February 18, 2020
Pallotta: Mindset Curbs Ability of Nonprofits to Fulfill Potential

Dan Pallotta
November 17, 2014 — Nonprofits have been trained to think about themselves “in a backward way” that is stifling their potential to change the world, Dan Pallotta, an activist who has garnered renown for his efforts to get people to think about nonprofits the way they think about for-profits, told a Boston gathering of human services providers today.

Speaking at the annual convention of the Provider’s Council, a statewide association of private, community-based care giving organizations offering educational, health, and social services, which posted a record 1,200 registrations, Pallotta said nonprofits need to think radically differently about their approach to solving social problems like childhood poverty and adult illiteracy.

“Are we here to act as a bandage for these problems? If we want to see solutions in our lifetimes, we must think radically differently,” he said. “These social problems are gigantic in scale, but our organizations are miniature in scope.”

He said that the larger society in which nonprofits operate applies a rulebook for nonprofits different from for-profits, which hinders nonprofits from fully empowering themselves to tackle big issues. Major areas in which those rules differ, he said, inlcude:
  • Compensation. The for-profit world pays what it takes to hire the best people, but the nonprofit sector doesn’t and consequently lacks many of the best and brightest people it needs.

  • Advertising and marketing. Businesses advertise to get more business, but many nonprofit supporters don’t like to see their donations spent on advertising for the charity even though evidence shows that advertising generates more donations.

  • Research and development. For-profit entities would be considered irresponsible, and their managers fired, if they didn’t engage in R&D to help ensure their futures, but nonprofits are terrified of engaging in any large new fundraising endeavor out of fear of failing.

  • Time. Companies like Amazon typically spend years before they launch, while the nonprofit sector lacks a similar level of patient for new endeavors.

  • Risk capital. For-profits can tap multi-trillion dollar pools of capital, but nonprofits lack access to risk capital, which is why, between 1970 and 2009, when 46,136 for-profits crossed the $50 million annual revenue barrier, only 144 nonprofits did.
Pallotta said one of the most detrimental questions asked by donors and watchdog agencies concerns the percentage of donations that goes to the cause vs. overhead, because “it makes you think that overhead is not part of the cause, that overhead steals from the cause.”

He said a struggling nonprofit that raises money through bake sales is regarded as morally superior to a larger enterprise that devotes 40% of its income to overhead, although larger nonprofits which invest more in fundraising can raise significantly more compared to those that don’t.

“We’ve been trained by watchdog agencies, attorneys general, the media, and nonprofits themselves to think in a backward way,” he said. “Decades of indoctrination have led everyone to think badly about overhead.”

Dan Pallotta, president of the recently formed Charity Defense Council, based in Cambridge, gained widespread recognition last year for his TED talk on "The Way We Think about Charity Is Dead Wrong” .

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