October 2009: The Nonprofit Starvation Cyle
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| October 2009 |
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| Strategies for Social Impact |
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| Dear Friends, |
This month's Knowledge Letter focuses on an issue challenging myriad nonprofits, to wit, their inability to secure the "good overhead" required to achieve better results for beneficiaries. In a world of "good overhead," staff members receive the training they need to do their best work; IT, HR, and finance systems strengthen operations; and teams have the tools to measure performance, inform decision-making, and improve outcomes. Unfortunately, most organizations are starved for adequate overhead, and are incented by funder biases to underreport their true needs. "The Nonprofit Starvation Cycle" Stanford Social Innovation Review's Fall 2009 issue, proposes a way to stop the madness and trigger a virtuous cycle. We hope the insights resonate in your organization.
Sincerely,
Katie Smith Milway
Knowledge Partner, The Bridgespan Group
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The True Costs of Administering a Complex Government Grant
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A great many nonprofits rely heavily on government grants, but the true cost of that money can be surprisingly high. Consider the experience of a Bridgespan client. An AmeriCorps grant provides nearly 30 percent of its network of affiliates' revenue. The grant requires extensive reporting. For example, the organization must provide evidence of eligibility and signed timesheets for all AmeriCorps members-a task that its part-time member base makes more onerous. It has to submit detailed financial, operational, and outcome reports. And it must track data not only online but also on paper. To cover the cost of these activities, AmeriCorps allows 13 percent of the grant to be put toward administrative costs.* However, our client suspected that its real costs were exceeding that amount significantly. Getting a firm handle on how much it actually cost to administer the grant would be essential if the organization were to develop a plan for becoming financially sustainable in the future.
Since staff time is the main driver of administrative costs, the organization worked with Bridgespan to add up all the hours that staff spent on AmeriCorps reporting. The joint team then used the appropriate labor rates to translate the total hours into a cost figure. The result was eye-opening: the organization was spending a sum equal to 31 percent of the grant amount-far more than the 13 percent allowance.
Discontinuing the grant was not an option, given its centrality to the organization's funding. Instead, the client's leadership looked for ways to reduce compliance costs. For example, they began shifting much of the day-to-day reporting away from experienced employees toward entry-level staffers. Measures like this will never close the gap completely, however. So their plan now includes fundraising efforts explicitly targeted to covering the grant's administrative cost overruns.
*AmeriCorps allows the national office to spend 5 percent of its grant on administrative costs. National passes the remaining 95 percent of the grant to the local offices. The local offices in turn can spend 8 percent of their grant amounts on administrative costs (a 5 percent allowance plus an additional 3 percent for activities such as training). Putting these national and local allowances together brings the administrative allowance to 13 percent of the total grant amount.
**Based on 2006 Bridgespan analysis.
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| Managing Performance |
The Nonprofit Starvation Cycle
Don Howard and Ann Goggins Gregory
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Why do nonprofits and funders alike continue to shortchange overhead? Bridgespan research reveals that a vicious cycle fuels the persistent underfunding as funders' unrealistic expectations about how much it costs to run a nonprofit put pressure on nonprofits to conform to those expectations. The result: Nonprofits spend too little on overhead, and they underreport their expenditures on tax forms and in fundraising materials. This, in turn, perpetuates funders' unrealistic expectations.
Changing funders' expectations, however, will require a coordinated, sector-wide effort. At a time when people need nonprofit services more than ever and when government is increasingly turning to nonprofits to solve social problems, this effort is necessary to keep nonprofits healthy and functioning.
Related content:
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| On HarvardBusiness.org |
Barry Newstead
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| We are reaching the end of the first stage of our work supporting Wikimedia's strategy development process (check out the progress at http://strategy.wikimedia.org) and Bridgespan Partner Barry Newstead has hit his first soul-searching moment. The catalyst? An email from Wikimedia strategy project manager Eugene Kim sharing his thoughts on how to think and act in a wiki way. Read the blog post on HarvardBusiness.org. |
The Right Way to Shift to the Nonprofit Sector
Wayne Luke
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| You're thinking about leaving the for-profit world and entering the not-for-profit arena. That's a great idea. Business skills are both needed and valued by the nonprofit sector. Before you make this leap, however, Bridgespan Partner Wayne Luke advises that you need to understand the makes or breaks in successful transitions: the organization's need for your particular functional expertise and your cultural "fit" with it. Read the blog post on HarvardBusiness.org. |
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How To Develop Yourself as a Nonprofit Leader
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Many people who are working within the ranks of nonprofit organizations could become great senior nonprofit leaders. However, in part because of budget constraints, few organizations in the sector have formal professional development programs to prepare mid-level managers for senior roles. As a result, most mid-level nonprofit professionals must take responsibility for their own career development.
One way to begin the process is to tap the experience of senior leaders who already have worked their way up within the sector. To that end, we spoke with six senior nonprofit leaders-all of whom have spent much if not all of their careers working in the nonprofit sector-about their career paths and the lessons they learned along the way. We also asked what advice they would give to mid-level managers looking to move into senior nonprofit leadership roles.
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Feature: To break the nonprofit starvation cycle, funders must take the lead. |
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Feature
The Nonprofit Starvation Cycle
Weblogs
Can an Online Community Shape Strategy?
The Right Way to Shift to the Nonprofit Sector
From Bridgestar.org
How To Develop Yourself as a Nonprofit Leader
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Media Mentions
"Leaders Urge Charities to be More Efficient," September 28, 2009, CharlotteObserver.com
(This news article about mergers in Charlotte, NC-area nonprofits quotes Bridgespan Manger Alex Cortez on the topic.)
"The Right Way to Unretire," September 22, 2009, CNNMoney.com
(Article notes Bridgespan's Bridgestar initiative as a resource for job leads and information about nonprofit careers.)
"Ending Starvation by Planting Seeds for Growth," September 21, 2009, Balancing the Mission Checkbook Weblog
(Weblog post references Bridgespan's article "The Nonprofit Starvation Cycle" in a discussion of nonprofit and for-profit infrastructure costs.)
Program Trains Minorities in Social Entrepreneurship, September 17, 2009, The Chronicle of Philanthropy
(News story mentions the Bridgespan Group's role in a June 2009 Management Leadership for Tomorrow MBA Prep program boot camp. Subscription required)
Read more media mentions
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