I would encourage any reader of this blog who is working in, or interested in, the Voluntary and Community Sector to spare 18 minutes and watch the following talk by Dan Pallotta on TED. It is compelling viewing and although the facts and figures he quotes are from the USA it applies equally to the Voluntary and Community Sector in the UK.

Dan’s talk is really about the need for social innovation. He passionately believes that the not for profit sector has a critical role to play in dealing with some of the massive social problems of our day but the organisations are small by comparison and there is a belief system that keeps them small. He says

We have two rulebooks. We have one for the nonprofit sector and one for the rest of the economic world. It’s an apartheid, and it discriminates against the [nonprofit] sector …

Dan asserts that charities are being discriminated against and illustrates his argument in five areas:

  • Compensation – a survey in the USA found that where the median compensation in for-profit organisations was 400,000 dollars, for the CEO of a large medical charity it was half that but for a hunger charity it was less than one quarter of that.
  • Advertising and marketing – it is OK to tell the consumer brands, “You may advertise all the benefits of your product” but we tell charities, “You cannot advertise all the good that you do.”
  • Taking risk in pursuit of new ideas for generating revenue – Disney can make a new $200 million movie that flops, and nobody calls the attorney general. But do a little $1 million community fundraiser for the poor, and if it doesn’t produce a 75 percent profit to the cause in the first 12 months your character is called into question.
  • Time – it was OK for Amazon to go 6 years without returning profit to investors because they knew there was a long-term objective of building market dominance. But if a nonprofit organisation ever had a dream of building scale that required that for 6 years, and no money was going to go to the needy because it was going to be invested in building this scale, there would be an outcry.
  • Profit – the for-profit sector can pay people profits in order to attract their capital for their new ideas, but you can’t pay profits in a nonprofit sector, so the for-profit sector has a lock on the multi-trillion-dollar capital markets, and the nonprofit sector is starved for growth and risk and idea capital.

And in summing this up he says

You put those 5 things together — you can’t use money to lure talent away from the for-profit sector, you can’t advertise on anywhere near the scale the for-profit sector does for new customers, you can’t take the kinds of risks in pursuit of those customers that the for-profit sector takes, you don’t have the same amount of time to find them as the for-profit sector, and you don’t have a stock market with which to fund any of this, even if you could do it in the first place, and you’ve just put the nonprofit sector at an extreme disadvantage to the for-profit sector on every level. If we have any doubts about the effects of this separate rule book, this statistic is sobering: From 1970 to 2009, the number of nonprofits that really grew, that crossed the $50 million annual revenue barrier, is 144. In the same time, the number of for-profits that crossed it is 46,136. So we’re dealing with social problems that are massive in scale, and our organizations can’t generate any scale. All of the scale goes to Coca-Cola and Burger King.

We have all heard the criteria used to judge charities – ‘what percentage of my donation is wasted on overhead?’ – and we know of charities that have bad reputations based on that criteria. So we, and the charities, view overhead as intrinically ‘bad’ and therefore charities go without the overhead things they really need to grow.

Taking fundraising as an example, Dan says:

So we’ve all been taught that charities should spend as little as possible on overhead things like fundraising under the theory that, well, the less money you spend on fundraising, the more money there is available for the cause. Well, that’s true if it’s a depressing world in which this pie cannot be made any bigger. But if it’s a logical world in which investment in fundraising actually raises more funds and makes the pie bigger, then we have it precisely backwards, and we should be investing more money, not less, in fundraising, because fundraising is the one thing that has the potential to multiply the amount of money available for the cause that we care about so deeply.

On a much smaller and more parochial scale I have seen the same effect, where the limited resources are spent on delivering social benefit at the expense of overhead which is seen as bad. This means that business improvement opportunities (such as implementing a quality regime such as PQASSO) are forgone and opportunities to deliver more and better services potentially lost.

It seems to me that this is an issue for charities, funders, commissioners and the giving public as well as the media. Is it possible to change the overwhelming worldview which views overhead as bad? Of course I am NOT saying that charities should be wasteful of their resources. But social outcome is a much better way of viewing the effectiveness of charities. And, after all that is what we all want – to improve the lot of those we are serving or giving our money to.

So what can you do to help change the accepted wisdom?

Let me know your ideas. And if you know of a charity that would benefit from investing a little on PQASSO in order to make a bigger gain in social benefit, please let me know and I would be delighted to help or point you in the right direction.