The original sin of nonprofit capacity builders

Back in 2011, a few weeks before I left Groundwire (R.I.P.), I was at a nonprofit conference down in southern Oregon. I was delighted to run into Dianne Russell, who runs the Institute from Conservation Leadership. Dianne’s been doing organizational capacity building work in the environmental sector for… well, pretty much forever and has always been one of those people I’ve admired as we worked over the years with many of the same great people and organizations.

So there we were in the lobby, catching up, talking about the weather, our kids, I don’t quite remember. But then out of nowhere, Dianne dropped this idea on me:

“I’ve been thinking lately,” she said (and I paraphrase slightly), “that we capacity builders have really screwed up. We’ve systematically miseducated funders about the true cost of doing the work.”

I swear that the clouds parted and a great beam of light shone down on us. (Never mind that we were indoors.) I heard the clap of thunder, but maybe it was just the sound of my jaw hitting the concrete floor.

I picked it up and said, “Oh, wow. You are… totally… right. I never thought of it that way before. How come I never thought of it that way before?

In an instant, I flashed through all of the ways I’d failed at pricing over 15 years of doing mostly-below-market-rate technology and communications consulting to environmental nonprofits:

  • Giving work away for free: FAIL. very few clients truly value what they’re not paying for, and a price of “free” makes it really easy to fail to invest in making new tools and knowledge sustainable.
  • Charging meaningful but “below-market” rates: FAIL. This is a more subtle way to fail. When you charge a meaningful amount, clients have “skin in the game” and that’s good. You have far fewer failing projects. But think back to Econ 101 — if you price below market, demand is infinite, and every unit of below-cost service you deliver is another unit of charitable subsidy you have to raise. So, while each project is great and your clients love you, you are digging a hole to hell with your good intentions.
  • Charging “the low end of market rate:” NOT A TOTAL FAIL, BUT DANG HARD. Here, your clients are happy and you’re not losing money hand over fist, but you’re trapped in the tyranny of the billable hour and the constant struggle to keep staff from being poached by higher-paying for-profits,  etc.

But, despite having experienced all of this failure modes, I hadn’t really thought about how underpricing affects funders — who, along with the nonprofits themselves, are often “the customer” for capacity building services, even though they are not “the client.”

As we tie on our superhero capes and leap into action, we often fail to calculate our true costs. And even more often, we fail to disclose that full cost either to our clients or to our funder/customers. This happens for many reasons, all of them sincere and well-meaning.

We capacity builders, with our zeal to get the work done — after all, there’s so much good work that desperately needs doing — we’re wizards at cobbling together a few bucks here, a few bucks there. And maybe we feel a little bit guilty about charging all that money to do good work.  We’ve usually got at least a touch of impostor syndrome (“we’re not really that good”) so we hem and haw and there are a thousand reasons why we just sort of don’t get around to really showing everyone who’s paying for a piece of our pie just how much the whole pie really costs.

This is all well and good and well intended. The clients are happy, the funders are happy and the capacity builder might even be pretty happy too. But over the not-so-long term, Bad Things Start to Happen:

Even if you’ve been rigorous about showing all your cross-subsidies, the cumulative effect of underpricing is that it affects what funders (and clients) are willing to pay for future capacity building engagements. This is what my economist friends call “price anchoring.” Over time it means that funders (and clients) start to believe that below cost is what it costs and, worse, that’s all it’s worth. This means that if a future capacity builder should have the temerity to charge enough to cover their full costs (including the cost of paying people competitive salaries, not burning them out with overwork, etc.), they are very likely to be told, “Sorry, that’s too expensive. Last time I only paid $BELOW-COST-PRICE.”

Let me be clear: it’s not that clients and funders are naive or that they are trying to abuse us by setting up a race to the bottom. Prices are signals and prices are stories, and our prices are telling lies that have, over time, systematically miseducated our customers (and our clients) about the underlying economic reality of the work.

The bill for this is coming due.

 

7 thoughts on “The original sin of nonprofit capacity builders”

  1. An interesting essay, many chunks of which I agree with. But curiosity–if a non-profit charges “what the service is worth” (which is also called “market rate”), then how does that mission differ from that of a for-profit entity? If Groundwire (R.I.P.) charged market rates for its consulting, how would it have maintained it’s non-profit status versus a for-profit consultant?

  2. A nonprofit is a tax status, not a bill rate. Provided a nonprofit meets the requirements of the law (mostly regarding the ratio of administrative vs. program costs plus a way to demonstrate that the nonprofit has community support ($, volunteers, grant money) – what they charge for services doesn’t matter to the tax status.

    Jon – I think you are spot on. Even after a lengthy foray into the for profit world (but happily back at a B-Corp now, serving nonprofits) – I still get the itch to undervalue. But I don’t scratch it.

  3. Actually, non-profits that haven’t carefully woven their fee charging pretty carefully into their stated exempt purpose can and do lose their determinations.

    Unrelated business income can easily creep up on unwary orgs. If the board structure includes staff who are compensated more highly than other non-profit staff in the field, that can and has tripped up some local orgs (private inurement).

    A local career counseling non-profit, for example, endured several years of arguments with the IRS over the actual charitable nature of their services–the only difference between a for-profit and a non-profit doing such work was deemed to be the $ charged. Otherwise, how did that consulting differ from a regular for-profit and taxable entity, they were asked.

    Groundwire itself ended up being told by consultants that it should become a B corp to best represent its activities. It was a truly great org for many years–seeing it go out was really sad.

  4. This isn’t a problem only for nonprofits. While working for a government contractor, our Plone skunkworks could consistently outperform the central IT department in terms of cost, schedule, and performance. However, with a sys admin who didn’t charge for server maintenance, we lacked historical data on how much effort routine tasks took. With our developers’ “low end of market rate,” we not only lived under the tyranny of the billable hour, but suffered staff attrition when management failed to replace key personnel. Not sure what the solution is, because charging full market rate resulted in being too expensive for lightweight projects in need of interactive websites.

  5. The results for my work with clients over 10 years may never be measured, but the results for me were quite striking: bankruptcy.

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