I know I'm going to get a lot of grief about this post. So be it.
About 50 years ago, a well meaning, smart individual created a baseline metric for non-profits. This metric, largely still used today, is a ratio (or percentage) of operating expenses to total expenditures. The magic number is 10-15%.
The theory is based on the thought that mission-driven organizations that rely on donations should spend the vast majority of those donations on programs that help those they are in business to help. So, if I'm a local food bank, I should spend "the vast majority" of my donation income feeding people. There is nothing wrong with the theory. The problem comes in when defining what goes into the "operating expenses" ratio.
The principle of the theory is spot on. The problem is, it severely inhibits the ability of these non-profits to grow, and therefore have more impact and do more of the good things they are passionately doing. Imagine going to a CEO of a $50M for-profit company and telling her or him — "you need to double your growth, but you can't spend more than $5-$7.5M on running your operation (rent, payroll, administration), hiring talented people, or marketing or selling your product." It'd be a short conversation. Or, tell that same CEO that they could only hire people that are "willing to take a very small salary" because they can't afford to hire the best. That'd be a shorter conversation.
Why then do we think it's a good idea to put those kind of limits on non-profits? I get the reality of wanting to closely mange spending, and make sure that money is flowing to the areas that need it most. I also get that this has been abused in the past. But, if non-profits are about helping people in the most difficult situations, why wouldn't we want them to do more of it? Why wouldn't we want them "investing" to grow their organization so they can reach and help more people?
In our work with non-profits, this is a constant battle. Non-profit boards make poor decisions, executives are relegated to making poor decisions because everyone is worried about the "metric". Donors and potential donors have been conditioned to look at that metric as the end-all-be-all, and often shy away from those that want to "invest" in sales/fundraising, marketing, and the best people so they can improve outcomes and grow. Ironically, this is also true of large, high net worth individuals who would never make those decisions in their own companies.
There are no easy answers to this dilema. Changing perceptions are hard, and changing behavior harder. An idea? Adjust the ratio to exclude "fundraising and marketing." While this doesn't entirely fix the problem and certainly doesn't allow non-profits to attract the best talent, it starts to reshape expectations and perceptions— which is a good thing. Let us know what you think about this topic!
Steve is a husband, father, and business exec. He loves anything outdoors, anything that is a hard challenge, and enjoys working with anyone who wants to continually improve. And golf. He loves golf. Steve is the founder and CEO of Executive Advisory Partners.