When is a trend really a trend?
Too often, in philanthropy (and maybe just in life), we fall prey to believing something is a trend based on rhetoric and talk, rather than actual data about what is happening.
Here’s an example: Many have suggested that there is an increasing emphasis on earned revenue in the nonprofit sector – and that there has been an increase in earned revenue as a funding source for nonprofits. A year or two ago, I sat in on a presentation in which the speaker said, with authority, that “the rise of earned revenue” in recent years was evidence of the “blurring of the boundaries between the sectors.”
He said it as if it was an undisputable fact we all knew.
I have no doubt that the speaker very much wanted what he said to be true, and maybe he even thought it was. But, the problem is, it isn’t.
The facts are, there is nothing new about earned revenue in the nonprofit sector (think Goodwill or hospitals or universities), and there is no data I have seen to support the contention that it is on the rise as a proportion of total revenue.
William Foster and Jeff Bradach of Bridgespan pointed this out in a very thoughtful Harvard Business Review article in 2005, noting that the data didn’t support the assertion that earned revenue was increasing as a proportion of total nonprofit revenue. I wondered whether that was still the case, so I checked with the Urban Institute’s National Center for Charitable Statistics. The folks there ran the numbers for me on what the IRS calls Program Service Revenue – the best proxy for earned revenue on the form 990.
What the most recent available data shows is that Program Service Revenue has remained steady, as a proportion of total revenue, between 1991 and 2008. It represented around 70 percent of total nonprofit revenue in 2008, just as it did in 1991. (Yes, of course, it has increased in absolute dollars, but then so has contributed revenue.)
Breaking it down further reveals that Medicare and Medicaid payments make up a much larger share than was the case a decade ago, while “other” revenue – which would include the kind of earned revenue that the speaker who was touting an increase was referring to – has declined as a proportion of total Program Share Revenue.
On the organization level, fewer of the nonprofits filing 990s are reporting any Program Service Revenue. That number has actually dropped slightly – from 57 percent of organizations in 1991 to 51 percent in 2008.
So, no matter how you slice it, it’s pretty hard to support the case that earned revenue has taken on a more important role in the nonprofit revenue story. This is just one example of the phenomenon (is it a trend?) in which a trend is proclaimed on the basis of talk on the conference circuit or articles and blog posts – rather than on the basis of actual data about actual practice.
Another example is the provision of general operating support, as my colleague Andy Brock has noted on this blog. While there has been much written and said about the importance of the provision of general operating support to nonprofits, both CEP’s data and Foundation Center’s suggest that, if anything, the trend is in the opposite direction. Another “trend” that is often over-stated is the focus by funders on building the capacity of nonprofits, as we discussed in our 2008 report, More Than Money: Making a Difference with Assistance Beyond the Grant.
The fact that we can point to a few, high-profile examples of something happening doesn’t mean there is a broad or widespread trend.
Our desire for something to be true, or to position ourselves as the chroniclers of a trend, does not make it true. It’s a disservice to everyone in the sector when the media, consultants, or academics ignore the data to overstate a case – or to create one out of whole cloth.
As John Adams said, “Facts are stubborn things.” And, as Chuck D. said, “Don’t believe the hype.”
I remain hopeful that the debates and discussions in the sector and in philanthropy can be more informed by facts and data in the future than they are today.
That’s a trend that is in our collective power to create.
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Interesting and useful post – thanks. I wonder what happens to the earned revenue trends if you filter out the sectors where it seems to play a larger role (I’m thinking hospitals, for instance). Similarly, I wonder if there are any specific sectors within the nonprofit world where earned revenue is actually playing an increasing role in the overall revenue picture even if overall the trend is flat. If you have a chance to probe the data in those kinds of ways, I’d love to know what you find.
Jacob, Great question. Urban Institute breaks out the data by broad organization type: Arts, Culture & Humanities; Education; Health; Human Services; Other. There’s a slight dip over time in earned revenue as a proportion of total revenue in education (from 59 percent to 51) and a slight uptick in Human Services (from 46 percent to 52). I’ll ask the folks at Urban if they have anything to add, but I don’t think there’s much of a story at the sector level either — at least not to be seen in the data I have reviewed. Happy also to email you what Urban provided me. Thanks for the comment and question.
Phil, always enjoyable to read your posts that take some of the hot air out of our sector’s hype balloon.
Interesting that for all the talk of earned revenue, that it remains just that, talk. My larger worry is that general operating support continues to remain elusive. It seems that everywhere I turn, “capacity-building” grants are falling off of trees (so to speak), but if that too is hype, then I worry that nonprofit sector will remain mired in the starvation cycle (SSIR article, which I’m sure you’re familiar with) indefinitely.
Since I first began working in the non-profit sector in 1982 I have found myself at odds with other ED’s who believed non-profits could not make a “profit”. Call it by any name, and I have heard a few interesting examples, Net Net Revenue, but an emphasis on earned income helps define the sustainability mindset of the organization and its desire to move beyond dependency. Only when we can measure a significant change in the existing attitudes of Execs and Boards about generating revenue by “earning it” will we to see any move for a trend with “earned revenues”. One measure of the continuing desire to hold on to the past are the advertisements for Development Directors who can write grants, with no emphasis on finding ways to generate revenues through other means.
James, I think the point is that, in fact, earned revenue represents the bulk of nonprofit revenue and that this is not a new development. Also, there is a big difference between revenue and profit (or revenue that makes a positive contribution after fully allocated costs, which is a more accurate, if inelegant, way to describe it in this sector).
Many colleges, for example, charge tuition that doesn’t cover the full costs of attendance — which are then subsidized by endowment income or annual gifts. So there is earned revenue, but it doesn’t, by itself, generate a positive economic contribution.
The Bridgespan article makes the important point that many nonprofits should not be chasing earned revenue, and I’d agree. I’d argue that it’s all very dependent on the goals, strategies, and contexts of individual nonprofits. There isn’t one right answer.
Here at CEP, earned revenue is about 55 percent of total revenue. Is that going to be a viable revenue mix for the homeless shelter down the street from us? Not likely.
Thanks for your comment.
Marc, Sorry to be late in replying to your comment … but I think your concerns are warranted. I do think we see some evidence of positive change in foundation practices (more on this in a few weeks), but not yet with respect to general operating support — and it’s often not being provided in the ways that make a difference (multi-year, six figure). Also, our research on assistance beyond the grant showed that some funders are doing this very well, but they’re much more the exceptions than the rule.
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