Let Nonprofits Spend More to Do More

Why aren’t nonprofits held to the same standards as for-profit corporations?

Privately held for-profit companies generally have overhead from 25 to 50 percent, and investors don’t balk. But nonprofits, including Ubuntu Education Fund, which provides health and education services to vulnerable children in South Africa, struggle under the expectation that they make steady progress on the world’s most intractable problems with overhead of less than 20 percent of their operating budgets, often accompanied by highly restrictive rules and expectations. In the nonprofit sector, the climate is one of fear — and that climate must change.

All too often, nonprofit executives don’t kick against this status quo: They are just happy to survive. In order to do so, they rely on a mixture of strategies, from understaffing to using outdated technologies to reallocating staff salaries to promising that 100 percent of donors’ dollars go to programs. Once an organization has underreported its operating costs, it uses the number to prove its effectiveness. Then donors expect that organizations can manage with less. It’s a vicious cycle, and it’s unnecessary.

How did we get here? The situation grows out of real policy — until recently, there was no mandate to cover overhead with federal grant money, and many nonprofits were prohibited from using more than 7 percent, or in some cases any, government funding for these costs. But it’s also a mind-set. Donors want to feel good about where their money is going, and it’s much easier to feel good about a tangible service: a bowl of soup for a hungry kid, a computer for a struggling student. Employee compensation, advertising campaigns, research — these expenses don’t make the cut. And nonprofit executives have not done enough to advocate for and educate others about the actual costs of their work.

In order to be effective, organizations must have an excellent staff, from the CEO down. At Ubuntu, 63 percent of our annual budget goes toward paying talented individuals a competitive salary and benefits, and we spend an additional $250,000 a year on professional training and development.

There’s also an unfortunate tendency to look at fundraising numbers in a vacuum. The less spent on marketing, it’s thought, the more for the cause. But this ignores the basic business precept of return on investment. If you get $1 to $8.70 back on every dollar you’ve spent on fundraising, as Ubuntu does, that’s a huge increase in what can be spent on services. In the for profit world, that would make investors very happy.

In a summit convened by Ned Breslin and Steven Nardizzi of the Wounded Warrior Project, more than a dozen CEOs of nonprofit organizations began working to find a way out of this harmful mind-set. What we discovered is that whether you are a $15 million organization or a $150 million one, the issues are the same: As a CEO, you need to be able to make business decisions that are judged not by an arbitrary cost ratio, but by their effect.

We need to own our narrative, take the risk of public condemnation, and, if it arrives, defend each other against it, in order to be able to spend the money and take the risks needed to be effective. We must educate the people we work with and the donors. And we should require complete transparency in nonprofit accounting, so that donors can see where money goes and can assess the impact of those dollars.

If nonprofits are going to be effective in their world-changing work (eliminating disease or eradicating poverty), they must be allowed to research, to advertise, and, most importantly, to fail — in the same way that corporations like Apple and Nike do. We need to embrace the notion that has long guided the for-profit world: think big, and often spend big, in order to succeed big.

Originally published on SF Chronicle on 8/11/15.