Nonprofits have always faced their fair share of complexities, and as a new year unfolds, new trends that will affect both strategy and operations continue to emerge. To delve into some of the key areas of focus, NetSuite’s Nonprofit Industry Marketing Lead, Morgan Carey, sat down with Nonprofit Industry Principal, Cheryl Gipson, to discuss what nonprofits should be thinking about in the new year.
Morgan Carey: What are the key industry trends that will influence how nonprofits operate and find success in 2019?
Cheryl Gipson: The sector is constantly having to change and adapt, both to enforced regulation, and more often to the new wave of technology, consumer expectations and business model innovations that are shaping the commercial sector and in turn affect nonprofits. As I look out on the new year, there are four key focus areas that nonprofits will need to consider and act on to continue the pursuit of their mission:
- Connecting dollars to outcomes, instead of activity
- Addressing the Overhead Myth in the spirit of cost transparency
- Adapting to new regulation with a forward-looking mindset
- Embracing a technology transformation
Carey: When donors are choosing what causes they want to fund, it is no secret that they are looking for organizations where their contribution can make a tangible impact. How does measuring outcomes differ from measuring activity, and how are nonprofits adapting to this thought process?
Gipson: Nonprofit researcher Robert M. Penna says that the nonprofit sector for most of its history, has not had to prove its impact on the issue area for which the organization was created to solve. Historically, nonprofit program activity was used as the sole benchmark of effectiveness, instead of measuring the results produced by the program activity. In short, most nonprofits have focused on what they are doing, not how they have impacted change.
To move beyond this mindset, Outcomes Measurement was introduced as an approach to evaluating nonprofit success that looks to create, measure and assess the social impact an organization fueled.
In the last decade, watchdog agencies such as Charity Navigator and Guidestar, have introduced a number of metrics that measure the effectiveness of nonprofits. Some of these measurements have been controversial, and then rebutted, such as the Overhead Myth and the Overhead Solution. Charity Navigator is now adding outcomes measurement to its checklist of performance metrics, which will help turn the conversation away from activity and toward impact.
Carey: Speaking of the Overhead Myth, this topic has been talked about for a while now. Can you explain why exposing transparency is such a hot topic, and how this has shifted over time?
Gipson: The Overhead Myth is the false notion that any costs that nonprofits are putting toward overhead and infrastructure are funds being taken away from mission performance. This ratio was historically used as the sole indicator of nonprofit performance, and in response, nonprofits would downplay the full cost of operations for fear they would lose funding.
To shift this conversation, there is a new movement toward nonprofit finance teams reporting on the full costs of running a nonprofit. Leading agencies like the NonProfit Finance Fund are encouraging the sector to re-imagine nonprofit sustainability by eschewing the overhead ratio as a measurement of effectiveness and to focus instead on systems to track and report on the full costs of running a nonprofit.
A recent video from the Human Services Council humorously depicts what a pizza joint would encounter if their business were judged by nonprofit standards. With increasing public awareness of the Overhead Myth, both funders and grantees will be using other metrics to determine the effectiveness of nonprofit organizations.
Carey: How does regulation fit into measuring financial health, and where can nonprofits turn for guidance in adapting?
Gipson: Regulation is the ever-present center of managing nonprofit operations. At this time last year, nonprofit finance managers were beginning to feel the effects of FASB Accounting of Standards Update (ASU) 2016-14 on nonprofit financial business process and reporting. This year, with some hindsight, nonprofit finance teams may still be struggling with how to provide qualitative and quantitative information on managing liquidity (cash flow). The AICPA (American Institute of CPAs) provides resources to help CFOs look more closely at measures of liquidity, and as we look at the trend of reporting on full costs, technology comes into view as critical tools of the trade.
Carey: How does technology fit into creating solutions for these trends?
Gipson: There are many ways that technology can overcome outdated processes to enhance nonprofit operations, but at the foundation of a true technology transformation is Enterprise Resource Planning (ERP) adoption.
Nonprofits historically have siloed systems. Program managers use specialized, often home-grown databases to manage clients; fundraisers use software such as Blackbaud Raiser’s Edge; accountants use systems like QuickBooks; and marketing professionals use multiple point tools for email, website and social media such as MailChimp, WordPress and Hootsuite.
But more and more nonprofit leaders want to see the big picture, and they just can’t get the numbers and reports to make strategic decisions because of lag time and disconnected data. While cloud technology has taken a foothold, the next trend for nonprofits is pulling all that data together, using an ERP system that can integrate multiple sources of data and multiple roles within a nonprofit. In the next few years, the term ERP will be understood within the sector, as more nonprofits begin to coordinate programs, fundraising, service delivery and communication touches.