We’ve all heard the proverb: “The road to hell is paved with good intentions.” It is ascribed to a French saint from the 12th century, St. Bernard. So it’s been around a while. Having spent most of my career in the nonprofit sector I learned early on that good intentions and desires are admirable qualities. However, good intentions are only helpful if refracted into reasonable action which effectively meets a human need.
In my role as a nonprofit consultant I’ve met many wonderful well intention people dedicated to doing good. All of these nonprofit staff and volunteers operate with a sentimental assumption that because they were doing good the public should unequivocally support them in their effort. This passion and personal commitment is to be commended. However, this assumption behind the notion of doing good can limit the capacity to actually do good. This is because the desire and the act involves two distinct human qualities. One comes from the emotional and passionate part of our humanity (pathos). The other from the rational part of our humanity (logos). The two must come together in a careful balance for effective action. The passion to do good must use logic and reason to craft workable action and effective results. To paraphrase Ben Franklin “let passion drive you and reason hold the reins.” Indeed one of the many barriers to increasing the effectiveness of nonprofit organizations and many for-profit businesses is passion without reason holding the reins.
Wanting to do good, whether it is feeding a homeless person or opening a great French restaurant, requires more than good intentions or passionate desire. It requires innovative questioning and analysis of the need to be met. It requires determining what is needed to meet this need. And if this analysis leads to success the satisfaction from achieving this effort will far outweigh the emotions from the intent. So the desire to do good is actually really not what only matters. Rather what also matters is building a workable process which effectively meets the need which the good intention hopes to address. Otherwise the result will be failure or a host of negative unintended consequences creating a road to hell paved with good intentions.
Often we tend to group nonprofits into one category. This is a mistake. All nonprofits are not the same. The US nonprofit sector is defined by Federal tax legislation. The tax code lists a diverse mix of nonprofit organizations conducting economic and social activity within the US economy. This can include the local country club, Kiwanis club, credit union, hospital, nursing home, chamber of commerce, child care center, foundation, college, professional association, church, Elks Club, cemetery, and even insurance company. Indeed, the Federal tax code lists over 27 types of nonprofit entities. All receive special tax exemptions and all are part of the economy. That is, all are doing business. But as you may notice not all are in the same line of business. Each of these organizations by tax code, behavior and business subsector are distinctive.
Most of the nonprofits registered by the IRS, which is required by all nonprofit organizations to receive special tax treatment, are charitable nonprofits defined under section 501(c)3 of the Federal tax code. These 501(c)3 nonprofits comprise over 70% of all nonprofits. Typically, these nonprofit organizations are what most people think of when they hear or use the word “nonprofit” or “charity.” These are the organizations where donors can deduct their donations on their tax returns. Yet even within this category not all operate similarly. Especially in terms of their source of revenue. For example, a nonprofit nursing home or hospital’s revenue derives mainly from fees charged to its users. The local soup kitchen or homeless shelter depend more heavily on donations to cover its cost of operation. All of the above mentioned nonprofits seek support but philanthropy impacts their outcomes differently.
Recognizing the diverse nature of nonprofits and the varied means by which they secure their revenue is important in how you view and judge a nonprofit organization. Not all require public fundraising to keep their doors open. Many operate more like a for-profit business in terms of revenue acquisition, salaries, overhead and administration, etcetera. Others like the local church or food pantry must make their “sales” revenue primarily via fundraising. Neither is better than the other. Philanthropy serves a role in both. So the next time you are approached by a nonprofit it helps to know what their product and outcomes are along with a breakdown in their revenue stream. Not all are the same.
Recently I heard a nonprofit leader proudly report that his organization spent only 10% on overhead and fundraising. The rest of the organization’s costs went to program. We hear such reporting all the time. Not only from those in the nonprofit community but from the press and the public. It’s a pervasive communication. The focus on this measure needs to be corrected! This measure alone is a poor proxy for determining a particular nonprofit’s impact. Even the leaders from three of the nation’s nonprofit “watchdog” organizations dubbed it a myth to use this data to measure a nonprofit’s impact. You can find these expense allocations on any nonprofit’s 990 tax form. The IRS encourages this thinking by requiring nonprofit filers to divide their expenses into three categories: program, management and general, and fundraising.
We won’t delve deeply here into the fact that the numbers reported across the nonprofit sector on this form are anything but accurate. We know from comprehensive studies of nonprofit tax forms that, in spite of generally accepted accounting principles, nonprofits find it difficult to consistently parse their expenses into program, management and general, or fundraising. However, none of this really matters because the very concept itself fails to recognize what should be measured. The important measure is a nonprofit’s outcomes and impact.
It is not the process leading to the service or product which ultimately is important but the product or service itself. If I go into the local Apple store to buy the latest and greatest iPhone I don’t ask the salesperson how much Apple spent in the last fiscal year on management and sales (fundraising). I’m sure the salesperson would think I was being silly asking such a question. And correctly so. This metric is not a valid measure of the satisfaction I will receive from their product. What I want to know is will the iPhone do what Apple says it will do and what I want it to do.
Similarly in nonprofits, in spite of the fact that there is asymmetry in the economic exchange — the donor may or may not be the recipient of the service or product — what needs to be measured is impact. And the specific overhead and fundraising costs incurred by a nonprofit to produce its product in no way guarantees the quality of its impact. As in a for-profit business the quality of their product may or may not be determined by these expenditures. Typically success is measured by customer satisfaction, sales, margins, and maintaining or increasing market share. So too with a nonprofit. What donors should be asking is: Based on your organizational objectives, how well did you deliver? What was the volume and quality of your service? How satisfied are your customers (beneficiaries and donors)? Compared to other nonprofits in the region or sector how do you compare? Are you listening to the beneficiaries of your service to continually improve your service? The list can go on. The point being the overhead and fundraising metric should go way down the list of measures used to determine a nonprofit’s impact. Indeed making this a guiding principle actually limits a nonprofit’s ability to achieve maximum return.
Recently I was commended for my work in the nonprofit sector. Often underlying these compliments is the notion that I was sacrificially answering some higher calling than a typical for-profit job. These perceptions help neither the nonprofit or the for-profit effort. Whether you work in a for-profit daycare center or a nonprofit daycare center your job is equally important and beneficial to society. Whether you are a nurse in a nonprofit hospital or a for-profit hospital your care for patients in equally significant and important. Whether you manage a local soup kitchen or the local Denny’s you are providing a valuable service to society. The value and importance of one’s work is not defined by whether all the profits must be retained by the organization as in the nonprofit’s case or retained by the owner(s) in the for-profit case. The clientele served by a nonprofit org or a for-profit org may be different. Or they may be the same. But at the end of the day the time, talents, and service provided are equally important.
Holding a higher view of work in the nonprofit sector as opposed to the for-profit sector handicaps the effectiveness of both workforces. In the nonprofit sector it helps perpetuate the notion and practice that the nonprofit organization’s staff should be paid less than similar jobs in the for-profit sector. This derives from the sacrificial notion of nonprofit work. It propagates a “do with less” philosophy within nonprofits. In the for-profit sector it comparatively undermines the value of work done by its workforce. All work is important if it produces a good or service which meets societies’ needs. And all should be rewarded equally! The only difference is the type of business vehicle society has designed to meet these needs. One is the nonprofit organization, the other the private for-profit organization. We need to reframe our views of both sectors by recognizing that both are conducting equally valuable business designed to meet societies’ needs.
An employee of a nonprofit recently expressed to me that he or she left the business sector to work in the nonprofit sector. The gist of his reason for the change was a desire to work in an environment that was less “business-like”. I didn’t ask for specific aspects of nonprofit work which was less business-like than work in a for-profit company. Mainly because I didn’t need too. A common misperception in the US work world is that nonprofit work is different from for-profit work. One of the reasons for this misperception is the very name given to organizations in the sector: “nonprofit”. Sadly, this title creates confusion regarding a nonprofit’s economic function.
So, let’s get this misperception out of the way from the start: Nonprofits are not nonprofits! Got it? To extrapolate: a nonprofit is about being profitable. Otherwise a nonprofit cannot consistently produce a quality product. The fundamental difference between a nonprofit’s net income and a for-profit’s net income is who owns these earnings. In the nonprofit’s case they are retained by the nonprofit. In the for-profit’s case they are available to specific persons (shareholders or partner/owners). However, both must make a profit to be, as accountants say, going concerns. Otherwise they are limited in their product quality and eventually become neither nonprofit or for-profit but out of business!
So, let’s drop this unnecessary ballast which we heave onto nonprofits. This ballast limits their effectiveness. Nonprofits are about making a profit. It will be a new day for the sector when in asking about a nonprofit’s impact the question includes a nonprofits … profits!