Where Does $100 to Operation Smile Go (2018)?

Operation Smile is a non-profit tax-exempt 501 (c) (3) that provides corrective surgery to children and young adults in developing countries who are born with cleft lip, cleft palate or other facial deformities.

Established in 1982, Operation Smile was founded by Dr. William MaGee,Jr.  (a dentist and plastic and craniofacial surgeon) who serves as the organization’s Chief Executive Officer and his wife Kathleen McGee, who serves as the organization’s President. Their daughter, Kristie Porcaro also serves as the SVP of US and Global Philanthropy of Operation Smile.

The bottom line is that Operation Smile raised about $70 million in 2017-2018, spent about $60 million (leaving $10 million to add to the general fund which some refer to as the endowment), and had $38 million in net assets (again, which is often referred to as the endowment) at year-end (June 30, 2018). Specific financial information is summarized as follows:

The IRS Form 990 (2017) for the year ending June 30, 2018 reveals the organization collected $73.4 million, most of which were contributions, including $2.4 million of non-cash contributions (primarily drugs and medical supplies).

Operation Smile spent $63 million or 86% of revenue on expenses, which can be viewed two ways:  by broad general category (i.e. grants, program services, management and general expenses, and fundraising) or by specific line item expense (i.e. compensation, office-related expenses, fees for services, travel and conferences, etc) with the latter approach providing more detail on how revenue was actually spent.

Expenses by Broad General Category

The $63 million in expenses were categorized as follows:

• $31 million (42% of revenue):  Program Services
• $ 5 million (7% of revenue):  Grants (primarily to foreign organizations, gov’t, and individuals)
• $19 million (26% of revenue):  Fundraising
• $ 8 million (11% of revenue):  Management and General Expenses

Using the above information, every $100 in revenue was spent as follows:

$100:  Revenue

-$ 26:   Fundraising Costs

-$ 11:    Management Costs

 $ 37:    Subtotal Fundraising and Management Costs

 $ 63:   Amount Remaining

-$ 42:   Program Services

-$  7:  Grants

-$ 49:  Subtotal Program Services and Grants

 $  14:  Revenue Remaining:  To Fund Balance

In order to fully understand how revenue is spent, the expenses need to be analyzed outside of the broad classifications of program, management, and fundraising because within the three categories are expenses that may not be direct program expenses. For instance, $21 million was spent on “public awareness” and $2.3 million in fees for services with no detail provided.  So, another way to look at the way $100 was spent is to look at the specific line item expense categories.

Expenses by Specific Line Item Category

The $63 million in expenses were categorized as follows:

• $24 million (33% of revenue):  Advertising and Promotion/Public Awareness
• $13 million (18% of revenue):  Compensation
• $ 5 million (7% of revenue):  Grants (primarily to foreign organizations, gov’t, and individuals)
• $ 5 million (7% of revenue):  Mission Supplies
• $ 5 million (7% of revenue):  Travel and Conferences
• $ 4 million (5% of revenue):  Office-related Expenses
• $ 4 million (5% of revenue):  Fees for Services (primarily professional fees and other fees)
• $ 3 million (4% of revenue):  Other Expenses

As illustrated above, the largest expense for Operation Smile is advertising and promotion/public awareness. $24 million was spent in this category, which represents 33% of revenue.  The second largest expense was compensation. 191 employees were compensated $13 million, which equates to an average compensation of $68,000. 15 employees received more than $100,000 in compensation including the President, William P McGee, Jr ($497,574) and his daughter, Kristie Porcaro, SVP US and Global Philanthropy ($205,934).

Fees for services ($4 million) – primarily professional fees and other fees are not detailed on the Form 990. However, the Form 990 does report that 16 organizations received more than $100,000 in compensation with the five most highly compensated being:

• $1,000,000:  Community Counseling Services of New York, NY for consulting
• $700,000:  One and All, Inc. of Pasadena, CA for fundraising counsel
• $700,000:  MDS Communications Group of Mesa, AZ for telefundraising services
• $500,000:  Merkle Response Services of Hagerstown, MD for Keying and Caging
• $400,000:  Blackbaud of Atlanta, Georgia for consulting

Operation Smile attributes $34 million in revenue to One and All, Inc.  MDS Communications Group raised $1.5 million in revenue but retained $750,000 (note:  this number is higher than the number listed above) leaving $750,000 for Operation Smile (note:  donors who want their charitable dollars to go further with Operation Smile should not respond to tele fundraisers and instead donate directly to the organization.  Merkle Response is attributed with raising $1.3 million for which they retained $150,000  leaving $1.2 million to Operation Smile.  They also paid nearly $100,000 to APPCO for marketing services.

Using the above information, every $100 in revenue was spent as follows:

$ 100:  Contribution

-$ 33:   Public Awareness, Advertising, and Promotion

-$ 18:   Compensation

-$  7:   Grants

-$  7:   Mission Supplies

-$  7:   Travel

-$  5:  Office Expenses

-$  5:  Fees for Services

-$  4:  Other Expenses 

-$ 86:  Total Expenses

$ 14:  Remaining Revenue:  To General Fund

As illustrated above, $33 out of every $100 was spent on public awareness, advertising, and promotion. Compensation, office expenses, fees for services and other expenses used up $32 of every $100.  Grants, mission supplies and travel used $21 out of every $100.

The IRS Form 990 (2015) also reveals the following:

Operation Smile pays for first class travel. Specifically, the organization allows for upgrades to business or first class air travel in limited circumstance for the CEO, President, COO, Chief Medical Officer Chief Program Strategist, Senior Vice President of Logistics, Strategic Initiatives and Development Directors. Upgradeable fares may only be purchased if travel is more than 5 hours domestically, business class fares for more than 8 hours internationally for the positions above. When possible upgrades are paid for with airline points. In addition, employees are allowed to travel business class if business fares are lower than coach or there is a medical necessity.

In summation, Operation Smile spends heavily on public awareness, advertising, and promotion with $33 out of every $100 spent in these areas.  In fact, more revenue is spent on public awareness, advertising, and promotion than on compensation, travel, and medical supplies. If expenses are viewed simply as program, management and general expenses, and fundraising, less than half of revenue was spent on program expenses (including grants to foreign organizations, governments, and individuals).  Fundraising and management and general expenses used up $37 out of every $100 in revenue. Operation Smile increased their fund balance by $10 million in 2018 by not spending as much as they raised.

To read the IRS Form (2017) for the year ending June 30, 2018, click here.