Non Profits & Buying Locally – Good For The Community vs Bad For Overhead Ratio

Back in September, Non-Profit Quarterly (NPQ) pointed to a new research study which has found overheard ratio is not a valid measure of organizational effectiveness. In fact, it there is a slight negative correlation between overheard ratio and commonly used measures of efficiency.

“…but our work is the first to approach it using efficiency theory—and we were able to demonstrate the problem using real-world data.”

….“In short,” Coupet says, “this demonstrates that not only is the overhead ratio bad at assessing efficiency, but also that using it to assess efficiency may actively mislead donors. We argue that nonprofit scholars, managers, and donors should move away from concepts and measures of efficiency based on financial ratios, and toward ones that embrace maximizing what nonprofits are able to make and do.”

NPQ says according to the study, overhead ratio is a poor measure of effectiveness because it doesn’t reflect what organizations are doing with their resources or what they “are accomplishing with their non-overhead spending.”

In other words, like I have written so often before, the value of what a non-profit does is not reflected by transactional data, economic impact numbers or test scores.

This being said, another part of the article raises the intriguing idea that if a non-profit is supposed to be working for the benefit of their community, shouldn’t they be focusing on buying locally rather at chain stores or wholesale warehouses? If so, the higher cost of buying locally would raise their costs a bit and impact their overhead ratio. But it may be worthwhile to do so.

Should we stop looking for cost savings that benefit our bottom line but lead to purchasing that harms the greater community? In other words, should nonprofits be considering (and be supported to pursue) their own “buy local” policies?

‘Nonprofits should be shouting about how much of their spending happens at locally owned, minority-owned, women-owned, veteran-owned or disabled-owned businesses. There is a multiplier effect in spending locally that shows that for every $100 spent at a locally owned business, $45 of that is re-spent locally, while national chains only spend $14 of that sale locally.’

This is an intriguing idea that has this author (a nonprofit executive who manages purchasing) feeling the financial pinch of a cogent ethical argument: If buying local supports healthy communities, and the mission and values of my organizations are tied to relevant healthy community outcomes, why am I doing my shopping at big box (including online) retailers?

This broadens the scope of what it means to be a non-profit in service to the community. Touting how much is being spent at locally owned business won’t necessarily smother the use of overhead ratio as a standard, but it has the potential to blunt the ratio’s use in an argument of a non-profit’s worthiness.

Play More Poker If You Love The Arts?

Earlier this week I wrote about the negative impact casino construction can have on the viability of performing arts entities in a region. I mentioned the steps a coalition of performing arts organizations took to mitigate those effects in NY State.

Even as I was mentioning this model at the meeting I attended to those discussing the casino related lobbying efforts, I was thinking that a model similar to the one in New York might be attractive to state legislators if they thought they could have gambling revenue replace state funding for arts and culture.

This could be a problem for a number of reasons. For a long time state lotteries have been sold as a way to provide funding for education, but the results have often been mixed with some believing the lottery funding has allowed state governments to shift funding elsewhere leaving education funding generally flat.

According to the Brookings Institute,

“Some scholars have argued that lottery earmarks provide a net positive impact, despite some fungibility. One study, for example, estimated that a dollar of lottery earmark funds for K-12 education increased per pupil spending by 50 to 70 cents, with the rest of the money being diverted for other purposes. Others have argued that lottery earmarks lead state lawmakers to supplant education funding so much that states invest less in education over the long run.

This is because budget decisions are made in context of scarcity, in which allocating resources to one arena of state policy limits the ability to fund other programs. Therefore, when lottery earmark revenue emerges, state lawmakers may use lottery earmark revenue to supplant instead of supplement education funding so that they can free up general fund money for other purposes that matter to their constituents and avoid raising taxes in the process.

What also should be considered is social dissonance in this form of funding as recently suggested by James Doeser in The Art Newspaper, regarding the use of lottery proceeds to fund the Arts Council of England.

Since its introduction in the mid-1990s, the UK National Lottery has made a lot of poor people slightly poorer while equipping Arts Councils to enrich an arts sector that disproportionately serves the better-off. It is not hard to picture an old woman applying coin edge to scratch card, with no more chance of winning the jackpot than of stepping inside the gallery she has helped to build

[…]

Arguing for public funding for the arts would be much easier if our tax regime were more progressive, and those engaging with the arts more reflective of society as whole…. Thanks to an austerity-induced accounting trick, the replacement of tax by lottery funding means that the least well-off increasingly shoulder the cost of rich people’s pursuits. A lot of well-meaning and progressive people continue to benefit from this arrangement, but it is not fair and needs to be questioned.

Which is more preferable when it comes to seeking an increase in public funding, making yet another appeal to supporters to contact their representative about bolstering arts funding or encouraging supporters to play more blackjack?

(Yes, that is a huge false dichotomy)

What Would You Do If A Funder Encouraged You To Push Them To Do Better?

I was skimming some entries on the Americans for the Arts blog when a couple sentences made my eyes visually screech to a halt and shift into reverse because I wasn’t sure if I read what I thought I did.

Lawrence Brad Anderson, Executive Director City of Salina KS Department of Arts & Humanities related a story about a prospective grant applicant in a situation I think we can all empathize with–though with a very atypical ending.

Our new staff member did an excellent job reviewing the grant guidelines and preparing him for the process, but as the meeting was wrapping up, I saw that something was still missing.

“May I share an observation with you before you go?” I asked. “Sure,” the artist quietly replied.

“I sense that you feel you may not be worthy of funding for your expressed need. This couldn’t be further from the truth. You have prepared as a professional in your field, you are active in musical performances, and your passion for what you do is evident. In addition to your own individual expression, I want for you also to consider being a mentor and artistic leader in this community. We need people like you to be a positive voice as an artist and a valuable member of this town. We may not always be able to anticipate your exact needs, but you have my permission to push us, ask questions, and encourage your peers to step up their game and get engaged.”

As I completed my statement he lifted his head and I could see that he was silently weeping. Whether this recognition was the cause, or as a man of color in a largely white community, he was unaccustomed to being affirmed in such a strong way. The experience served as an important reminder of the role and responsibility arts administrators serve in their community.

As I say, I think we can all identify with feeling despondent that our programs or organization is not suited to the particular criteria of a funder.

But it is pretty dang rare for a funder to tell us explicitly that we are well suited for their program, challenge us to expand our leadership role in the community and encourage us to push them as funders.

I think we would all join the artist in silently weeping.

We Believe There Is A Secret Phrase Even If You Say There Is No Secret Phrase

I wanted to make another visit to the  piece on shared power and transparency in grant making F. Javier Torres and Leila Tamari wrote for Inside Philanthropy which I referenced in yesterday’s post.  I wanted to address this issue separately in its own post.

Torres and Tamari talk about the lengths they went to provide grant applicants with as much information about how they were applying their criteria as they could.

When we embarked on refining the application process for the NCPF in 2015, we asked ourselves: “How do we benefit by holding our cards close to the vest?” There was no benefit! As a result, we sought to provide thoughtful explanations for why we needed information in a certain format. We also pushed ourselves to remove as much jargon as possible.

[…]

At the next stage of our process (where approximately 7 percent of applicants were invited to submit a full proposal), we made the process more open by providing all applicants with what we’d actually be looking for in the full proposal and site visits. This is the same material we provided to panelists who reviewed all the projects and provided funding recommendations.

However, they said, in their effort to be as clear as possible about the criteria they would be employing in evaluating proposals, they also provided people additional information with which to game the system.

This showed up for us in 2016 when we chose to publish that we were particularly interested in projects focused on community development sectors underrepresented in our portfolio to date. We received hundreds of submissions in which applicants attempted to alter the goals and strategies of their projects into one of the sectors we listed as being “of special interest,” believing this would make them more competitive in the funding process.

More often than not, these projects would have been strong had they been framed in a community development sector more authentic to the work, instead of the ones we stated as priorities for the year. As a result, these proposals were received by our peer review panel as round pegs attempting to fit into square holes, and ultimately decreased their competitiveness.

There are frequent conversations in articles and blogs like mine about how organizations will undermine their operational effectiveness by pursuing grants that ill fit their organization and then by going through the contortions trying to execute grant activities alongside the core programs for which they really wanted the grant money.

Less frequently do funders tell the non-profit community that it was clear to them applicants were proposing something for which they were ill-suited and they would have been more effective taking an approach that reflected their core strengths.

As one who has served as a grant panelist, I can tell you it is often clear that organizations are trying to change color to suit the grant program criteria. It is just that few organizations will come out and generally encourage applicants to avoid taking that approach.

By the same token, the unequal relationship dynamics and opacity Torres and Tamari say the National Creative Placemaking Fund (NCPF) was working so hard dismantle does encourage people to try to game the system.

If you aren’t clear what a granting entity wants, there can be a perceived benefit in correctly guessing the secret combination of words that the granting entity has determined will unlock the funding. There may not really be a narrow set of phrases the granter is looking for, but the opacity of the process means that getting funded reinforces your confidence in your superior ability to read between the lines of proposal guidelines.

Basically, I think in some respects applicants have been conditioned to try to game the system as much as possible. Faced with funders who say they are being completely earnest about what they are looking for, some applicants will be convinced there are some unspoken criteria with which they will align and enable them to gain funding.

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