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would ensure that tax-benefited dollars are Rule #3: Save American Taxpayers by Ensuring One of the reasons forgranted outright to nonprofits within a reason- that Donors’ Tax Benefits Are Commensurate the popularity of DAFs isable period of time. with the Public Benefit of the Donation their ability to give donors maximum taxRule #2: Save Charities by Preventing One of the reasons for the popularity of DAFs is benefits—indeed, theDAFs from Being Used to Undermine their ability to give donors maximum tax ben- same benefits affordedPrivate Foundation Payout Rules efits—indeed, the same benefits afforded out- outright donations to right donations to public charities—and ongoing public charities—andIn 1969, Congress became concerned that control over donated property. Tax benefits for ongoing control overprivate foundations were providing too many DAFs are particularly valuable with respect to donated property.tax benefits to donors without any assurances donations of assets other than publicly tradedthat donated funds would benefit the public in a stock. As a result, much of the growth of DAFstimely manner. In order to address this concern, is attributable to these types of donations.Congress enacted a rule that required privatefoundations to distribute roughly 5 percent However, missing from the conversationof their assets each year to public charities.13 regarding DAFs is how these donations maySensibly, the payout rule could not be evaded impose significantly greater costs—in terms ofby a private foundation making distributions foregone tax revenue—than the public receivesto other private foundations, because then the in terms of charitable benefits. This loss offunds would simply await further distribution revenue burdens all American taxpayers, whoby that foundation. must pick up the slack. Since the rise of donor-advised funds, some The starting point is that donors get sig-private foundations have been meeting their nificantly more tax benefits by making contri-payout requirements by making grants to butions of appreciated property rather thanDAFs.14 The foundation can then advise distri- cash to a charity. Where a contribution of cashbution of the grant from the DAF to a charity can save the donor as much as $0.37 on eachat a later date. This can have multiple benefits dollar donated, a contribution of appreciatedfor the foundation: one is that the transfer property can save the donor as much as $0.57counts for purposes of the foundation’s payout for each dollar donated (taking into account(because the DAF sponsor is a public charity); both capital gains tax savings and income taxanother is that the foundation can disguise savings). Although donors can get this doublethe source of the funding by flowing the funds tax benefit for contributions of publicly tradedthrough a DAF. stock while still maintaining some control over donated property (by transferring the dona- Neither of these benefits is consistent with tion to a private foundation), if the property isthe spirit of the rules that have governed private not publicly traded stock, the donor’s optionsfoundation conduct since the enactment of the are far more limited. In order to obtain the fullTax Reform Act of 1969. The payout is intended double tax benefit for the contribution of prop-to measure distributions to active charities, not erty other than publicly traded stock (like realto other investment funds. Further, because estate or closely held business interests), theof the potential for abuse at foundations, they donor must either make an outright donationare held to higher standards of transparency. to a public charity or must make a donation to aAllowing foundation-to-DAF transfers to count donor-advised fund. Since it is a natural humanfor payout purposes is inconsistent with the poli- tendency to want to maintain rather than relin-cies behind the private foundation payout and quish control, many donors choose DAFs.disclosure rules. As a result, a significant source of DAF assets In order to address these concerns, Congress is complex assets. The problem is that due to ashould provide that foundation-to-DAF transfers variety of factors, it is quite likely that the taxare not “qualifying distributions” for purposes benefits afforded to contributions of complexof a private foundation’s payout. assets can outstrip the value to the public ofS U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​49

Donor-advised funds these contributions. The reason for this is that tax deduction for donations of complex assetsare here to stay. . . . complex assets, by definition, are difficult to should not be based on appraised value butBy enacting appropriate value and lack a ready market for their sale, instead should be based on the net value ulti-regulation that takes often resulting in significant transaction costs mately transferred to the donor’s DAF account.into account the when converting these properties to cash. Each This could be accomplished either by requiringinterests of charities of these poses problems from a tax policy point the donor to wait to take the deduction untiland American taxpayers, of view. the property is sold or by providing for thewe can ensure that DAFs recapture of tax benefits to the extent that theact as seeds of growth Complex assets have no easily identified claimed deduction exceeded the value of theto the charitable sector— market value. As such, taxing authorities must contribution.and not seeds of depend on donors’ hired appraisers to determinedestruction. the property’s fair market value. Valuation is an • • • art rather than a science, and there is often a considerable range of defensible valuations for Donor-advised funds are here to stay—in large property that does not have a ready market. part due to the enormous benefits they afford Being dependent on donors for their fees, there to donors, DAF sponsors, and the financial is a natural pressure on appraisers to come up services industry. By enacting appropriate with higher values that will afford donors better regulation that takes into account the interests tax savings. Due to the expense and difficulty of of charities and American taxpayers, we can valuing property that has no ready market value, ensure that DAFs act as seeds of growth to the it is virtually impossible for the IRS to provide charitable sector—and not seeds of destruction. sufficient oversight for the amount of complex assets contributed to donor-advised funds.15 Notes 1. Officially called “An Act to provide for reconcili- More troubling is the fact that the appraised ation pursuant to titles II and V of the concurrent value of property does not include the cost of resolution on the budget for fiscal year 2018.” converting that property to cash. What this 2. Peter Olsen-Phillips and Brian O’ Leary, means is that a donor’s deduction is likely to “How much America’s Biggest Charities Raise: be greater than the amount that ends up being 27 Years of Data,” The Chronicle of Philan- available for distribution. Depending on the thropy, October 31, 2017, www.philanthropy time that it takes to sell the property and the .com /i ntera ct ives /ph i la nt h ropy- 40 0 ?cid = cpw expenses associated with the sale, there can _featuredata#id=table_1992 and www.philanthropy be a significant disconnect between these two .com /i ntera ct ives /ph i la nt h ropy- 40 0 ?cid = cpw numbers. _ featu redata # id = table_ 2017. 3. Giving USA 2018: The Annual Report on Phi- Consider the case of a donor that has a con- lanthropy for the Year 2017 (Chicago: Giving USA, dominium in an area where the market is cur- 2018). rently depressed. Assume the condominium has 4. “Charitable Giving Rose 4 Percent in 2011, ‘Giving an appraised value of $500,000. After donation, USA’ Finds,” Philanthropy News Digest, June 20, the DAF sponsor may have to pay significant 2012, www.philanthropynewsdigest.org /news fees associated with the property (such as prop- / ch a r it a ble - g iv i n g- r o s e - 4 - p er ce nt - i n -2 011- g iv i n g erty taxes, utilities, and condominium fees), and -usa-finds. the eventual sale of the property will require 5. 2012 Annual Report: Reporting on Fiscal Year payment of transfer taxes and real estate broker- Ending June 30, 2012 (Covington, KY: Fidelity age fees. After all of these expenses are paid, Charitable, 2012). only $400,000 is allocated to the donor’s DAF, 6. 2017 Annual Report (Covington, KY: Fidelity even though the donor was allowed to take a tax Charitable, 2017), 25. deduction based on a $500,000 appraised value.16 7. The effect of this double benefit is significant. A donor making a contribution of cash can receive tax In order to ensure that the tax benefits afforded donations are commensurate with the value provided to the public, the charitable50 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

benefits of thirty-seven cents for each dollar con- that all DAF dollars are eventually made availabletributed, whereas a donor making a contribution of for use by charities.appreciated property can receive tax benefits of up 12. Multiple contributions could simply be groupedto fifty-seven cents for each dollar contributed. The by year, so that all 2018 contributions would be allo-reason for this discrepancy is because the donor cated to the 2018 fund (with an outside distributioncan avoid capital gains taxes on the appreciation date of 2028), and 2019 contributions would be allo-of the property (which would otherwise be taxed up cated to the 2019 fund (with an outside distributionto 20 percent) and can also offset ordinary income, date of 2029).which would otherwise be taxed at up to 37 percent. 13. Qualifying distributions also include funds spent8. A donor’s charitable deduction for the contribu- directly for charitable purposes.tion of complex assets to a private foundation is not 14. The Economist found that some private foun-based on the property’s fair market value but instead dations distribute 90 percent of their qualifyingis limited to the property’s basis (the amount the distributions to DAFs. See “A philanthropic boom:donor paid for the investment). Closely held busi- ‘donor-advised funds’.”nesses—particularly those that are based on tech- 15. This has led some to question whether we shouldnology—often have very low tax bases. be allowing deductions for charitable contributions9. Paul Arnsberger, “Donor-Advised Funds: An Over- of property. See Roger Colinvaux, “Charitable Con-view Using IRS Data” (paper presented at the con- tributions of Property: A Broken System Reimag-ference “The Rise of Donor Advised Funds: Should ined,” Harvard Journal on Legislation 50, no. 2Congress Respond?,” Forum on Philanthropy and (June 2013): 263–329.the Public Good, Washington, DC, October 23, 2015; 16. And theoretically, the reverse can happen. Therevised November 20, 2016). charitable deduction is based on the value of the10. According to a recent article in The Econo- property at the time of transfer to the DAF andmist, Fidelity Charitable was the top recipient not at the time that the property is ultimately sold.of distributions from three of the largest com- Thus, a property could acquire higher value so thatmercially affiliated DAF sponsors—Fidelity, a higher amount than the original appraised valueSchwab, and Vanguard. In addition, the third gets allocated to the donor’s DAF, while the donor’slargest recipient was the American Endowment tax break stays as it was originally. It is also possibleFoundation, another DAF sponsor. See “A philan- that an appraiser could underestimate the value ofthropic boom: ‘donor-advised funds’: The rise of the contributed property. In either case, it seemsDAFs may be as much about tax as charity,” The more appropriate to tie the deduction to the actualEconomist (March 23, 2017), www.economist.com amount that is available for charity./news /f ina nce -a nd- economics / 21719494 -r ise-dafs-may-be-much-about-tax-charity-philanthropic To comment on this article, write to us at feedback-boom. @npqmag.org. Order reprints from http://s​ tore.nonprofit11. A term limit is preferable to the annual 5 percent quarterly.org, using code 250207.payout model applicable to private foundations. Anannual payout rule would remove the flexibility ofdonor-advised funds without significantly increas-ing the flow of dollars to nonprofits. Experiencewith private foundations suggests that donors aresusceptible to treating floors as ceilings; therefore,they may be more likely to think of their DAFs asperpetual accounts. In addition, since DAFs aresponsored by public charities, donors receive sig-nificantly greater tax advantages for their contribu-tions to DAFs. As a result, it makes sense for DAFsto be subject to stricter payout terms that ensureS U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​51

DAF Reform—A Chance to Provide Real Benefit to Working Charities by Dean ZerbeOur nation’s charities perform vital is really being accomplished by charities and to work—helping those in need, improv- the effectiveness of tax policies for charities and ing our communities, lifting up those charitable giving. suffering overseas. The public andpolicy-makers will support tax policies that they Where We Are: The Charitablebelieve will get dollars into the hands of the chari- Sector and Washington, D.C.ties actually doing the lift and pull. But there hasbeen a growing cynicism from the perspectives The recent tax reform bill is Exhibit A for thisof both the public and policy-makers that tax reality. A number of major voices in the charitablepolicies that are intended to encourage chari- sector decried the efforts of the Republicans intable donations and provide a meaningful differ- Congress to expand the standard deduction, whichence in people’s lives too often are not meeting the Republicans viewed as a means of providingexpectations. tax relief and simplification to working families. This is the real disconnect—the slip between In meetings with leading charities, I and otherscup and lip—that leaders in the charitable sector strongly encouraged them to recognize thatneed to recognize. Every elected official is happy opposing Republican leadership on the issue ofto give a speech extolling the importance of chari- increasing the standard deduction was a losingties—similar to the first sentence of this article. hand. We suggested that a better tack would be toThe reality, though, is that policy-makers on both look for common ground on policies that wouldsides of the aisle have taken a hard eye to what encourage charitable giving, particularly giving that would put more dollars in the hands of thoseDean Zerbe is alliantgroup’s national managing direc- charities actually helping the poor, improving thetor. Prior to joining alliantgroup, Zerbe was senior community, and the like: the “working charities.”counsel and tax counsel to the U.S. Senate Committee Reforms to donor-advised funds (DAFs) was puton Finance. During his tenure on the finance commit- forward as a perfect example where reform couldtee, Zerbe was involved in nearly every major piece be realized that would provide significant mean-of tax legislation signed into law—including the 2001 ingful benefit to working charities.and 2003 tax reconciliation bills, the American JobsCreation Act of 2004 (corporate tax reform), and the The charitable sector chose to fight. We allPension Protection Act of 2006. know the results: the tax reform bill doubled the standard deduction and expanded estate tax relief (viewed by some as harming charitable52 ​T H E   N O N P R O F I T   Q U A R T E R LY  “ T H E E M PER O R ” (D E TAIL; AN D P. 56) BY AN C A S T EFAN E S C U/ W W W. AN C A S T EFAN E S C U.CO M

donations). Tax reform also included a number can have a major positive impact for working Having charitableof other provisions that impacted charities: a charities and the beneficiaries of these charities. donations go to banksnew tax on university endowments; a new tax on (aka “warehousehigh nonprofit salaries and benefits; UBIT (unre- My comments here are broad and reflect my charities”), with thelated business income tax) expansion; limitations years of experience in Congress with charitable wealthy getting their taxon donations vis-à-vis college athletics; bond policy and DAFs, and what I believe are positive benefit today, the moneyreforms; and so on. The provisions encouraging changes and reforms for the charitable commu- managers getting theircharitable giving—Pease reform and an increase nity that can be accomplished. I have no dog in fees today, and the fiscalfrom 50 to 60 percent of adjusted gross income the fight except in seeing more charitable dollars agent receiving fewerallowable as a deduction for cash donations made get into the hands of working charities that are tax dollars today—to public charities—are of some help, but perhaps making a meaningful difference to the lives of mil- while the poor seemore on the margins (and with Pease, were just a lions of Americans. a benefit (maybe)happy byproduct of a bigger reform goal).1 tomorrow, or next year, Payout: Money to Working Charities Today or ten years from now— I fear that the Washington, D.C.–based chari- is nonsensical.table organizations are telling themselves (and Payout is the cornerstone of DAF reform. The We can do better.the charities nationwide that they seek to repre- whole rationale for the generous tax treatmentsent) that the setbacks are just a partisan problem of charitable deductions is that the money ends(ignoring that the previous Democratic admin- up in the hands of a charity that is actually helpingistration had also proposed limiting charitable those in need—providing the blankets, feeding thedeductions—and there is hardly much in the way hungry—what I call “a working charity.” Havingof successes in tax policy for charities to point charitable donations go to banks (aka “warehouseto when Democrats ran the show). Alternatively, charities”), with the wealthy getting their taxspecial pleading is put forth that the bad news is benefit today, the money managers getting theirdue to this staffer, that congressman, or a news- fees today, and the fiscal agent receiving fewerpaper article. The charitable community needs to tax dollars today—while the poor see a benefitrecognize that the old approach has failed—and (maybe) tomorrow, or next year, or ten years fromthat instead, it needs to engage and find common now—is nonsensical. We can do better.ground with, put forward positive solutionsto, and champion best practices that will help The easy solution (also an anti-abuse measure)working charities. It also needs to recognize that, is to have a payout requirement for DAFs onfor elected officials on both sides of the aisle, the an account-by-account basis. A starting point fordoor is wide open when it comes to constructive discussion would be a payout from DAFs overpolicy proposals from the working charities in five years (as proposed by former chair of thetheir state or district: the corner soup kitchen, the House Ways and Means Committee Rep. Davidlocal diaper bank, the clinic aiding communities Camp), or of 5 percent annually, similar to privatestricken by abuse of opioids. If these organiza- foundations. But consideration should be giventions find their voices, they can be powerful in to a higher payout or to policies that encourage amaking DAF reform a reality. higher payout (à la Camp). The argument that a floor for payout will become a ceiling doesn’t holdWhere We Can Be: Charitable Reform water. One look at the embarrassingly low payoutto Help Working Charities of college endowments (that grow every year with additional donations), as well as the hundreds ofThe above overview is intended to set the stage for DAFs that have no payout currently accordingsuggested policy reforms for DAFs. While I think to IRS Statistics of Income, shows what happensthere is a need for reform in many parts of the tax when there is no requirement of payout.code regarding charities and charitable giving (notjust DAFs), DAFs are now a major (and growing) We cannot be blind to the fact that there isrecipient of charitable donations and are a good a real tension with DAFs. With humans beingplace to start. And reform of DAFs is doable and humans, managers of some DAFs—especially those managed by for-profit financial institutions (FIDAFs)—will feel in many cases a strong pull toS U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​53

While the reasons for keep funds under management. Policy-makers and (I wonder what is the statistical probability thatpayout on an individual supporters of working charities cannot ignore the each FIDAF independently determines every yearaccount basis for DAFs reality that having more funds under management that its mother financial institution is the best oneare straightforward in is the golden rule for money managers and finan- to manage the funds of the FIDAF.) Further, asgetting dollars into the cial institutions, and charities running DAFs aren’t discussed earlier, FIDAFs (as with all DAFs, buthands of working immune to this pull, either. Further, as shown in a stronger with FIDAFs) have a strong pull towardcharities, another reason number of studies, donors themselves often feel keeping as many dollars under management asfor payout on an a strong pull to keep funds in a DAF and not pay possible—which is counter to the policy of Con-individual DAF account out, for a variety of behavioral reasons.2 The laws gress and the public of getting dollars into thebasis is that it serves as and regulations requiring payout—with incentives hands of working charities.an anti-abuse measure. for getting dollars into the hands of the working charities—are necessary to counter that pull on FIDAFs are playing by the current rules that both investors and donors to keep dollars in a DAF. they helped to write; we need to change those rules. For instance, a requirement that FIDAFs I encourage those who, in good faith, are con- be operated and managed as independent chari- cerned about the possible loss of donations to ties—with the best interests of the charitable working charities from the increase of the stan- community in mind, and encouraging donors to dard deduction, to realize that at least a partial make donations to working charities—would go solution stretches before them—that being to far in cleaning up many of the problematic poli- encourage a greater proportion of the warehoused cies and practices regarding DAFs. A minimum charity dollars at DAFs to go to working charities. starting point should be that the majority of the Imagine if the energies and passion of the chari- board members of these charities not be members table community were focused on getting the bil- of and have no relationship to the FIDAF, and that lions of additional dollars out of warm banks and the independent board members be nominated into the hands of working charities? The results and confirmed by independent board members. would be astonishing. And DAFs—especially DAFs managing billions Independence: DAFs That Put of charitable dollars—must be housed at chari- Working Charities First ties that enjoy broad public support, have inde- pendent boards, and are committed to the goal of The IRS and Congress must recognize and address getting dollars into the hands of working charities. the pretense that is the linchpin of the largest DAFs—the DAFs that are essentially arms of finan- The results would be that some FIDAFs would cial institutions, the FIDAFs mentioned earlier. adapt and carry on, but with a greater focus that We are all familiar with these financial institutions puts working charities first. Over the long term, I (they are some of the biggest charities out there) would anticipate that we would see dollars moving that set up charities to receive donations from to DAFs managed by community foundations, their clients/customers in DAFs and then continue which would be able to provide better service to to extract fees managing the money. donors who have a focus on local charities. The reality of these FIDAFs is that they are End Estate and Tax Games—Cash and commonly part of the mother financial institu- Tradeable Securities Only to DAFs tion. Typically located at the same place, and (mostly) sharing the same board members/offi- While the reasons for payout on an individual cers, FIDAFs are essentially indistinguishable account basis for DAFs are straightforward in from—and, most important, have no indepen- terms of getting dollars into the hands of working dence from—the mother financial institution. charities, another reason for payout on an indi- The proof? Every year, the board of each of these vidual DAF account basis is that it serves as an FIDAFs scours the world to determine who is best anti-abuse measure. The hard reality is that some placed to manage the funds of the FIDAF, and— very wealthy individuals use DAFs as a means of surprise—it is the mother financial institution. abusive tax planning. In the field of estate planning, you will see the54 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

individual donate land, real estate, and shares in hands of a charity that buys a blanket for a cold, The Roman Empirea closely held business (typically nonvoting) to a homeless person? The simpler solution is to end ended after a thousandDAF (taking a significant charitable deduction, this play and require that the private foundation years or so. Milk goes badoften with an optimistic fair-market value), and distribute the dollars to a working charity or, in days. Should there bepark the asset in the DAF. In short, the individual alternatively, allow the transfer to a DAF with the an expiration date on anhas reduced the overall value of the estate, ben- requirement that the funds must be completely individual DAF account?efited from the charitable deduction, and lost no disbursed to working charities within a reason- Perhaps not an issuesubstantive ownership interest. able time period. with a robust payout requirement, but the On the tax planning side, there has been a huge Charitable Donations—Eventually idea of requiring endincrease in donations to DAFs of closely held to the Working Charity periods for DAFs . . .stock, in-kind goods, and the like—all of which should be addressed.can allow the taxpayer to play fast and loose with The Roman Empire ended after a thousand yearsinflated valuations. or so. Milk goes bad in days. Should there be an expiration date on an individual DAF account? These kinds of abusive transactions are dif- Perhaps not an issue with a robust payout require-ficult for the IRS to attack, with valuations ment, but the idea of requiring end periods foralways particularly difficult. It would be easier DAFs (having them expire after a set period withto limit charitable donations to DAFs to cash and distribution to designated charities by the donor,tradeable securities (publicly traded stocks and or having them expire at the death of the donor,bonds), similar to the limitations already in place designated successor, etc.) should be addressed.for private foundations. Policy-makers should be Some charities that manage DAFs have some ofaggressive in addressing the reality that DAFs are these requirements, but it is a best practice thattoo often seen by tax planners as a work-around deserves adoption across the board. Again, it goesfor the anti-abuse rules of private foundations. to the point that these dollars need to get into the hands of working charities as well as seek Alternatively, policy-makers could look at to honor donor intent, and that recognizing therequiring DAFs to sell the asset within a limited countertension—that the money managers areperiod of time or base its value with a set formula happy to keep on managing and getting their feeson the amount of income produced. Particularly ad infinitum—is key to reforming DAF practices.intriguing is the idea that the donation wouldonly be completed when the closely held stock, Improved Reportingproperty, et cetera, is sold and the proceeds trans-ferred to a working charity. This would end the The IRS itself should take steps now to improvevaluation play and also get dollars into the hands reporting on DAFs. The IRS Statistics of Incomeof working charities. Washington, D.C., needs to (especially the work of IRS senior statisticianprovide a clearer message and guidance for DAF Paul Arnsberger) highlights the limited naturemanagers to say no to those who are making dona- of data currently available on DAFs, especiallytions for their own interest and not in the interest individual DAF accounts. The IRS has extensiveof working charities. reporting requirements on the Form 990 Schedule A for supporting organizations—and the need forCharitable Dollars to Working enhanced reporting on DAFs is arguably greater.Charities, Not to New Warehouses The IRS should establish reporting requirements for large sponsors (over $500 million) of DAFsIn the wilderness of mirrors that is sometimes and DAF accounts that will allow a heightenedcharitable policy, one of the oddest is that understanding of what is going on—on payout,dollars warehoused in private foundations can acceptance/sale of nonpublicly traded property,be transferred to DAFs—and thus circumvent and other issues of interest for public policythe payout requirements of private foundations. and compliance with the charitable laws. TheIs it too much to ask that at some point a dona- enhanced reporting should also look at issues oftion for charity—for which the taxpayer receiveda significant tax benefit—actually ends up in theS U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​55

I have no doubts, from board independence and management of funds, change the discussion overnight by funding andmy years working in as well as provide an opportunity for the DAF supporting efforts to bring forward DAF reformsCongress and seeing sponsor to discuss the work it performs that pro- (as some have, already making a big change insuccessful legislative vides substantive value to donors and working the discussion) and support charity watchdogsefforts, that if the food charities. Finally, DAF reporting should encour- in this field.banks, the homeless age best practices: addressing dormant/inactiveshelters, and the hosts of funds, independent board members, control of For those who disagree with DAF reformwonderful working investment decisions, and others identified by the or have other priorities for encouraging chari-charities tell Congress charitable community. table donations to working charities, a note ofthat DAF reform is caution: proposals that cost the sun and thea change that is Best Practices for DAF Managers moon are simply unrealistic and not workable.needed . . . it will One of the great benefits of DAF reform is thatbe quickly passed, with Many charities that manage DAFs provide impor- we can see significantly more dollars moving tocooperation on both tant and valuable support—especially those working charities at very low cost to the publicsides of the aisle. located at a number of community foundations. fisc. The score of a proposal by the Joint Com- These charities that embrace managing DAFs mittee on Taxation is everything in terms of real- and providing value to donors will highlight spe- izing success in this political environment. A low cific charities doing important work, foster dona- score in terms of revenue lost to the public fisc tions, and encourage donors to move dollars into (which is the case with DAF reform) translates the hands of working charities—and also send into a high possibility of getting changes signed out warnings of possible bad charities. The IRS into law. I appreciate that people are captivated should consider steps it could take to encour- by high-flying proposals for credits, et cetera, to age more robust and engaged management of encourage charitable giving. Unfortunately, they DAFs by charities through reporting and other will cost the sun and the moon—and will not pass. requirements. Even more effective would be for Working charities need real help that DAF reform the charitable community itself to establish best can provide—not pie in the sky. practices for DAF management and to highlight and champion those charities that are the best DAF reform would mean that dollars that are at managing DAFs. Similarly, organizations that donated for charitable purpose—and receive are watchdogs, such as CharityWatch and BBB huge subsidies from the public and are currently Wise Giving, should consider focusing some warehoused on and on and on—would provide attention on this underserved part of the chari- the real, tangible benefit of billions of additional table community that holds billions and billions dollars going today to the working charities of dollars and is often the biggest recipient of across this country. charitable donations. Notes Next Steps 1. I recognize that supporters of tax reform highlight the hoped-for economic growth that will translate into I have no doubts, from my years working in Con- jobs, improved communities, greater charitable giving. gress and seeing successful legislative efforts, My point is that, on its own terms, the tax reform bill that if the food banks, the homeless shelters, and did not embrace the priorities of many Washington, the hosts of wonderful working charities tell Con- D.C.–based charitable organizations. gress that DAF reform is a change that is needed 2. See, for example, James Andreoni, “Warm Glow and will make a real difference to their vital work, and Donor-Advised Funds: Insights from Behavioral it will be quickly passed, with cooperation on Economics” (Working Paper presented at the Forum both sides of the aisle. It would be enormously on Philanthropy and the Public Good, Washington, helpful to this effort if the private foundations, DC, October 23, 2015; revised May 2016). and especially the community foundations (who would also benefit from reform to DAFs), To comment on this article, write to us at feedback also pulled oars. The private foundations could @npqmag.org. Order reprints from http://s​ tore.nonprofit quarterly.org, using code 250208.56 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

You First: Leadership for a New World NONPROFIT LEADERSHIP “Tipping Points—Tipsy Times” by Mark Light, MBA, PhD In this installment of his new column, Light deftly weaves together boiling frogs, libations, and our natural resistance to change, to discuss evolutionary and revolutionary tipping points. As he concludes, when contemplating an organizational change effort, keep in mind that “context is everything, and adapt your leadership style accordingly.”With news that co2 levels in financial loss, identify major weak- others to crash.8 Some tipping points April 2018 hit the highest nesses vis-à-vis competitors); eliminate are manually constructed by creating a average ever recorded,1 obvious examples of excess; insist that sense of urgency or unfreezing the status I couldn’t help but think people talk regularly to unsatisfied cus- quo. A particularly powerful way to doabout the boiling frog video. It begins tomers; and bombard people with infor- this is to dismiss an executive followingwith a frog sitting in a pan of cold water. mation on future opportunities.5 an organization’s sustained decline inSuddenly, a scientist pours in boiling performance.9water. The frog jumps out. The scientist Instead of urgency, the venerablethen repeats the experiment, only this Edgar Schein uses the term unfreez- Other accelerants include two typestime slowly heating the water up. The ing, and offers three ways for creat- of innovations. Sustaining technolo-frog sits in the pan until the tempera- ing the motivation to change. Using an gies, as noted by Clayton Christensenture reaches over two hundred degrees example of a house on fire, here’s how and Michael Overdorf in the HarvardFahrenheit. We don’t see what finally to unfreeze the status quo: show people Business Review, are “innovationshappens, but we can guess. that the house is on fire (disconfirmation that make a product or service perform and disequilibrium); convince them better in ways that customers in the It turns out that the legend of the frog that they may die (creation of survival mainstream market already value.”10 Dis-is just that: a legend. And, it is scientifi- anxiety or guilt); and offer them a way ruptive innovations “create an entirelycally false.2 But of course, a metaphor out (creation of psychological safety to new market through the introduction ofdoesn’t have to be scientifically true to overcome learning anxiety).6 a new kind of product or service.”11 Alongbe useful, and authors of leadership arti- these lines, whatever it is that makes thecles and books regularly use the frog to And then there is the notion of the organization successful today will be theexplain effective organizational change.3 tipping point, a term popularized by cause of its crisis tomorrow.12 Malcom Gladwell, who defines it as the Now, no one declares, “Boil a frog!” “moment of critical mass, the threshold, Tipping points can also originate into initiate a change effort; and change the boiling point.”7 The term carries a the environment itself (hello, volcanoes),gurus like John Kotter use more politi- sense of immediacy, a definitive point and are frequently out of the control ofcally correct phrases like create a sense in time. It is borrowed from epidemiolo- leaders. Sometimes very small things leadof urgency. And this is important—in gists, who use it to describe the point at to tipping points. This is the essence offact, Kotter makes it his first step in his which, for example, a run-of-the-mill cold the butterfly effect—wherein, accordingeight-stage change model.4 Kotter lists outbreak in a classroom infects an entire to Kevin Kelly in Out of Control: The Risenine ways to invoke a sense of urgency, school system and shuts it down. Think of Neo-Biological Civilization, “a smallincluding: create a crisis (allow a one domino causing fifteen thousand alteration in the initial conditions canS U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​57

NONPROFIT LEADERSHIP amplify into wide-ranging effects through- Rosabeth Kanter acknowledges as much your way to revolutionary change, where out the rest of the system. . . . [like] the when she writes that “many companies you’re going to be tested. You’d better be flap of a butterfly’s wings in Beijing trig- are change-klutzes.”19 (Time for some willing to do the heavy lifting of leading gering a hurricane in Florida.”13 rotgut.) change. (Don’t pour a Chardonnay; uncork the vodka.) Tipping points can be either intended And hear this, too: Resisting change or unintended, which is in keeping with is hard-wired into our behavioral Third, understand that context is Margaret Wheatley’s observation that DNA. Research by Rolf Smith on the everything, and adapt your leadership there are “two sources of change: the Myers-Briggs Type Indicator® finds that style accordingly. As suggested in The traditional type that is initiated and two out of three people broadly resist Great Plan of China (circa between 1121 managed; and external changes over change, and half strongly resist; one out and 2200 BCE), “In peace and tranquil- which no one has control.”14 of six will be broadly receptive; and only ity, correctness and straightforwardness 6 percent of people “will be strongly (must sway); in violence and disorder, Tipping points aren’t alone in the wil- receptive to change and act as change strong rule; in harmony and order, mild derness; each one has a before and an agents.”20 rule.”23 (If you take this route, break out after. There is the evolutionary variation, the brewskis and ask for a raise; you’ll with its “prolonged periods of growth Here are six reasons why so many of deserve it.) where no major upheaval occurs,” and us resist: the change is not necessary; there is the revolutionary variation, it’s not feasible; it’s not cost effective; it Notes with its shorter periods of “substantial would cause personal losses; it’s incon- 1. Chloe Farand, “Carbon dioxide levels in turmoil in organizational life.”15 Put dif- sistent with values; and the leaders of Earth’s atmosphere reach ‘highest level in ferently, evolutionary change is of the the change effort are not trusted.21 If you 800,000 years’,” Independent, May 5, 2018, 10 percent variety that “almost any orga- want to usher in revolutionary change, w w w. i n d e p e n d e n t . c o . u k / e n v i r o n m e n t​ nization can tolerate”; revolutionary you had better have a darn good reason. /carbon-dioxide-concentration-atmosphere​ change is its antithesis—short, major, (Sip a brandy and think it over.) -highest-level-800000-years-mauna-loa​ and all-encompassing.16 -observatory-hawaii-a8337921.html. A few closing observations. First, 2. “Boiling frog,” Wikipedia, accessed May If you’re thinking this is a brand-new if you’re doing pretty well—balancing 11, 2018, en.wikipedia.org/wiki/Boiling_frog. change model, think again; it’s as old as the budget, growing revenues every 3. Ronald A. Heifetz, Leadership Without time itself. Indeed, paleontologists Niles year, mostly hitting your marks—your Easy Answers (Boston: Belknap Press, Eldredge and Stephen Jay Gould call it agency is likely in a period of evolution. 1998); Peter M. Senge, The Fifth Disci- the punctuated equilibrium model.17 It’s tempting to think that this would be pline: The Art & Practice of the Learning (See model illustrated below.) the perfect time to go for a revolution- Organization, 1st ed. (New York: Double- ary change, but this will likely be an epic day/Currency, 1990); and Noel M. Tichy Before you decide to enter the realm fail.22 (Instead, sit back, chill out, and and Eli B. Cohen, The Leadership Engine: of tipping points, however, hear this pour yourself a Bordeaux; a tipping point How Winning Companies Build Leaders at loud and clear: Most change efforts fail. will come in due time.) Every Level, 1st ed. (New York: HarperBusi- Kotter found, “A few of these corporate ness, 1997). change efforts have been very success- Second, if your predecessor was 4. John P. Kotter, Leading Change, rev. ed. ful. A few have been utter failures. Most ousted because of your organization’s fall somewhere in between with a distinct sustained declining performance, odds tilt toward the lower end of the scale.”18 are you’re following a tipping point on Intended Evolutionary Tipping Revolutionary Unintended Incremental point Transforming Uneventful Traumatic 58 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

(Boston: Harvard Business Review Press, A. Nadler, “Executive Leadership and Orga- NONPROFIT LEADERSHIP2012), 23. nizational Evolution: Managing Incremental5. Ibid., 46. and Discontinuous Change,” in Corporate6. Edgar H. Schein, Organizational Culture Transformation: Revitalizing Organiza-and Leadership, 4th ed. (San Francisco: tions for a Competitive World, ed. Ralph H.Jossey-Bass, 2010), 300. Kilmann and Teresa Joyce Covin (San Fran-7. Malcolm Gladwell, The Tipping Point: cisco: Jossey-Bass, 1987), 111.How Little Things Can Make a Big Differ- 17. Niles Eldredge and Stephen Jay Gould,ence, 1st ed. (New York: Little, Brown and “Punctuated Equilibria: An Alternative to Phy-Company, 2000), 12–14. letic Gradualism,” in Thomas J. M. Schopf,8. Hevesh5, The Amazing Triple ed., Models in Paleobiology (San Francisco:Spiral (15,000 Dominoes), 2:27, Sep- Freeman, Cooper & Co., 1972), 82–115.tember 10, 2016, www.youtube.com 18. Kotter, Leading Change, 1./watch?v=lo6x4eulY9g. 19. Rosabeth Moss Kanter, Rosabeth Moss9. Michael L. Tushman and Elaine Romanelli, Kanter on the Frontiers of Management“Organizational Evolution: A Metamorphosis (Boston: Harvard Business Review Press,Model of Convergence and Reorientation,” 1997), 25.Research in Organizational Behavior 7 20. Rolf Smith, The 7 Levels of Change: Dif-(1985): 180. ferent Thinking for Different Results (Wyo-10. Clayton M. Christensen and Michael missing, PA: Tapestry Press, 2007), 248–49.Overdorf, “Meeting the Challenge of Disrup- 21. Gary A. Yukl, Leadership in Organiza-tive Change,” Harvard Business Review 78, tions, 8th ed. (Boston: Pearson, 2012), 80–81.no. 2 (March-April, 2000): 72. 22. Greiner, “Evolution and Revolution as11. Ibid. Organizations Grow”; Peter M. Senge, The12. Larry E. Greiner, “Evolution and Revolu- Dance of Change: The Challenges of Sus-tion as Organizations Grow,” Harvard Busi- taining Momentum in Learning Organi-ness Review 76, no. 3 (May-June, 1998): 58. zations (New York: Currency/Doubleday,13. Kevin Kelly, Out of Control: The Rise of 1999).Neo-Biological Civilization (Reading, PA: 23. Sacred Books of the East: The Shû King.Addison-Wesley, 1994), 140. The Shih King. The Hsiâo King. Confucian-14. Margaret Wheatley, “When Change Is Out ism, Vol. 3, Part V: The Books of Kâu: Bookof Our Control,” in Human Resources in the IV: The Great Plan, trans. James Legge, 1879,21st Century, ed. Marc Effron, Robert Gan- accessed May 11, 2018, sacred-texts.comdossy, and Marshall Goldsmith (Hoboken, /cfu/sbe03/sbe03031.htm.NJ: John Wiley & Sons, 2003), 187.15. In earlier version of Greiner, “Evolution Mark Light, MBA, PhD, is founderand Revolution as Organizations Grow,” 38: and president of First Light GroupLarry E. Greiner, “Evolution and Revolution (www.firstlightgroup.com), with a missionas Organizations Grow,” Harvard Business to bring your future within reach throughReview 50, no. 4 (July-August, 1972): 37–46. leadership coaching, teaching, and writing.16. Elaine Romanelli and Michael L. He has also written for NPQ under the penTushman, “Organizational Transformation name “Dr. Conflict.” Follow Light on Twitteras Punctuated Equilibrium: An Empirical @DoGoodGreat.Test,” Academy of Management Journal 37,no. 5 (October 1994): 1141–66; Christensen To comment on this article, write to us atand Overdorf, “Meeting the Challenge of [email protected]. Order reprints fromDisruptive Change,” 66–76; and Michael L. http://store.nonprofitquarterly.org, usingTushman, William H. Newman, and David code 250209.SUMMER 2018 • WWW.NPQMAG.ORG  T H E   N O N P R O F I T   Q U A R T E R LY  ​59

IRS REGULATION OF NONPROFITS SPECIAL REPORT How Many Nonprofits Are There?: What the IRS’s Nonprofit Automatic Revocation and 1023-EZ Processes Left Behind by Michael L. Wyland With several years of data on IRS revocations covering almost 800,000 organizations now at our disposal, a few trends are emerging. For example, after an initial surge, automatic revocations are reaching an equilibrium of around 44,000 organizations annually; reinstatements of exemptions are decreasing each year; and 501(c)(3) groups are being revoked at a greater rate than other types of nonprofits. From the middle of 2010 to the end source is the IRS’s automatic revocation including a provision that requires the of 2017, the IRS revoked the tax- data, downloaded from the IRS website.3 IRS to revoke the tax-exempt recogni- exempt recognition of more than A single ASCII file contains all auto- tion of any nonprofit that fails to file an 760,000 nonprofit organizations matic revocations made since 2010. The annual Form 990 return with the IRS for failing to file Form 990 returns.1 IRS updates the bulk file monthly. The for three consecutive years.4 The IRS More recently, it has implemented the version used for this analysis was down- was charged with organizing itself to 1023-EZ process, which makes apply- loaded in January 2018, and included send a written notice of revocation to ing for federal tax-exempt status easier. data for the 2010–2017 fiscal years. the last-known address for each non- What effect have these changes had on reporting nonprofit, with revocation the numbers of nonprofits in our sector? Before 2011, it was impossible to get happening after the 990 filing deadline Are there marked differences in trends a sense of the true numbers of feder- passes for the third consecutive year of vis-à-vis 501(c)(3)s and 501(c)(4)s? ally tax-exempt nonprofits in the United noncompliance. This first-of-its-kind analysis is States; this is because there were informed by two key data sources. The so many listed nonprofits that never The timeline set in place by the 2006 first is the Internal Revenue Service reported to the IRS—either because law provided that automatic revoca- Data Book, the annual compendium of they were legitimately too small to have tions would begin on May 15, 2010. IRS statistics published since 1863— to report, or they were defunct, or they Using that timeline, almost 400,000 non- specifically, the data contained in Tables were sloppy. No one really knew how profits—more than 60 percent of them 24, 24a, and 25 of the Data Books from many belonged in which category. The 501(c)(3) charities—were slated to have 2007 through 2017.2 The second data Pension Protection Act of 2006, however, their exemptions revoked.5 However, changed the reporting requirements by the IRS delayed implementation of the 60 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

revocations from October 15, 2010 (just IRS REGULATION OF NONPROFITSafter the start of the 2011 fiscal year),until the summer of 2011 (the last Interestingly, the exemption type Timeline of Events Related toquarter of the 2011 fiscal year), to make (for example, 501(c)(3), 501(c)(6), Automatic Revocation and Streamlinedsure that more nonprofits were aware of etc.) field is optional. Fortunately, onlythe law and of their requirement to file. 28,300 out of 761,780 records, or about Exempt Applications 3.7 percent, do not have an exemption Many very small nonprofits that had type identified; they are carried in the August 17, 2006:not been required to file a Form 990 or database with a 0 value, despite thereForm 990-EZ in the past were particu- being no such thing as a 501(c)(0) Passage of the Pension Protection Actlarly unaware of the new Form 990-N, organization.10 of 2006 with mandate for automaticknown as the “postcard” return. The revocationForm 990-N is an electronic form that How the Action Affectedrequires a nonprofit not required to 501(c)(3)s and 501(c)(4)s May 15, 2010:file a 990 or 990-EZ to provide annualupdates to basic contact information Not surprisingly, 501(c)(3) organiza- Effective date for first wave of automaticfor the organization. Thus, these smaller tions topped the list of revoked exemp- revocationsgroups were at risk of being surprised tions from 2010 to the end of 2017,by the action. To prevent that, the IRS, representing just under 60 percent of October 15, 2010:national infrastructure groups, and the the total. Following 501(c)(3) groupsmedia did broad outreach amplifying were 501(c)(4) social welfare groups, Original date for implementationthe new requirement. with almost 16 percent; 501(c)(7) rec- (announcement) of automatic reation clubs, with about 5.3 percent; revocations The IRS’s implementation delay gavemany organizations the opportunity to July 1, 2011:bring their filings up to date, but a reviewof the IRS’s automatic revocation data- Revised date for implementa-base shows that the FY 2010 and 2011 tion (announcement) of automaticrevocations still affected more than revocations450,000 nonprofits,6 including 275,000501(c)(3) public charities and private July 1, 2014:foundations.7 IRS implements use of Form 1023-EZ The IRS posts a list of all automatic application for 501(c)(3) tax exemptionrevocations to its website, both in abulk download option and as part of itsnewly revised “Tax Exempt Organiza-tion Search” service, which providesaccess to basic information about alltax-exempt organizations.8 (The filecontains information on automaticrevocations only; it does not include anyorganizations that had their exemptionrevoked as a result of a review of activi-ties and either an administrative deter-mination by IRS staff or determinationby a court.) The automatic revocation dataset isvery simple, containing twelve fields,only four of which are required, as canbe seen in the IRS table at top.9S U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​61

IRS REGULATION OF NONPROFITS 501(c)(6) business leagues, with revoked at a lower rate than would be automatic revocation varied, both in 4.8 percent; and 501(c)(19) veterans’ expected, given their premier place total and for 501(c)(3) groups specifi- organizations, with 2.4 percent.11 among 501(c) tax-exempt groups. cally. Total annual automatic revoca- tions for 2012–2017 reached a low of Chart 1 shows each year’s total of The 501(c)(3) s represented 36,185 in 2015 and a high of 84,478 in all 501(c) organizations and the cor- 68.5 percent of all 501(c) organiza- 2017. Automatic revocations during the responding totals of 501(c)(3) and tions in 2010; by 2017, that percentage same period affecting 501(c)(3) groups 501(c)(4) organizations that are included had increased to 78 percent, based on varied from almost 25,000 in 2015 to in the reported total. figures available in the annual Data 36,180 in 2013.14 • The total numbers of all 501(c)(3) Book published by the IRS.12 Significantly, the total number of and 501(c)(4) organizations were at In that seven-year period, as men- nonprofits—and the number of 501(c)(3) or near their highest levels in FY 2010, tioned above, automatic revocations groups—has essentially remained stable the last year before automatic revo- of 501(c)(3) s averaged just under since 2010. Looking at Table 25 of the cation was implemented. 60 percent of the total, and only Data Book is intriguing, because it • The 501(c)(3) numbers dropped sig- approached 70 percent in one year shows a drop of 200,000 501(c)(3) groups nificantly in FY 2011, and only recov- (2015). Automatic revocations made from 2010 to 2011, when the first auto- ered to the FY 2010 level in FY 2017. prior to July 2011 (beginning in May matic revocations were announced.15 • The 501(c)(4) numbers have dropped 2010) were first publicly posted by The 2017 Data Book (latest available) significantly and steadily since 2010, the IRS in June 2011. Fiscal year 2011 records show there were only 5,442 with the exception of a one-year announcements included 390,168 more 501(c)(3) organizations in that spike in FY 2014. revocations, including almost 250,000 year than there were in 2010. Overall, • The 501(c)(3) and 501(c)(4) organiza- 501(c)(3) private foundations and public there were 175,000 fewer 501(c) groups tions comprise an average of about charities. This was to be expected, as of all tax-exempt classifications in FY 67 percent of the total for all 501(c) many long-dormant groups were iden- 2017 than there were in 2010.16 organizations. tified in the first wave of automatic One key finding in reviewing the data- revocations.13 The use of the short Form 1023-EZ base is that 501(c)(3) organizations have for tax exemption as a 501(c)(3), which had their tax exemptions automatically In the following years, the number began in July 2014 (the final quarter of of nonprofits processed through Chart 1 Number of Exempt Organizations, 2007–2017 501(c)(3) 501(c)(4) All All compared with 501(c)(3) and 501(c)(4) 2,100,000 2,050,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2,000,000 1,950,000 1,900,000 1,850,000 1,800,000 1,750,000 1,700,000 1,650,000 1,600,000 1,550,000 1,500,000 1,450,000 1,400,000 1,350,000 1,300,000 1,250,000 1,200,000 1,150,000 1,100,000 1,050,000 1,000,000 950,000 900,000 850,000 800,000 750,000 700,000 650,000 600,000 550,000 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 62 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

the 2014 federal fiscal year), may be Chart 2 IRS REGULATION OF NONPROFITSresponsible for reversing the down- IRS 501(c)(3) Application Determinations 2007–2017ward trend in the number of 501(c)(3)groups seen in 2010 through 2013. The (Source: IRS Data Book – “Table 24”/“Table 24a” for each year)short form was introduced by the IRS inreaction to bad publicity over a growing 120,000 100,000backlog of Form 1023 long form applica- 80,000tions that had reached more than 66,000 60,000during 2013.17 The number of 501(c)(3) 40,000applications approved annually by theIRS grew from a low of 37,000 in 2013 20,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017to 94,000 in 2014, and remained near or Total Approved Disapproved Otherabove 80,000 in the 2014–2017 period 0(see Chart 2). The IRS reports that the 2007Form 1023-EZ was used for 65 percentof all applications for 501(c)(3) tax IRS, totaling just over 98,000 organiza- about 33,000 reinstated in 2010 and onlyexemption during FY 2017.18 tions. Typically, the IRS has restored about 2,000 organizations reinstated in these organizations’ exemptions from 2017.20 This may reflect the low number Chart 2 shows annual applications for the dates they were revoked, so that of truly dormant nonprofit organiza-501(c)(3) tax exemption received by the there is no gap in their record of exemp- tions of all exemption types, as well asIRS and how they were processed, based tion. However, about one-third of the a growing understanding of the need foron Table 24a of the IRS Data Books. reinstated organizations have a reported annual Form 990 reporting using one of • The overwhelming majority of appli- gap during which time they were not the options available to filers. tax exempt. The reported gap between cations are approved each year. revocation date and reinstatement date Chart 3 adds to the previous chart • Very few applications are disap-­ varies from a couple of months to more depicting handling of new applications than three years.19 for 501(c)(3) tax exemption by including proved. automatic revocation and reinstatement • “Other” usually means that the IRS The number of reinstatements for data for 2010–2017.21 501(c) organizations has dropped each • Automatic revocations for 501(c)(3) has held the application pending year from 2010 to 2017, beginning with further information from the ap- organizations started out high in 2010 p­ licant. • The trend of new applications de- clined annually from 2007–2013,spiked in 2014, and retreated from Chart 3that high in 2015–2017, though the numbers received and approved IRS 501(c)(3) Application Determinations 2007–2017 have remained at high levels since the advent of the 1023-EZ short form 200,000 application in 2014. 180,000• The numbers of other applications 160,000 and disapproved applications have 140,000 remained fairly constant since 2011. 120,000 100,000Reinstatements 80,000 60,000Nonprofits that have had their tax 40,000exemption automatically revoked havethe opportunity to apply for reinstate- 20,000ment. For the years 2010 through 2017, 013 percent of all automatically revokednonprofits have been reinstated by the 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Approved Disapproved Other Auto Revoked ReinstatedS U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​63

IRS REGULATION OF NONPROFITS and 2011, with more organizations a drop to 84,000 in 2015.26 However, if the almost 60 percent of the total of being automatically revoked than automatic revocation of 501(c)(4) organi- 84,478 automatic revocations for new applications for exemption were zations was due primarily or solely to the the year. received by the IRS. 2014 spike in 501(c)(4) groups, that spike It should also be noted that, until • Revocations of 501(c)(3) organiza- should have continued through 2016 and recently, new 501(c)(4) groups were not tions have remained stable since even into 2017. required to apply for tax exemption or 2014, with automatic revocations otherwise notify the IRS of their forma- occurring at a level approximately Chart 4 shows new tax exemption tion until their first Form 990 was due 30 to 35 percent of new 501(c)(3) tax application determination activity and to be filed. However, beginning in 2016, exemption applications received.22 automatic revocation and reinstatements new 501(c)(4) groups are now required • The number of 501(c)(3) groups for 501(c)(4) groups between 2010 and to file Form 8976—a “Notice of Intent having their tax exemption rein- 2017.27 to Operate”—with the IRS within sixty stated after having been automati- • New applications, approvals, disap- days of formation.28 In 2017, the IRS cally revoked is a small percentage acknowledged 1,908 forms and rejected of the total revoked—and, of course, provals, and other activity (typically 474 for purely technical reasons unre- a much smaller number than for new applications held by the IRS await- lated to a judgment about their proposed applications approved. ing additional information from the activities.29 • Annual reinstatements of exemp- applicant) closely follow trends seen tion for 501(c)(3) organizations have in 501(c)(3) applications and for all • • • declined since automatic revocation nonprofits generally. started in 2010, from a high of 19,379 • In general, 501(c)(4) applications We now have several years of data on in that year to a low of 1,821 in 2017.23 account for less than ten percent IRS automatic revocations covering of all exemption applications for a almost 800,000 organizations. A few 501(c)(4) Mysteries given year. trends can be identified: • There was a spike in applications • After the initial wave of automatic Two findings without an explanation and approvals in 2014, with a steady are: (1) the changes in the number of decrease in annual 501(c)(4) applica- revocations in 2010–2011, the trend 501(c)(4) organizations between 2010 and tions in 2015–2017. is that automatic revocations for all 2017; and (2) the extraordinary number • Automatic revocation of 501(c)(4) types of nonprofits are reaching an of 501(c)(4) groups that were automati- organizations was a relatively equilibrium in the vicinity of 44,000 cally revoked in 2017. There were almost small percentage of all revocations organizations annually—with the 140,000 501(c)(4) organizations in 2010; for each year until 2017, when 49,426 exception of the 501(c)(4) revoca- by 2017, that number had dropped to 501(c)(4) revocations accounted for tions in 2017 as a significant outlier. just under 82,000—a reduction of more than 40 percent that is not explained by Chart 4 the automatic revocation data for those IRS 501(c)(4) Application Determinations 2010–2017 years.24 In 2017, 58 percent of all auto- matic revocations made by the IRS were 50,000 2010 2011 2012 2013 2014 2015 2016 2017 to 501(c)(4) groups (47,315 out of 77,077), 45,000 a significant departure from the annual 40,000 Total Approved Disapproved average of 15 percent.25 This may be due 35,000 Other Revocations Reinstated to an extraordinary number of 501(c)(4) 30,000 groups being active during the 2012 and/ 25,000 or 2014 election cycles and subsequently 20,000 failing to file 990s beginning in 2014, 15,000 resulting in automatic revocation in 10,000 2017. This theory may be supported by 5,000 the jump in 501(c)(4)s from 91,000 in 2013 to more than 148,000 in 2014, followed by 0 64 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

Types and Numbers of Tax-Exempt Organizations, FY 201730 UST IRS REGULATION OF NONPROFITSType of organization, Internal Revenue Code section Number of 501(c)(3) Employers organizations Have Exlusive Funding Options That Help ReduceTax-exempt organizations, nonexempt charitable trusts, and nonex- 1,799,401 Unemployment Costs... Findempt split-interest trusts, total Out Which Option Could 1,646,650 Best Protect You FromRecognized section 501(c) by subsection, total [1] 651 Future Claims Volatility. (1) Corporations organized under an act of Congress Get Your FREE UI Cost (2) Title-holding corporations 4,477 (3) Religious, charitable, and similar organizations [2] 1,286,181 Analysis Today at (4) Social welfare organizations www.ChooseUST.org/eval (5) Labor and agriculture organizations 81,935 (Use Priority Code 2018NPQ (6) Business leagues 46,660 to Expedite Your Request) (7) Social and recreation clubs 63,621 (8) Fraternal beneficiary societies 49,175 T H E   N O N P R O F I T   Q U A R T E R LY  ​65 (9) Voluntary employees’beneficiary associations 44,060 (10) Domestic fraternal beneficiary societies 6,330 (12) Benevolent life insurance associations 16,390 (13) Cemetery companies 5,334 (14) State-chartered credit unions 9,243 (15) Mutual insurance companies 1,808 (17) Supplemental unemployment compensation trusts (19) Veterans’organizations 690 (25) Holding companies for pensions and other entities 94 29,167Other 501(c) subsections [3] 763 71Recognized section 501(d) Religious and apostolic associations 220Section 527 Political organizations 34,748 117,783Nonexempt charitable trusts and split-interest trusts[1] The number of organizations, by 501(c) subsections, includes organizations that applied for and received recognition oftax-exempt status, or that are exempt by virtue of a tax treaty.[2] Includes private foundations. Not all organizations described in section 501(c)(3) must apply for recognition of tax-exempt status, including churches, interchurch organizations of local units of a church, integrated auxiliaries of a church,conventions or associations of churches, and organizations (other than private foundations as described in section 509(a))that have normal gross receipts in each taxable year of not more than $5,000. In addition, organizations may be recognizedas tax exempt under section 501(c)(3) without filing an application if they are included in a group exemption letter given toan affiliated parent organization. Section 501(c)(3) organizations that have not applied for recognition of tax-exempt statusare not included in this number.[3] Includes teachers’ retirement funds (section 501(c)(11)); corporations organized to finance crop operations (section501(c)(16)); employee-funded pension trusts (section 501(c)(18)); black lung benefits trusts (section 501(c)(21)); veterans’associations founded prior to 1880 (section 501(c)(23)); trusts described in section 4049 of the Employee Retirement IncomeSecurity Act of 1974 (ERISA) (section 501(c)(24)); state-sponsored high-risk health insurance organizations (section 501(c)(26)); state-sponsored workers’ compensation reinsurance organizations (section 501(c)(27)); and qualified nonprofit healthinsurance issuers (section 501(c)(29)). Tax-exempt status for legal services organizations (section 501(c)(20)) was revokedeffective June 20, 1992.NOTE: Information from tax-exempt organization returns is available to the public; therefore, data in this table are not subjectto IRS disclosure regulations. However, information on closures of applications for tax-exempt status (reported in Table 24a)is subject to disclosure regulations.SOURCE: Tax Exempt and Government Entities: FY 2017 Accomplishments, Internal Revenue Service, March 19, 2018.SUMMER 2018 • WWW.NPQMAG.ORG

IRS REGULATION OF NONPROFITS • Reinstatement of tax exemption the automatic revocation database at for Tax-Exempt Status, by Organization once automatically revoked is the time. Type and Internal Revenue Code Section, decreasing each year, accounting for In future years, the Internal Revenue Fiscal Year [2016, 2017—the years refer- less than 10 percent of all revoked Service Data Book may be redesigned enced in this article]”; “Table 25” is titled organizations. in such a way as to allow for inclusion “Table 25. Tax-Exempt Organizations and of automatic revocation information Nonexempt Charitable Trusts, Fiscal Years • The 501(c)(3) groups are not only as a distinct dataset of interest. In the [2007–2010, 2010 and 2011, 2011 and 2012]” automatically revoked at a greater rate meantime, the bulk download of the and “Table 25. Tax-Exempt Organizations, than other types of nonprofits but also Excel spreadsheet and searching the Nonexempt Charitable Trusts, and Nonex- are revoked at a higher percentage IRS website provide the opportunity for empt Split-Interest Trusts, Fiscal Year [2013, rate than the percentage of 501(c)(3)s researchers and others to examine and 2014, 2015, 2016, 2017—the years referenced relative to all 501(c) organizations. interpret information about tens of thou- in this article].” Following notes that refer- sands of nonprofits each year that lose ence these IRS Data Books and tables are • Automatic revocations reported tax exemption without human interaction abbreviated, unless the Data Book from a in 2011 affected approximately or determination. specific year was used, in which case the full 20 percent of 501(c)(3) organizations source is cited. recognized by the IRS in 2010, and Notes 3. “Tax Exempt Organization Search Bulk the total number of 501(c)(3) organi- 1. Author’s own analysis, using “Tax Exempt Data Downloads.” zations took until 2017 to recover to Organization Search Bulk Data Downloads,” 4. Pension Protection Act of 2006, Public Law 2010 levels. Internal Revenue Service, accessed January 109–280—Aug. 17, 2006, 109th Cong. (2006), 12, 2018, www.irs.gov/charities-non-profits​ www.gpo.gov/fdsys/pkg/PLAW-109publ280 • The number of 501(c)(4) organiza- /tax-exempt-organization-search-bulk-data​ /pdf/PLAW-109publ280.pdf. tions has declined significantly since -downloads. (Note: This hyperlink leads to 5. Stephanie Strom, “One-Fourth of Nonprof- 2010, with the exception of a spike the current version of the file accessed in its Are to Lose Tax Breaks,” April 22, 2010, in 2014 and a 40 percent drop the fol- January 12, 2018 via a different link that no www.nytimes.com/2010/04/23/us/23exempt lowing year—a drop not reflected in longer functions. The IRS changed the loca- .html; and “Automatic Revocation of tion of the data from the time of the author’s Exemption List,” material from the IRS REFAUCLHL PYoOteUntRial access. All references in this article to the website archived by “Wayback Machine,” “Tax Exempt Organization Search Bulk Data accessed May 29, 2018, web.archive.org Balance your education, career Downloads” are from January 12, 2018 access /web/20110610234250/http://www.irs.gov and life with UIU’s online Master date.) /charities/article/0,,id=240099,00.html. of Public Administration program! 2. The Internal Revenue Service Data Book, 6. “Tax Exempt Organization Search Bulk Department of the Treasury (Washington, Data Downloads.” 8-WEEK CLASSES | STUDENT-FOCUSED DC: Internal Revenue Service); and “Tax 7. Amy S. Blackwood and Katie L. Roeger, Exempt Organization Search Bulk Data Revoked: A Snapshot of Organizations That 800.553.4150 – [email protected] Downloads.” Note: each IRS Data Book Lost Their Tax-Exempt Status (Washington, covers one fiscal year. Charts in this article DC: Center on Nonprofits and Philanthropy, UIU.EDU/NONPROFIT that address multiple years and cite the IRS The Urban Institute, August 2011), 1. Data Book tables (“Table 24,” “Table 24a,” 8. “Tax Exempt Organization Search Bulk Data and “Table 25”) reflect the same table or Downloads”; and “Tax Exempt Organization tables from multiple Data Books covering Search,” Internal Revenue Service, accessed those years. “Table 24” is titled “Table 24. January 12, 2018, apps.irs.gov/app/eos/. Closures of Applications for Tax-Exempt 9. “Automatic Revocation Download Layout,” Status, by Organization Type and Internal from “Tax Exempt Organization Search Revenue Code Section, Fiscal Year [2010, Bulk Data Downloads,” apps.irs.gov/app 2011, 2012, 2013, 2014, 2015—the years /eos/forwardToRevokeDownloadLayout.do. referenced in this article]”; “Table 24a” is 10. “Tax Exempt Organization Search Bulk titled “Table 24a. Closures of Applications Data Downloads.” 66 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

11. Ibid. Note: Author used the IRS automatic makes it difficult to represent the reinstate- -your-form-8976-notice-of-intent-to IRS REGULATION OF NONPROFITSrevocation database data to calculate the ments fully on a single chart. operate-under-section-501c4.presence of each exemption type as a per- 22. “Table 24”/“Table 24a.” Note: Calculations 29. “Table 24b. Receipts of Forms 8976,centage of the total number of records in were performed based on data from these Notices of Intent To Operate Under Sectionthe database file. tables for the referenced years. 501(c)(4), Fiscal Year 2017,” The Internal12. “Tax Exempt Organization Search Bulk 23. “Tax Exempt Organization Search Bulk Revenue Service Data Book 2017, 56.Data Downloads”; and The Internal Revenue Data Downloads.” 30. “Table 25,” The Internal Revenue ServiceService Data Book 2017: October 21, 2016 24. All calculations were made using data Data Book 2017, 57.to September 30, 2017, Publication 55B, from “Tax Exempt Organization Search BulkDepartment of the Treasury (Washington, Data Downloads”; and “Table 25” (for refer- Michael L. Wyland currently serves as anDC: Internal Revenue Service). Note: Author enced year/s). editorial advisory board member and con-made calculations based on information 25. “Tax Exempt Organization Search Bulk sulting editor to the Nonprofit Quarterly,from both sources for the applicable years. Data Downloads.” with more than 400 articles and features13. All calculations were made using data 26. “Table 25” (for referenced year/s). published since 2012. A partner in the con-from “Tax Exempt Organization Search Bulk 27. Data for the referenced years taken from sulting firm of Sumption & Wyland, WylandData Downloads.” “Tax Exempt Organization Search Bulk Data has more than thirty years of experience in14. “Tax Exempt Organization Search Bulk Downloads”; and “Table 24”/ “Table 24a.” corporate and government public policy,Data Downloads.” 28. “Electronically Submit Your Form management, and administration.15. “Table 25. Tax-Exempt Organizations, 8976, Notice of Intent to Operate UnderNonexempt Charitable Trusts, and Non- Section 501(c)(4),” Internal Revenue To comment on this article, write to us atexempt Split-Interest Trusts, Fiscal Year Service, May 4, 2018, www.irs.gov [email protected]. Order reprints from2017,” The Internal Revenue Service Data /charities-non-profits/electronically-submit http://store.nonprofitquarterly.org, usingBook 2017, 57. Note: Data Book figures from code 250210.multiple years are obtained from each year’sIRS Data Book. donors-v1.csv16. The Internal Revenue Service Data Book donors-v2.csv2017. Note: Author made calculations based donors-v2-final.csvon information for the applicable years. donors-v2-final-2.csv17. Michael Wyland, “Widespread Form donors-v2-final-2-FINAL.csv1023-EZ Abuse Reported by IRS,” Non- donors-i-might-cry.csvprofit Quarterly, January 8, 2016, nonprofitquart​ erly.org/2016/01/08/form-1023-ez-abuse​ funraise.io-irs-reports/.18. Tax Exempt and Government Entities:FY 2017 Accomplishments (Washington, DC:Internal Revenue Service, March 19, 2018), 6.19. Calculations were made using data from“Tax Exempt Organization Search Bulk DataDownloads.”20. Data is from “Tax Exempt OrganizationSearch Bulk Data Downloads.”21. Calculations were made using data from“Tax Exempt Organization Search BulkData Downloads;” and “Table 24”/“Table24a” (for referenced year/s). Note: Thischart reflects around 20,000 reinstate-ments in 2010, to give a sense of the overallpicture. The relative scale of the numbersS U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​67

NONPROFIT MARKETS Community Influences: Understanding Nonprofit Markets by Steve Zimmerman “As communities change, so do the markets in which nonprofits operate,” explains the author. “Shifting demographics, political and social pressures, and competition and resources require leadership to be continually ready to adapt. To do so, leaders must understand not only how their own programs deliver impact and financial viability but also how the market is influencing their ability to do so.” Undertaking a market analysis can get you there. Nonprofit organizations operate to do?” but leaves out the crucial voice in a financially viable manner.2 This snap- in dynamic and lively commu- of those directly receiving services or shot of an organization’s portfolio of pro- nities with shifting political benefiting from the organization’s pro- grams allows leaders to make strategic landscapes, funder priorities, grams. It also doesn’t build the support decisions to strengthen the business constituent needs, and demograph- and engagement necessary for success. model. However, just as a boat moving ics. For many for-profit businesses, the Rather, nonprofits need a structured way through water is affected by the current, direct relationship with their customers of understanding the market in their com- tides, and wind, an organization’s busi- creates a feedback system allowing them munity to inform a different, more impor- ness model is buffeted by external forces to understand the impact these changes tant question: “What does our community that must be taken into consideration for will have on their business model. But need us to do?” a sustainable strategy. for many nonprofits, those providing the financial capital are different from those Answering this question requires A holistic view of a nonprofit’s market using their services—leading to at best a engaging and listening to the broader recognizes those who receive services or lag in information and at worst misinfor- community. A deeper understanding who benefit directly from an organiza- mation or unaligned forces. John Carver of the needs and values of different tion’s efforts as well as those who fund calls this a “muted market” because of segments of a community strength- the efforts or benefit from the improve- the lack of direct voice from those using ens program design, leading to greater ment to the community and society. services.1 The result is additional com- impact; and greater impact, together Beyond these two, a nonprofit’s market plexity for leadership in understanding with knowing the values and motiva- also consists of other for-profit, non- and analyzing the influences the com- tions of current and potential funders, profit, and public organizations working munity has on an organization’s business may open up new revenue strategies to side by side, including those whose model. increase sustainability. approaches differ and who compete This complexity often leads boards with the organization for resources, and staff to focus solely on funders At Spectrum Nonprofit Services, our talent, and impact. Likewise, an organi- when assessing their market in search of previous work has focused on helping zation’s mix of programs, effectiveness, sustainable funding. This approach may organizations visualize their business and sustainability can be influenced by answer the questions “Where can we sell model using a tool called the matrix map, the availability of skilled labor and by the our idea?” or “What do funders want us which showcases how mission-specific political and social environment. A true and fund-development programs work market analysis needs to explore all of together to achieve exceptional impact 68 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

Market Wheel multiple other groups by furthering human capital every day in the form of NONPROFIT MARKETS their ideals, values, or shared beliefs, staff, volunteers, and board members.Political/Social Direct supporting their businesses and com- Understanding the trends of talent andEnvironment Beneficiaries plementing efforts in a systemic way. other resources is essential to having Drawing on Dennis Young’s work on a complete picture of the nonprofit Inputs/ Nonprofit Other benefits theory,3 this component looks market.Labor Market Beneficiaries/ beyond the traditional beneficiaries to 5. Political/Social Environment. Non- Other include any group of the population profit organizations and those that Organizations Funders that may benefit from an organiza- fund their missions don’t operate in tion’s efforts. a vacuum. Philanthropic and publicthese influences at some level. To capture 3. Other Organizations. No organi- funding are both subject to social andthe influences, we segregate the non- zation operates alone in a commu- political trends that can dramaticallyprofit market into five components (as nity. This component of the market influence an organization’s ability todepicted in the “market wheel,” above). examines other organizations, both accomplish its mission. Therefore,1. Direct Beneficiaries. The primary for-profit and nonprofit, that share the understanding and working to shape community. Other organizations may the environment is essential to knowing pool of people using the organization’s be competitors, or potential collabora- how to craft an organization’s strategy. services or directly benefiting from the tors, or—depending on the programs organization’s efforts. offered—both. Each of these market components2. Other Beneficiaries/Funders. 4. Inputs/Labor Market. Providing influences aspects of an organization Beyond their direct beneficiaries, effective services or benefits for the and its business model differently, with nonprofit organizations benefit community requires a pool of quali- some at times being more important than fied, talented, and compassionate others. From the perspective of delivering individuals. Nonprofits compete for exceptional impact, however, no voice is Determining Your MarketUnderstanding markets is challenging for organizations, in part because Finding the right definition of the marketplace is more art thanthey intersect and influence so many different aspects of their community, science, and the connected nature of issues nonprofit organizations seekturning a straightforward task into a multifaceted challenge. Milwaukee to address means that they may serve more than one market. The Milwau-Youth Symphony Orchestra (MYSO), for example, often speaks of itself as an kee Youth Symphony Orchestra, for example, could claim three markets:arts and culture organization. However, with a mission to“empower young • Performing arts organizationpeople from diverse backgrounds to joyfully pursue musical excellence • Youth performing arts organizationwhile building crucial life skills,” MYSO is easily seen as a youth develop- • Youth development organizationment organization, placing it in a different market. Defining an organiza- Each description entails its own list of potential constituents, col-tion’s market may seem like a matter of semantics, but it plays an important laborators, and competitors. Focusing on one market description allowsrole when articulating the value of the organization and pursuing funders. the organization to spend the time necessary to deeply understand it, Different programs within an organization may have different markets, as opposed to having a shallow understanding of multiple spaces. Alongbut for purposes of understanding the overall context in which the organiza- with the statement of intended impact, leadership should consider howtion operates, it is helpful to agree on one primary market. A statement of constituents—including funders—view the organization’s market. Forintended impact is a useful first step in providing this overarching context. example, many funders of MYSO debate between funding their efforts orThe statement articulates the organization’s purpose by defining the primary funding those of the Boys and Girls Clubs. Likewise, the youth that partici-audience the organization serves, the desired outcomes it seeks, and the pate are choosing among music, sports, and academic interests. With theseprocess by which it demonstrates and monitors progress toward its goal. considerations in mind, leadership of MYSO will find it most beneficial toIt offers a long-term beacon for what the organization aims to accomplish, view the organization as a youth development organization and claim theand thereby helps to define the organization’s primary market by staking corresponding market.This market definition will allow leadership to betterout its identity in relation to other organizations seeking the same goals. understand all the influences on their ability to accomplish their mission.S U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​69

NONPROFIT MARKETS more important than that of the direct narrowing down those that benefit most Moving outward, the other circles beneficiary. Understanding deeply the directly from the organization’s activities reflect groups also benefiting from the needs and options of an organization’s gives leadership increased clarity on and organization’s efforts, but less directly. direct beneficiaries allows leadership to power to navigate their market. Direct Identifying distinct subgroups of the design both an impact strategy (theory beneficiaries can be defined by: market in this manner acknowledges that of change) and programs to meet those • Age or demographics; different groups that benefit from the needs. It also allows the board and staff to • Socioeconomic status; organization may have different needs, understand how the other market compo- • Geography; and that, at times, trying to reach and nents interact with those needs and influ- • Specific needs; or satisfy the entire range of different needs ence the organization’s business model as • Other distinguishing characteristics. is difficult. Concentric circles enable it strives to meet them. prioritization, which proves useful in Concentric Circles for Identifying setting strategy after the completion of The following pages explore each Direct Beneficiaries the market analysis. aspect of the market in more detail, and offer a framework for conducting a Focus D Direct Some organizations find the concen- market analysis that considers each com- BeneficiarByeneficiaries tric circle prioritization challenging, as ponent by asking questions and gathering they have multiple subgroups of direct information to better understand how it PolitiFcoacl/uSsoCcial Other beneficiaries that are equally served is changing. And, recognizing that the EnBveirnoenfimcieanryt Beneficiaries/ by the organization’s efforts. In these depth of understanding of each market cases, a table of two to four subgroups component is endless and can be all Inputs/ Funders with equal weight can be created. Larger consuming, they introduce a tool to help Labor Market Focus B organizations with multiple programs, leaders prioritize which market forces for example, may find that their programs require immediate strategic attention. Beneficiary have distinct core beneficiaries. To truly Through this analysis, nonprofit leaders, understand the influence of this market board, and staff together will be able to Focus A component, all direct beneficiaries need assess the elements collectively and Beneficiary to be understood. paint a complete picture of their non- profit’s market. Then, using the internal Many organizations struggle with A market analysis of direct benefi- assessment, they can engage in discus- identifying just one group on which ciary subgroups helps leadership better sion and decision making about strategic to focus. The statement of intended understand how relevant the organiza- priorities and how best to structure the impact—a specific statement identify- tion is to each group. Once the focused operations of the organization to achieve ing the change the organization seeks subgroups have been identified, a table impact and strengthen sustainability. to create, who the organization serves, can be set up to lay out and answer the and how progress is demonstrated—may relevant questions, as shown in Table 1. Direct Beneficiaries be useful here, since that process typi- cally defines a target beneficiary of the Market forces may affect beneficiaries To understand an organization’s market, organization’s desired impact. Another differently. For example, beneficiaries leadership must start by engaging with way to consider direct beneficiaries is who receive services funded by a third (and understanding better) those con- to think of groups in concentric circles, party may be impacted differently than stituents who benefit directly from the with a specific group in the middle (see those who pay directly. For this reason, organization’s efforts. For social service graphic, above). The innermost circle it is important to understand the different organizations, these may be clients; for reflects constituents who are core to the segments and how changes within them arts organizations, they may be audience organization—individuals who would may affect the organization’s ability to members; for advocacy organizations, either benefit most from the organiza- accomplish its mission. they may be those they advocate for; tion’s services or those whom the orga- and for some organizations, they may be nization most wishes to serve. Answering Additionally, for organizations where all three. the question “Who must the organization board, staff, and constituents come serve to accomplish its mission?” helps from different parts of the community, While the efforts of nonprofits often identify the core direct beneficiary in the it is important to make sure that there benefit many segments of the community, center circle. is a shared understanding of the needs and perceptions of direct beneficiaries. 70 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

Table 1: Direct Beneficiaries NONPROFIT MARKETS Focus A Beneficiary Focus B BeneficiaryDescription: How do we describe this group? What are the demographics of this group? Average age, gender, socioeconomicDemographics: status? What is the employment status? What is the level of education? Where do members of this group live?Demographic What is happening with the demographics of this group? Is the group growingChanges: or shrinking? Is the group moving? Is its income increasing or decreasing?Needs: [Much of this information can be found on the US Census website.]Interests: What common needs does the group have? Are there common interests beyond the mission of the organization that theChanges: group shares? Have the needs and interests been consistent over time, or have they changedAccess: over the last five years—and if so, how? As a whole, does the group have access to institutions (public, private, orOther nonprofit) to meet its needs and interests? What are the barriers to access,Organizations: if any?Gaps: Are there other organizations (for-profit or nonprofit) the group turns to for itsLevel of needs or interests?Involvement: Are there gaps in services to meet the needs of the group?Traits or As an estimation, what percent of this beneficiary is engaged with theCharacteristics organization?of Organization:Satisfaction with What traits or characteristics of the organization does the group value most?Services:Length of Tenure: How satisfied is this group with the organization’s efforts? What does the groupOverall Perception: like? How could the efforts be improved? How long have members of this group been involved with the organization? Overall, how do members of this group perceive the organization, and how has this changed over time?This empowers constituents to be a true Other Beneficiaries/Funders for employee–community engagement;part of the organization, having a say in or homeowners in a particular neighbor-the future direction and building of an Beyond direct beneficiaries, there are hood that might benefit from the nonprof-organization that maximizes impact by many other groups that benefit from it’s presence. Other beneficiaries includemeeting their needs accurately. It also the efforts of nonprofit organizations. foundations and funders who furthersets up leadership to understand how These may include public agencies, their missions and interests by support-the remaining segments of the market such as school districts or police or ing nonprofit organizations. We considerwill influence the organization’s ability housing authorities. Another example all these groups to be “other beneficia-to deliver impact and build sustainability. might be businesses that benefit when ries” and, similar to direct beneficiaries, an organization provides opportunities seek to understand their demographics, needs, and motivations for supporting How to Get the Info. the organization.Census information found online and additional research can provide a lot of data, but the easiestand best way to get this information is by talking with constituents. Conduct a survey—paper or This is an opportunity for leadersonline—to determine if they’re satisfied with services. Hold a series of focus groups to ask the ques- to think broadly about the benefits thetion and get people talking. Invite constituents into the process by providing a place for them to give organization’s work brings to segmentsinput, and take the time to truly listen to their needs, what is working, and where there are gaps. of the community it may not normally consider. Understanding this segmentS U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​71

NONPROFIT MARKETS of the market helps organizations not marketing—when a business publicly the local business community. Lastly, by only in honing their impact but also in displays its support of a nonprofit— engaging volunteers from corporations strengthening their revenue strategy and benefits the business by associating it in park cleanup and other events, the remaining relevant to funders. with the positive brand of the nonprofit organization provides a way of involving organization.4 its employees in the community, one of Dennis Young’s normative theory of many factors contributing to employee finance offers four different types of Once an organization’s leadership satisfaction. benefits organizations may provide to understand which segments of the com- various segments of their community: munity are benefiting from their efforts, In this story, we’ve identified several 1. Group Benefits. Subgroups of com- there may be an opportunity to explore beneficiaries, including: different sources of revenue—for munities with shared values may be instance, by asking those who benefit to • Local property owners interested in supporting an organiza- contribute to the organization through • School districts tion’s mission that aligns with their program fees or philanthropic support. • People interested in educational values. For example, people who like animals may be supportive of a To identify other beneficiaries, lead- outcomes dog rescue organization, and those ership should think expansively about • The police department who were in New York on 9/11 may the following questions: • Local businesses support an organization that assists • Who benefits from the results of • Larger corporations 9/11 victims. Identifying common • People interested in environmental values that align with an organization’s our work? mission can help identify groups that • Who else’s missions are more suc- science for youth might support the organization. • The general public 2. Public Benefits. When a large seg­ cessful because of our work? ment of the community is supported • Do corporations or small businesses Each of these beneficiaries can be or strengthened as a result of an orga- examined in more detail, not only to nization’s efforts, the organization is gain by being associated with us, and maximize impact but also to discover said to have “public benefits.” Types if so, how? possible revenue sources. The analysis of organizations that may benefit the • In what ways are homeowners or should answer: public in this way include, for example, property owners better off because • What is the motivation or goal of health and wellness programs, juve- we are in their neighborhood? nile mental health programs, and • Are there other initiatives that are the beneficiary in supporting your employment-based programs. When an less costly because of our work? organization? organization can demonstrate specific • How aware are the beneficiaries of public benefits resulting from its work, For an example of other beneficiaries, the organization’s efforts? this presents an opportunity to pursue consider an organization that provides • How much do they care about the public funding. environmental education for schoolchil- organization’s efforts? 3. Private Benefits. Individual consum- dren in a public park. The direct benefi- • Is their awareness of the organiza- ers may also benefit from an organiza- ciaries are the schoolkids. However, by tion and concern about the issues tion’s efforts. By identifying through hosting programs in neglected parks, growing or declining? market analysis individuals who local crime drops and property values • What else is this particular group benefit from an organization’s efforts, rise. Additionally, by providing experien- interested in? the organization may discover some tial learning opportunities, educational willing and able to pay for the services outcomes improve—a favorite cause of A table like the one below may be and benefits they receive, presenting helpful for capturing answers to these another revenue opportunity. questions. 4. Trade Benefits. Institutions and businesses can benefit from asso- Table 2: Other Beneficiaries/Funders ciating with a nonprofit and its mission. For example, cause-related How Does the Is the Group Aware of Other Emerging or Group Benefit? the Organization? Interests? Declining Concern? Property Owners Other Organizations Foundations/ Community-Involved Organizations Government Agencies 72 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

There’s a direct link between other cooperate. For example, restaurants a substitute. To fully understand how NONPROFIT MARKETSbeneficiaries and an organization’s compete with one another for diners, other organizations affect a nonprofit’srevenue strategy. Understanding this but they also gain business by locating business model, leadership need tomarket component, the motivations of near one another and collaboratively think broadly about how they defineother beneficiaries, and how they’re providing parking and other amenities. competition.changing will help leadership stay Likewise, Internet providers competeclose to those funding the organiza- for subscribers but might work together A laundry list of other organizationstion’s impact, explore potential new to fight the NSA. can be daunting to analyze. Listingsources, and build organizational the organizations and then prioritiz-sustainability. Blurry boundaries between the non- ing based on a task force’s perceptions profit and private sectors are another makes the analysis more manageable. How to Get the Info. consideration when thinking through Once prioritized, briefly understanding Board members, as representatives of the other organizations in the market. It is demographics and geography served, community, are well positioned to engage in the important to consider both other non- services provided, and revenue streams discussion around beneficiaries. Again, having profit organizations and for-profit busi- will be helpful. Table 3 captures the identified beneficiary groups, in order to inform nesses when analyzing the competitive foundational understanding. your analysis it is helpful to host discussions landscape. In some cases, it may also be with representatives of each group to learn wise to include government agencies or While this table will provide lead- firsthand their knowledge of and interest in the quasi-governmental service providers. ership with a list and some attributes organization’s mission. to compare characteristics of organi- Leadership also need to consider zations, there are other methods thatOther Organizations substitutes for an organization’s ser- can be used. Peter Frumkin and Suzi vices. For example, while other restau- Sosa, in their Nonprofit QuarterlyThe competition and cooperation that rants may be direct competition for a article “Competitive Positioning,” offernonprofits encounter from surround- dining establishment, a bicycle deliv- one such model that creates a matrixing organizations is one of the more ery service is a substitute. For an art of characteristics of similar organiza-dynamic and confusing components museum, a direct competitor might be tions, allowing leadership to compareof market analysis. On the one hand, the science and technology museum and contrast.5there is intense pressure from funders across the street or an art galleryand other beneficiaries for nonprof- located across town. However, think- Putting the organization in context,its to cooperate or collaborate with ing even more expansively, a movie and understanding how it interacts—other organizations and form strate- theater or bowling alley might also be or could interact—with other non-gic alliances. On the other hand, fierce profit organizations in the community,competition for funding presents a chal-lenge—whether for philanthropic or Table 3: Other Organizationsearned revenue. These realities of thenonprofit landscape make it difficult to Organization Type Constituents Served: Geography Services Revenue Streamsdetermine which organizations are com- Number/Demographics Served Offeredpetitors and which are complementaryand thus ripe for cooperation or poten- Similar Service Providers (perceived competitors)tial collaboration. Complementary Service Providers Nonprofit executives shouldn’t spendtoo much time worrying about this, as it Substitutes (if any)is often a false distinction: an organiza-tion may both pose competition as wellas present an opportunity for collabo-ration. Similarly, in the private sector,companies frequently both compete andS U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​73

NONPROFIT MARKETS provides an opportunity for greater col- necessary to meet customers’ needs. satisfaction survey is a useful tool to laboration as well as a way to surface For nonprofit organizations, this means assess this part of the market. Ques- the distinct advantages an organization not only understanding how those who tions focused on whether employees brings to its beneficiaries and mission. benefit from their services or programs feel they have the tools necessary to are changing but also being mindful perform their jobs, are provided oppor- How to Get the Info. of the inputs necessary to generate tunities for development, and feel they One of the best ways to identify competitive and impact. The biggest input for nonprof- are valued can be helpful in determin- complementary organizations is to ask your con- its is people. To have a sense of the ing how significantly job satisfaction stituents directly: “Which other organizations do market, leadership need to understand may influence the organization. you think offer similar services?” and “Which other an organization’s competitive posi- organizations do you turn to for services?” This tion in attracting and retaining quality Additionally, a vibrant discussion can be done through surveys or focus groups, for talent. This is especially true if an orga- around some key questions will help to example, at the same time you learn about their nization’s mission requires specialized surface concerns in this area: needs and perspectives as direct beneficiaries. skills. • What is our turnover rate, and why Board members and funders are also great In his excellent monograph Good are people leaving? resources for identifying similar or complemen- to Great and the Social Sectors, Jim tary organizations in a community. You can Collins talks about having the “right • How long does it take to fill open ask, “Who else are you talking to?,” “Which people on the bus” as a critical first positions, and are there particular organizations do you see as offering similar step to achieving greatness.6 Unfortu- positions that are harder to fill? services?,” and “Which organizations do you nately, in the spirit of trying to serve see as offering services that are complemen- as many constituents as possible, most • What is the ratio of our lowest to tary or go hand-in-hand with our services?” nonprofits shortchange their staff highest salary? with low compensation or poor benefit Furthermore, staff can provide a unique packages. This mentality is one of the • How much do we invest in or provide perspective on which organizations they see reasons why the nonprofit sector has a professional development? providing competitive and complementary higher turnover rate than the for-profit services. Staff who are engaged in the com- sector, leading to shortsighted budget • Do we partner with and empower munity are particularly qualified to provide decisions in which the cost of recruit- our staff to lead, valuing their expe- information about who else participates in com- ing and training employees is often rience and input in guiding the munitywide discussions relating to your mission. uncalculated. organization? Revenue streams can be determined by The accessibility and objectivity of How to Get the info. looking at the organization’s IRS Form 990 salary surveys turn the focus of many The answers to many of these questions are data using GuideStar (www.guidestar.org) or by discussions on staffing and satisfac- points that can be tracked through payroll. Many of reviewing the organization’s annual report or tion to compensation. However, today’s these indicators trend over time and collectively will website. Alternatively, for a fee, GuideStar and employees want more than just mone- reveal how challenging it is to find the necessary Nonprofit Finance Fund’s Financial SCAN product tary compensation: they want a mean- skill sets. These metrics may also be included as allows for comparison and benchmarking of ingful work environment that engages part of an organizational dashboard. Additionally, revenue streams and financial health using 990s. and develops them over time, valuing conducting exit interviews when employees leave their opinions and professional per- will provide a good indication as to why the orga- Inputs/Labor Market spectives. Therefore, when assessing nization is having turnover and surface the percep- the state of the labor market, leadership tion employees have of the organization’s culture. There is no question that, with his bril- need to look beyond compensation to liant idea for the Apple computer, Steve the overall work environment and Too often, nonprofit staff are taken Jobs intuitively understood what people ability to attract, develop, and retain for granted, but compensation is typi- really craved. But, without the engi- key talent. cally the largest expense for an organi- neering expertise of Steve Wozniak, zation, and employee skills are among the Apple might have remained simply Just as leadership conduct surveys, the biggest drivers of impact. Beyond a dream. Understanding customers is interviews, and focus groups with con- the cliché of saying “people are our not enough; leadership also need to stituents and stakeholders, an employee most important asset,” leadership need be mindful of the resources and skills to understand the market for attract- ing, developing, and retaining talented 74 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

employees and the effect that may have • Is the issue controversial in the pub- decisions to strengthen sustainability, NONPROFIT MARKETSon the organization’s ability to continu- lic’s mind? How and why? leadership must understand how theously deliver deep impact and generate market affects their business model.financial resources. • Is there support for the organization’s Tactics for sustainability must con- strategies or theory of change to stantly evolve as constituent needs, pro-Political/Social Environment achieve impact? (While many people grammatic best practices, revenue and may want the same outcome, the talent availability, the landscape of com-The last element of the nonprofit “devil is in the details,” and people petitors and collaborators, and commu-market that can affect an organiza- may not support the organization’s nity perceptions change. Market analysistion’s ability to accomplish its mission strategies. Having clarity on specifi- enhances sustainability by giving leader-while remaining financially viable is cally what about the organization the ship a clearer understanding of how allthe political and social environment public supports is important.) components of the market are changingin which the organization operates. and how their evolution might influencePublic policy affects every nonprofit • Who are key voices with respect to the the organization’s business model.organization. For example, organiza- organization’s issue in the local, state,tions that rely on government contracts and federal government, and does The amount of influence each aspectare affected by the debate over the role the organization have a contact in or of the market has on a nonprofit’s busi-of public funding in our country. The direct connection to these people? ness model varies. For example, chang-debate may happen in Congress but the ing constituent needs or labor marketsramifications are local, and the social • Is there an association or network may drastically affect an organization’sand political environment in each orga- that provides lobbying or informa- ability to achieve its intended impact,nization’s community helps to inform tion on the organization’s issue, and whereas a change to other beneficiariesthe discussion. Similarly, on the impact is the organization connected with it? or increased competition may affect anside, public policy is an important tool organization’s financial viability some-for environmental organizations to It is important to note that I am not what less drastically.achieve their mission-related goals, proposing that there needs to be uni-such as protecting wetlands or improv- versal support for an organization’s Analyzing the market won’t, on itsing air and water quality. Regardless of mission or theory of change. However, own, dictate a foolproof strategy for anthe organization, the level of political knowing the importance and level of organization to cope with its changingand social support for an organization’s public support and how it is evolving market. However, understanding howvalues and mission affects its business will provide guidance to leadership the changing market is influencing themodel. in setting organizational strategy. For organization will give leadership an example, if the organization relies sig- idea of how their mission-specific and Nonprofit leadership and staff often nificantly on public funding, it is imper- fund-development activities could bedeeply understand this aspect of the ative that it engage in an appropriate altered to be more responsive to marketmarket; however, they may not take the level of advocacy and perhaps lobbying trends. Some programs may be welltime to articulate their knowledge or of elected officials, either on its own or positioned to seize partnership oppor-educate the board. Holding space for through an association. BoardSource tunities or meet the changing needs ofdiscussion of key questions and review- has an excellent resource, “Stand for constituents, while others may need toing research interviews or survey data Your Mission,” which advises boards be redesigned or even phased out.can bring this aspect of the market to on how to engage in advocacy.7 Thislight and provide context for strategic market analysis discussion will help Exploring each aspect of the marketdecision making. Key questions for dis- the board understand the importance individually can be insightful, butcussion and research include: of this role. putting the segments of the market together to obtain a comprehensive look • Is there public awareness of and Tying It All Together at the forces influencing an organization support for the importance of the yields the most useful information. organization’s mission? Organizational sustainability is an ori- entation, not a destination, because After analyzing each market segment • Has that awareness increased or organizations must continually evolve to individually, leadership can ask the fol- decreased over the last five years? be sustainable. When making strategic lowing questions to prioritize which market aspects are currently impactingS U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​75

NONPROFIT MARKETS their organization’s business model • Yellow: Score 5 to 7, “Bears Watch- Conclusion most (and see Table 4): ing.” These aspects are on the edge, • How quickly is each market compo- perhaps not as high a priority as other Nonprofit organizations are vehicles aspects of the market but they should for community engagement—groups nent changing relative to the others? be watched to understand better how of individuals coming together to • In relative terms, how significantly they may influence the organization’s make their community a better place. business model. However, when it comes to setting strat- would a change impact the organi- egy, leaders often don’t consider all the zation’s sustainability (impact and • Green: Score 2 to 4, “Stable Influ- aspects of the community that influence financial viability)? ence.” These aspects are relatively their ability to achieve the mission but stable and not in need of in-depth instead focus solely on the desires of Table 4: Market Forces monitoring. those who are funding their mission. How How An example follows: To ensure relevance of the organi- Quickly Is Significantly zation to its community, however, the the Market Would Change Total Table 5: Market Forces board’s first priority needs to be those Changing? Impact the whom the organization directly serves. Organization’s With an understanding of the changing Sustainability? needs of this group, the board is better positioned to then explore how all the Direct How How elements of the market influence its Beneficiaries Quickly Is Significantly ability to impact the group. the Market Would Change Other Changing? Impact the Total As communities change, so do the Beneficiaries/ Organization’s 8 markets in which nonprofits operate. Funders Sustainability? 9 Shifting demographics, political and 6 social pressures, and competition and Other Direct 3 5 2 resources require leadership to be con- Organizations Beneficiaries tinually ready to adapt. To do so, leaders 5 must understand not only how their own Inputs/ Other 4 5 programs deliver impact and financial Labor Beneficiaries/ viability but also how the market is influ- Market Funders encing their ability to do so. Political/ Other 2 4 This framework provides a holis- Social Organizations tic method for executives and boards Environment to explore their market and prioritize Inputs/ 1 1 which aspects need strategic attention. Labor Additionally, it sets up a conversation Market about how ready an organization is to change, and whether it truly has the One way to prioritize the relevance Political/ 2 3 capacity to respond to market influ- of different market forces for an orga- Social ences. Having an engaged and com- nization is to rate the speed at which Environment mitted board and staff that reflect and each is changing and the significance represent the organization’s core con- with which each impacts the organiza- For this example, the market wheel stituents can dramatically expedite this tion on a scale of 1 to 5. Leadership can would be color-coded to reflect the process. While it may seem intense, by then compare the results to determine urgency of strategically addressing dif- undertaking a market analysis an orga- which market aspects need immediate, ferent market influences: nization will become both more aware strategic attention. of its position in the community and Market Wheel more empowered to help build a stron- To help depict how strongly each ger one. market aspect is influencing an orga- Political/Social Direct nization’s business model, the market Environment Bene ciaries wheel graphic can be color-coded in the following way: Inputs/ Nonpro t Other • Red: Score 8 to 10, “High Priority.” Labor Market Bene ciaries/ Other These aspects of the organization’s Organizations Funders market are either changing rapidly or having a significant effect on the organization’s business model. They must be addressed when setting strategy. 76 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

A Faster Way—Starting at the End Notes NONPROFIT MARKETSWe warned you—nonprofit markets are complex; and when leadership look holistically at all five segments, 1. John Carver, Boards that Make a Dif-it is easy to feel overwhelmed. So where to start? A faster approach might be to start at the end. ference: A New Design for Leadership in Nonprofit and Public Organizations, 3rd Boards and staff tend to have pretty good instincts from a high-level perspective about what is hap- ed. (San Francisco: Jossey-Bass, 2006).pening in their market. Boards gain understanding through their role as community ambassador, while 2. See Steve Zimmerman and Jeannestaff gain insight from their day-to-day work with constituents and partners. To simplify the process, start Bell, “The Matrix Map: A Powerfulwith the survey on how quickly the market components are changing and how that change would impact Tool for Mission-Focused Nonprof-the organization’s sustainability. A board and staff task force can take the survey and discuss the results. its,” Nonprofit Quarterly, April 1, 2014,Discussion of how individuals scored on the two questions will yield new information and unknown areas for nonprofitquarterly.org /2014/ 04/ 01/theexploration. Lastly, based on perceptions that the survey uncovers, the task force can efficiently prioritize which -matrix-map-a-powerful-tool-for-missionaspect of the market needs exploring first. -focused-nonprofits /. 3. Financing Nonprofits: Putting Theory Market Analysis and the Matrix Map into Practice, ed. Dennis R. YoungThe matrix map is a visual depiction of how an organization’s programs work in concert to deliver excep- (Lanham, MD: AltaMira Press, 2006).tional impact in a financially viable manner.8 By plotting the performance of both mission-specific and 4. Ibid.fund-development programs on the dual bottom line of impact and profitability, leadership can make 5. Peter Frumkin and Suzi Sosa, “Com-strategic decisions in a holistic manner to strengthen the organization’s business model and sustainability. petitive Positioning: Why Knowing Your Competition Is Essential to Social Impact The map reflects a snapshot at a moment in time, but the impact and profitability of programs are Success,” Nonprofit Quarterly, March 20,constantly moving in response to organizational strategy and execution as well as market influences. The 2018, nonprofitquarterly.org/2018/03/20market wheel, showcased in this article, highlights the five segments of the market influencing the map. /competitive-positioning-why-knowing -your-competition-is-essential-to-social The market analysis allows for a deeper understanding of the messages from the matrix map. The shifting -i mpact- success /.of programs over time affects the organization’s sustainability, and the market analysis helps to dissect the 6. Jim Collins, Good to Great and the Socialexternal versus internal causes of the programs’ movement, enabling leadership to make strategic decisions Sectors (New York: HarperCollins, 2005).and adjustments to strengthen the business model. For example, a high-impact job training program may 7. BoardSource, “Stand for Your Mission,”have shifted lower on impact and profitability over the past two years. Using the market wheel framework to boardsource.org/research-critical-issuesexamine relevant influences, leadership may realize that both movements are related to increased competition /stand-mission-advocacy/.from the largest employer in the city starting its own job training program, and therefore a significant portion 8. Zimmerman and Bell, “The Matrix Map.”of the organization’s constituency no longer has this need. However, the need may still exist with a differentpopulation, which means that a refinement of the program could increase impact and secure additional funding. Steve Zimmerman is principal of Spec-Similarly, healthcare-related nonprofits are facing increased pressure from the labor market. By exploring the trum Nonprofit Services, a consulting firmmarket wheel and focusing on the labor market, leadership may realize the importance of continuing to invest based in Milwaukee focused on strength-in retention and development of their nurses as an important strategy for delivering high-impact programs. ening relevant impact and sustainability for nonprofits. He is a frequent conference This exploration can be done first by examining and understanding the market segments and presenter and a consultant on strategythen seeing how those might affect the programs on the matrix map—or, if you have already done development for a diverse set of organiza-the map in the past, revising the map and then exploring which programs are most likely to be influ- tions across the country.enced by market forces. The latter is particularly useful if the programs serve different markets. To comment on this article, write to us The market wheel does not seek to provide a strategic answer but instead offers a systematic at [email protected]. Order reprintsmethod of exploring the external forces shifting key programs. Such analysis allows leadership to ascer- from http://store.nonprofitquarterly.org,tain the severity of those pressures and to identify strategic priorities to strengthen the organization. using code 250211. Market Analysis and Starting a New ProgramSimilar to starting a new organization, every potential new program has its own market. When con-sidering whether an organization should begin a new program, the market wheel can be used toexplore whether there is truly interest and need in the community. The answers to the questionsoffered in each segment begin to build the case for support: What are the needs of the target ben-eficiary? Who else is providing these or similar services with whom the organization will competeor collaborate? Does the organization have the skill set to deliver the program, or will it be able to hirenew staff with those skills? How does this align with the funders’ needs? Answering these ques-tions will help to refine the idea, increasing the likelihood of success for programs that move forward.S U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​77

SOCIAL CHANGE Courageous and Ethical Leadership in a Polarized World by Grant Oliphant The genius of movements like #MeToo, #TimesUp, and #BlackLivesMatter is that while each had its creators and drivers, who spark and tend the flame, no one has really been in charge of making it all happen. That makes such movements messy and unpredictable. But it also gives them their power to change culture. AEditors’ note: This article was first published by NPQ online on May 16, 2018. It is reproduced here with minor changes. n art museum near Pittsburgh mysterious. We are simply being called to to wall off reality and lock us all inside recently lost a major funder live our values. the hellish confines of a warming, pol- over a photography exhibit on luted, xenophobic, strife-torn planet. Centuries ago, a Sufi mystic named immigration. In another era, Hafiz wrote a poem that I think beauti- They manifest in the desire to curry favor the show’s sympathetic images would fully captures the noblest mission of our with white supremacists, mock the suf- have seemed poignant yet unremark- sector: fering of those considered “different,” able, a typically American invitation to The small man builds cages flirt with despotism, and sow intolerance, remember our shared otherness. But in for everyone he knows, divisiveness, and mistrust. They appear today’s context, humanizing immigrants in the facile disavowal of responsibil- and refugees was, for the museum, an act while the sage, who has ity, even as bullying, racism, and hate of courage with material consequences. to duck his head crimes increase; as the climate changes, droughts and disease spread, and sea In this period when even an effort to when the moon is low, levels rise; as yet another group of inno- summon our better angels can invite ret- keeps dropping keys cents is gunned down with military-grade ribution, what does it mean for America’s weapons; as faith in democracy and in nonprofit sector to lead bravely and ethi- all night long each other withers. cally? Like many of us, I have struggled for the beautiful, rowdy prisoners.1 with that question in a time that has felt What struck me when I read that It is tempting, at a time when parti- catastrophic for so much of what we care poem afresh earlier this year is that we sanship is infecting everything, to think about—a more just world, air and water live in a disturbing era of small men. of these cages in purely political terms. we can safely breathe and drink, com- But it also struck me that we live in an But many are broadly cultural and deeply munities designed for everyone, civility era of hopeful liberators, and that, in an familiar. We see this in the small men who and decency, caring across differences, increasingly divided world, the task of mistake dominance for strength and human and civil rights, a free press, courageous leaders in our sector is to be employ their power to harass, control, respect for science and art, and perhaps the providers of keys, to help free others and abuse. We see it in the urge to believe most of all, the sense of collective and ourselves from the cages being built we are only one thing—one identity, responsibility that is the core of every around us. one tribe, one tiny sliver of the human healthy, functioning human society. But They are prisons of small-mindedness, experience, lonely islands of experience I actually don’t think the answer is all that meanness, and fear. They are the impulse without common ground—rather than 78 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

connected and beautifully interwoven. the planetary ecosystems that sustain silencing and intimidating the voices of SOCIAL CHANGE We find it in the fierce defense of a us, undermining our economic future, civil society. I have heard from so many dismantling the trust in self-government leaders who have felt pressure not todeeply unjust status quo, the refusal that protects and empowers us, undoing speak out even though values they con-to consider what we ourselves do not the sense of shared interests that allows sider core to their missions were underexperience—the police stops, poverty, us to see and speak and work with each attack, because the mere act of defend-harassment, and violence that tear away other, and unraveling the threads of com- ing those values has suddenly been madeat hope. We find it in the naked greed that munity that nurture us. political. The only advice I could givepontificates about what society can no them was to speak anyway, and manylonger afford—teachers, parks, libraries, All of that sounds terribly daunting, have. They understood that, for ourhealth care, pensions, safety nets—while and it is. This is a profoundly serious sector, silence is damning.gobbling up ever greater shares of the time. But it is emphatically not a timeworld’s riches. We find it in technology for despair. The role of the courageous That’s why I so profoundly disagreethat preaches disruption and community leader is never to find hope in good with those in our field who dismiss cou-but lines its pockets with the price of our times; it is, rather, to give hope in dif- rageous speech from us as unnecessary.disconnection and the cheap gift of our ficult times. So what does that look like? Equal Justice Initiative’s Bryan Steven-distraction. I want to offer three suggestions that I son rightly says that truth telling must think are especially relevant for us in this come first—including for us.5 It is neither And, if we are wise, we find it in the polarized world. self-indulgent nor tribal nor partisanmirror, in our own anger and righteous- to call out racism and sexism, to fightness, indifference and arrogance, our First, it means we are willing to act in an entrenched cultural belief that theown failure to see what is in front of us. support of the people we serve and the freedom of some depends on the dimin-One of the wisest and most thoughtful values we cherish. When a crisis comes, ishment of others, to publicly stand withquestions I have heard in the past two we do something—rarely the perfect the victims of oppression, or to defendyears was, “How am I this?” thing, but something. As the author science, journalism, and truth itself. Natalie Goldberg has observed, “The only It is such an important question for difference between neurosis and wisdom When we learn not to make ouranyone who aspires to truly meaningful is struggle.”2 Courageous leaders in our actions purely about us, about our ownleadership in bitterly divided times. What field understand that the world does comfort and preservation, we make roomwe inevitably learn in our work is that we not need our neurotic hand-wringing. for what the activist and writer Rebeccaare all the prisoners we seek to free, and It needs our voice, and our authority; it Solnit meant when she commented lastall the oppressors from whom we wish needs us to struggle alongside it. year, “We know what we do. . . . But weto be freed. The work of the courageous don’t know what we do, does.”6 We mayleader starts there, with a hard look at We may often feel like the wrong mes- not ever know the ultimate value of thewhat we bring to the dance. senger. When Pittsburgh’s local daily actions we take when we move from paper ran an editorial on Martin Luther bystanders to contributors. But we can Hafiz wrote his poem some seven King Day excusing the President’s use of be certain that all change comes fromcenturies ago, which tells us something the phrase “s-hole countries,”3 Pittsburgh that shift.about the constancy of oppression. In Foundation President Max King joinedsome ways, all of human history is the me in responding with an unequivocal Second, more than ever before, to be astory of people striving to free them- rebuke.4 We were blasted by white con- courageous and ethical leader in our fieldselves from the cages of inequity, of servatives who said two white men had means that we do with, not for. Hafiz’smindless conformity, of phony nostalgia no right to our perspectives, as if they sage doesn’t open the prison doorsfor times that never were, of hatred for would have found our views more legiti- himself—he merely provides the tools.the different, of shrinking our dreams mate had our skin been darker. In a case It is up to the prisoners to pick them upinto a diminished reality defined by bars like that, it is especially important for and liberate themselves.erected precisely to keep us from ever people in positions of power and privi-realizing our own true potential. lege to step up, to be the unlikely voice Leaders who arrive as saviors strip in the room. the people they would help of power and It is an old story. What makes today agency. They offer a self-aggrandizing liedifferent is that the stakes are so much What I have learned in the past year of external salvation, of rescue, whenhigher. We can neither afford nor toler- is that polarization is a powerful tool for what all of us locked in our cages ofate this any longer. We are destroyingS U M M E R 2 018 • W W W. N P Q M A G . O R G  T H E   N O N P R O F I T   Q U A R T E R LY  ​79

SOCIAL CHANGE doubt and limitation most need is to see networks of networks, persuading thou- 3. Editorial Board, “Reason as racism: our own capacity to find the way out. sands of students and adults to carry An immigration debate gets derailed,” their message of sane gun measures Pittsburgh Post-Gazette, January 15, We never learn what doors we can forward. Where others had felt impotent 2018, www.post-gazette.com/opinion​ open when we let others define our sense in the face of intransigent policymakers /editorials/2018/01/15/Reason-as-racism-An​ of the possible. In a recent interview for who offered only thoughts and prayers, -immigration-debate-gets-derailed/stories​ our podcast We Can Be, Carnegie Mellon they tapped directly into Martin Luther /201801150024. roboticist Illah Nourbakhsh told of King’s “fierce urgency of now.” 4. Grant Oliphant and Maxwell King, “Grant working in a village in Uganda where the Oliphant and Maxwell King: We must face the streets were littered with unused stoves The genius of their nascent move- realities of racism,” Pittsburgh Post-Gazette, provided by a well-meaning philanthropy. ment, and of movements like #MeToo, January 18, 2018, www.post-gazette Asked why the foundation had gotten the #TimesUp, and #BlackLivesMatter, is that .com/opinion/2018/01/18/Grant-Oliphant stove’s design so wrong, he answered, while each had its creators and drivers -and-Maxwell-King-We-must-face-the “Because we’re bigots.”7 who spark and tend the flame, no one -realities-of-racism/stories/201801180013. has really been in charge of making it 5. “Inside the Memorial to Victims of This, at heart, is a failure not just of all happen. That makes them messy and Lynching,” 60 Minutes interview with philanthropy but of our culture. We think unpredictable, but it also gives them their Bryan Stevenson and Oprah Winfrey, we know each other, when in fact we power to change culture. April 27, 2018, www.cbsnews.com/news have stopped listening. Our sector has to /inside-the-memorial-to-victims-of-lynching be the bridge between worlds, between Our sector likes to believe we can -60-minutes-oprah-winfrey/. what we think we know and what other control outcomes. We still live in a world 6. Rebecca Solnit, “Falling Together,” On people really need and want. Bryan Ste- of projects and logic models. But maybe Being, interview by Krista Tippett, Decem- venson describes this as “getting proxi- we need less control and more enabling. ber 14, 2017, onbeing.org/programs/rebecca mate.”8 If our goal is to help or change In a changing world where we expect -solnit-falling-together-dec2017/. someone, he says, we need to know them others to grow and evolve, that seems 7. Illah Nourbakhsh, “R2-D2, Illah & Ethics: first; it is the only way we will ever open like an area where we need to do some How robotics and AI genius Illah Nour- their hearts, or our own. evolving—by becoming more willing to bakhsh was inspired to use his superpowers fund those who do outreach, push for for good,” interview by Grant Oliphant, We As it happens, this is also the first and change, bravely speak truth to power, Can Be, Season 1, Episode 9, podcast audio, most important rule of effective social and engage people we never will. wecanbe.podbean.com/mf/web/s5qsw8 change: we have to start by getting closer /S01E08_Illah_Nourbakhsh180430 and listening and learning. This is the Heinz Award–winner Angela _1429.mp3. only way we can model moving past the Blanchard, who dedicated her career 8. Bryan Stevenson, Just Mercy: A Story of dualism—the divided, us-versus-them to social change in Houston, told me Justice and Redemption (New York: Spiegel view of humanity—that most narrows recently, “We actually do need everyone.” & Grau, 2014). our minds and shrivels our hearts and In an era that seems intent on forgetting 9. Jeremy Heimans and Henry Timms, New perpetuates our pain. that and intent on dividing us, our role Power: How Power Works in Our Hypercon- in the social sector—and, I believe, our nected World—and How to Make It Work for Third, to be a courageous and ethical sacred responsibility—is not to let it. We You (New York: Doubleday, 2018). leader in an era of mind-boggling com- are called to be liberators, sages sowing plexity means that we have to get better a different kind of populism, one that at Grant Oliphant is president of The Heinz at sharing power. Jeremy Heimans and its heart remembers that we are all, truly Endowments. Henry Timms describe a phenomenon and forever, in this together. they call “new power” in their book by To comment on this article, write to us at that name.9 New power is the social Notes [email protected]. Order reprints from change that comes through broad, 1. Hafiz, “Dropping Keys,” The Gift, trans. http://store.nonprofitquarterly.org, using self-organizing movements. It can be ter- Daniel Ladinsky (New York: Penguin code 250212. rifying and unethical. But it can also be a Compass, 1999). powerful force for good. 2. Natalie Goldberg, Long Quiet Highway: Waking Up in America (New York: Bantam, The students at Parkland exemplified 1993). new power, spreading their message in every medium available and, through 80 ​T H E   N O N P R O F I T   Q U A R T E R LY  WWW.NPQMAG.ORG • SUMMER 2018

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