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Why Do Projects Separate from Fiscal Sponsors?

Fiscal Sponsorship Separation Series, Part 1

Welcome to the first post in Schulman Consulting’s “Separation Series” focused on the experience of separating and all that goes into it. We’ve created this series because while there is lots of information available on the legal definitions of fiscal sponsorship and how it technically works, there is not a lot available about specific issues and experiences that fiscally-sponsored projects have and how to deal with them.

Separation. It’s a major decision (maybe THE major decision) in the life of a fiscally-sponsored project. This decision should involve lots of reasoned discussion among leadership, the advisory board (if there is one) and even staff.

But organizations, even if they are under a fiscal sponsor and part of a larger group of nonprofits, often operate in a bubble and it's easy to get caught up in your own world and not have the ability to easily “check” your thoughts, feelings and decisions against what goes on the wider world.

With that in mind, the goal of this post is to help shine a light on some of the major reasons why projects are inclined to separate from their fiscal sponsor. My aim is to give you a sense of what I’ve seen and heard in my experience.

Before we get started, I’d like to put this in the back of your mind: each of these reasons surely have their merits but keep in mind that, in most instances, project leaders should consider all of the implications that separation will have on their organization -- and not just focus on alleviating a single issue.

Ok, let’s go:

Growth

One of the top reasons that I hear from projects is that they have grown beyond the services of their fiscal sponsor. This is usually code for any number of different reasons (We’ll cover the main ones below), but usually it has to do with a) the amount of money that the project is now paying out to its fiscal sponsor and/or b) the level of service it is receiving relative to its needs. Let’s dive into each of these in more detail.

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Fees

Cost is probably the reason that grates on project leaders the most, if only because it's right in their face every month when they review their financial statements. (You ARE reviewing your financial statements each month, right?)

It’s like filling up your gas tank. You go to the gas station and the price blares at you from the big sign in front of the gas station. Then you actually watch the counters spin as the gas goes into your car and you see the exact amount of money that it's costing you. You know you need it, and you’re not really able to control the cost at all (except for saving a few cents by driving to the outskirts of town), but it’s right in your face.

But let’s take a step back.

Your organization likely signed on with its fiscal sponsor to save time and money (especially if you were just starting out or in the early stages of getting your organization off the ground) -- and even though you are forced to see that money going out the door every month, it’s still highly likely that it’s a cost savings over what it would it take for your organization to replace all of those services yourself (more on that coming in a later post).

In some cases, though, if your project is raising millions of dollars annually, it may make sense for you to become an independent organization. I still recommend that you consider the hard costs, in addition to the intangibles and hidden costs of going independent (more to come on these soon).

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It’s Hard to Explain to Donors

This is an offshoot of the “Fees” issue. If it bothers you, as a nonprofit leader, you can bet it’s going to raise some eyebrows from a subset of your donors.

Certain donors (especially individuals) aren’t always quick to grasp the concept of fiscal sponsorship and some may initially be turned off that ~10% of their donation seems like it is going to another organization.

And so it’s incumbent on you and your development team to be able to quickly and simply explain the benefit of being under fiscal sponsorship. This may take some time and energy but it’s worth it.

In fact, many fiscally-sponsored projects use this to their advantage. Depending on your situation, being accepted into fiscal sponsorship by your sponsor can be a stamp of approval and a sign of credibility -- especially for young organizations. Also, having the backing of a larger, more established organization can be a signal to donors that their money is in good hands and is being managed appropriately. But only if you approach it that way.

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Speed of Approvals/Accounting Frustrations/Customer Service Issues

These are all symptoms of the same issue -- a disconnect between what you (as a project leader) expect and what your fiscal sponsor is providing.

These customer service type issues can take any number of forms, but they are usually focused on speed (or lack thereof) or repetitive occurrences of the same issue.  Let me explain.

When it comes to speed, it's almost inevitable that you’ll want to move faster than your fiscal sponsor. Whether it’s reviewing/approving contracts, or approving check/purchase requests, things just move more quickly and in less predictable ways for smaller or newer organizations (your project) than for larger, more established ones (your fiscal sponsor).

This doesn’t make it any less frustrating for you. So here’s how it plays out: you need to sign a vendor contract for an event that’s happening next week and your fiscal sponsor promises to review all contracts within 5 business days. So, you tell them the situation and ask politely for an expedited review. Then you nudge politely. Then a little less politely. And finally you go into all out stalking mode to get a signature. I’ve been there -- it’s not fun. In most cases, the fiscal sponsor is doing the best they can under the circumstances, but it still may not satisfy you.

And unfortunately, depending on your fiscal sponsor’s size and policies, you may run into this again and again -- and there may be no real way around it -- except for lengthening your timelines to allow more time for reviews and approvals.

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Need for Specialized Services

In rare cases, as your project grows and evolves, you may require some specialized services that your fiscal sponsor is just not equipped, or willing, to provide. This could be a technology or technical solution, a specialized insurance policy, extremely technical nuances in your accounting or something else altogether.

In most cases, fiscal sponsors are serving a number of different projects -- it could be as few as a handful or as many as several hundred or more -- and so they are looking to provide the services that most or all of their projects can utilize. This helps them amortize the cost of that service across the largest number of recipients. That’s how your sponsor is able to get better rates for employee benefits, corporate insurance, and sometimes even online donation processing.

But that’s also why they’re not always able to fulfill every request or tackle problems that only affect your project. Usually fiscal sponsors will try to do what they can -- looking for workarounds or alternative solutions -- but sometimes, there just isn’t a viable solution.

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The Relationship Sours

This can be a by-product of some of the reasons listed above, but occasionally, over time (months or years), the relationship between your organization and your fiscal sponsor can go bad.

This is unfortunate, as both parties are usually want the same thing (for your project to be successful) but sometimes personalities, past disagreements or other issues can get in the way.

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To sum things up, there are any number of reasons why fiscally-sponsored projects end up separating from their sponsor. Hopefully this post gives you a sense of what those are and how to recognize them, along with an understanding that other projects under other fiscal sponsors  are having the same issues. If you’re considering separating from your fiscal sponsor, please reach out to us so we can review your situation and provide you with objective, experienced feedback.

If you’re currently a leader of a fiscally-sponsored project or of an independent nonprofit that’s gone through the separation process, which of these resonate with your experience? What other issues have you encountered? Please share your experiences by leaving a comment below.

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Next Up: Now that you understand “the Whys” let’s talk about what’s actually involved with the separation process. Click here for next post in this series.
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