COURAGEOUS CONVERSATIONS WE NEED TO HAVE — PART II — HOW PHILANTHROPIC ORIENTATION MATTERS IN THE OVERHEAD RATIO CONVERSATION

Andrea McManus, ViTreo Group Inc
March 19th 2019

Net Revenue Vs. Costs
It’s a topic that needs to be addressed, but one that can be polarizing. On one hand, as fundraisers and not for profit organizations, we know that operating and fundraising costs are necessary. Landlords and staff must be paid; educated, experienced and trained staff must be retained to provide our services; funds must be raised to support the cause for which we exist. Donors, on the other hand, want to maximize the portion of their donation going directly ‘to the cause’.

One of the conversations I want to talk about in this series is about overhead ratio, and what can be done about the misinformation that is spread -- this courageous conversation is one that needs to happen if we are going to change the external narrative. As always, I’m going to advocate for developing strategy before embarking on any type of activity. No surprise there!

In the business world, a company’s strategic orientation directs its efforts - businesses can have a market orientation, a product orientation or a sales orientation. As in business, a not for profit’s strategic orientation is critical to its success.

In its summary report Philanthropic Orientation: What Is It and Why Does it Matter?, The Philanthropy Center argues that an organization’s strategic orientation is important because “it shapes the strategy it will implement to create the behaviours necessary to sustain or enhance its overall performance (Gatignon and Xuereb, 1997; Slater et al., 2006).” 

The report goes on to discuss the development of a philanthropic orientation. One of the key components for a philanthropic orientation is the existence of a philanthropic core — philanthropy and fundraising must be clearly embedded in the organization’s core. The not for profit must “consciously reflect on the nature of philanthropy and how the organization as a whole will respond to and nurture it. The development of philanthropy cannot be something that is the sole responsibility of the fundraising team, everyone (including members of the Board or governing body) must see it as their responsibility. Everyone should be offered training in the basics and everyone should have fundraising (or at least supporting fundraising) in their job descriptions.” (source: The Philanthropy Center, Philanthropic Orientation: What Is It and Why Does it Matter? Summary Report, Dr Adrian Sargeant and Emma Bryant)

If we believe that culture is important, and that everyone in the organization understands the role philanthropy plays in achieving the mission, then perhaps this better arms us to turn the ever-plaguing discussion of overhead and costs on its head. 

This is the courageous conversation we need to have - we must ensure everyone within our organizations understands our philanthropic orientation and is able to speak to it in terms of revenue and impact rather than just costs and expenses. When we can do that, we can begin to dispel donor concerns about costs. If we can speak to external stakeholders with a clear understanding of the cause and how we are solving the problem, then the question of revenue vs costs can be discussed with more balanced perspective. And we can become more effective in our fundraising.

Impact Is What We Should Be Talking About

It’s impact that truly matters, yet we seem to use efficiency and effectiveness interchangeably. We must stop this. Efficiency is about cutting costs. Effectiveness is about productivity and impact.

Overhead ratio can be deceiving. Here’s a great example from a comparison at a lecture on measurement and effectiveness of charities:

“Two charities that operate in the same sector and in the same city. Charity “A” spent 25% on overhead and Charity “B” spent 10%. The presenter was a top measurement consultant who has done work for major U.S. foundations. The presenter asked the audience which charity they would support if they were a donor or a funder. Almost everyone raised their hand to support Charity “B”. The next slide from the presenter contained more information on charities “A” and “B”, and how the low overhead charity was not nearly as effective, had no reserves, had low staff morale, was in financial trouble and was considering its options for merger or being wound up. Now which charity are you going to support? (source: Blumberg Segal LLP)

And another example: You are implementing a new and innovative fundraising program. Your goal is to raise $150,000 in the first year. The program requires an investment of $25,000 (staff, materials, etc). You achieve your goal. You have turned $25,000 into $150,000! Typically, what we do is talk about this in terms of costs, e.g. the cost of this program was 16.6%. However, if we look at the revenue generated we can demonstrate to donors that we (and they through their gifts) triggered a 600% return that goes to mission fulfillment! Which story would you rather tell?

In fact, I believe we should spend more on overhead - specifically, we should take more risks and strive for more innovation, which in turn will lead to more effectiveness. If our only focus is to keep overhead ratios low, charitable organizations are often without the infrastructure needed to create the very effectiveness we are tasked to achieve. If we don’t invest in technology, training and development, it becomes difficult to achieve our mission.

Has this been an issue for your organization - have you been held back by a lack of the critical infrastructure needed to reach your goals?

In the for profit world, risk is considered a good thing. Without it, there wouldn’t be any breakthroughs and improved methods to achieve goals. Without it, this can lead to what’s called the ‘nonprofit starvation cycle’. Why, in the not for profit arena, is risk a dirty word? I think the bigger risk is to not invest in innovation, to remain stagnant.

We need to have the courage to have these conversations so that we can address the unrealistic expectations of donors, other stakeholders and the public. We need to have these conversations to challenge the status quo, so that our organizations are willing to be more innovative and to take more risk. We need to have these conversations throughout the organization including making sure our board members are fully conversant to talk about productivity and impact rather than attempting to defend costs. Only then, can we truly be more effective.

How have you addressed donor or other stakeholder expectations in the past? What was the result?

In its report on courage, Deloitte tell us that:

“Courage really does make a difference. While our research uncovered some startling truths about Canada’s business courage, it also provided insights into the tremendous impact courage can have on an organization’s success. Courageous businesses achieve better results.”

- Deloitte, The Future Belongs To The Bold: Canada Needs More Courage, 2016

Discussions about net revenue vs costs can be contentious. I hope that by defining and strengthening your culture, they no longer have to be.

Check out ViTreo's Braintrust as we bring you additional insights into what is and what will be important in philanthropy through our Weekly News Recap and our Podcast.

ABOUT THE AUTHOR

Andrea McManus, Chair, Board of Directors, Partner
ViTreo Group Inc

Andrea McManus is a Partner with ViTreo with over 30 years’ experience in fund development, marketing, sponsorship and nonprofit management. A highly strategic thinker and change maker, Andrea has worked with organizations that span the nonprofit sector with particular focus on building long-term and sustainable capacity.