Money, Money, Money!

By Steven Worth, President, Plexus Consulting LLC

“Money, money, money, money, money….” (from “Cabaret,” the musical).   Many, if not most, of us consciously chose careers in the nonprofit and public service sectors

Many, if not most, of us consciously chose careers in the nonprofit and public service sectors because of their mission-driven focus to better the world, or at least that part of it that we are in. And in this context, the subject of money is often seen as antithetical to value-based organizations and causes many good nonprofit and public service executives visibly to cringe whenever the word is mentioned.

This is unfortunate—especially as for-profit companies, which are definitely driven by money, are increasingly eating nonprofit organizations’ lunches in markets such as education and professional credentialing that used to be the exclusive reserve of nonprofit organizations.

Money may be the “root of all evil” for religions, but it is a good and useful tool for managers who are interested in measuring the efficiencies and effectiveness of their programs and operations as well as the relevancy of any and all products and services that might otherwise be bundled and given away for free as “member benefits.”

This concept of money as a metric is a large part of what has driven nonprofits to become less dues and more non-dues focused over the past decade and is a major contributing cause to the nonprofit awakening that we are seeing (cf. A new study by Johns Hopkins University highlights new data from the Bureau of Labor Statistics that reveals surprising trends from nonprofit sector job growth. “Holding the Fort: Nonprofit Employment During a Decade of Turmoil” reports from 2000 to 2010 the nonprofit sector had an annual average job growth of 2.1 percent. Over the same period the for-profit sector had an average annual rate of minus 0.6 per).

So if you are a manager of a nonprofit and pride yourself on not giving a thought to money—you may want to reconsider—it may not be your personal motivator, but it is definitely your friend as a management tool.

The Overhead Myth

By Virgil Carter

Through a historic collaboration, The Better Business Bureau, GuideStar and Charity Navigator have distributed a "letter to donors," aimed at clarifying the "overhead myth" often used to assess performance of nonprofits when making donations.  Here’s the verbatim letter:

To the Donors of America:

We write to correct a misconception about what matters when deciding which charity to support.   The percent of charity expenses that go to administrative and fundraising costs—commonly referred to  as “overhead”—is a poor measure of a charity’s performance.

We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results. For years, each of our organizations has been working to increase the depth and breadth of the information we provide to donors in these areas so as to provide a much fuller picture of  a charity’s performance.

That is not to say that overhead has no role in ensuring charity accountability. At the extremes the overhead ratio can offer insight: it can be a valid data point for rooting out fraud and poor financial management.   In most cases, however, focusing on overhead without considering other critical dimensions of a charity’s financial and organizational performance does more damage than good. 

In fact, many charities should spend more on overhead. Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs. These expenses allow a charity to sustain itself (the way a family has to pay the electric bill) or to improve itself (the way a family might invest in college tuition).

When we focus solely or predominantly on overhead, we can create what the Stanford Social Innovation Review has called “The Nonprofit Starvation Cycle.” We starve charities of the freedom they need to best serve the people and communities they are trying to serve.  

If you don’t believe us—America’s three leading sources of information about charities, each used by millions of donors every year—see the back of this letter for research from other experts including Indiana University, the Urban Institute, the Bridgespan Group, and others that proves the point.

So when you are making your charitable giving decisions, please consider the whole picture. The people and communities served by charities don’t need low overhead, they need high performance.

Signed by the Presidents/CEOs of the BBB, GuideStar and  Charity Navigator, these thoughts should help all of us to better recognize the proper role of overhead and what is truly important in our volunteer contributions and organizations.

To see the original letter, go to bbb.org bbb.org 

It’s Still the Economy

By Virgil Carter

Have you noticed that the economy hasn’t been transformed into a positive, high-energy environment?  While we may not be in the depths of 2009, there is little to encourage optimism.  Non-profit organizations, dependent on dues revenues and non-dues income, continue to be under pressure.  The pressure may be from diverse sources:

•          Reduction in membership and membership dues
•          Shrinking base of non-dues income sources
•          Less available time for volunteer service to the non-profit
•      Pressure to cut staff and other operating expenses

Many associations, facing these pressures, continue to do what they have always done, drawing on reserve funds to offset the negative economy.  Other associations have seen the slow economy as a leadership opportunity; an opportunity to review and adjust their operations and value-added approach to business.

Opportunity for the Visionary

The challenging impacts of the prolonged economic slowdown actually offer an opportunity for the visionary.  This may be the very best time to re-assess legacy programs, products and services, identifying and prioritizing which ones most effectively support the organizational mission and provide essential capital for operations and reinvestments. 

Virtually all non-profit organizations have a host of long-term, legacy programs, products and services that hang on from year to year.  Experienced association staff know that major organizational change almost never takes place when times are good and members/money is rolling in.  For change to take place, it’s often the case that the pain of doing nothing has to outweigh the pain of change!.  Thus, when membership and revenues are decreasing, often becomes the ideal time to focus everyone’s attention and energy on important changes needed to meet a changed economy.

Change Leadership

Why do many organizations continue to do what they have always done, even during challenging economic times and even enduring negative annual financial performance?  Why is change leadership so difficult?  Harvard Business School professor John Kotter writes that the essential first step in organizatonal change is “to establish a sense of urgency” which is shared throughout the organization!  Even during emergencies, there is a normal human desire to hang onto the familiar and predictable.  Unfortunately, little in our changing world remains familiar and predictable for long.

Thus, our continued economic challenges are an opportunity for change leadership, where it may be most needed and beneficial.  Experienced and visionary volunteer and staff leaders will work together to critically review their organization’s performance,  communicate a sense of urgency about needed changes and put in motion the new vision and implementation steps which may be needed.

This “challenging” economy offers important opportunities for new organizational directions.  Let’s get cracking!

Comparisons: McKinsey Global Survey on Improving Board Governance

By Virgil Carter

Every organization, whether for-profit or non-profit, strives to achieve an effective governing board.  McKinsey & Company, a recognized leader in organizational management  in the for-profit corporate sector, often provides research useful for profit oriented and non-profit organizations alike.  In a recent 2012 survey, “Improving Board Governance:  McKinsey Global Survey Results”, McKinsey has some interesting findings which may be useful benchmarks for non-profit CEOs and volunteer leaders.

Survey contributors Chinta Bhagat, Martin Hirt and Conor Kehoe write, “Board directors today are more confident in their knowledge of the companies they serve and more strategic in their approach than they were in 2011. We asked respondents to focus on the single board with which they are most familiar. Overall, 166 respondents represent publicly owned businesses, and 606 represent privately owned firms; they represent the full range of regions, industries, and company sizes.

Focusing on Strategy

“Over 90 percent of respondents also say their boards have become more effective over the past five years, most often attributing that improvement to better collaboration with senior executives and more active or skilled independent directors”, according to the survey.
Two reasons may explain why boards are most effective at strategy: board members say they spend more time on it than other areas and that they have increased the amount of overall working time they devote to strategy, answering the call to action expressed by respondents to previous surveys. “In our 2008 survey, respondents reported that 24 percent of board time was spent on strategy—and a clear majority said they would increase the time spent.”  Now, directors say their boards spend 28 percent of their time on strategy, and only 52 percent say they would increase it (compared with 70 percent of respondents who said so in 2011). Meanwhile, the share of time spent on execution, investments, and M&A has shrunk, which is likely related to the fact that overall M&A activity has declined since 2007.

Room for Improvement

While respondents say their boards are taking more responsibility for strategy, risk management is still a weak spot—perhaps because boards (and companies) are increasingly complacent about risks, as we move further out from the 2008 financial crisis. This is the one issue where the share of directors reporting sufficient knowledge has not increased: 29 percent now say their boards have limited or no understanding of the risks their companies face. What’s more, they say their boards spend just 12 percent of their time on risk management, an even smaller share of time than two years ago.
Despite the progress they report, directors identify the same factors that would most likely improve board performance as respondents did in the previous survey: a better mix of skills or backgrounds, more time spent on company matters, and better people dynamics to enable constructive discussions. With respect to time, directors say they devote roughly the same number of days to board work as in 2011, and they still want more time. Across regions, directors at North American companies work an average of 22 days on company matters—notably less time than the 29 days and 34 days, respectively, reported by directors at European and Asian companies.

Looking ahead

• Increase attention to risks. According to respondents, most boards need to devote more attention to risk than they currently do. One way to get started is by embedding structured risk discussions into management processes throughout the organization.
• Make time. As in 2011, most directors say they want to spend more time on board work, and the results suggest real benefits from doing so: directors at higher-impact boards spend many more days per year on their work than everyone else, which likely helps them stay more relevant to and engaged with important company matters.
• Learn from peers. Directors at boards with less impact have much to learn from the actions taken by higher-impact boards, and not only when it comes to strategy. Using robust financial metrics, conducting postmortems of major projects, and using systematic processes to create competitive advantage through M&A—which the high-impact boards do more often—could all help boards become better.

How would you compare your non-profit governing board to these results?  Do you periodically survey your board for bench-marking and opportunities for governance improvement?  For a full copy of the survey findings, go to http://www.mckinsey.com/Insights/Strategy/Improving_board_governance_McKinsey_Global_Survey_results?cid=other-eml-alt-mip-mck-oth-1308