Going Up? Taking Charity To Scale With ReVV 2010 Keynote Speaker Dan Pallotta

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Dan Pallotta, the featured Keynote Speaker at Springboard Innovation‘s ReVV 2010 Conference, has big ideas, big dreams and some steadfast beliefs about how we need to change charity in America. Looking at what it will take to bring our charitable endeavors up to scale, Pallotta has introduced a set of game-changing solutions he believes will allow our charities and non-profits to be successful on the level we need them to be. He has visions of cancer being cured and homelessness in America being a thing of the past.

SE:   What’s holding back the non-profit sector from being more effective in today’s world?
DP:
First and foremost, the thing that’s holding back non-profits from being effective is scale. The scale of our social problems is massive—we have over 1 billion people who are malnourished in the world; the poverty rate in the U.S. is 12 percent; there are 43,000 women dying of breast cancer every year in America; 3 million Americans with epilepsy; 30,000 Americans die from suicide every year and 17 times that number attempt it. The non-profit organizations built to address these problems are tiny in scale compared to these massive issues.

What prevents non-profit organizations from reaching the scale that they need be at to address these problems is a separate economic rulebook. We have one set of rules for charity and we have another for the rest of the economic world. That separate rulebook discriminates against the non-profit sector at every level and in five areas in particular: Compensation, advertising, the ability to take risk, the ability to think in the long term and access to capital.

In these five areas, the for-profit sector has every advantage. With respect to compensation, the for-profit sector can pay people a competitive waged based on the value they produce without limit—which means they can enter into all kinds of fields and levels to compete for leaders where the non-profit sector is not allowed to go.

In terms of advertising, the for-profit sector has enormous freedom to advertise, because the public and the shareholders understand that they have to advertise in order to sell products. Donors in the non-profit sector don’t like to see donations spent on advertising. So non-profit organizations often can’t market and they can’t build demand for donating to support things like ending breast cancer in the same way that Apple can invest in advertising in order to get people to buy an iPad.

With risk taking, Paramount Pictures can make a $100 million movie that flops and shareholders understand that it’s part of their business model, but if you ever tried to do a $5 million charity fundraiser that doesn’t produce a huge return to the charity within the first 12 months then people’s character is called into question. So these organizations are petrified of trying any on a large scale, that is a high profile, risky, bold, new revenue generating endeavor for fear that if they fail, it will be the end of the organization.

In terms of the long-term horizon—every success is supposed to happen within the first 12 months. Airbus can wait 20 years before they look at and calculate the success of the Airbus 8380, but charity has to look at whether they’ve made their fund raising event a success within that first year. That kills the ability to establish long-term revenue streams.

Last, but not least, the for-profit sector can pay a profit to investors to attract capital. The non-profit sector, by definition, cannot. This has lead to the monopolization of the multi-trillion dollar capital market by for-profit organizations, leaving the non-profit sector starved for capital.

When you put all five together—no competitive compensation, no advertising, no risk, no long-term view and no stock market—you put charity at the most unbelievable disadvantage to the for-profit sector at every level.

SE: Why do you think people have such a hard time with the idea of non-profits investing in competitive compensation and advertising, etc?
DP:
Two reasons. First is a Puritan legacy, with charity as a penance for profit making tendencies. How can you make money at charity if charity is your penance for making money in the first place? We’re still stuck with those ideas.

Second, we have this ridiculously undermining and simplistic measure called the Overhead Ratio that is used to measure every charitable endeavor and this question of what percentage of my donation goes directly to the cause. Donors want that number to be as high as possible in the short-term. But to make that number as high as possible in the short-term, you can never take risk, you can never invest in an expensive leader and you can’t think over the long-term because you’re getting measured on your success for these 12 months.

SE: So, for example, what do you think about the criticism the Red Cross has received from the public regarding not immediately spending all the money they received from donations during the aftermath of the Haitian earthquake?
DP: This is exactly what I’m talking about. If they had spent it immediately the media would have been all over them for making flaky grants or not spending the money with enough intent. So you either do an immediate spend—without any knowledge of who you’re giving money to—and we’ll criticize you for not making it a more thoughtful process or give money out slowly—really thinking about who it’s going to—and we’ll criticize you for not solving the situation fast enough. They can’t win.

SE: How do you think America’s notions about charity and charitable organizations need to change?
DP:
We need to trust them and we need to give them the same permissions that we give to business. We also need to stop measuring them by their Overhead Ratios and start measuring them by their dreams—and what kind of progress they’re making towards those dreams. Those are the key elements that we need to have in place to scale up charity.

There is a huge difference between asking charity to be more like business and actually giving them permission to do so. The popular phrase in the culture for the past 10 years is that, “We want charity to act more like business.” What we mean by that is we want them to be more efficient, we want them to draw more blood from the stone, we want them to do even more for less.

That’s not how businesses operate. Businesses don’t put efficiency first—businesses put vision first. We’re simply not giving charity the same freedoms we have in place for the for-profit sector. So when we tell charities we want them to act more like business, it’s cruel, because we don’t give them any tools to succeed.

If we really want charity to be more like business, we have to truly give them permission to do it. That means sometimes the executive director of a charity is going to make $11 million a year—the same way we would pay the head of a health insurance company—if that means really attracting a person who is worth that value to the organization and could catalyze something huge, like curing cancer.

We need to give charity the ability to things like take out ads in the Super Bowl to create awareness for a cause and increase demand for donations without being attacked.  We’re going to have to give charity the freedom to take big risks—and fail.

And that means we need to do some real soul searching. What do we want most? This pure idea of charity that makes us feel good? Or do we want our charities to actually be effective at doing good? Nobody ever asks the poor, starving child in Africa what he or she wants. But I’d be willing bet a lot that those children wouldn’t care what an executive director was getting paid if he or she could save their lives.

SE: Are there mechanisms you believe should be put in place to give that freedom to non-profits, but keep corruption at bay?
DP:
Absolutely. I’m not advocating investing people’s money with a willy-nilly approach. Charities ought to be held accountable by measuring the impact they’re making or trying resolutely to make. You just can’t measure that with a number all the time.

When most people talk about oversight, they’re talking about some number. The latest craze is to replace efficiency ratios with some kind of rating for effectiveness. That’s still simplistic. You can’t distill the work of a complex charity down to one factor. Even giving grades—A, B F or five stars—whatever complexity goes into that rating is still simplistic and doesn’t carry any of the underlying information that might show why an organization is a B instead of an A, which might be critical.

This is an incredibly difficult thing to assess. How would you assess whether the people at Jonas Salk’s lab were worth the money they were being paid if you looked there a year before they came up with the polio vaccine? There would have been no vaccine and nothing to show, other than a lot of failed experiments, for their work. What do you say? They’re obviously terrible because they hadn’t found a cure for Polio yet? These are not easy issues and they can’t be measured with simplistic measures and grades. Donors need to spend time getting to know the charities they want to contribute to, and developing a sense of trust for the passion the organization has for its work.

SE: Is the term non-profit outdated? Is it more important to put “social profit” in the lead—whether an organization is a for-profit or not—in our current landscape?
DP:
It is more important to focus on the social profit an organization is producing. The principle reason I see for maintaining the non-profit structure is so that you don’t give value away in those cases where people don’t want monetary value or profit in return and to provide tax-deductibility on donations.
That being said, I believe we ought to change the tax code so that tax deductibility could, in some cases, be provided for for-profit endeavors that have a social good focus and the consumer is not personally benefitting from their donation.

I had someone ask me at one of my talks if I could think of a for-profit enterprise that has had a social impact. I told them I would be hard pressed to think of a for-profit enterprise that hasn’t made a social impact. We’ve got this twisted notion that the non-profit sector does things to help others and the for-profit sector only does things to help themselves. This notion is held by incredibly bright people, but it’s obvious they haven’t really sat down and thought about it.

Carl Schramm wrote a great article in the Stanford Social Innovation Review last month about how all entrepreneurialism is social. He specifically talked about the refrigerator and the health benefits of that item. I can’t think of many things that have had more social impact recently than the refrigerator. Other things too—the automobile, the computer, clean water producing devices, or the electricity that’s powering my lamps right now.

This notion we hold of a binary system is crazy. At least in the sense that there is a separate set of rules for everything that produces a social good. There’s a line somewhere, because most things produce both social good and social harm, and a very few industries that produce only harm. Those industries that produce only harm are outliers, with the majority of organizations produce at least some kind of social good.

But nobody likes to hear all of this, because it’s vexing and it upsets the whole apple car of a system we’ve got going on here.

SE: Do you think non-profits will be able to survive if they don’t change how they do business? Or will they just be ineffective?
DP:
They won’t necessarily be ineffective; they just won’t be nearly as effective as we need them to be. For instance, you can’t say that a local homeless shelter isn’t effective. It’s effective—it’s sheltering 50 people—but they problem is there are 5,000 people who need shelter. They aren’t effective enough on the scale they need to be. That’s the real issue we’re dealing with. If we don’t give them more freedom, there is no way for them to achieve that necessary scale.

The non-profit model won’t be obsolete, because there are certain issues that can’t be monetized in advance. For example, the issue of AIDS orphans won’t be solved with micro-finance, but you can solve it with charity and some people transferring their wealth to help others. But we need to increase the scale of charity and in order to do that you need to give it certain freedoms.

A telling statistic I’ll share with you is that charitable giving has remained constant at about 2 percent of U.S. GDP ever since we started measuring it in the 1970s. Charity is not taking market share from the for-profit sector. If we could bump that figure to 3.5-4 percent of GDP, it would create a significant increase in scale and there would be a lot more we could do. But in order to achieve that bump, we need leaders with the vision to increase the scale and the resources to tell people about it through advertising and marketing endeavors. We have to give them access to capital and so on. None of this is complicated—it’s all Business School 101—but it’s philosophically unconventional.

SE: What is your vision for the future of social investing? What do you see as tantalizingly possible?
DP:
Ultimately my vision is that we set vivacious goals for the end of breast cancer, AIDS and homelessness, etc. and then for us to pursue those goals with great courage and determination. If we do that, a lot of these philosophical things will have to fall behind because they stand in the way of those great dreams.

I think the non-profit sector and the American public need a magnificent assessment apparatus that will impart a rich story as well as numeric information about charitable organizations. It would be great to have it in video and narrative form and it ought to cover every organization, be updated on an annual basis and objectively prepared. Obviously we’ll need a significant apparatus to do that. Right now the 3Ws have about $3 million in budget money each year to do that, which is about 200 times less than what they need to adequately assess the work of our charities.

I think we also need changes in our tax code that allow for-profit charities and entrepreneurs to get into the work of charity and do fund raising work with tax-deductibility. I think we need to abolish the Form 990 because it’s useless and paints distorted pictures of charities.

Right now 79 percent of Americans think that charity is wasting a great deal or a fair amount of money. I’d also like to see that number flip so that 79 percent of Americans think that charities are doing a really great job, because most of them are.

Dan Pallotta is the author of the new book on social investing and charity, Uncharitable. He founded Pallotta TeamWorks, which successfully raised over $305 million for charities over a period of nine years. He is currently the founder and President of Springboard, a branding firm.

Dan was a keynote speaker at the ReVisioning Value Conference in April 2010 in Portland, Oregon. To learn more about Dan Pallotta, his ideas and dreams, visit: http://www.danpallotta.com

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