Last week, we focused on burnout for those working in the nonprofit sector. This week, let’s take a look at what burnout costs — particularly for donors, investors and the impact of the nonprofit in the community.
To set the stage, let’s examine expectations about nonprofit overhead. This landmark study from Stanford Innovation Review about the nonprofit starvation cycle lays it out:
- Whereas Americans see an acceptable for-profit business overhead as somewhere between 20 to 50 percent, we also believe that nonprofits should run their businesses on an overhead of just 14 percent.
- Funders often reward thin overhead, particularly during periods of economic downturn, and some adopt policies that explicitly discount overhead, for example: “We don’t fund salaries for non-program staff” or “We don’t fund overhead costs”.
- As a result, nonprofit administration is often understaffed relative to other businesses, and executives even in established organizations may be supporting million-dollar operations with a staff more appropriate to a small business with revenues of 1/10th that amount. This requires them to take on more and more roles within the organization, leading to risk, gaps in service and burnout.
- Most nonprofit employees are doing their work at below market value, making it harder to remain in the sector when another opportunity comes calling.
Given that nonprofits play a critical role in our communities – addressing gaps in systems, serving as guides for those most in need and, in many cases, literally saving lives – the logical question is whether these arrangements are leading to the outcomes that donors, investors and the community expect. To answer that point, I’d suggest we consider the following:
- For small- and medium-sized nonprofits dealing with particularly challenging issues on a 1:1 basis (mental health supports as one good example), it’s not unusual for an organization to spend 30 – 60% of their budgets on salaries. Counseling, social service navigation and similar mission-critical services are done by people, so salaries are their primary programmatic investment to achieve their missions.
- Turnover in the nonprofit sector is unusually high, between 20-40 percent in any given year (far higher than for-profit).
- Research indicates that the cost of turnover, depending on the organization, ranges from half a position’s annual salary up to 2x the annual salary. This includes recruiting, hiring, onboarding, training, ramping up to peak productivity, higher error rates during the first 18 months, etc.
This suggests the possibility that between a third (and up to half) of the dollars a donor invests in a non-profit are used to manage turnover rather than delivering the mission of the organization.
Stated differently, for every $10,000 investment made in a community non-profit, we can reasonably expect around $3,000 of it to be used to navigate the transition of staff and systems because of the gaps in administration and other supports noted above. Many nonprofit partners readily admit this system is exhausting and ineffective, but since budget arrangements are largely driven by the ways funders want to donate, they don’t see another way to proceed.
And so, we have to ask: as donors, are we comfortable with that the results of the systems that, in many cases, we help foster?
Thankfully, there are some signs that this ship is starting to right itself. Nonprofit salaries in some sectors and some parts of the country are trending closer to for-profit market value. Donors are re-adjusting their expectations, and nonprofits are standing together to change perceptions of their work and the role of administration in achieving their mission.
We’re glad to partner with many nonprofits navigating this transition in Louisiana and to partner with many businesses and funders doing the same. We know, though, that there is much more to do.
Part of the work is drawing attention to this issue, but there is always more we can do to accelerate change in Louisiana. Have an idea of what we or others can be doing to make more progress on this and other critical issues impacting communities, kids and health in Louisiana? Let’s talk…
– Michael Tipton
BCBSLA Foundation President and Head of Community Relations