as well as partnerships with businesses that operate resale stores to benefit nonprofit organizations. Some resale stores employ the Goodwill model of training clients needing job skills, others use the store to obtain items clients need as well as selling items, and others sell all of the donated items to raise earned income.

Some earned income opportunities provide permanent employment as well as trains clients. Often this model raises ethical considerations. Sheltered employment opportunities, for example, are earned income opportunities often utilized in organizations serving the disabled. These self-contained worksites usually do not provide opportunities for the clients to integrate with other nondisabled workers or empower clients to learn more than one employment opportunity. Instead the goal is for clients to work in the same position at the nonprofit’s workplace assembly line for the long term.

The ethical issues stem from how the client is compensated. Often the nonprofit can not generate revenue without paying the client less than market wage. In these cases, the goal should be for clients to move on to market opportunities and the nonprofit’s compensation is similar to a stipend.

Many of these activities are social enterprises but social enterprises do not always generate earned income. We will continue exploring social enterprises and earned income in our next post.

Looking for successful ideas and methods to empower leaders and develop earned income. Send me an email and we can schedule a meeting.

New Revenue Sources

Since the recession, nonprofits’ struggle to raise revenue has increased dramatically. Governments slashed funding as deficits grew thanks to the collapse of government pension systems and decreases in tax revenue. In response, nearly fifty percent of organizations surveyed by the Urban Institute’s Nonprofit-Government Contracts and Grants: Findings from the 2013 National Survey reported experiencing a drop in local, state and/or federal funding. At the same time, interest rates dropped leading to a decrease in private foundation investment returns. Many responded by reducing their donations. The recession also led to a decrease in corporate revenue; in response, many corporate leaders cut their marketing and foundation budgets.

At the same time the number of nonprofits has grown dramatically increasing competition for remaining funds. According to the Nonprofit Quarterly, the number of nonprofits reporting to the IRS increased by 24%, from 2000-2010 to a total of 2.3 million. https://nonprofitquarterly.org/policysocial-context/23359-infographic-what-is-driving-nonprofit-sector-s-growth.html

As nonprofits saw revenue decreasing, the demand for services rose exponentially. The recession led to millions of families losing their homes or selling them at a loss. Some lost their job and were unable to find another with a similar salary. Many of them were forced to work at lower or even minimum wage.

Over the last year, many government leaders have announced the end of the recession, but its effects linger. Although, foundation investment return is starting to rise, many determine their total gifts by averaging the returns of the last three or five years. These averages limit the effects of current growth. Further, many foundations continue to see an increase in the number of proposals they receive.

The increasing number of nonprofits is also leading to an increase in the number of solicitations many individual donors receive. The increase is doubled with the use of email. Not only are these generous individuals and families receiving requests from two sources and new organizations, but their friends are also asking them to give to their favorite charities.  Many report they are sick of the constant barrage of appeals, even from the nonprofits they feel passionate about.

Thankfully there is a silver lining for nonprofits and the millions they serve. Many nonprofit leaders are creatively developing new revenue generating sources. Additionally the internet is providing new tools to reinvent other methods. Finally, many states are creating new revenue generating organization forms. All of this activity is leading to social enterprise; limited, liability, low profit (LLLC) and benefit corporations; crowd funding, and social investment. With all of these new opportunities, smart leaders are trying to stay in front of the curve and educating themselves and their donors.

Developing these revenue sources requires resources and dedication. How do leaders decide which ones are right for their project or program, if the method is efficient, and how to develop the infrastructure needed? We will begin to explore these questions in the next post.