Jackie Cefola Consulting

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Back in 2014, I had the pleasure of working with the Nonprofit Centers Network to complete a feasibility assessment to assist the Association of Community Services of Howard County in considering the potential to develop a human services center. Information was collected through a detailed survey, focus groups, individual interviews, and analysis of the local market for real estate. Recommendations were drafted for the proposed center’s mission and goals, potential tenant organizations, and operating models. Presentations were made during a public “Town Hall” and several  Advisory Committee meetings. Recently, I was pleased to read that the Association succeeded and will open the doors to a new center serving the local community. Read more about the project here.

In early 2017, I had the pleasure of working with the Nonprofit Centers Network and the Inter County Community Council (ICCC) of Thief River Falls, MN to create a pre-development strategy exploring the potential for a nonprofit center. As part of the planning process, we facilitated a Town Hall meeting to engage stakeholders from area nonprofit organizations, public agencies, and small businesses. After the meeting, several participants voiced strong appreciation for the opportunity to convene, learn more about local services, and share ideas about the needs of the local community and service providers. I very much look forward to staying in touch with the ICCC as plans continue to develop.

A nonprofit’s operations are built into every aspect of what it does and how it does it. Strong back-office operations, including accounting, bookkeeping, information technology, human resources, and compliance, strengthen nonprofit organizations, enabling mission impact. Decisions about operations directly impact the scale, scope, and delivery of programs and services. 

In previous articles, we discussed why minimizing overhead is not an effective strategy and the need for strategic planning to include operational planning

But what can nonprofit organizations do to increase their focus on operations? As a first step, we suggest starting with an operations self-assessment.

Why an operations self-assessment?

Most nonprofit organizations compile and disclose information annually to federal and state governmental agencies, the public, the Board of Directors, and to other stakeholders through:

  • An annual financial audit
  • The IRS 990 Form
  • An annual report, and more.

This documentation reports a nonprofit’s compliance, financial stability, tax exemption, employment, and other practices, ensuring that the organization is fulfilling its agreements to be mission-based, not maximize profit, and create a public benefit. 

Some estimates for a nonprofit’s operations and personnel expenses are reported in these filings (i.e. the administrative category in the “allocation of functional expenses” on the Form 990”). But that’s it. There is no annual operational audit of processes or reporting, equivalent to a financial audit. There also is no annual operational report of activities or impact, equivalent to an annual report. 

We believe that this lack of attention to operations contributes to:

  • Operational processes not being proactively managed or invested in
  • Operations not being resilient or adaptive in the face of emergency or changing circumstances
  • Operational problems not getting addressed until systems are seriously broken or the organization is out of compliance with regulators or funders
  • Operational practices increasing an organization’s risk of not being effective or capable of fulfilling its mission

There is great potential for organizations to be more proactive in managing their operational strategy. But there needs to be a baseline to understand how things currently work. 

Self-Assessing Operations

Step 1. Start by identifying the back-office functions that are necessary and completed on a regular basis. The division of labor, tools, and strategies for back-office tasks will be unique to every nonprofit organization. Operational systems evolve over time to suit the people involved, the resources available, and the mission being supported. There is no one-size-fits-all approach.

Key areas to assess can include:

  • Accounting and bookkeeping
  • Compliance and risk management
  • Human resources
  • Information technology
  • Database management 
  • Fund development, 
  • Governance
  • Communications
  • Administrative functions (reception, clerical, purchasing, storage) 

This is an opportunity to also recognize if there are essential operational functions that are not being completed regularly. For example, we frequently see organizations lacking human resource services, even while employing staff or managing volunteers. 

Step 2. Figure out who is involved in each operational area, including leadership, staff, board members, volunteers, and contracted service providers. Oftentimes these functions are shared among leaders and staff or completed as a side task by someone who primarily focuses on programmatic work, for example, the executive director who also is responsible for accounting or website management. Sometimes operational processes are completed but not formally assigned – it isn’t completely clear who’s doing the work or how, for example, the database that is used by all, though it’s unclear who is responsible for updates and maintenance.

Step 3. Ask questions to better understand the current state of each service area. We suggest starting with…

Who is involved and what supports are available?

  • Is this operational service your primary job function? 
  • Is there more than one person who knows how to complete this job function?
  • Are processes and policies documented and accessible to others? 
  • Do you and the other people completing these tasks regularly participate in training or professional development related to this service?

Goals and feedback?

  • Are goals for this service area documented and understood? 
  • Do you receive regular and useful feedback that helps you to improve this service area? 

Current strategies and potential areas for improvement?

  • What are key systems and processes are used to complete routine tasks?
  • What are the strengths or weaknesses of current procedures?
  • How often are systems and processes evaluated and updated?  
  • If budget was not an issue, what improvements would you suggest?

Alignment of operations with the big picture

  • How do current practices support our organizational mission? 
  • Do the people, strategies, and systems involved reflect our organizational values? 
  • How does this service support the organization’s strategic plan? How is this service area involved in strategic goals and activities?
  • Does this service area strengthen our relationships with partner organizations, community members, funders, and other key stakeholders?

Step 4. Understand the time required to complete operational tasks and the associated financial costs. The largest operational expense will most likely be related to personnel – the hours required to complete tasks and the wages paid in compensation. If operational services are contracted, this will be easily estimated by reviewing contractor invoices. 

However, most nonprofit organizations do not contract and many do not have detailed time management practices in place for staff who complete operational tasks. Most organizations also have staff who work across multiple back-office functions. Understanding these challenges, ask the people involved to estimate the hours that are typically required for different operational tasks or alternatively, the percent of time they spend on operational responsibilities. Once hours are calculated, estimate the associated financial expense – the wages and benefits paid for the time allocated to operations.

In gathering this data, it will be important to communicate that these estimates are not intended to reduce hours or employment – but rather to understand how much time is being spent, potentially to increase dedicated hours or staffing in service areas that require more capacity. It’s also a great time to capture ideas about improving processes from those performing the services.

With this new understanding of the operational tasks being completed, the personnel involved, the processes and systems required, and the time and associated expenses, organizations have many of the inputs needed to develop a clearer understanding, a baseline, for how things are working. Yet it is important to remember that this self-assessment is limited to the information known from within the organization, one frame of reference. 

In the next article we’ll talk about how to also gather information about operations from your customers to generate a second frame of reference. We suggest that customers might include clients, board members, volunteers, partner organizations, and others who are impacted by but not directly involved in operations. 

In taking this more holistic view of operations, one that includes self-assessment and customer feedback, organizations will be prepared to develop strategic goals and indicators – the foundation for strategic planning.

This article is part of 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.

Nonprofit strategic planning starts with the mission as the launchpad for aligning an organization’s programming with purpose. The strategic plan also creates an opportunity to take an authentic look at how the work impacts the communities served. Staff and leadership, with the board, develop strategies to fulfill goals and move the mission closer to reality.

All strategies require alignment with an organization’s operational capacity and systems, including the bookkeeping, database management, human resources, information technology, and other back-office functions. However, operations are not usually factored into strategic planning in a meaningful way. 

For example, an existing data management strategy, or access to a multi-lingual translation service, or a new warehousing space, are seldom drivers for strategic goals. Furthermore, the operational needs created by new strategic goals, for example, a new point of sale system, or an increase in human resource services, or new insurance policies, are not always included in a strategic plan. We’ve seen too many instances when excellent strategic goals are not achieved because of limited operational capacity.

This separation between strategic planning and operational planning suggests that operations are reactionary and ancillary, not a driving force for change. Yet we know that high-quality operations are required for nonprofit organizations to actually be strategic and 

  • Ensure effective and compliant programs and services, now and in the future
  • Support a knowledgeable, innovative, team of staff, board, and volunteers
  • Invest in research for future growth opportunities.

Nonprofit organizations need to be strategic about operations – in the same way they are strategic about program and service activities. 

A strategic plan that holistically includes operations identifies opportunities for enhancing mission-based activities and the back office. In doing so, the plan supports not only the programmatic impact – but organizational impact. 

A strategic plan that includes operations can also strengthen funding requests by providing a detailed explanation about which operational services need financial support and how that support will generate positive impact. There is an urgent need for both nonprofit organizations and funders to communicate more effectively about the needs for and impacts of operational funding. 

More broadly, we see potential for operational strategic planning to challenge current norms and encourage the nonprofit sector to stop treating operations as something to be minimized. Proactive investment in back-office services is connected to organizational health and resiliency – the foundation for programmatic impact. Let’s begin to recognize that, plan accordingly, and communicate the impacts that result. 

This article is part of 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.

What is nonprofit overhead? 

Nonprofit overhead is described as non-program-related expenses. If an organization files an IRS Form 990, the overhead rate is the sum of reported management and general and fundraising divided by total expenses. 

Many have previously explained why the concept of nonprofit overhead is highly problematic.[i] As we discussed last month, the idea of nonprofit overhead creates an unhealthy distancing between mission-related activities and the supporting activities that sustain the organization, as if the mission could be fulfilled without an organization driving the effort. 

Nonprofit overhead can also be hard to measure. Overhead is not always defined by job title or by job task. Most nonprofit organizations have budgets under $250,000 and a small staff who always work on everything and take on multiple roles. Many activities blur across the lines of programmatic and non-programmatic categories. Most organizations do not have sophisticated cost accounting or strict time tracking procedures in place. Hours spent on overhead tasks are estimated as best as possible.

Yet there is a need to track and report out operational performance metrics and, for now, the overhead rate continues to be used for evaluation:

  • Charity Navigator’s Financial Efficiency Performance metrics include ratings based on programmatic, administrative, and fundraising spending. For “general and grantmaking organizations,” a top rating goes to groups with non-program spending under 15%. 
  • Donor Mindset Study reported that the average US donor believes, across the board, that nonprofit overhead should not exceed 19%. 
  • Public and private funders also often set overhead limits, often 10 to 20% of overall spending. 

These overhead rate guidelines and limits are applied to nonprofit organizations regardless of many factors that influence operational expenses, such as mission, programs, budget size, geographic location, staffing model, need for research/development, and lifecycle of the organization. 

Why are navigators, funders, donors, and the public in general so keen to set nonprofit overhead rates? And why are higher overhead rates considered to be bad? 

We suspect that the setting of overhead rates relates to a common but mis-held belief that nonprofit organizations are inherently inefficient and wasteful because they are not influenced by supply, demand, competition, and other market factors in the same way that for-profit businesses are. How many times have we heard the call for nonprofits to act more as businesses? 

But if nonprofits really acted more as businesses, there would be room to invest in overhead. In the for-profit sector, overhead rates are understood to vary by industry and absolutely exceed 19%. In one study, small business overhead rates reportedly ranged from 36% (clothing stores) to 73% (child day care services).[ii]

Somehow a higher overhead is acceptable when the goal is to generate profit but not when the goal is to create mission impact – even when the mission is required to combat market failure. 

We also think the drive to minimize nonprofit overhead rates implies a lack of trust in nonprofit leadership. The setting of an overhead rate limit is like the setting of an allowance, or a parental guardrail. The implication is that a spending limit is needed because executive directors lack knowledge, skills, and experience and cannot be trusted to develop operational strategies that best serve their organizations without significant guidance. 

Given all these pressures and perceptions, it isn’t surprising that nonprofit leaders are primed to reject strategies that could potentially increase overhead, even temporarily. Couple this with the need for greater funding of high quality nonprofit operations and it becomes clear why there is such a strong drive to minimize overhead.

How can we move beyond the drive to minimize nonprofit overhead and allow for more sound operational management and organizational health? 

What if instead of focusing on overhead we asked, “how much are we spending on operations and why?” What are the true costs of programs and operations? We’ve seen more than one nonprofit organization, to minimize overhead, not recognize that their business model relied on taking high operational risks, burning out staff, not staying in compliance, or not allocating for a reserve fund. There is a need to measure and communicate nonprofit health more completely and with a mindset that values proactive and long-term strategy, including investments in operations.

What if we trusted nonprofit leaders to be capable of making the right decisions and requests for their organizations, including decisions to invest in overhead? Imagine a relationship where nonprofit leaders are trusted to make the right programmatic decisions and can also be trusted to make the right operational choices. It is exciting to see the emerging body of work around “trust-based philanthropy.” The Trust-Based Philanthropy Project created an initiative to make trust-based practices the norm in philanthropy through peer-to-peer learning and advocacy. 

Overall, funders, donors, nonprofit leaders, the public must build support for nonprofit organizations to spend an appropriate amount, not a minimal amount, on the operations needed for effective and impactful programs. 

Together, we must move beyond overhead limits and allow for the possibility that higher operational costs are sometimes necessary for long-term stability, compliance, growth, and innovation.

This article is the third 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.


[i] Vu Le, “How the focus on overhead disenfranchises communities of color and fans the flames of injustice;” Curtis Klotz, “A Graphic Re-visioning of Nonprofit Overhead;”  Ann Goggins Gregory & Don Howard, “The Nonprofit Starvation Cycle

[ii] https://www.washingtonpost.com/wp-srv/special/business/costofrunningabusiness.html

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.

Nonprofit operations may not seem sexy, but they are key to building capacity and resiliency. And what’s really not sexy is a nonprofit organization with outdated systems that cause inefficiency or non-compliance; or practices that contribute to someone’s burnout.

During a recent a presentation about shared services someone asked, what’s sexy about nonprofit operations and why should we pay attention?

Admittedly, when you first learn about a nonprofit organization, the mission is probably what sparks your interest. The back-office of an organization, the accounting, finance, information technology, human resources, and other administrative services, is not as immediately eye catching. Yet we know that these functions are essential. 

In a recent conversation, an Executive Director of a newly forming nonprofit recognized the need for operational support. “My Board wants me to focus on the strategic direction of the organization and not on administrative tasks, but right now there is no one else to do them. In the short-term, board members will be supporting in these areas. Board members that have been recruited have skills that are needed.”  

More resources exist for for-profit startups. When an entrepreneur starts a small business, there are public structures to provide consulting, support, and resources to help set up effective operations, including through the Small Business Administration (SBA). While nonprofit entrepreneurs can utilize and adapt the SBA’s services, there is no dedicated Small Nonprofit Administration, despite the reality approximately 2/3 of nonprofit organizations that report any expenses have budgets under $250,000 per year. 

A $250,000 nonprofit budget typically translates to an organization with a staff of one or two people who are responsible for all operational functions in addition to mission-related activities. In practice we frequently see an executive director who is responsible for accounting, finance, information technology, human resources, and marketing – in addition to leading programs and services. 

This increases organizational risk because no one person can be exceptional at every operational and programmatic function. There may be gaps in service quality if, for example, best practices are not followed, or systems are not updated. This also can contribute to leadership burnout because it is very hard to balance so many competing priorities and also have very little capacity to consider alternative ways of doing things. 

The founder of a 5-year-old environmental group recognized the need for operational planning, budgeting, and funding as she looked back on her experience, “I created a business model that never included staff and I’m paying for that now. I took classes to build my skills, but I did not want continue to do everything.”

Maybe our interest in operations is changing. Over the past year the COVID-19 pandemic caused many nonprofit organizations to pivot. Funders had a choice about what to do when funds were allocated for programs that couldn’t be provided as proposed. Some funders responded by allowing organizations to re-purpose funds to make operational investments, for example, to support technologies and systems for remote work.

National networks and local networks also offered new ways for nonprofit leaders and back-office service providers to share information and best practices, for example, to help organizations navigate the PPP loan application process. 

Outsourcing and shared service providers, including fiscal sponsors, continued to offer different collaborative back-office services to suit the needs of nonprofit organizations. 

Looking forward, as nonprofit organizations transition back to the workplace, we suggest that the back office must continue to be a priority. As we’ve learned over this year, an organization’s operations can strengthen stability, resilience, and responsiveness and when we invest in the back office, we increase overall capacity for mission impact.

 

This article is the first 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.