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Design Thinking is a solution-based approach to problem solving. It begins by gaining an empathetic understanding of the human needs in the problem to be solved. We do this by engaging, observing and conversing with our customers and clients. Based on evidence and understandings from this analysis, the problem is reframed and defined in human-centric ways.

Organizational leaders and participants need to spend some time thinking and talking with one another “outside the box” about what the real problem is and striving to avoid jumping to early solutions to perceived problems. Various authors refer to this as the “ideate phase”, the process of brainstorming and synthesizing ideas to generate potential solutions. The last phases in design thinking are prototyping the solution – generating low-fidelity representations of the solution idea – and seeing how customers and clients respond, before investing in a scalable model to hopefully solve the identified problem.

As Dana Mitroff Silvers puts it:

“Design thinking in the nonprofit world is inherently scalable and flexible and any nonprofit – regardless of mission, size, or operating budget – can implement this human-centered process of innovation. The beauty of design thinking is that it offers a toolbox of mindsets, skills and methodologies than can be adopted, adapted and incorporated, depending the project, team members and institution.”   (See https://www.nten.org/article/design-thinking-a-powerful-tool-for-your-nonprofit/)

How well are nonprofits doing? Are we providing what our clients need and want – or are we just doing our best to balance implementation of our board’s mission with an overworked program staff and an underfunded budget?  Do we need to rethink our mission? Or just the delivery of our mission? If we’ve got our mission right, and are doing pretty well on delivery, what are we doing to sustain our organization – its leaders, actors and clients? How do we know?

Consider using the Design Thinking toolkit to take a human-centric approach to your organization’s analysis of its effectiveness or its next staff problem-solving session.

Board Source’s Power of Possibility helps organizations use Design Thinking tools to consider different types of strategies and approaches and not be afraid to “Go Bold” in re-envisioning your organization. Reconnect with your organization’s core purpose through generative discussions among the Board, staff and clients. Consider some of the following questions:

• What is our core purpose? What problem are we trying to solve or what new reality are we trying to create?
• If we were to be founded today, what and who’s needs would we be trying to meet? Are there new players that are making our work more (or less) relevant?
• How do our results and reputation compare to other organizations that are working in a similar organizational space as ours? Do we have competitive advantages (or disadvantages) that should inform the way that we are thinking about the potential of a strategic alliance or restructuring?
• If we were to close our doors today, from whom would we hear and what would they say?

Design Thinking can help you engage in that work with a more open mind, being ready for new ideas and approaches to current problems.

Have conversations with your Board, funders and fellow staff about how your organization thinks about funding its core mission. What kind of nonprofit are you?  Does your service work directly with your clients, in which case, their salaries are going to be big part of your program offerings? On the hand, if you are a foundation or work primarily with ideas or online, you may not need as many staff and may be able to justify a smaller staff with lesser space and a greater commitment to technology and administration. How do you fund your various programs and obligations? Are you investing in infrastructure that will help your organization be sustainable? Do you have appropriate financial controls?

Work with your Board: You might consider a board retreat or at minimum, a couple of board meetings developed to Lessons for Boards from the Nonprofit Overhead Cost Project. The following resource reviews major findings from a national study and makes recommendations in four areas: financial controls, financial reporting, financial staffing and organizational effectiveness See: http://www.coststudy.org/

Develop a strategy that explicitly recognizes infrastructure needs. For advice on how to do so, see Bedworth and Howard’s article: Nonprofit Overhead Costs: Breaking the Cycle of Misleading Reporting, Unrealistic Expectations and Pressure to Conform at: https://www.bridgespan.org/insights/library/pay-what-it-takes/nonprofit-overhead-costs-break-the-vicious-cycle/

Make the argument for more general operating funds.  See: http://nonprofitaf.com/2018/03/the-ethical-argument-for-general-operating-funds/

Engage the board in assessing organizational needs and ensuring appropriate overhead to make the best use of financial resources: See https://boardsource.org/resources/discussing-overhead-expenses-boardroom/ for a straightforward primer on managing your mission and overhead expenses.

Engage your publics and the media on rethinking nonprofit business models. See https://nonprofitquarterly.org/2018/03/13time-public-understand-nonproft-business-models/

Have your funders lead the effort to eradicate the overhead myth. For resources, see: https://effectivephilanthropy.org/funders-can-help-overcome-overhead-myth/

Join the nonprofit overhead Project: See: https://www.calnonprofits.org/programs/overhead/about-the-nonprofit-overhead-project/how-inordinately-low-overhead-hurts-nonprofits-foundations-and-communities/

Invest in strong and sustainable fund-raising programs: Fund-raising is an essential part of being a nonprofit. BoardSource has some excellent resources on investing in strong and sustainable fundraising programs. In short, how much are you spending to raise a dollar and IS YOUR CURRENT APPROACH, THE BEST APPROACH for you to meet your needs? For more information, see: https://boardsource.org/research-critical-issues/measuring-fundraising-effectiveness/

Although every organization defines it a little differently, overhead is a generic term for the cost of doing business. These typically include: indirect costs, administrative costs, shared costs and fixed costs, although depending on the organization, they can also include the salaries and expenses for everyone who is not providing program services.

Overhead isn’t an accounting term but it gets used regularly in businesses, nonprofit and otherwise. The purpose of this newsletter is to help NPOs to agree on how the term will be used in your organization, to:

• Be fiscally responsible;
• Adequately fund the organization’s mission, and
• Maximize the organization’s sustainability.

A definition to begin the conversation: The table below classifies various functional expenses of a nonprofit, all of which are reported on an IRS Form 990. Administration and fundraising are typically part of overhead expenses.

Functional classification of expenses *

Table drawn from FINANCIAL LEADERSHIP FOR NONPROFIT EXECUTIVES: Bell, J & Schaffer, E. a Compass-Point-Fieldstone Alliance Book (2005)

BE FISCALLY RESPONSIBLE:

Key to fiscal responsibility are:

(a) Ensuring that you have someone who understands the rudiments of accounting and

(b) Leadership willingness to talk openly, honestly and effectively with donors and your board about the costs of doing your organization’s business and why it is actually a good thing to raise money, hire qualified staff, and run an effective and efficient business.

It’s important to do your homework and not rely solely on the accountants. Not only does organizational staff need to be clear and transparent about reporting programmatic, administrative and fundraising costs, they need to be savvy about how to do so. For example, if an Executive Director (ED) makes the time to do 2-week biannual time tracking, this sample will provide a better picture for the Board, the public and the IRS of what ED and/or program staff really do with their time rather than lumping time into a generic classification of “management and general”, essentially making them part of overhead. Instead, a closer look at the ED’s time might show that 70% of her time is spent on program, 20% on management and 10% on fundraising.  This evidence can be used to allocate the ED’s time across program and funding categories, as well as administration, and will be useful in conversations with the board about how many staff are needed to adequately address the organization’s mission, whether additional staff are needed and whether their time should be allocated for program, fundraising, or other activities.

Talk with your accountant about how to define “overhead” in your organization and make sure you understand:

• Classification of expenses ( see chart above)
• How employee and ED time is tracked.
• Allocation of common costs, :
• Treatment of restricted and unrestricted contributions
• Use of accrual based accounting to ensure that earned revenue is matched with related expenses
• Capitalization and depreciation, to spread the costs of capital acquisitions, their use and estimated useful life across multiple years. Capital expenses: (equipment) show up as an asset on the balance sheet, but not in the income/expense statement. Their depreciation is an overhead expense, required by accounting rules

FULLY FUND THE CORE MISSION:

Why do we get into trouble talking with donors and our boards about how much it costs to fund the mission? The short answer is: a lack of understanding about the real costs of doing business and uncertainty about how to report overhead correctly. Historically, Boards and donors have looked at financial ratios (cost of program outcomes versus administrative and fundraising costs) as a measure of organizational effectiveness. Approaching nonprofit finance in this way leads to misrepresentation of both processes and outcomes. In a “Nonprofit Starvation Cycle” https://ssir.org/articles/entry/the_nonprofit_starvation_cycle), the Stanford authors describe how the overhead myth and nonprofit starvation cycle have led to a spiral of nonprofit underinvestment in core costs and a lack of transparency about what is needed financially to realize nonprofits’ missions.

In response to this article, the Presidents/ CEOs of the Better Business Bureau Wise Giving Alliance, GuideStar USA and Charity Navigator have formed a coalition to help end the “Overhead Myth”. In a joint statement issued in 2014, they asked nonprofits to join them in re-envisioning how nonprofits describe their core mission costs, including fundraising and administration. They ask that we commit to this re-envisioning by:

• Demonstrating ethical practice and sharing data about organizational performance.
• Proactively sharing information about goals, strategies, and management system so donors will trust us.
• Understanding the true costs of achieving our mission and managing toward those results, and
• Educating funders (individuals, foundations, corporations and the government) on the real cost of our program outcomes.

Information about how to participate in this initiative is available at: www.overheadmyth.com

Here is a re-envisioning example: We have historically used a pie-chart to describe our organization’s financing. Perhaps we report 60% of our budget as “program costs”, with the remainder divided between administrations and fundraising. This underfunds what we financially need to accomplish the mission.

Instead, we need to think about our investment in key infrastructure as part of our core mission support.  Core mission support includes: financial, human resource and Board support. Core mission support also supports funding raising and work with our partners. In addition, we have program specific direct expenses and expenses shared by programs. These graphics can be found at www.propelnonprofits.org/blog/a-graphic-re-visioning-of-nonprofit-overhead/  and used to describe this approach to your board or staff.

MAXIMIZE YOUR ORGANIZATION’S SUSTAINABILITY:

We need to honestly fund our nonprofits for both their everyday programs and their overhead expenses. Doing so, will give nonprofits some fiscal flexibility. As a result, they can better plan and execute program services within their organizational niche. Nonprofits also need to generate fiscal surpluses to reinvest in the organization’s immediate and future health. After paying operating expenses, surplus resources are important to:

• Meet unexpected liquidity needs – paying the bills on time
• Protect against risks and take advantage of new opportunities
• Add to fixed assets and
• Make principal repayments on debt.

Funding these full costs and adopting new ways to talk about overhead will contribute to your sustainability and further the dialogue to end the overhead myth. For more information and resources on covering full costs see Claire Knowlton’s January, 2016 article in the Nonprofit Quarterly:  https://nonprofitquarterly.org/2016/01/25/why-funding-overhead-is-not-the-real-issuethe-case-to-cover-fill-costs/

“Thinking the Unthinkable” is never an enjoyable task.  We hope to make that process less daunting and cumbersome by providing a few resources to buoy your conversations a planning.  Having a plan for both management and communications during a crisis BEFORE the crisis appears can be the winning recipe for you and your organization to emerge on the other side with as little damage as possible.

Article on Definitions: What’s the difference between a crisis communications plan and a crisis management plan?

Surviving a Crisis: Practical Strategies for Nonprofit Organizations – published booklet provided compliments of Nonprofits Insurance Alliance of California (NIAC) and Alliance of Nonprofits for Insurance, RRG (ANI).
Managing Crisis: Risk Management and Crisis Response Planning –  booklet created by the Compassion Capital Fund National Resource Center.  Both address creating and implementing a crisis management plan and could be useful in a staff and/or board discussion.

Board Source publication on Emergency Succession Plans (when the CEO/ED dies unexpectedly or has to be fired immediately, etc.)

For policies that relate more generally to emergency planning, see these sample risk management and emergency response and recovery policies:  E-Policy Sampler: Finance and Investments.

Front line staff are sometimes our best asset in a crisis. This blog tells a recent story – And don’t forget about our front line staff Info Session – Step Up Your Service Game on April 11th.

Compass Point also has a range of resources, including printed materials, videos and workshops to support crisis communication and crisis management.

General resources and blogs on various aspects of crisis management are in this index at the Free Management Library.

Large organizations typically have a communications department and a risk management plan to address crises in leadership, physical plant, financial stability and public perception. Most of our smaller nonprofit organizations don’t have a formal plan, much less agreed upon strategies for what to do in the first seventy-two hours after a crisis develops.

Executive directors, Board members and key staff need to spend a little time to occasionally talk about risk, whether your liabilities are in the forefront of consciousness or not, and what approaches you and others should take.  Start with a review of the organization’s policies, many of which are probably already in place.

• What kind of risks does this organization face? How do we serve the public? Who are our clients? Children? Young People, Frail Elderly, At-risk adults, Homeless, Animals? Do we have adequate control procedures for handling funds?
• How likely is it that we might have an emergency? How severe could it become?
• What should we do in the immediate hours after a crisis to address issues of communication, interim management for delivery of services and financial oversight?

We have identified some major risk factors (Crisis in Leadership, Responding to Physical Risk, Financial Jeopardy, Crisis in Credibility and Reputation) and urge that you and your key staff and board members have a risk management plan to reduce the likelihood of catastrophic events and a set of strategies to implement during the first 72 hours of an unthinkable event.

It isn’t important to identify every possible risk, but recognize where the likely risks are and have a strategic plan for what to do for the major risks that may impact your organization.

The most dangerous time during an unlikely death, a physical threat, a financial crisis or a major challenge to your organization’s credibility, is while the event is occurring. This is time when you need space to gather information to make informed decisions, ensure that the board and staff speak with one voice and that the core of the organization has a plan for regaining its footing in the community. Creating this space is more straightforward if you have talked with one another about a plan, practiced some strategies for dealing with hypothetical situations and don’t compound a bad situation by not having a plan to reduce risk and a set of strategies when a risky situation arises.

Crisis in Leadership

As outlined in a 2016 Board Source article on planning for succession, it is vital for the organization to also have an emergency plan in place in the event an Executive Director (ED) or CEO resigns abruptly, becomes seriously ill, is fired, or is otherwise unable to lead the organization. There is considerable advice on Chief Executive Succession plans. However, for this conversation, look for articles on emergency leadership transition plans. This Article covers communications, financial oversight, interim management and executive search.  

Responding to Physical Risk

Fire is an ever present danger in Northern California, as several of our local nonprofits who were required to evacuate in our 2017 wild fire season can attest. The national news reminds us of every day about potential physical risks from individuals, organizations and the environment. While there is a limited amount that we can do to prepare, consider some of the following questions and whether your organization has answers to them.

• During a period of physical risk, have we identified what needs to happen first -for the people, the animals, the art, mission critical records, and our organization’s facilities?  Will it be necessary to relocate?
• Is our primary service location safe for staff and volunteers? If so, are they a help or a hindrance in the current situation? How do we contact them? Who contacts them?
• How do we deal with inquiries from outside? Do we just let the phone ring because we don’t have answers? Can we safely use social media to acknowledge a situation and urge people to not over-react but stay tuned as the situation develops? Creating time for key people to develop a response to the situation and alert others who can help us is critical.
• How ready are we, right now, to respond to a physical crisis in an orderly fashion?

Financial Jeopardy

As much as we don’t want to think financial crises will occur, every nonprofit needs a contingency plan for the possibility of insolvency created by embezzlement, financial institution failure, or a negative organizational audit.

• Does the organization have a fiscal plan and multiple signatories on the organization’s checking accounts to continue business in the absence of the E.D.?
• Is the organization’s financial health a standing board agenda item, and not just the purview of a finance manager or board treasurer? How can we train ourselves to make better use of financial data? Do we have regular audits by uninterested/independent entities?
• Do we have an attorney, CPA, or other qualified person to advise the board in the event of a financial calamity? Is our organizational and personal insurance up to date? Do we know what it covers?
• Accountability and transparency generate credibility and confidence among donors, the life blood of a nonprofit business. Does our organizational culture foster financial leadership on both staff and the board?

For more information, see Financial Leadership for Nonprofit Executives, by J Bell and E Schaffer, published by Compass Point. See a listing of their workshop HERE. Also see the National Council of Nonprofits resource on governing board’s fiduciary duty to ensure that the assets of a charitable nonprofit are used in accordance with donors’ intent, and in support of the charitable mission. Financial management strategies and suggested policies can also be found.

Crisis in Credibility and Reputation

Perhaps the crisis is not a critical event at all. It is an awareness that something is powerfully wrong in the organization. Perhaps there is a rumor circulating in the organization and/or community, or staff dissension that has risen to the level of community knowledge which is jeopardizing the work of the organization. As distasteful as these situations are, there are occasions when leadership is either not aware of the situation and didn’t knowingly contribute to it, but needs to participate in managing its resolution for the health of the organization.

Hypothetically, one of our employees has been involved in a legal situation and was removed from the office by the authorities who also impounded the staffer’s computer. How do we respond?  We are required by law to protect privacy. However, this situation has temporarily disrupted the work environment and other staff are immediately turning to social media with a tidbit for the gossip mill.

• What to do? How do we handle this situation to both protect privacy, not be paternalistic about staff behavior, and yet still protect the community’s trust in the organization?

Initially, it is important to let staff know that the situation is under control and that we don’t yet have the facts. As a point of discussion, we want to be forthcoming to the extent possible. We want to be truthful without violating privacy or taking sides. We also want to create space by using our agreed upon strategies to reassure our clients, constituents and employees who are not involved that steps are being taken to contain the situation.

• What about the media? We can ask staff to not post on social media until we know what is going on. We may need some time, but we will alert them and the media of appropriate facts as soon as they are verified. Remind everyone that we have a plan in place to cover services until the situation returns to normal. For the moment, all questions can be directed to (name a person).

In Summary
Each of these scenarios – loss of leadership, physical risk, financial jeopardy and a challenge to organizational credibility share the need for the organization to have contingency plans and practice opportunities for staff to discuss:

• Who speaks for the organization in the immediate moment while the facts are still being determined?
• What strategies are we going to use to determine the facts?
• How will we inform our staff and constituents of this information?
• How will this unforeseen event affect delivery of services and for how long? Are there arrangements we can make to see that any loss of service has a minimal impact on clients, even if that means cooperating with another agency that we normally compete with?
• What is it going to take, structurally, corporately, physically, and psychologically, to bring us back to full capacity?
• Who can help us?

When the immediate crisis has abated, this may be when we want the newspaper and the media to come in, to hear the evidence, be filled in on the plan for next steps, and help the community look forward to us getting back to full capacity as soon as possible.

Having a communications policy to address these issues is a beginning, but making sure everyone is aware of it, and having conversations to occasionally think about the unthinkable will help us have a mindset to be ready if something does occur. In brief, we need to rehearse in our collective minds, what kinds of things we would need to address when circumstances are really uncontrollable.

Hopefully, they won’t occur often!