To ensure delivery of timely information, please add <jobswatch@deweykaye.com> to your address book.

Wednesday, January 6, 2010

The Cost of Doing Business

By Kate Sphar, Senior Consultant, Dewey & Kaye

With the onset of our current economic condition, nonprofit organizations have become increasingly cautious about their spending. Are we stretching every dime as far as we can? Are there costs we can cut while we weather the storm?

The resulting dialogue has focused on what is the "acceptable" level of overhead costs for nonprofits.  A recent article in the Stanford Social Innovation Review by Ann Goggins Gregory and Don Howard entitled "The Nonprofit Starvation Cycle", highlights a trend that has been prevalent for years — that nonprofits consistently underestimate and underreport the true cost of delivering quality service.  Grantors often limit levels of overhead spending to 15 or 20%, numbers that pale in comparison to the levels of indirect expense carried by companies in the for–profit sector.

The authors' hypothesis is that funders have unrealistic expectations of the level of indirect expense it takes to adequately support mission–driven programs.  These expectations drive a cycle that forces organizations to continuously stretch their resources further and further.  The cost of this underfunding is inevitably a decline in either the quantity of services available or the quality of those services, neither of which serves our communities well. 

The article suggests that funders and grantees need to strive for more open and honest conversation about the real investment in infrastructure that needs to be made in order to sustain high quality programs.  So let's hypothesize for a moment that funders welcome honest analysis of program costs and are willing to fund greater infrastructure investments.  And let's also say that nonprofit organizations are willing to share their budget estimates and reports without fear of negative repercussions.  In this idealized world, is the problem solved?  Does honest conversation alone lead to well̵funded organizations that offer high–quality programs and services?

I would argue that in that world the issue of nonprofit starvation remains, due to a fundamental lack of understanding within organizations about how much it currently costs to deliver programs, let alone how much it should cost to ensure quality outcomes.  In my work, I frequently encounter organizations that have little idea how much it costs them, in both direct and indirect expense, to deliver a unit of service.  Nor can most adequately allocate how much time each employee spends on various direct and indirect activities.  Most dangerously, nonprofit boards often aren't getting the right information, or are unaware of what financial information they need to make wise decisions.

So what can you do to ensure you have the right information to reverse the starvation cycle?  Even if you think you’re on track, ask yourself some quick questions:

• Does our budget realistically reflect what it costs to deliver programs and operate the organization?
• Do we know what it costs to deliver a unit of service? 
• Can we locate where we are underestimating our expenses?
• Can we accurately break down how employees spend their time?
• Do our financial reports provide us with enough information with which to make wise strategic, programmatic, and operational decisions?
• Do we have multiple financially literate board and staff members who review reports on a regular basis?
• Do we have financial policies and procedures that protect the organization from error and fraud?

If you answered "no" or "not sure" to any of these, that might be a sign that there's room for improvement.  And as always, the new year is the perfect time to make that change.

Kate Sphar specializes in nonprofit business and strategic planning, financial analysis, market research, and strategic mergers and alliances.  Kate can be reached at 412.434.1335 or kSphar@deweykaye.com.

Dewey & Kaye