It’s heretical.  What would happen if we applied free market capitalist ideas to charities?  What would it be like to have non-profit organizations operate with the same (or similar) rules as commercial organizations?  Uncharitable: How Restraints on Nonprofits Undermine Their Potential explores this from the perspective of a former fundraiser – someone who used the power of marketing to gain funds for charities – but in the process spent a lot of money.

Changing the Rules

The way that charities are ranked, rated, and evaluated isn’t based on their results.  It’s on their efficiency.  We’ve confused effort with effect.  Instead of asking the hard questions about whether they’re effective, we simply ask what percentage of their income goes to programs.  In addition to not being the best measure, it may be fiction.

If you want a universal measure that applies to all non-profits, efficiency – how much is spent on programs as a percentage – makes sense.  It’s universal.  It sounds good.  The problem is that it doesn’t tell you anything.  I can spend 99% on programs with minimal infrastructure.  I can also fail to accomplish anything meaningful for anyone.

Consider an organization that spends 50% on programs – but is incredibly effective and transitions people from food scarcity to abundance.  Compare that to an organization that spends 99% on programs but only serves to address the current food need of people daily.  They can’t meet demand, and the demand keeps getting bigger – because they never help people find ways to eliminate their food scarcity.  Which is the better organization?  From the metric, the second.  From the outcomes, the first.

In addition, when everyone is pressed for the magic number of what they spend on programs, they’ll necessarily put more into that bucket than should be there.  Take accounting fees, which 27 percent of non-profits categorized as program expenses despite IRS rules telling them not to do so.  What about grant writing or proposal writing?  How do you account for an executive director’s time if they’re also running programs?  The answer is that in many – but not all – cases, the answers are biased towards programs.

Of course, it’s a bit of a misnomer, because everything is ultimately in service of the programs – it’s just a matter of how directly or indirectly those funds are used.

Short-Term and Long-Term

We know that in the long term, long-term investments will do better than short-term investments.  It’s a tautology.  We know the best way to create the best societal outcomes is to focus on the long-term problems – but there are people in need today.  Charities are penalized – and sometimes vilified – when they invest funds to improve the situation in the long term if they can’t serve today’s needs.  Consider the example from above, with the organization that spends 50% of its money on programs that transitions people out of food scarcity.  If this process takes a year or two, and significant investment in training them for better skills, it may be that the organization is vilified because they’re focusing too many resources on too few people.

In the corporate world, we look for organizations that are capable of producing consistent results and that transform their industries.  For charities, we look for those who are processing the most people today – regardless of whether they’re solving the real problems or not.

Financial Efficiency

A 2008 Ellison Research study found “most Americans believe non-profit organizations and charities are not financially efficient in their work.”  This may be in part based on the guidelines for what should be devoted to program operation versus overhead.  It may be in part because nonprofits are unable to make long-term investments to reduce their operational costs.  Whatever the source of the concern, it’s one that nonprofits need to take seriously.

Strangely, the effort to be cost efficient – accepting donated computers, furniture, and more – may lead to the inefficiency that so many of the public are concerned by.

Selfless and Selfish

At the root of financial problems for charities is the tension between the completely selfless and the completely selfish.  We expect that corporations are filled with people who are entirely selfish.  (See The Selfish Gene.)  We expect that charities are completely selfless.  Neither is true.  The movement towards corporate responsibility and B Corps is one way that we see that corporations aren’t entirely selfish.  (See Red Goldfish for more.)  Conversely, most people who are working for nonprofits need to make some money to support their lifestyles.  They need to make something to contribute to their family’s needs and dreams.

Donor Absolution

Certainly, donors contribute to a nonprofit because they believe in them.  They believe that the mission that the nonprofit is on is a worthy one.  However, there’s also a hidden challenge lurking in the shadows of most people’s consciousness.  The challenge is that people don’t believe that they should have so much money or that they’ve made decisions that have unintentionally hurt others.  Donating is at least in some small part a way to pay penance for sins.

The Puritans who started America believed that financial success meant God’s favor and living right.  However, at some level, they also believed that it was sinful to amass worldly goods when they’re supposed to be working for heaven.  This dichotomy has plagued us ever sense.

Tactical Morality

Most people haven’t given deep consideration to their morality.  Certainly, there are works like How Good People Make Tough Choices, The Righteous Mind, Choosing Civility, and Trust Rules that offer a detailed view of morality.  However, most of us don’t consider that there are three different approaches to morality.  Do we care about the results (ends-based, utilitarianism), the rules, or the intent (care)?  (This whole conversation is reminiscent of feeling, meaning, and power perspectives in Dialogue.)

This creates a problem when we’re talking about funding options for nonprofits.  Consider a fundraiser that raises $5 million but costs $3 million to do.  The net – utilitarian – view is $2 million in the coffers of a good cause.  This would seem on the surface to be a good thing.

However, those more concerned with the rules might wonder whether such a “wasteful” approach makes sense when $3 million would do a lot of good.  In the view of Uncharitable, this is not the right way to think about it, since the $2 million wouldn’t be available for good if the $3 million hadn’t been spent on the event.  The cries of efficiency echo.  Instead of looking at the outcomes that can be had with the additional money, we challenge the way it was raised.

Bowling Alone decried the loss of social capital, because instead of investing in relationships in groups, we started paying our dues.  We didn’t look at fundraising based groups the same way that we did the ones we participated in – and that may hold the kernel of our concerns for large scale, but high cost, fundraising.

Hiring a Service for the Poor

In some ways, a donor is hiring a person or service on behalf of those served.  The donor wants to be compassionate and thereby resolve the pains of those who the nonprofit serves.  This view isn’t the common thinking about donations, but it helps to change the conversation from one of efficiency to effectiveness.  There’s an opportunity to negotiate on costs at the start of the donation process.  It’s during this time that the nonprofit can set expectations about what the impact should be.  The donor can make $100,000 available with the expectations that 10,000 people will be reached and supported (or whatever the numbers are).

This changes the conversation to the efficacy.  Did you do what you said you would do – yes or no?

Failure Is Not Accepted

In the long term, it may not be acceptable to fail – but in the short term, are there incentives for bold initiatives that can make a real change?  In most cases, there’s not.  When donating, people want certainty – even if that certainty offers marginal benefits.  A venture capitalist knows that many of the companies that they invest in won’t make it.  They’ll fail.  They’ll break even.  However, there will be the occasional break out success.  The success will earn them 10x or 100x or even 1000x on their investment, and in doing so, they’ll make the whole portfolio of investments work.

However, a similar sentiment doesn’t exist in the nonprofit space.  First, there are fewer investments being made in nonprofits.  It lowers the threshold for risk.  You want to know that your donation made an impact – you don’t want a one in seven chance of making a 10x impact.  It doesn’t make emotional sense.

Investors and Donors

What if we gave investors an opportunity to invest in nonprofits – and to make a return on those investments.  It’s a radical and uncomfortable idea where we’d allow investors to participate in fundraising capital with the idea that they could take some percentage of the outcome from the event.  It feels wrong – but it might make the capital that nonprofits need to be able to get more donations easier to get.

There are many forms of how this investment might happen and the potentially promised returns might be structured.  For many, myself included, it “feels” wrong even if it might be morally right.

In all, that’s the challenge of Uncharitable: how do we get past our simple evaluations of morality and look to the broader good – even if it’s uncomfortable?

The Way It Really Is

In the end analysis, I struggled with the gap between what really is today and where Dan Pallotta would like to see the world.  I do think that we need to have a bold vision for making things better.  I believe in better metrics.  I accept that better marketing means more total dollars and a lower percentage.  I accept that, to get more capital than what donors are willing to provide, we need to find other approaches.  What I don’t see is the path from where we are today to where we want to go.  Uncharitable sets out a bold vision and explains the problems, but it feels short on solutions.  Pallotta claims that his subsequent works address this gap – we’ll see.