If society is serious about ending the big problems 'charity' aims to solve - poverty, hunger, ignorance, and diseases - why do these problems persist?
Activist and author Dan Pallotta sees charities as lacking resources that are held back by culturally imposed constraints. Our culture objects to charities that use a high percentage of donors' gifts to raise money for charity – an indirect cost called ‘overhead.’
Overhead expenses are dollars not going directly to those served by the charity’s purpose; they instead pay indirect costs such as rents, salaries, event costs, administration, IT, advertising, etc., which are costs that enable fundraising and all the other operations of the charity. It is not possible to run a charity or a business without some overhead.
On one level, donor avoidance of overhead seems logical; why spend money raised to raise more money instead of giving to those in need? On the other hand, certain types of businesses incur high overheads due to the nature of the business.
For example, medical services have high overhead costs for rent, equipment, salaries. A very low percentage for medical services goes to direct costs of bandages, etc. Yet we accept this high overhead rate for medical services, and abhor such high rates for charities.
Dan’s point is charities should not be measured by the percentage of revenue going to overhead but rather by the organization's social impact. I encourage you to watch Dan’s compelling Ted talk and read more detailed and nuanced arguments for change in his book, Uncharitable.
In this article, we brainstorm how Ben's Way Funds Generators[i] might enable Dan's perspective to go forward to help charities make a bigger impact, and in reverse, we explore learnings from Dan that may assist with our efforts to raise money for charities over the long, long term.
Who is Dan Pallotta?
Dan Pallotta is an accomplished fundraiser based in Massachusetts. Dan invented the multi-day charitable event industry. He created the Breast Cancer 3-Day walks and the multi-day AIDS Rides, which raised more than half a billion dollars in nine years and were the subject of one of the first Harvard Business School case studies on social enterprise. Dozens of charities now employ the model and methods he created and have raised more than $1.5 billion more for important causes, from pediatric leukemia to AIDS to suicide prevention.
Despite his success in impacting many worthwhile causes, the world turned against Dan's fundraising event company rather suddenly because of public pressure that his service costs ballooned charities’ overhead costs to beyond acceptable levels.
Dan’s learnings
Dan’s business as a fundraising event supplier to charities dared to go for a big impact.
To raise billions of dollars, he used everyday business tools such as extensive advertising, high-quality marketing with data-driven cross-selling, well-crafted delivery of incredible experiences for the multi-day participants, and fair compensation to his team, resulting in a high percentage of revenues collected going to the overhead cost of raising the money.
When media produced some incendiary articles about pay levels and expenses of Dan’s business practices, sponsors and charities freaked at the bad publicity since ‘everyone knows a good charity must have low overhead.’ But how much is good vs bad overhead?
Overhead as a percentage of revenue is often used to compare charities' effectiveness. The mistaken belief is that more dollars go to those in need if we have lower overhead. Overhead ratios do not reflect the charity's efficiency, effectiveness or accomplishments and, therefore, are fundamentally inappropriate when choosing a charity to receive your donation.
Dan advocates for a worldview where performance by charities is measured by impacts achieved vs today’s prevalent approach of insisting on arbitrarily low overhead and risk avoidance.
If two charities address the same cause with one at a 15% overhead that raises $1 million (netting $850K) and the other at a 60% overhead that raises $10 million (netting $4M), does the overhead rate number matter? Does either overhead rate evaluate the effectiveness of the charities? Would a medical practice without adequate facilities, and hence lower overhead, make sense?
What Dan suggests
Dan suggests the public allow charities to be on a level playing field with for-profit corporations. No organization, for-profit or non-profit wastes money. They scrutinize every decision. But non-profits face the added hurdle of public perception.
Dan’s movement, the Charity Defense Council, is the only organization in America focused on teaching the public and the media to ask about results instead of overhead. Pay employees what they are worth; use effective marketing and all the latest business tools available to deliver great outcomes. Building an optimized business model, team, and delivery processes is the minimum needed to make an outsized impact.
How Ben’s Way could help Dan’s cause
A couple of ideas come to mind to assist. First, since Dan’s work is all about fundraising, the work done by Ben’s Way Funds Generators could assist and eventually satisfy all fundraising needs. However, attaining such fundraising financial independence could take hundreds of years.
Second, a more immediately useful idea is to invest the Ben’s Way funds wisely with community interests at heart. For example, a Ben’s Way's investment portfolio could invest in Social Impact Investments (SIIs). We discussed SIIs in relation to Ben’s Way in detail in this earlier article.
Lessons for Ben’s Way
When the first Ben’s Way Funds Generator is created one day in future, its legal form will likely be a ‘for-profit corporation,’ albeit with the business purpose of providing ever-growing funds for charity.
I’ll admit that my preference for the first Ben’s Way Funds Generator until now has been to operate it as a non-profit. I assumed the public would only support a charity fundraising service by setting up the Funds Generator as a non-profit. Even if reluctantly using a for-profit structure, I still had envisioned any excess profits would go to the charitable funds being raised. A for-profit mode may be selected if it is the only legal form allowed to grow and accumulate capital.
Now I see that paying the appropriate market rates to run the business means not scrimping to keep costs (and thus overhead) down to unrealistic threadbare minimums. Spending more to generate far greater impact, done wisely, is better than meeting arbitrary overhead-to-revenue ratios. Moving forward, some, but not all, of the profits from Ben’s Way will still go to charity as we advance. Some profit will be re-invested to grow the business.
The best things about unabashedly seeking profit are to 1) motivate the Ben’s Way operators and 2) attract competitors.
Motivating the team is an obvious win for Ben’s Way. Capitalism succeeds by sharing wealth with those who create new goods and services. Capitalism is the proven best way to motivate staff to get results. Through the simple tool of making a profit, we will inspire individuals to consider Ben’s Way as a viable career.
Creating competition is perhaps not so obvious a method to help Ben’s Way, so here is the explanation. Nature uses a powerful proliferation strategy that boosts the odds of a species surviving. Plant seeds are created in overabundance, increasing the odds that some will germinate and grow into mature plants that will, in turn, create still more seeds. Having multiple Ben’s Way Funds Generators similarly makes their survival more likely.
If several replica Ben’s Way businesses pop up to compete for donor dollars, then the likelihood increases that at least some Funds Generators will survive for centuries. Proliferation creates more security of continuity, ensuring that more donors' wishes will be followed for longer. Especially if cross-registration of donor gifts and wishes were empowered by competitors pledging to support all registered donor wishes.
The Big Rethink
Dan Pallotta inspires us to take a fresh look at the performance of charities’ activities and not just their costs. Going forward, measured performance is how we make better decisions on which charities to support.
While Funds Generators may one day assist charities, the big rethink for Ben’s Way is to consider the for-profit model to attract funds, talent, and competition.
[i] A Ben’s Way Funds Generator is a proposed organization that invests donated seed funds to grow and repeatedly give portions per the donor’s wishes from the portfolio to charity at various set payout periods or targets. Since infinite time continues after we die, we advocate that society use that time to invest funds to grow more new donations, creating a repeating Funds Generator. The term Ben’s Way attributes the inspiration for Funds Generator plans to Benjamin Frankin. He set up a social impact loan business to last 200 years after his passing via his Last Will and Testament. The business was a socially impactful money lender to young apprentices from 1790 to 1990. Ultimately, Franklin's donation and legacy of social impact investments compounded his seed funds into major gifts to Boston and Philadelphia at the 100- and 200-year mark. In 2022 dollars, his roughly $283 thousand invested in 1790 grew to become gifts in 1890 of $11.2 million and $13.9 million in 1990. Learn more here.
Photo by Mayur Gala on Unsplash
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