November 02, 2015

The Lessons of the Philanthropy 400: Investing in Fundraising Matters in a More Competitive World

The last quarter of a century has been a remarkable time in charity fundraising, as The Chronicle’s Philanthropy 400 attests.

More charities have gotten better than ever at persuading Americans to be generous: Today it takes $61 million to get on the list; in 1991, the equivalent amount was $22-million when inflation is taken into account.

And all of this fundraising has resulted in the top 400 charities collectively increasing their share of Americans’ donations during the last 25 years.

I have devoted my scholarly studies to the list — including updating many of its figures — as part of my dissertation. The Philanthropy 400 offers an unusual window into how private fundraising works, in part because no other benchmarking report has done so much to capture and tally the donations received by national organizations with lots of affiliates.

For instance, the American Red Cross files a single Form 990 while charities of a similar size, like the Boys & Girls Clubs of America or Ducks Unlimited, file individual Forms 990 for hundreds or thousands of affiliates. Looking at the informational tax returns in isolation provides too little insight about the financial heft of charities at a national level.

Perhaps the lesson that is most important for all in philanthropy to understand from the rankings is that the investments charities have made in professionalizing their fundraising is paying off. Competition for donors is stiff, and only those groups that invest in keeping their donors loyal can expect to keep contributions flowing steadily.

But what is just as heartening to see is that it proves even young charities can leap into the big leagues. To be sure, the list is dominated by household names like the Salvation Army and Harvard, but new charities, like Wounded Warrior Project and Chronic Disease Fund (now called Good Days), have climbed into the rankings and stayed there, even though they got their start only a decade or so ago.

It’s also encouraging to see that even in these days of growing concern about elite colleges, hospitals, and museums getting big gifts, nonprofits that serve the poor, such as social services and international relief and development organizations, represent a growing share of the charities among the 400.

And while many of the groups that have made the 400 in the past 25 years are based in major population centers, not all are. Idaho is the only state that has never housed one of the charities on the 400, and more than 75 of the ranked charities have their headquarters in rural towns with a population less than 75,000.

While the groups on the list are diverse, they increasingly get into the rankings because they have figured out how to specialize.

The American Cancer Society is one of the few general health charities that managed to grow, as groups that take on specific cancers, such as breast cancer and leukemia, are increasing their donations quickly.

Other types of specialization have little to do with mission: The rise of the commercially affiliated donor-advised funds on the list, with five such organizations in the top 10 this year, compared to none in 1991, demonstrate a critical change in giving in America as donors seek time to consider further use of their donations.

Yet other charities have grown fast by focusing on distributing donated products and putting them to use.

Charities like Habitat for Humanity rely on their local affiliates to maximize the value of partnerships with companies that donate construction goods as well as offer opportunities for employees to volunteer.

And relatively unknown charities, including Brother’s Brother Foundation, which channels in-kind gifts worth eight and nine figures to other charities, have made it onto the 400, along with groups like Good360 and the National Association for the Exchange of Industrial Resources, which disperse donations to other nonprofits in smaller amounts.

While these specializations are popular today, that doesn’t mean these particular charities will dominate the list when it celebrates its 50th or 75th anniversary.

But we can imagine many of the same types of organizations will stay on the list. New generations require education and medical care; citizens seek entertainment from arts, museums, and public broadcasting; and religious needs are ever present. While charities providing social services, environmental protection, and health advocacy may solve some of today’s problems, we will always have additional needs.

And we can expect donors to change their views of what causes matter most. After all, the particular Christian churches that shaped America’s early nonprofit sector no longer play a dominant role, nor do fraternal organizations that involve American men.

Still, it is worrisome that charities embracing new causes and approaches are not gaining even more ground in the upper ranks of American generosity.

The solution is to build fundraising talent and skills at more of America’s charities.

More groups need to invest in building trusting relationships with donors and in the systems that help manage gifts and communicate successes. And many need to develop more marketing prowess so they can become well-known brands.

But it’s important that the ones rising to the top are doing the best work, not just excelling at donor and marketing relations. That takes an investment in evaluation and feedback done by respected independent parties.

We also need better measures of nonprofit finances. For example, there’s no easy way to track the billions of dollars that pass from one charity to another and what value — and cost — come from these regular transfers.

We must also get beyond financial efficiency ratios, which measure what a group spends on programs, overhead, fundraising, and other efforts compared to its budget. These metrics, increasingly popularized in the wake of World War II, inappropriately use the same metric to evaluate all charities, akin to stock-market investor evaluating a mature public utility and an emerging biotech with the same yardstick.

These ratios are even more problematic when used to evaluate big charities like United Way Worldwide or Susan G. Komen. After all, the real efficiency measure is what happens to the dollar when it reaches the local beneficiaries of United Way or a breast-cancer prevention or treatment. The situation gets more complicated for international charities, because donations must be shipped overseas and disbursed through a web of intermediaries. But a donor to many charities never sees that information, because donations may pass through several organizations before reaching the ultimate beneficiary.

As the nonprofit sector becomes more complex, efficiency ratios make even less sense for comparing charities, even ones that appear to provide similar services.

Nonprofits — and the donors who support them — must keep an eye on what insights the Philanthropy 400 offers. It tells us which causes and groups are growing fast enough to meet social needs — and which are falling out of favor. And it is a reminder to everyone that if we don’t get better at asking Americans to give more, we can’t expect to solve the problems of our communities, the nation, and the world.

William Suhs Cleveland is a doctoral candidate at Indiana University’s Lilly Family School of Philanthropy. He has updated and revised many of the figures that appear in The Chronicle’s Philanthropy 400 database showing fundraising totals for more than 1,100 groups over the past quarter of a century.