Dianna Sutton's - "Philanthropy Corner"
Sunday, October 4, 2009
Here Are a Few More Charity Myths Dispelled

By Dianna L. Sutton

In response to a recent Philanthropy Corner article regarding myths that exist about the nonprofit sector, I have received inquiries about two other myths.

The first one is that charities should allocate 100 percent of their budgets on core programs and services. The second myth is that nonprofit organizations with strong internal management are more successful and effective in creating social change.

Professional researchers have dispelled both of these myths. The first one centers around a common belief among donors that the best organizations to support are those with the lowest percentage of fundraising expenses and overhead costs. Well-publicized abuses in excessive spending in relation to services provided by a charity on the local and national level make this belief appear warranted. Although using audited financial statements to calculate general and administrative overhead and fundraising costs as a percentage seems like a useful way to compare and rank charities, it is an inconsistent method to gauge organizational efficiency and effectiveness.

According to an article in the Journal of the DMA Nonprofit Federation, using ratios as a measurement of organizational efficiency is a useful tool but donors should not use it as the only determining factor because of the inconsistency of reporting and interpreting this measurement. First, there is no uniform standard regarding whether to compare fundraising costs as a percentage of total income, contributed income, or whether to include in-kind gifts, grants and extraordinary income such as estates that can significantly impact a given year. Second, there are legitimate reasons why fundraising, general and administrative expenses may differ among charitable organizations, such as payouts from endowments, an organization's age and extraordinary circumstances such as a crisis or capital campaign. Finally, although there are accounting standards that were created to more uniformly report fundraising and administrative costs, there are still varying interpretations of the guidelines that nonprofit organizations use to report these costs.

Some charities may claim their fundraising and administrative costs are covered by grants or other sources so 100 percent of the donation will be spent on programs. Charity Navigator warns that "any charity that claims to spend 100 percent of your donation on programs should be looked at with a critical eye." Organizations cannot operate effectively without spending a portion of resources to support infrastructure and generate new income. If a charity claims that all the fundraising or administrative costs are underwritten by a donor or other means, they still need to efficiently allocate their organizational resources as a whole. Fundraising experts recommend that charities spend only 60 percent of their budgets on programs. Charity Navigator found that most charities actually spend at least 75 percent of their expenses on programs and services and are operating efficiently by spending less than 10 percent of their budgets on fundraising and less than 15 percent on administrative costs.

The second myth suggests that nonprofit organizations with strong internal management are more successful and effective in creating social change. Researchers at the Center for the Advancement of Social Entrepreneurship found that measuring nonprofit efficiency and effectiveness through the traditional metric of calculating overhead and fundraising ratios may not be a true indication of organizational impact. Organizations creating social change know the importance of investing in organizational capacity despite public pressure to keep administrative costs low. The research of 12 well-known, successful, high-impact nonprofits dispelled commonly held beliefs that internal growth and management is the pathway for organizations to achieve social impact. By studying these organizations' application of generally accepted nonprofit management practices, researchers found that although internal growth and management is important, the ability of an organization to achieve social impact is contingent on its external work.

Rather than growing their own organization from within, high-impact nonprofits build social movements that transform individuals, businesses, government and other nonprofits to create systemic change. While mastering basic management principles, high-impact organizations adopt some or all of the following practices. In addition to delivering services, high-impact organizations engage in policy advocacy to affect legislation and acquire government resources. Also, high-impact nonprofits go beyond the traditional altruistic concept of charity to leverage markets and create additional resources through earned income and corporate partnerships. High-impact organizations convert supporters into evangelists for their causes and organizations. They also build networks with their nonprofit allies by sharing resources and they distribute leadership internally and throughout external networks. High-impact nonprofit organizations aren't mired in past practices of effectiveness but are highly adaptive in modifying plans and programs on an ongoing basis.

Rather than focusing on conventional methods to evaluate organizational efficiency and effectiveness, existing myths and assumptions and operating models need to be challenged. The one-size-fits-all evaluation methods simply do not accurately evaluate nonprofits. Donors seeking to increase their return on investment should seek out organizations that are utilizing the principles of high-impact organizations to create social change.

Dianna Sutton is president and CEO of the Community Foundation of the Florida Keys. She can be reached at 292-1502 or dsutton@cffk.org