You Get What You Pay For?

By Melissa Stevens, Director of Special Projects, FasterCures
You wouldn’t choose a restaurant based on how little it pays its chef, or a surgeon based on how cheaply the hospital retains his services. So why would you choose a charity based on how low its overhead is?

Dan Pallotta is the author of the newly released Uncharitable: How Restraints on Nonprofits Undermine Their Potential. Pallotta spoke at a Milken Institute Forum on February 11 about his new work, which is described as “a manifesto that puts a new cause on the map - equal economic rights for charity.” He addressed the compensation disparities between for-profits and nonprofits, and challenged long-held conventional wisdom that overhead is a reliable measure of effectiveness.
Pallotta argues that charities are pressured into playing by different rules than for-profits, and that these pressures can stifle the organization’s productivity.
Consider:

• Compensation – Salaries for nonprofit executives are frequently criticized as too high. When nonprofits are compelled by external forces to tamp down executive compensation, recruitment quality is the first casualty.
• Advertising – Mass marketing is considered wasteful and frivolous in the nonprofit world – a costly and shortsighted judgment in the era of the multimedia-driven, 24-hour news cycle. The refusal to play in the mass marketing arena stifles charities’ ability to capture market- and mind-share, and cedes the stage to campaigns about the latest soft drink or i-product rather than malaria eradication or ending hunger.
• Vision –Nonprofits are incentivized to spend funds in the near-term to make an immediate impact, leaving them unable to invest in long-term, strategic initiatives, and sacrificing long-term gains for short-term returns.
• Learning – Nonprofits are given very little room for error in the court of public opinion. The climate of hard judgment creates disincentive for creativity and risk-taking. A risk-averse entity will never reach its full potential.
• Capital – Nonprofits are locked out of the financial markets because they do not pay financial returns. This leaves them continually dependent on what FasterCures’ calls “passion capital,” which only promises social returns.

Pallotta also articulated his frustration with the habitually asked “What percentage of my donation goes to the cause and how much goes to overhead?” Pallotta asserts that overhead actually is part of the cause. Investment in management and infrastructure are critical aspects for ultimate success, and should not be treated as incidentals. Further, he noted that measuring overhead does not give donors sound information about outcomes and the impact made by the organization.

Pallotta calls for developing a metric for assessing charitable giving. FasterCures agrees with this approach, and is leading the charge in the biomedical research space with the Philanthropy Advisory Service (PAS), an information resource that aims to create a transparent marketplace about nonprofit disease research organizations that fund and facilitate disease research. The PAS organizes and analyzes information about strategy, research portfolio, management, and financials. Even more importantly, the PAS creates an assessment framework to evaluate an organization’s internal and external contributions to the field. These assessments are made based on the organization’s own mission statements, as well the unique nuances of the disease research system.

The PAS framework organizes our assessment around the following metric categories:

• Accountability: The degree to which an organization engages in planning, demonstrates transparency, and upholds responsibility to stakeholders.
• Collaboration: The degree to which an organization can engage and nurture relationships that accelerate the overall funding and research cycle.
• Research Effectiveness: The degree to which the organization’s research portfolio yields sufficient data and deliverable returns to achieve its stated mission.
• Resource Building: The degree to which the organization contributes critical resources and infrastructure to scientific advancement.

FasterCures has engaged scientific and organizational experts to provide input to the organizational assessments, ensuring an informed, credible, and objective review. The PAS is currently being piloted across four disease areas – Alzheimer’s disease, multiple sclerosis, malaria, and tuberculosis – and is targeted to launch later this spring. FasterCures is excited about the PAS and its contribution to a new paradigm of nonprofit evaluation – the overhaul on overhead is long overdue.