This week saw the release of the annual Giving USA report on philanthropic activity in America, from the Giving USA Foundation and Indiana University Lilly Family School of Philanthropy.

Certainly, a headline is the total giving number – a whopping $373.25 billion in giving in 2015. For the second consecutive year, total giving set an all-time record (both in real and inflation-adjusted dollars). But the element of the report that might be of most interest to nonprofit staff and board leaders is the element that is consistent year after year after year: who is making the gifts.

•   80% of giving comes from individuals (directly and through bequests)
•   16% comes from foundations and grants
•   4% comes from corporations

This reality – 80% of all giving comes from individuals, not from corporations, foundations, or grants – leads to an important question for nonprofit staff and board leaders: Does our organization commit 80% of our fundraising resources (staff time and hard costs) to cultivating and soliciting individuals?

Organizations that are extremely and consistently successful at fundraising tend to say yes, that’s about right. But for many nonprofits, a remarkably disproportionate amount of time and effort is spent on the 20% piece of the pie (writing grant proposals, seeking corporate sponsorships, etc.), and far too little is spent on the far more lucrative 80% (see Footnote 1).

If our organization isn’t allocating 80% of fundraising resources to individual giving, there’s a good chance that we are raising considerably less than we have the capacity to raise. Which is a pretty exciting place to be; untapped potential is a good thing as we look toward increasing contributed income.

So how does an organization change to achieve the desired 80/20 allocation?

First, we need a good understanding of how we currently allocate our resources. If we don’t feel like we have an accurate sense of this already, some analysis is in order. The hard costs in our budget should be relatively easy to assign to the various categories. For human resources, we are going to want to allocate salaries and benefits of every employee who participates in any fundraising activities, based on the actual percentage of total time she or he spends on each category. Best estimates of those percentages from each employee and her/his supervisor are likely to be accurate enough for the purposes of this analysis. And we should be sure to include everyone who participates in fundraising, including the chief executive, key program leaders who help cultivate/solicit gifts, communications staff who work on development materials, etc. This assessment will ultimately give us a total-dollar cost for each category. Divide that cost for each category into the total amount spent on all development, and we have our percentages.

As we work toward moving individual giving up the 80% level that will maximize our contributed income capacity, we need to decide whether we're going to decrease the resources we commit to foundations/grants and corporate giving, or whether we're going to increase the total resources dedicated to fundraising. To make this decision, we want to look at the amount that we are investing every year in foundation, grant, and corporate fundraising efforts, and compare it to what these efforts have consistently brought in over the past five years or so. If the revenue from these categories doesn’t justify the costs, by bringing in considerably more in funding than we spend to raise it, then we should reduce the amount of resources we commit to these categories. Basically, we'll want to prioritize more and do less in these categories. (For example, stop spending extensive staff hours writing grants for small dollar amounts and/or where there aren’t strong relationships and a clear fit with the foundation’s giving focus; that time will yield far more contributed revenue when it’s dedicated to individual cultivation and solicitation.) If, however, the money raised through our foundation, grant, and corporate activities is reliably and significantly higher than what we're spending, then our best course of action might be to keep that level of activity but still add staff and resources to individual giving.

But whether or not we increase our total investment in development, it only makes sense to move to the 80/20 allocation. Individual giving is four times more lucrative than all other types of giving combined. A dollar, staff hour, phone call, proposal, or personal note “spent” on individual giving will yield four times as much as the same spent on any other type of giving. That’s where contributed income really comes from in America. That’s where we should be dedicating our efforts and resources.

A Little Rant on Individual Giving (Join Me!)

So, none of this information is actually new, and yet so many critical nonprofits dedicate so much of our fundraising time on anything-but-individual-giving. I'm asking myself, in the voice of my teenage daughter, "Um. Why, though?!"

I might read this national report and think, "Yes, but my [small/medium/large] [city/suburban/rural] [established/new] [etc.] organization is different. We can't fundraise like that." But, of course, my organization isn't different. The truth about fundraising is that, most of the time, "people give money to people" and it's the work of fundraisers to connect those people directly, consistently, and deeply to our mission and the needs we fill in the community. But there's an understandable aversion to putting ourselves on the line and making fundraising personal. So fundraising activities like grant proposals often become an organization's focus, because they feel safe. At the end of the day, though, that desire for safety leads to lost opportunities to fund our organization's critical work.

Philanthropy is an inherently personal act, and the more personal and connected the ask is, the more likely a donor is to be moved to give. (The most effective foundation and corporate fundraising also rely on leveraging personal relationships and making the close, personal connections.) The good news is that our aversion to "putting ourselves on the line" is pretty easy to overcome. Direct, thoughtful, and personal cultivation and solicitation is an extraordinarily positive experience for both the solicitor AND the donor. So, generally, the more someone does it, the more comfortable they are, and the less they need to gravitate toward removed activities like grant applications (see Footnote 2). Our organizations must give board members and other solicitors the opportunity to gain that comfort. We have to invest time and effort into structuring and focusing individual giving programs – and, very importantly, to offering solicitors the support materials, tools, and training they need to do it confidently and well.

Individual fundraising isn’t easy; it takes a lot of good work. In fact, it should take just about 80% of our work.

In reality, the “individual” percentage is even higher than 80%. A significant portion of foundation giving comes from donor-directed funds and family foundations, where the giving decisions are made by individual donors. And corporate gifts are often directed by the CEO, senior management, or other employees. So the real percentage of giving that comes from individual cultivation and solicitation is probably closer to 90%. But I’ll stick with the USA Giving number for this piece, since that report doesn’t breakdown its foundation or corporate numbers by decision-maker.
Or fundraising events (silent auctions, golf outings, galas) and other fundraising activities that distance the donation from the impact a gift will have and the relationship the donor has with the person asking them to make the gift. These ancillary activities have their place, but doing them successfully requires an understanding of what you actually want to accomplish with them and their full cost, including staff resources. But that’s a blog for another day.

With “Giving Tuesday” coming up tomorrow, followed by the end-of-year giving season for so many donors and nonprofits, I wanted to re-share this important joint letter from GuideStar, the Better Business Bureau, and Charity Navigator (the country’s three leading sources of information about charities), titled “The Overhead Myth.” PLEASE take a look.

The three organizations are working to move donors away from looking at fundraising and administrative costs (or overhead) as a negative measure. I am so grateful for these organizations’ work in this area – so thought I’d join them briefly on their noble soapbox with a little holiday-season rant, if you’ll indulge me.

Because nonprofits invest donors’ money into the choices we make to accomplish our missions, I have always felt that we have a particular and fundamental obligation to be focused, strategic, intentional, and well-managed – to work diligently to maximize the impact of every dollar raised. Financial management and organizational focus matter. But, although it is often used that way, “overhead percentage” is not a measure that indicates whether an organization is prudent, focused, well-managed, or has an impact.

Overhead is not a bad thing – at all. Overhead is the investment a nonprofit makes in the organization-wide staff, facilities, and systems/infrastructure it needs to accomplish its mission and have an impact.
Overhead is not an indicator of impact. The only indicator of impact is impact. Does the organization do work that meets a deeply meaningful need? Do its programs make a difference in people’s lives? Need, quality, reach, outcomes – those are the building blocks of impact; overhead is irrelevant in the equation.
Overhead is not an indicator of the quality of management or the efficiency of the organization. It’s not an indicator of anything other than that organization’s investment in its own overall capacity to accomplish its mission. Different organizations, missions, sectors, geographic locations, and programs all require different types and levels of overhead investment. There is no magic “right percentage.” In addition, it’s worth noting that there is no consistency in what nonprofits classify as administrative and fundraising (“overhead”) expenses, as the IRS grants enormous leeway in their definitions.
Overhead percentages do not indicate how much of your donation goes to the cause you’re trying to support. 100% of your donation goes to support the cause. There was an era where some nonprofits contracted with outside fundraising companies and that third-party company would keep a percentage of every donation and give the nonprofit the remainder. That era is long past, and the practice almost never happens today. But the language of that era has remained, and overhead is inaccurately being inserted into that language. For example, let’s say that a nonprofit spends 20% of its budget on overhead costs. People will sometimes look at that and say, “80% of my donation goes to support the work the organization exists to do.” Maybe they think that’s high, or maybe they think that’s low. But, either way, it’s nonsense. First, to reiterate, the overhead costs are essential to doing any meaningful work (see above), so investments in overhead are also supporting the work the nonprofit exists to do. And second, whatever the organization has determined it needs to spend on overhead in order to accomplish its mission, it has already made that decision and spent that money – whether or not you make any gift or not. Your gift has no impact on how much money is invested in overhead. Give a nonprofit $100, and they have $100 more than they did before to do the work they do to achieve their mission.
In reality, far too many nonprofits spend way too little on overhead – specifically because they are afraid of people looking at them negatively for spending it. The result of avoiding overhead spending is that nonprofits perform their work more poorly, reducing their public-benefit impact and impeding their ability to achieve their mission. Here’s a stark example: at the height of the obsession with overhead percentage as a negative indicator, the New York Times discovered and reported that highly respected medical research nonprofits were having their scientists spend a substantial amount of their time writing grants, rather than working on research to cure the diseases the organizations existed to cure (research that only these scientists could perform). They did this because grant-writer salary was counted as “overhead,” and scientist salary was counted as “program” – and they felt pressured to get their overhead percentage lower, at any cost.

I’m not saying that there are no bad-apple nonprofits out there, but overhead percentages tell us nothing about whether an apple is bad or not. If we’ve never heard of a nonprofit or are worried about whether it is legitimate, we can do a Google-search for the organization’s name and “complaints,” or “investigations,” and we’re likely to find out if there have been any potential problems. But it’s important for us to remember that the vast, vast majority of nonprofits are completely legitimate - and using their resources well. In my opinion, the best approach to whether nonprofits are worthy of our giving is to look at their website and materials, looking for the solid information on what they’re doing and what impact they’re having. If their programs and impact line up with what we value, what we think is important in addressing a need/cause that matters to us, then they are good nonprofits for us. If we aren’t moved by the work that they’re doing, then we should look for other organizations that do move us. For information from an impartial outside source, I do recommend Guidestar, which shares solid information on programs and results, as well as financials and operations. Overview information is available to anyone, and if you create a free account, you’ll have access to additional information and the organization's financial data in their annual IRS-990s. If you decide you want to really dig into a 501(c)3’s financials, here's a primer: "FINDING 'THE BOTTOM LINE' IN NONPROFIT FINANCIALS".