The Need for Funding High-Quality Nonprofit Operations

When we talk about the potential for nonprofit organizations to engage in shared back-office services, including fiscal sponsorship, joint contracting, MSOs, or other collaborative strategies, we often hear that the concepts are attractive but… before these strategies can be considered, there needs to be more funding to pay for high-quality operational services. 

We think that the lack of funding for nonprofit operations is influenced by history. Early nonprofit-type organizations in the US were founded by religious institutions, civic campaigns, community associations, and memberships involving charity, education, service, activism, and social activities. Groups were volunteer-led and not recognized as independent legal entities. These historic concepts of charity, volunteerism, and informal work still influence how nonprofits are perceived, namely that nonprofit organizations are somehow not “real” or deserving of high-quality operations.

We see a related push for nonprofits to run their operations “more as businesses,” implying that for-profit operations are more effective than mission-based operations. For example, common funding proposal questions read like sections from a business plan, including:

  • What is the proposed service and what is your competitive advantage?
  • Who is your client or customer and how many will you reach?
  • What is your sustainability plan? What is your earned income? What are your other sources of funding? 

Here’s the disconnect. Unlike business plans, nonprofit funding proposals usually do not require an operations plan with information about organization-wide functions, such as accounting, data management, compliance, insurance, professional development, purchasing, communications, human resources, or facility management. We suspect that an operations plan is not required because many funders seek to fund specific program activities and not general operating, start-up, capital, or overhead. It is also common for nonprofit funders to limit indirect expenses to a set percent of program expenses, regardless of the mission and administration involved. 

Despite the expectation for nonprofits to be more business-like, it’s as if the operational functions, what makes the nonprofit an organization, aren’t as important when compared to funding the direct costs of programs. As if programmatic impact can happen independently, almost magically, without:

  • High-quality, stable, and compliance-oriented operating systems
  • A knowledgeable team of professionals and board members
  • Appropriate workspace and supplies
  • Funding for startup, growth, and emergencies
  • Research and development for future proactive strategies

Yet we know, especially now, that this is not how effective organizations, whether for-profit or nonprofit, operate. The COVID-19 pandemic has shown us that high-quality operational practices are necessary for organizations to adapt to unexpected situations, provide essential goods and services, and offer stable employment in times of stability and in times of crisis. 

The pandemic has also shown us that a new prioritization of nonprofit operations is possible. In 2020, we saw a new immediacy and acceptance for nonprofit organizations to discuss operational challenges with funders, including challenges that were persistent. More funders offered unrestricted funding and engaged in collaborations to share information and collectively support emergency response and capacity building. New shared service networks started up and new fiscal sponsors began offering services to support increased demand.

Adding to this momentum, we believe there is new financial capacity to support nonprofit operations. Because, despite the pandemic, investment returns were high, wealth grew, and as a result, funding institutions have more to give. There is potential to increase unrestricted, general operating, capital, and multi-year funding without taking away from existing programmatic priorities. 

With these trends in mind, we hope that nonprofit operations will become more of a priority and that nonprofit organizations will have the resources needed to access high-quality back-office services. As this support and recognition of the need for nonprofit operations grows, we also hope that more organizations will be able to explore the potential for shared services and not miss out on opportunities due to a lack of funding.

This article is the second in a series, based on conversations between Jackie Cefola and Debra Box about nonprofit shared services and related topics. 

Jackie Cefola, principal of Jackie Cefola Consulting, is a trusted advisor to nonprofit leaders who are starting up new collaborations, often related to shared services. Debra Box, principal of In the Box Consulting and former President and CEO of Support KC, where she helped nonprofit organizations to focus on their missions by providing integrated expertise in financial management and support services.

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