Return on Mission
Every year around the first of July, October, or January, nonprofits launch their fiscal year. Board committees, finance teams, and senior staff settle on spending and revenue targets, and countless other new nonprofits enter the marketplace as new organizations. Yet the annual budget process and the tools which usually accompany them get a disproportionate share of attention, versus resolving the tough social problems outlined in their missions. Addressing this reality would transform existing nonprofits and assure that new ones planning to launch were truly thoughtful about the wisdom of doing so.
ROI vs ROM
Nonprofit finance committees, staff, and boards typically ask, “What’s our Return on Investment?” This question drives nonprofits toward genuine reflection and deliberation about where to allocate scarce resources. But the process of nonprofit budget development and approval prioritizes organizational stability, not Return on Mission (ROM.) What drives change is mission fulfillment and organizational stability. Both are important but for too long mission has been subjugated to stability. We need ways to propel mission rise that result in future potential, not perpetuating the status quo.
Whereas the private sector has powerful tools to assess returns, nonprofits have few. Even when private sector staff join nonprofit boards offering up their tools, nonprofits need more. Whereas businesses sell products and services to consumers who want them, nonprofits offer products and services to consumers who need them paid for by donors willing to give them. Hence, nonprofits must meet a dual value proposition that succeeds on returns beyond dollars; they need measurable returns on mission which are inclusive of finance, outcomes, and organizational structure and efficiencies. We posit that most social sector organizations, especially nonprofits, fail to integrate programmatic and financial analysis in a way that measures mission. The result is nonprofit perpetuity alongside the problems they are trying to resolve but little changes. We must start to evaluate return on mission. But first…
Budgets are Easy; Mission is Hard
Nonprofits face a starvation cycle. Competing financial and resource realities hinder their ability to focus on mission, and a noble and cultural adherence to incremental budgeting perpetuates the status quo. In making marginal increases for existing programs, nonprofits do not fail, but they fail to grow. This denies much needed space to test new business models, launch new endeavors, or even question existing programs. In fact, this can close the door to fulfilling mission. The pursuit is always ongoing but never finished. Some examples:
- Micromanage Me– As donors have become more knowledgeable, they have become more scrupulous about where they will contribute. This has led to deviations and even mission creep, often resulting in multiple programs tailored to multiple donors. It is not just foundation and individual donors, but also drafting grant proposals to meet RFP requirements that “fit” donor wishes but blur mission focus.
- Just One – Grant awards are often limited, even for single year only, so organizations struggle to build sustainable programs that can take two to three years to build. Single year (or short term) grants result in poorly built programs and distracted nonprofits who are spending more energy on finding money to replace recently awarded funding.
- Five to Fifty – Grants five to fifty thousand dollars, common and needed, hardly cover a full time employeeso organizations, while grateful, can overplay the likely impact such gifts will carry while finding themselves in the unenviable position of under-resourced projects.
- M&E – Agrowing interest in Monitoring & Evaluation (M&E) without the requisite resources or tools to support M&E. Domestic nonprofits are especially vulnerable in that finding the resources to hire M&E experts or deploy appropriate software is especially difficult.
- “Game of Departments” – Because programs are often funded by a single funder like the government, management takes indirect funds, sometimes referred to as Admin which is a percentage of each grant that can be from 10-25%. Further still, unrestricted resources are desperately sought. Both streams can be overly invested in places that don’t feed back to organizational infrastructure that supports programs equally and find themselves in other departments that do little to build mission infrastructure. Leadership teams often fight for precious resources and win based on who best persuades the CEO/Executive Director that their “kingdom” is most worth
The list continues but we think a methodology that integrates and balances financial, program, and other organizational tenets will lead to more effective allocations, reduce subjective influence, and incorporate genuine cross departmental analysis. Once agreed upon, Return on Mission can become something beyond simple budget allocations of funds to departments that win and lose, but really sync investment toward clear objectives that feed mission.
Nonprofits need to develop and utilize tools that measure and meet mission, not budgets that simply seek incremental investments to ensure stability. Current nonprofit practices can overvalue programmatic spending, match requirements, and in-kind contributions so that program investments look rich but actualimpact remains poor. Some examples:
- A donor contributes an on-line donation to a crisis-oriented solicitation expecting their gift will go to the stated cause.But those funds go to an unrestricted pool. This means the issue gets investment and the nonprofit is incentivized to send more mailings to ensure their sustainability rather than addressing the stated cause. The outcome is an unmet need, a weary donor (if s/he knows but even if they don’t, the issue persists), and a nonprofit eager to send more urgent appeals for issues it will not address, at least directly.
- A government funder requires a 20% revenue match that a grantee commits to raise and contribute.In actuality, the organization uses fundraising tools to show a match but less, if any, of the 20% is a match that comes from new or unrestricted funds.
Nonprofits, and the donors that give, must have ways to assess donor investments and validate the nonprofit’s purpose. Failing to do so means nonprofits multiply as others start new ones to address the same issue(s), outcomes are elusive, and the public grows weary of countless organizations purporting to do the same thing. It is time to reverse the status quo to capture Return on Mission.
The Formula: Definitions
These realities demand that we make this tangible and present a way to begin accounting for them. We acknowledge that in any attempt to do so, countless variables could affect our model, so readers should view this as a framework to be adjusted for your organization. At the same time, one must minimize subjective decision making. Your bias might make the numbers look better, but your Return on Mission won’t improve and your mission will lose. Don’t cheat your current work or potential. The model includes three areas:
Resource Sum – This accounts for all resource inputs, not only revenue. It equals Cash (both Restricted & Unrestricted) + Volunteers (time value) + In-kind gifts (dollar value)
Dollars as cash = This is a number that includes unrestricted dollars and restricted donations provided for programs only.
Volunteer time = This includes a measure of dollars calculated by Number of Hours times the recommended dollar value per hour as suggested by the Independent Sector. This number is $25.43 which was updated by the Independent Sector on April 11, 2019.
In-kind gifts = This is the dollar value of in-kind gifts. We do not make assumptions on how well Volunteer Time and In-Kind gifts are managed. Doing so would be difficult and lead to inconsistencies. However, we do assume that donations are made and expended the same year.
Time (length of donation) = We add these three factors and divide them by 12 months to get a per month utilization. We then do it for three years so that we can grasp the resource trajectory year over year for each month.
Diffusion Sum – We need to understand how organizations diffuse funds, not just expend them. Organizations always seek strategic decisions on where allocate dollars across programs and departments but over time departments and programs develop constituencies that fight to maintain the status quo. Even with a new strategic plan, those parts of the organization frame their area as key to that plan. A strong analysis should account for how an organization spreads resources and how that may have expanded over time. So, we introduce the idea of a Diffusion Sum which is based on:
Diffusion (# of programs) = This includes the number of programs an organization implements. If they are trying to run 2 vs 8 for example, we should explore if they are limiting outcomes by trying to do too much.
Pillars (# of departments) = Pillars are more consequential. Each Pillar is a department respresenting a distinct area of work. Every organization needs pillars like HR or Finance for example. But each diffuses expenditures and has political affect. First, more means more decisionmakers competing for department resources, arguing for their strong infrastructure and the ability to hire well-paid decent staff. While no one would argue against a strong infrastructure, each department results in more competition for resources and the potential minimization of core programs. Imagine a organization with mission X that has 8 departments “supporting” x such that the X department gets a disproportionate lower share of new investment every year. Further, if the CEO is particularly close to other non-program (x) leaders, the core mission is diminished and distanced. Decisions can become more subjective as departments grow in size and number, resulting in silos and declining rates of return.
Staff Ratio – The final and simplest area is looking at staff. Not only do departments grow but so does staffing. We think organizations must assess the proportion of staff specifically focused on program delivery. By getting a sense of the staff devoted to program vs other areas, we can get a grasp organizational focus on mission. It is even more notable to assess this over a period of time like 3 years.
Program staff = This is the number of staff who work directly on programs. By programs, we mean the work toward mission alone.
Non-program staff = These are human resources not working on direct service but support functions. By support functions, we do not mean administrative alone. We mean development, finance, HR, and advocacy (if this is not part of the core mission.)
The ratio is the number of Program staff divided by total staff. Therefore, if an organization has 10 staff and only five offer direct service, the ratio is .5. The larger the number, the better.
Resource Sum = Cash (Restricted & Unrestricted) + Volunteers (time value) + In-kind gifts (dollar value)/ 12 (months) = Xa
Diffusion Sum = Diffusion (# of programs) + Pillars (number of departments competing for resources outside of core mission-based programs) = Xb
In application, Xa/Xb = Monthly Raise (MR). Next, we look at the staff ratio. This is calculated by:
Staff Ratio (SR) = Program staff / total staff (including finance, executive, human resources, advocacy, etc.) = Xc
Next, we take MR and multiply by SR (MR*SR) which gives us our first result for Return on Mission. While the framework will eventually be useful in comparing nonprofits, the most practical use of the exercise is for organizations to compare numbers over three years to grasp their actual progression toward or away from mission. This allows organizations to understand what is going on with mission and leads toward our ultimate objective: moving beyond stability and survival toward prioritizing mission.
A word on outcomes…
Finally, before an organization considers building out a version of this formula for themselves, they must agree upon the mission outcomes they are seeking. This is far more difficult (or taken for granted) but must underpin any exercise using the formula. We do not mean something like “End Homelessness” but rather, “We seek to reduce homelessness for women in South Chicago.” Outcomes won’t be explicit in a mission statement but should easily be an extension thereof. It is also important that we not confuse indicators with outcomes.
It is incredibly difficult for organizations in the Social Sector, especially nonprofits, to ensure Return on Mission is tangible. Until today, most have drafted budgets and assessed resources like a company making widgets. However, nonprofits are far more nuanced in what they “produce” so they need new tools to explore their impact on society. Cetainly, these formulas for ROM are not perfect. For example, they necessitate organizations judge their own work against prior years which will usually, if not always, offer a positive outcome even if the trajectory is still teachable. Further, organizations must engage their finance professionals and even outsiders like board members and volunteers with finance expertise, to agree on definitions. Mission Rise beseeches organizations to start though. The missions we serve cannot wait.
(c) Mike Mitchell, Mission Rise, September 2019