JAN 23, 2018 BY HUDSON JUNGCK
It’s always been hard to run a nonprofit. Lower pay for more work. Fewer resources, less public support. Nonprofits might be tax-exempt, but that status brings its own set of drawbacks—lofty expectations, complex regulation, unending scrutiny from donors and the media alike.
In recent years, disparate trends have coincided to make the task of nonprofit executives even more challenging. These forces impact the nonprofit landscape in subtle and often systemic ways, complicating any attempt to resolve them.
Take two, for instance: big data and public trust. While modern data techniques have the power to solve complex problems, their very existence can put donor pressure on nonprofits to adopt them, even when they lack the necessary expertise and funding. And while nonprofits have grown more efficient, high-profile scandals like those at the Trump and Clinton foundations have revived distrust toward anything with a tax-exempt status.
Such predicaments characterize the world facing nonprofits in 2018 and beyond.
1. Tax policy
When it comes to tax reform, one conclusion transcends parties: whether for good or ill, the recently passed Tax Cuts and Jobs Act will have a massive impact on the philanthropic landscape.
The National Council of Nonprofits, among other organizations, predicts that the bill’s changes to tax incentives could slash charitable giving by up to $20 billion.
Xledger’s Nathan McCann laid out the reasoning for such predictions several weeks ago. Here’s a quick recap.
First, the reforms in question double the standard deduction for both individuals and married couples. By making the standard deduction more attractive, the bill disincentivizes taxpayers from itemizing—currently the only way to deduct for charitable donations. As we have seen in previous cases, this will likely result in fewer overall donations.
Second, by eliminating the estate tax, the TCJA creates an adverse incentive to legacy giving. While estimates vary, even lowball predictions put the final loss above $13 billion.
Expect to see nonprofits pursue a mixture of coping strategies in 2018. Many will tighten their belts and begin laying off nonessential staff. Many more will double down on fundraising efficiency, on grant-writing and applications for federal aid. Donors should expect to hear from organizations they’ve given to in the past, and to receive a wave of new requests on mobile and social media platforms.
2. The Overhead Myth
Charity ‘watchdogs’ like Guidestar and Charity Navigator have reshaped the nonprofit sector. Today, most donors won’t give to a charity they haven’t evaluated through one of these sites.
Yet sources both popular and academic have critiqued what they see as an overemphasis on the ratio between overhead costs and program spending. In a 2009 article published in the Stanford Social Innovation Review, Ann Goggins Gregory and Don Howard point out that the rush to optimize this ratio propels nonprofits into a vicious cycle. If one organization reports overhead costs below the industry norm, other organizations feel the pressure either to match or beat it in order to compete for donors. Each lower number informs donor expectations, which in turn compels nonprofits into underspending or, more serious, misreporting.
The Nonprofit Quarterly fingers the 990 form, nonprofits’ sole reporting requirement and the foundation of nonprofit watchdogs, as “both Ground Zero for nonprofit starvation and the primary source lazy journalists use to take down nonprofits.”
Watchdogs use financial efficiency metrics as a “ubiquitous proxy” for what donors really want, which is “data on nonprofit performance,” write Jesse D. Lecy and Elizabeth Searing in their 2012 study “Anatomy of the Nonprofit Starvation Cycle.”
But the overhead ratio is uniquely unreliable, even among financial efficiency metrics. As Lecy and Searing admit, they “cannot discern,” even from 25 years of financial data, how much of the reduction in overhead spending “has resulted from tangible changes in nonprofit behavior (allocating more funds towards programs than administrative expenses) and how much is a result of changes in reporting practices.” If exhaustive research can’t discern between actual and fictitious improvement, an individual donor certainly won’t be able to.
Expect to hear the overhead ratio and associated nonprofit starvation cycle mentioned more often. Depending on how drastic donation shortfalls are, expect also to see nonprofits seek trust by other means, whether greater transparency or data-driven fundraising.
3. Public Mistrust
Nonprofits have long had a fraught relationship with public opinion. In 2008, NYU commissioned the Brookings Institute to examine public trust in nonprofits. The resulting survey found that the percentage of the general public with little or no trust in nonprofits was 37% in 2002 and 34% in 2008. When the Chronicle of Philanthropy redid the poll in 2015, the authors found that the percentage distrustful of nonprofits had actually risen to 35%. After rising from 60% in 2002 to 34% in 2008, the percentage that expressed at least fair levels of trust in charities fell to 62% in 2015.
On the one hand, these scores put public trust in charities well above public trust in Congress or the President for any of the same years. On the other hand, they indicate two problems: first, that nonprofits have a troublingly low degree of public confidence, and second, that they have proven unable to remedy the issue.
Much public distrust stems from a series of high-profile scandals that have rocked the nonprofit world in the past thirty years. The record reads like a laundry list of the ways leaders can abuse power: sexual wrongdoing at Covenant House, embezzlement at United Way, the outright Ponzi scheme at New Era, nepotism and mismanagement at Feed the Children. In the 2016 election, apparent corruption at both candidates’ foundations sparked a public outcry. Despite the fact that these represent a tiny portion of U.S. charities, public perception tends to make its own reality.
As tax reform goes into effect, the stakes will rise in the fight for public trust. Expect to see both alliances and individual nonprofits conducting a charm offensive.
4. Fundraisers Adapt to Changes in the Donation Landscape
In 2015, Curt Swindoll of the Stanford Social Innovation Review identified four trends shaping the “Future of Fundraising.”
1. Advancing technology
2. Transitional, ad-hoc organizations displacing fixed nonprofits
3. Big data becoming “ubiquitous”
4. Proactive responses to ‘opportunistic fundraising campaigns’ (think ALS Ice Bucket Challenge)
When we compare Swindoll’s 2015 predictions to the state of nonprofits at the beginning of 2018, one thing becomes clear. Swindoll seems, broadly speaking, to have been correct. The four trends he noted are indeed reshaping the future of fundraising. In fact, we might go so far as to say that his four trends will likely play an even greater role in 2018 than they did in any of the years prior.
With this in mind, let us reexamine Swindoll’s list in light of the years since. For greater clarity, we will approach his four trends in two broad ‘themes.’
Technology and big data
As the SSIR article uses them, ‘technology’ and ‘big data’ function as synonyms. ‘Technology’ allows nonprofits “to identify prospects for giving…and then use that data to drive face-to-face visits and upgrade solicitations.” Similarly, ‘big data’ refers to “external wealth-screening data, which evaluate a donor’s capacity to give outside of their giving records.”
Whether we call it ‘technology’ or ‘big data,’ nonprofits have long struggled to use it. We can attribute this to three obstacles. First, the means of gathering and analyzing data have come at prohibitive expense, restricting their use to only the largest or best-funded nonprofits. Second, few nonprofits have had the in-staff skill set to understand and act on data. Almost half of all nonprofit professionals have an incomplete understanding of what data means for their organizations. Third, many have questioned what ‘big data’ can do when applied to the systemic issues many nonprofits target. As Kevin DeSouza and Kendra Smith write in a 2014 SSIR article, “the jury is still out on how well big data can tackle complex social problems.”
As we enter 2018, it seems that nonprofits are finding answers to these three challenges. Over the past several years, data-gathering and analytic capabilities have both fallen in price and risen in convenience. A spate of new firms have cropped up to help nonprofits access and master the power of data, often for cheap or free. New York’s Foundation Center, for instance, curates a growing database of donors for nonprofits to access and learn from, while DataKind acts as a matchmaking service between nonprofits and data scientists willing to donate their time. Thus, expense and ineptitude have faded as challenges.
However, this still leaves the question of how data science can impact social problems. Are DeSouza and Smith correct in saying that “the jury is still out?” on big data in systemic application?
A closer look reveals that the jury has indeed returned, and with a favorable verdict. Since 2015, nonprofits have shown the power of data science to tackle even ‘wicked’ social problems. Change.org uses big data to link similar petitions and decide where to funnel their energies for real-world results—a tactic that led to a successful campaign against exotic animal transportation. International data-gathering helps US AID and Feed the Future understand indigent hunger. Data science turns the millions of data points generated by trafficking reports into actionable intelligence on traffickers’ tactics, as with The Polaris Project and its Google-driven Global Human Trafficking hotline.
Transitional Organizations and Viral Campaigns
In recent years, ‘crowdfunding’ has redefined fundraising. Raising money through small donations from thousands, if not millions, of contributors, crowdfunding works to democratize fundraising. Accessible to anyone, sites like Indiegogo, GoFundMe, and Kickstarter pose unique challenges to more established organizations.
The wider public debut of crowdfunding came with perhaps the greatest example of its success. Using social media, a group of supporters in 2014 circulated a viral challenge on behalf of the ALS Association, a group dedicated to researching and treating Amyotrophic Lateral Sclerosis. Those challenged could either donate or film themselves dumping ice water on their heads. Many participants did both, and in the end, the campaign raised over 200 million for the ALSA and led to several medical breakthroughs in ALS research.
Yet despite stratospheric returns on the Ice Bucket Challenge, most crowdfunding has a different flavor. Charitable causes account for but a small portion of the total money raised by crowdfunding. Sites like Patreon, Kickstarter, and IndieGogo see most of their traffic directed towards product launches and companies in need of equity. According to the Pew Research Center, most successful charitable crowdfunding centers around “efforts to help someone in need,” not fundraising for established organizations.
Fast Company’s Ben Paynter captures the dark side of this dynamic:
Viral campaigns may reach more potential donors but those givers often respond in an emotional as opposed to rational way: You’re paying to alleviate someone’s suffering, not the broader societal problem it represents.
The Ice Bucket Challenge notwithstanding, it shouldn’t surprise us that crowdfunding tends to favor smaller, ‘transitional’ organizations. Motivated by urgent need rather than close analysis and commitment, much crowdfunding has the potential both to supercharge giving and to misallocate gifts.
The dynamics of crowdfunding play into another hot topic in the nonprofit world: the differences in generational giving. According to MobileCause, 84% of Millennials give an average of $481 to charity, making up 11% of total giving in the United States. By comparison, 59% of Gen Xers give an average $732; 72% of Boomers give an average $1,212; and 88% of the Greatest Generation give an average $1,367. Yet data also shows that Millennials account for a disproportionate percentage—33% and growing—of crowdfunded giving. The format fits the giving preferences of Millennials, which incline toward “tangible and immediate” aid. Thus, the complexities and opposition raised by crowdfunding seem likely only to increase as Millennials enter their more generous later years.
The SSIR’s Swindoll wonders, “What would it look like if more nonprofits formed for the purpose of addressing an immediate challenge and then ceased operations?”
In 2018 and beyond, we may well find out.
5. Cybersecurity Threats
Sensational hacks dominated the headlines of 2016 and 2017. A breach at credit agency Equifax involved the loss of as many as 143 million records. Other disasters included the rabid spread of WannaCry, a ransomware program with credible ties to North Korea, as well as attacks on entities ranging from the NSA to political data firms. Investigations continued into the high-profile hacks on the DNC and Clinton campaign, while Russian cyber-meddling in the 2016 election continued to occupy news sources.
Any fears of unfounded hysteria dissipate with a glance at the numbers. The threat is real. According to security firm Gemalto, 1.9 billion records were breached in the first half of 2017, 1.3 billion more than during the same period in 2016.
To date, nonprofits have seemed an unlikely target for major hacks, Russian or otherwise. But as the skill, frequency, and cost of cyberattacks skyrockets, it would be foolhardy for any organization with a possible attack surface to dismiss the threat. Many nonprofits handle client data at the highest levels of sensitivity, from CASA chapters in thousands of court districts across the nation to foundations offsetting the medical costs of cancer patients.
Here, too, concerns are well-founded. According to NetDiligence’s 2017 Cyber Claims Study, 8% of all breaches occurred in the nonprofit sector. 2018 saw a series of attempts, successful or not, to access nonprofit data. From an email scam in Minneapolis to ransomware at a nonprofit hospital in Los Angeles, cybercriminals have shown no compunction about targeting philanthropic organizations. “These days, unfortunately,” observes the Nonprofit Quarterly, “it looks as if cybercriminals have discovered the gold mine that is nonprofit data.”
But breaches stem from more than cybercriminals. In fact, Gemalto data shows that less than one seventh of recorded breaches occur at the hands of “malicious outsiders.” An overwhelming majority qualify as “accidental loss,” a result of loose protocols and human error. While state actors and shadowy organizations do pose a threat even to small organizations, nonprofits face the same diversity of threats as any other entity: from inside as from out, from malice as well as negligence.
To combat this threat, nonprofits will have to adopt a range of security strategies. Such approaches might include replacing or updating hardware, optimizing protocols for email and installation permissions, training staff to recognize scams, or working with an established security firm to do the above and more.
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Despite these obstacles, nonprofits do have reason to hope. True, 2018 will almost certainly find nonprofits in a more precarious position. True, most of these challenges lie outside of any one organization’s control. But three things make nonprofits particularly well-suited for rough waters.
First, nonprofits have a long history of overcoming challenges. Many are intimately familiar with shoestring budgets, fundraising challenges, and a fickle public. In times of need, their executives can draw on a deep reservoir of staff dedication and personal resilience. Nonprofits exist in order to fight for a cause, and they have thrived through worse.
Second, nonprofits can prepare, and many have already done so.
What does preparation look like? It looks like nonprofits honing their storytelling. Optimizing their donor outreach. Using new technology to streamline back office operations. Studying publications like the Millennial Impact Project and adjusting for Millennial giving habits. Tightening their belts and renewing their commitment to the cause.
Finally, nonprofits can leverage the power of partnerships, whether for shared space or financial management.
Enterprise Resource Planning provides an excellent example of how this might work. For many nonprofits, aging on-premise systems place a colossal and continuing drag on nonprofit finances. These systems can hobble, or even paralyze, a nonprofit’s attempts to plan for the future. By partnering with a true-cloud vendor, nonprofits can gain access to regular upgrades, heightened efficiency, and superior planning tools; all for a monthly subscription, and all without a cent of hardware spending.
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Xledger delivers the market’s most automated and unified ERP solution to 9000+ clients on a true cloud platform. Nonprofits including Cure International and the Salvation Army have used Xledger to reshape their financial planning and operations. If you would like to learn more about how Xledger can empower your organization in 2018, please contact us. We look forward to speaking with you.
1 Gemalto, “Breach Level Index-first half of 2017.” Gated PDF. Available for download at https://www6.gemalto.com/breach-level-index-2017-h1-report?utm_medium=press-release&utm_campaign=bli-lp-report