In Conversation with… Dan Pallotta – Uncovering the Elephant in the Room: Overhead & Impact

On October 24th we hosted a gathering of family foundations from across Western Canada diving into topics around strategic philanthropy, measuring overhead and impact in the charitable system and the role that private philanthropy plays in shaping our societies.

The keynote by Dan Pallotta, author of UnCharitable and Charity Case both of which you can order through our bookshelf (and see the other books we have read) addresses the tough topics of overhead, accountability and expectations donors have of the charities they support.

What’s in a name? The misnomer of the non-profit sector

Below are just a few points raised from his presentation that garnered discussion and further food for thought:

North American charities and non-profits vary in size from small *under $300K” to extra-large “$100Million+”. The classification of non-profit or charity, in and of itself leads to confusion around really the size and scope that these agencies play in our communities. In fact, Canada’s charitable sector’s contribution to the GDP is the same size as the Automotive, Retail, Agriculture and Manufacturing combined! This represents 8.1% of Canada’s GDP, 2 million employees and 13 million volunteers.

While their corporate structure might give the misnomer that they are not financially driven; the sheer size of their economic power combined with their mandates to solve some of our most complex social, environmental and health related challenges should encourage us to give pause around how money flows into the charitable sector.  By this I mean we need to consider how we invest in charities, and what our expectations are of these organizations in striving to achieve their mandates.

In the for-profit world, investing in overhead (professional development, staff salaries, good working environments, sales, marketing & communications) attributes to improving operational effectiveness and profitability. Yet, these same positions in the charitable sector are viewed, not as improving the quality of the product, or the scale-ability of the solution, but rather as a waste of money and resources. Ultimately this ties the hands of the charity’s program staff and executives because it prevents them from investing in their overall infrastructure. This negative philanthropic behaviour sends a message that, “We don’t really want you to scale.” These actions end up ensuring that we continue to fund problems and not finance solutions.

What is overhead?

Consider the following:

1. In order for the charity’s office to function, someone pays for the lights to be turned on paper to be put into the printer. If you direct your funds just to programs and not to operations then you are actually preventing that organization from driving forward because it has to spend the rest of the time looking for overhead investments.
2. In order for problems to be solved and solutions scaled, funds need to be directed to raising awareness and capital for investing in those solutions. By encouraging charities to keep their overhead and fundraising costs below an arbitrary percentage we are telling them that it is okay for them not to dream big and drive towards a solution.
3. Look at how much time you spend shopping for your big-ticket items like a new car, a flat screen TV or your next vacation, now consider how much time you spend learning about the big-ticket social issues you are supporting. Is there a disconnect? These big ticket social items make up the fabric of your community, they influence the policies that are being set at all levels of government and how we operate in a global landscape. The ripple effect of your single donation can be in scale of magnitude compared to your latest car purchase.
4. We have to stop funding problems and start financing solutions. In order to do this effectively and strategically we need to free up capital for scaling.

How to evaluate charities?

How do we effectively evaluate a charity? What are the questions to ask about overhead? We have created a self-reflection checklist to help you consider the types of organizations you want to support and a set of charity evaluation questions to guide your information gathering process. The main thing to keep in mind is:

If you don’t know what it costs to NOT solve the problem, how are you going to know what the correct cost is to solve the problem? 

To solve these complex issues, funders need to be walking alongside their recipient organizations. This partnership goes beyond the pocketbook and feeds into time available for volunteering, accessing talent to leverage the donor’s contribution and tapping into the ties/network of the philanthropist (4 T’s). A strategic philanthropist knows that they can’t be the only donor carrying the load, just like there can’t be a single source organization to solve these complex problems.

As always, we look forward to hearing how you use these tools, what conversation is spurred at your family table and what types of discussions you have with potential recipients of your philanthropic dollars.