The War on Charity: Nonprofits Should Take a Page from the For-Profit Handbook to Survive & Thrive

by Partridge Snow & Hahn LLP
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Nonprofit organizations do good, improve lives, strengthen communities, and lighten the burdens of government and society as a whole.  Unfortunately charities are, more than ever before, facing exponentially growing needs, but competing for the same shrinking pool of dollars from donors and public and private funders.

To add insult to injury, the federal government is targeting charities to raise additional revenues.  The President’s 2015 budget proposal would cap charitable deductions for wealthier taxpayers.  A bill introduced by the Republican chair of the U.S. House Ways and Means Committee would, among other things, make charitable deductions more like the deductions for uninsured health expenses, subject nonprofits to a 25% surtax on executive compensation, require money in donor-advised funds to be paid within five years, and impose a 1% excise tax on large private colleges’ and universities’ endowments.   These changes, if implemented, could significantly impair charitable giving. 

These proposals have little or no chance of passing during a midterm election year, but they should not be ignored.  Fewer and fewer dollars left to fund greater and greater need, and more and more policymakers are viewing charitable giving as a source of government revenue.  In this environment, mission and quality alone are insufficient.  For a charity to survive and thrive, it should take a page from the for-profit handbook, and learn to mind its M’s and A’s.

Measuring

One of the most common ways that for-profit organizations measure success is return on investment (“ROI”).  The ratio of resources invested to benefit obtained shows whether the product/service/program is effective and has value.

Nonprofits historically have not been required to demonstrate mission-related ROI, but that is changing rapidly.  Donors, funders, and evaluators are increasingly focused on mission-related results, and demanding accountability.  Charities cannot prove positive outcomes unless they measure them.

Most charities are in the early stages of measuring and reporting results.  But measurement is not a luxury. Measuring ROI is the primary way that non-profits can assess – and more importantly, demonstrate - their effectiveness, efficiency, impact, and value to the community.  Comprehensive measurement systems that confirm a strong ROI make a charity more competitive and attractive to the shrinking pool of private/public funders.

Marketing

Marketing is an unfamiliar concept for many charities.  Unlike traditional fundraising, it goes beyond identifying interested parties and asking for money.  Marketing means carefully defining the target markets, identifying their needs, designing products/programs/services to suit their needs, measuring customer satisfaction and adjusting products/programs/services accordingly, and communicating all of that to potential customers and others.  And nonprofit marketing is more complicated than for-profit marketing, because nonprofits have at least two “target markets” whose needs do not always overlap: clients on the one hand, and donors/volunteers on the other.   

Effective marketing requires analysis, planning, and measurement, to devise and implement a plan that incorporates who the charity is serving, what they want/need, what criteria they use to judge success (and if they think the charity is successful), who else provides the same products/services/programs, and how the charity can distinguish itself from its “competitors”. 

Charities that want to survive and thrive in a competitive environment should strive for successful marketing.

Advocacy

Effective advocacy also is necessary for charities to survive and grow despite the war on charity.  Effective advocacy is critical to combat budget cuts such as the “reforms” described above.  It also allows charities to communicate their message, enlist partners, create momentum for change, and have a voice at the table on policy issues key to achieving their mission. 

Charities can – and should - engage in advocacy, despite legal restrictions on legislative and lobbying activity.   In most cases, representatives of charities can attend public hearings, contact public officials to express their views, provide resources for clients, donors, and volunteers to do the same, provide expert testimony or educational support to public officials on subjects concerning their mission and funding, and educate the public to garner support for the charity, its mission, and its funding.

Mergers & Acquisitions

Over 2600 public charities are located in Rhode Island, approximately 1 for every 300 adults in the state.  Donor fatigue is not just understandable, it seems unavoidable, and some Rhode Island charities are struggling to survive.  Nonprofit mergers and acquisitions are one option to increase operating efficiencies, create synergies, decrease competition for resources, protect charitable assets, and do more good.

Nevertheless, charities have been reluctant to consider M&A.  They may be fearful of alienating loyal donors and employees.  They may associate M&A with aggressive and predatory behavior unsuited to the nonprofit world.  

The key question is simple: could a single entity better achieve the charitable mission than two (or more) entities operating independently?  Charities need to seriously consider that question and, if so, seriously evaluate M&A.

Conclusion

Charities are starkly different from for-profit businesses: they are designed to do good, not make money, and that shouldn’t change.  But in order to survive and thrive, charities should look to the for-profit world.  Charities that mind their M’s and A’s - through strategic consideration and/or implementation of measuring, marketing, advocacy, and mergers and acquisitions – will be the ones with sufficient strength, resiliency, and appeal to fulfill their charitable missions, despite the war on charity.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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