Companies & Industries

The Charitable Challenge

Philanthropic donors need to understand that "overhead" should not be considered a dirty word when it comes to nonprofit organizations

I once heard that, 22 years ago, when Peter Drucker wrote the Harvard Business Review article, "What Business Can Learn from Nonprofits," some thought that the magazine had committed a colossal typo and gotten it backward. Surely it meant to say: "What Nonprofits Can Learn from Business." Although I suspect this story is apocryphal, clearly Drucker was way ahead of his time in identifying the social sector as an arena in which many of its foremost organizations are every bit as well run as the most successful corporations. "The Girl Scouts, the Red Cross, the pastoral churches … are becoming America's management leaders," Drucker wrote. "In two areas, strategy and the effectiveness of the board, they are practicing what most American businesses only preach. And in the most crucial area—the motivation and productivity of knowledge workers—they are truly pioneers, working out the policies and practices that business will have to learn tomorrow." Drucker was not exactly a nonprofit Pollyanna. While the top organizations are exemplars, he thought, there are far many more that are simply muddling along. In fact, only "a small … number of nonprofits are truly well-managed," Drucker asserted. The vast majority, he added, "can be graded a 'C' at best." Drucker's assessment—capturing both the dynamism of stellar nonprofits and the deficiencies of most of the pack—came to mind recently when I read Give Smart (PublicAffairs, 2011), a book by Tom Tierney and Joel Fleishman. Tierney, chairman of the nonprofit consultancy the Bridgespan Group, and Fleishman, a professor of law and public policy at Duke University and an expert on charitable foundations, have written a guide not only to help wealthy donors achieve results from their largesse but to produce "more and better results over time." Motivating Continuous Improvement

As they note, that's no easy task. For one thing, they write, "feedback on the results of … philanthropic efforts can be ambiguous, even suspect." What's more, "philanthropy has no built-in systemic forces to motivate continuous improvement." To help overcome these difficulties, Tierney and Fleishman urge donors to "engage in a process of rigorous inquiry around six separate but related questions:" 1) What are my values and beliefs? 2) What is "success" and how can it be achieved? 3) What am I accountable for? 4) What will it take to get the job done? 5) How do I work with grantees? 6) Am I getting better? All of these are fitting to ask in an age marked by tremendous wealth and a strong desire by many to change the world, a combination symbolized by the dozens of billionaires who have pledged to meet the challenge issued last year by Bill and Melinda Gates and Warren Buffett to give at least half of their net worth to charity.

For my money, the fourth question may prove most significant of all. For it is when discussing how to get the job done that Tierney and Fleishman tackle what is among the most pernicious problems facing nonprofits: the reflexive bias that many donors have against "overhead." "There are two kinds of overhead: good and bad," they explain. "While it's wrong to waste philanthropic dollars on goods and services that aren't needed, it's equally wrong to limit the impact of philanthropic dollars by depriving nonprofits of the funds they need to sustain, improve, and expand their performance ('good' overhead)." "Learn About What's Working"

In his book Managing the Nonprofit Organization, Drucker advocated implementing a range of actions aimed at "converting good intentions into results:" conducting deep market research, incubating new ideas, and training and developing staff and volunteers. He also called for devising timely feedback and measurement mechanisms—a notion echoed in another recent book written for donors seeking to maximize their impact, Do More Than Give, by Leslie Crutchfield, John Kania, and Mark Kramer. Among the steps they suggest are building systems focused less on past performance and more on enabling donors and their grantees "to learn about what's working and what needs to be fixed in real time to advance a cause." None of these undertakings, however, happen magically. They require talented employees, procedures, and technology to accomplish—all of it costly activity that could be classified as "overhead." In a 2008 study, Bridgespan described the "vicious cycle" that many nonprofits fall into as they attempt to please donors who "tend to favor organizations with the 'leanest' profiles" or choose to fund only those specific programs that directly serve the needy. Feeling pressure "to conform to funders' expectations," these nonprofits don't invest in their core organizational capacity and otherwise under-report their spending on general management and infrastructure on tax forms and in fund-raising materials, according to Bridgespan. This, in turn, reinforces the donors' misguided notions about "overhead." Fortunately, some are starting to get it. The American Express Foundation, the Edna McConnell Clark Foundation, the Weingart Foundation, and others are now looking to strengthen nonprofit management skills and systems. But much more needs to be done. "Like you," Tierney and Fleishman write to their donor readers, "your grantees need the right capacity to deliver the results you and they expect to see"—in short, the "right people, right processes, and right costs." Nothing else will turn all those grades of C that Drucker handed out into solid A's.

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