One of the core lessons of financial markets is that you can only increase returns by increasing risk (you can be more talented than other people at any given level of risk, but the level of risk is the primary determinate of long term returns). I’ve been talking for a long time about why the social sector needs to embrace the idea that only people that run the risk of failure (and therefore fail sometimes) can achieve greatness.
Here’s video proof:
Recently, the GiveWell blog looked at how individuals are by far the biggest philanthropists in the United States. Total annual giving from foundations pales in comparison to donations by individuals. Depending on how you slice it, well over 80% of giving comes from individuals.
This fact was a driving force behind the creation of the philanthropic services platform at my firm Ensemble Capital Management. The way that the chart shown on the GiveWell site is designed, “individuals” and “bequests” become proxies for “non-institutions”. However, they are actually just “non-structured” giving. With donor advised funds, private foundations and charitable remainder trusts (a potential replacement vehicle for bequests) becoming available to smaller and smaller donors, I believe we’ll see a huge decrease in “individual” giving as defined by the statisticians. But we’ll actually being seeing a rapid increase in the use of sophisticated giving techniques by individual donors.
This doesn’t just matter to me (as an advisor to these donors) it matters to the whole field of philanthropy and by extension to the social sector because these “non-institutional” donors are our field’s “low hanging fruit.” Recently marketing guru Seth Godin commented on the magic of low hanging fruit:
Imagine that half the cars in the US get 10 miles per gallon. And half get 40 miles per gallon. Further stipulate that all cars are driven the same number of miles per year.Now, you get one wish. You can give every low-mileage car a new set of spark plugs that will increase fuel efficiency by 5 mpg, up to 15. Or you can replace every 40 mpg car with a car that gets 75 mpg, an increase of 35 miles for every gallon driven.
Which is better?
It turns out that the 5 mpg increase is far better for overall mileage than the 35 mpg increase, even though it’s smaller both as a percentage and absolutely. That’s because the 10 mpg hogs use up so much gas. They’re the low-hanging fruit, not just easy to fix, but worth fixing.
As marketers, we’re tempted to tweak the already tweaked, to turn the 100 to 101, to optimize for the peak performances. That long tail is very long, though, and if there’s a way you can raise the floor (instead of just focusing on the ceiling) you may be surprised to discover that it can have a huge impact.
I love to try to “tweak the already tweaked, to turn the 100 to 101, to optimize for the peak performances.” But frankly I think that philanthropy is such a deeply inefficient market that we can make great headway as a field by simply working on the basics.
The Big Give (not to be confused with Oprah’s Big Give television show) is an interesting UK based website that allows donors to search for projects to fund. Much like a stock screening tool (which lets you look for stocks to buy that fit your criteria), The Big Give lets donors “screen” projects based on size of gift, charitable “sector”, geographic location and beneficiaries. The site is a good example of the type of tool that I think will become the leading way that donors of all size will find the nonprofits they support. See the column I wrote for the Financial Times that looked at philanthropy in the year 2033 for more details.
Tactical Philanthropy reader Jon Brooks is Managing Director of The Big Give. Rather than explain the site myself, I thought I’d let Jon take the floor. (FYI: Jon sent me a note about The Big Give after I suggested that most foundations should stop accepting most grant requests and instead proactively seek out grantees. At the time, I said that being deluged by grant requested “sounds like spam to me.” So one way to think of The Big Give is as anti-spam software for your foundation!)
In 2007 the UK-based Reed Foundation was struggling to find quality funding proposals for its £1m/year grants. Unsolicited requests were never appropriate and seemed a waste of valuable charity resources.With no paid members of staff, processing requests also used valuable foundation resources. Promoting the foundation’s need for quality proposals (e.g. through a website/marketing) would have only led to more administration work for both charities and the foundation.
We felt the most suitable solution was an online database of charity projects, and so developed The Big Give. UK charities upload and categorize their own projects - remaining responsible for all content - which allows the Reed Foundation to filter by various factors. Once we have a short-list of projects, we can contact the charity to discuss their proposal in more detail.
The beauty of the web is that we can share The Big Give with other donors looking for new projects. The site is free, and users remain anonymous until they decide to contact the charity. With over 4,500 charities registered, we do not carry out in-depth due diligence. Instead, we provide links to third party websites - such as the Charity Commission - to make it easy for donors to research potential charities to a level that suits their needs.
An example:
In 2007, the Reed Foundation trustees wanted to consider a £100k donation to rainforests. Other websites provided limited information on the work each rainforest charity did, and the charities’ own websites concentrated on the £5/month donors. The only way to find out if a charity could provide us with an interesting project was to ask - and that led to face-to-face meetings, offers to tailor projects to our needs, and so on.
With The Big Give, we are able to search for rainforest projects at £100k and have a short-list of concrete proposals within seconds. Only when we have selected the best ideas and checked the accounts of the charity behind the project do we meet with the charity.
My personal story:
As happens at many small foundations, I worked on the Reed Foundation alongside a full-time job within the Reed recruitment company. As the idea for The Big Give developed, I spent more time on the project and went full-time with The Big Give in August 2007. The website launched to charities in October 2008, and we are now looking at how to make The Big Give relevant to all charity donors.
Steven Mayer is one of the people behind the Pathways to Progress website, dedicated to social justice philanthropy. Albert Ruesga wrote recently that “metrics based” philanthropy and “social justice” philanthropy are often viewed as two warring camps. But Albert suggested that in fact, “We fail to appreciate how closely united these two camps are in their rejection of philanthropy as usual.”
Today I want to highlight a recent essay by Steven Mayer that I think shows an approach to metrics that has the potential to bridge the divide between “metrics” and “social justice”. Because of the way Steven frames his approach to evaluation, I think he even presents a way to think about these issues that bridge the gap between the participants in the philanthrocapitalism debate.
Steve Mayer:
Our website JustPhilanthropy.org presents many productive avenues for pursuing social justice using the resources of philanthropy. Funders, nonprofits, and potential donors exploring these options frequently ask, “How can we evaluate these efforts?”Needed: useful evaluation questions
“What is being achieved through this effort?” and “What kind of results are you getting?” are worthwhile questions that must be addressed to be fair to those who support this work. But demands for “measurable impact” and “outcome measures” are inappropriately placed on separate, local efforts; they apply more to the bigger picture, the picture indicated by disparities data. This is not to avoid the questions, but instead to find better ways of answering them. More satisfying data that inform next steps, stimulate innovation, engage participating stakeholders, and make better use of scarce philanthropic capital would come from asking for “evidence of progress” or even “early signs of impact.”
Think courtroom, not science
To appreciate these better questions, try this mental exercise: assume the program you support or operate has been accused of being trivial or ineffective, doing nothing to reduce disparities or improve social justice. What evidence could you provide in its defense? Think of a parade of witnesses testifying from their unique expertise, vantage point, experience, and vested interest. What “portfolio of evidence” could make a case good enough to persuade a jury of peers that this work, when considered in context, is useful and necessary for closing a key disparity?
No less rigorous or accountableAsking for “evidence of progress” is by no means a diminished demand for rigor. Instead, it frames evaluation in more familiar and approachable terms. Data of all kinds can be considered — numbers, stories, graphs, pictures, records, opinions, artifacts, etc. There is no single “measure” that communicates effectiveness or truth, just as in a courtroom no single witness provides all the testimony. In a court, multiple lines of evidence are entered and judged on their merits, resulting in conclusions that stand tests of credibility and accountability.
I’ve seen lots of frameworks borrowed from different disciplines in an attempt to find a good way to evaluate the effectiveness of nonprofits and philanthropy. I even once suggested that we should turn to movie critics as a model of how evaluation should be performed. But I think that Steven’s court room framework is elegantly simple and captures the way I think of evaluation and impact analysis better than I have ever been able to describe.
The fact is, I think that the best way to evaluate the social sector is via a system similar to investment research on publicly traded stocks. But to most people, this is an alien system that they incorrectly believe is concerned only with quantitative evidence. In actuality, stock market analysis is much more like the idea that Steven presents, “Data of all kinds can be considered — numbers, stories, graphs,
pictures, records, opinions, artifacts, etc. There is no single
“measure” that communicates [the potential of an investment idea].” But most people do understand that in court rooms all sort of evidence is presented and evaluated as a composite whole.
Steven’s framework is brilliant. The one point I would make (I think Steven would agree although he doesn’t make this point explicitly) is that in the court room things musted be proved “beyond a reasonable doubt.” This makes sense because the ramifications for deciding incorrectly are very high. But in the nonprofit/philanthropy world, we simply need to get to a point where it can generally be agreed that some funding opportunities are better than others.
Bravo Steven!
My recent column in the Financial Times has sparked the biggest response of my year old career as a newspaper columnist. I’ve gotten a ton of email, comments and the Chronicle of Philanthropy featured the column in Philanthropy Today. The response (of people who have contacted me directly) has been overwhelmingly positive. But I hear through the grapevine of at least a couple prominent people who don’t like the column. I’d love to hear any negative feedback that’s floating around our there.
I would like to clarify something in the column that I think deserves further attention (I only get 800 words in the Financial Times, so I have to leave out some points). In the column I say that donors do not understand how social impact is created (they tend to think it is the money they give, so they want to eliminate nonprofit costs, instead of recognizing that it is what the nonprofit does with their money that creates impact). I then state that for-profit investors have a better understanding than donors do of how the input of money (an investment or a donation) is transformed into an output (profit or social impact).
Here’s the important point that I hope is implicit in my column, but that I want to make explicit: for-profit investors and donors are the same people! I’m not suggesting that “for-profit investors” are smarter than philanthropists. I’m saying that when most people put their donor hat on, they also put on some bizarre kind of glasses that make them see the nonprofit world in a completely dysfunctional way. Instead of seeing nonprofits as firms that create value, the way we see for-profit organizations, they see nonprofits as bureaucratic entities that destroy the value of our donation as it travels from us to the “cause” we hope to support. It is only through this Alice in Wonderland looking-glass approach to understanding the social sector that we could possibly justify underpaying nonprofit employees, demanding that nonprofits only spend our donations on their “program”, and worry intensely about “overhead expenses.”
But I am not in the least suggesting that “business people” or “investors” have a better approach. Business people and investors are donors too and they view the nonprofit sector just as bizarrely as other donors. My discussion of how investors understand that for-profits are organizations that produce value is meant as a template for understanding how donors should view nonprofits as organizations that produce value. My additional point is that many of the behaviors that for-profit firms exhibit in their pursuit of maximizing value production (Handsomely rewarding employees in order to attract the best, for instance) are viewed as scandalous in the nonprofit sector.
In February I wrote about Tactical Philanthropy reader Teri Behrens (director of evaluation at W.K. Kellogg Foundation), new project The Foundation Review. Said Teri at the time:
I am very excited about this new venture because I believe the time is ripe for a peer-reviewed publication that will provide practical information about what works — and doesn’t work — in foundation-funded programs.
Articles submitted for the first issue (Comprehensive Community Change), planned for December 2008 publication, are out for peer review now. Teri has issued a call for papers for issue 2 & 3. Click here to get the details on how to submit your own paper.
I asked Teri why she thinks The Foundation Review is needed and she provided the answers below:
* Philanthropy is increasingly becoming recognized as a profession in its own right. A peer reviewed journal is a key mechanism for building the knowledge base of the profession.* There is increasing demand for transparency about the workings and results of foundations.
* Anyone who works in philanthropy can point to stacks of technical reports about the field of philanthropy (e.g., those published by Grantmakers for Effective Organizations and Foundation Strategies Group), and about the results accomplished by philanthropy (which are usually published by the foundations themselves). With no central place in which to publish these reports, retrieval and use of the information challenging at best.
* Existing disciplinary based peer reviewed journals may occasionally include articles on topics related to foundations, but they require a style of writing (e.g., an extensive literature review) that is not compatible with the way the sector works.
* Although much of what is published on the results of philanthropic work is written by external consultants — such as evaluation consultants — these consultants also may not have incentives or funding to enable them to spend time writing for peer reviewed publications. Further, disciplinary based journals may not be receptive to articles that report on the broader, community based issues that are generally of interest to foundations.
In December of last year I wrote about the growth capital fund being raised by the Edna McConnell Clark Foundation. At the time excerpted a description from a Stephanie Strom article in the New York Times.
A New York foundation that focuses largely on opportunities for low-income youths is creating a fund to help charities become bigger and more efficient.
The institution, the Edna McConnell Clark Foundation, has committed $39 million to the fund and attracted $49 million more from other foundations and individuals, putting it well on its way to achieving its goal of raising $120 million by June…
Yesterday I received an update from Nancy Roob, the CEO of the EMCF (below). I think the key reasons I am excited about this deal is that EMCF believes 1) “we need to explore and test better ways of financing high-performing organizations”, 2) that they are getting co-investors to “fund the same business plan”, 3) that their choice of organizations to fund is based on impact, and 4) that they are committed to “sharing learning”. These are some of the critical themes I have been writing about and that need to be investigated for philanthropic capital markets to come of age.
Bravo to Edna McConnell Clark and their co-investors!
I am extremely pleased to report that, as of June 26, 2008, we and our grantees have succeeded in achieving our goal of raising $120 million for these three organizations.
The grantees and the individual goals they have met are:
1. Nurse-Family Partnership, which has administered for 30 years a scientifically validated home-visitation program that improves the health, development and, eventually, the economic self-sufficiency of children born to first-time, low-income families ($50 million).
2. Youth Villages, which conducts cost-effective, evidence-based interventions, such as multi-systemic therapy, that help youth involved in the juvenile justice and foster care systems stay in or return to their homes ($40 million).
3. Citizen Schools, which improves the academic performance and high-school readiness of low-income, middle-school-age youth by providing rigorous academic support, leadership development, and hands-on learning projects led by volunteer “citizen teachers” and trained staff during after school hours ($30 million).
Of the $120 million total, EMCF trustees committed $39 million. We have been joined by [19 other investors].
Although reaching this goal is significant, it does not represent an end in and of itself. All three organizations will need to continue to raise significant amounts of renewable, reliable private and public funding to execute their growth strategies and achieve long-term sustainability. It is our belief that this initial infusion of $120 million in up-front growth capital will lay the groundwork and pave the way for additional investment and support by others.
We at the Edna McConnell Clark Foundation are most excited about the unprecedented nature and structure of these coordinated co-investments. These are three separately syndicated deals and our partners have joined us in investments of their choosing. What all three agreements have in common is that, in addition to financial support, co-investors have made a commitment to the same set of practices and protocols:
• Funding the same business plan. Grantees developed multi-year business plans with clear performance metrics and a road map showing how an infusion of up-front growth capital from the private sector could lead to longer-term financial sustainability, including new and increased public funding.
• Agreeing to the same terms and conditions for investment. Every investor has agreed to sign a memorandum of understanding that aligns the terms and conditions for each investment. Co-investors will meet as a group quarterly with grantee leadership to review performance. A critical goal here is easing the habitual reporting burden for grantee organizations.
• Adopting a performance-based approach to payout. A common payout schedule is part of the terms of investment and requires that grantees achieve key performance milestones and develop longer-term financing mechanisms at the pace their business plans call for. This should ensure that growth capital is drawn down wisely.
• Ensuring an effective exit. Raising up-front growth capital and spending it down over several years while other reliable and renewable funding streams kick in should ensure that co-investors will be able to exit responsibly and effectively. Although some co-investors may choose at a later date to fund another phase of growth, for now these deals are structured so that all parties involved can exit at their conclusion. Most co-investors, including EMCF, view our commitments as one-time in nature.
• Sharing learning. All co-investors are committed to learning together and being transparent with each other and the public about the pluses and minuses of this syndication model.
The Edna McConnell Clark Foundation’s role in this effort is different from anything we have done before. Although we will not directly manage other funders’ money (all funds flow from individual investors to the grantee), we are responsible for coordinating investor activities, organizing quarterly reports and meetings, and ensuring transparency and information flow between investors and grantees. This role significantly raises the bar for the Foundation in terms of our accountability to our funding partners, our grantees and ourselves.We launched this pilot initiative because we knew we could no longer “go it alone” if we wanted to finance more effectively over the long run our most promising grantees. We also believe that, on behalf of our philanthropic and other colleagues in the field of youth development who are striving to solve at sufficient scale some of our nation’s most intractable social problems, we need to explore and test better ways of financing high-performing organizations with the potential to change dramatically the life trajectories of greater numbers of economically disadvantaged youth.
Flaw #9 from the Project Streamline report:
More than 80 percent of the grantmakers who responded to our survey reported that they have taken steps to make their information gathering practices “more efficient and streamlined for nonprofit applicants.”
…Many streamlining strategies have turned out to be useful to foundations and their grantees. Yet others, notably online applications and common grant applications, have produced mixed results, creating new issues for grantmakers and grantseekers alike.
…Common grantmaking forms for application and reporting (here, generically referred to as CGAs), which provide a single set of application and/or reporting questions that a substantial number of funders in a region (or funding area) will accept, have seemed like a logical time and resource saving tool for philanthropy. Yet our research found surprisingly little support for common grantmaking forms as a strategy for effective streamlining. CGAs are accepted (or, much less frequently, required) by 34 percent of foundations that responded to our survey.
Common grant applications is one of those ideas that make so much sense on the surface. But then I think about how any investment manager would reject the concept of having a standard template of information on which to base their decisions. Every person has at least slightly different criteria for making an investment or grantmaking decision.
But investors do have a very important infrastructure in place that philanthropy lacks. Investors in publicly traded markets know that every company will file their financials with the SEC. Unlike nonprofits’ 990s, SEC filings are not documents focused on compliance and IRS driven issues. SEC documents are designed to inform investors (the recent changes to the 990 did move them in this direction). In addition, companies host quarterly conference calls to discuss their business. While every investor has their own criteria for investing, they have a common set of information they can obtain about any company.
But here’s the critical difference. A common grant application means that there is a standard set of information that nonprofits can send to funders. In the stock market, the common set of information is available for investors to go get. This switch from passive receiving of information to proactively going out to find what you want is one of the core changes that the internet (and especially web 2.0) bring to the world. A common grant application misses the whole value of the internet. Instead of having nonprofits fill out and submit lots of grant applications, why don’t they just post a single set of common information for any funder to download? The 990 could serve this purpose, but why should funders let the IRS dictate what information is important? Why can’t the philanthropic community design their own “impact report” template that every nonprofit could complete and keep updated? (I asked Brian Gallagher, CEO of United Way of American, this question in a recent podcast.)
Personally I think that most funders should do away with even accepting most grant requests. I think it would be boring to be deluged with requests, most of which I wasn’t interested in. Sounds like spam to me. I’m much more interested in proactively identifying and researching the investments (for-profit or nonprofit) that I am interested in. It sure would help if I could pull up good information about nonprofits on Google Finance the same way I can pull up good information on stocks!
Update: I should be more clear when I say foundations should not accept grant applications. What I believe is that the system of philanthropy should switch from a system of where nonprofits ask for money to one where funders proactively seek out grantees. I layed this thesis out in a Financial Times column earlier this year. But within the current context, I realize there are ramifications if a single foundation stops accepting requests.
Flaw #8 from the Project Streamline report:
Since it is difficult to determine exactly what is needed for due diligence (and since the list regularly changes), grantmakers tend to play it safe at the recommendation of their legal and financial advisors, requiring redundant and often unnecessary documentation from grantseekers. According to one foundation focus group participant, the foundation’s auditors give such confusing and contradictory advice that “we just make everyone go through the same process just in case, even though it seems like a waste of time for some of these grants.”For example, the Tax Determination Letter—the original letter from the Internal Revenue Service (IRS), establishing an organization’s tax status—does not prove that the organization is still in good standing with the IRS. The only real way for grantmakers to verify an organization’s standing is to research the nonprofit before each payment to be sure that the letter has not been rescinded. The IRS suggests that granting organizations either access the Business Master File (a file that is updated monthly) from the IRS, or rely on a third-party (such as GuideStar’s Charity Check) to verify that the organization remains in good standing. However, most grantmakers, often at the insistence of their legal and/or financial counsel, continue to collect the Tax Determination Letter for each grant request.
“I know that we could stop asking for the IRS letter, and could use a system like GuideStar. However, our auditors ask for the tax letter to be in each file!”
—Grantmaker
I’m an advisor to foundations and other grantmaking entities. I want to help them be as efficient and effective as possible. But more than anything, I want to make sure they do not get into any trouble. Even though my firm is not directly charged with managing their compliance, I do everything I can to help my clients gain access to the tools and services they need to insure they never run afoul of the IRS. So I understand why this “flaw” exists.
It seems to me that one of the solutions to this sort of issue rests in the idea of nonprofit “stock exchanges”. I’m not convinced that there is a viable concept behind the idea of nonprofits “trading” on an exchange. But I do think that an “exchange” could emerge that would essentially make the promise to funders that listed nonprofits had passed a level of due diligence to qualify and were required to submit regular documentation of their ongoing compliance. It would not be the responsibility of the exchange to judge the impact of the nonprofit (that would be the funders job, just like the New York Stock Exchange does not suggest that every company is a good investment). But at least funders could dispatch with all the run of the mill due diligence and the IRS could extend a sort of safe harbor to funders who gave to listed nonprofits.
I wrote more about this idea in the Financial Times column titled The Donor Landscape of 2033 is Bright.
Flaw # 7 from the Project Streamline report:
The most commonly cited effect of the foundation funding system is that nonprofits continually reinvent their programs—at least on paper—in response to foundations’ preference for the “new and different,” and reluctance to pay core operating support. Application and reporting requirements also cause nonprofits to develop strategies that are the opposite of what foundations intend. For example, nonprofits learn to work around grantmaking staff to ensure that their proposal is considered. They devote time and energy to board mapping, described by one nonprofit representative as “looking for the second cousin twice removed” who can help the nonprofit avoid the standard hoops and get straight to the funder’s board. Grantmaking staff find it troublesome when a nonprofit organization circumvents the normal application and reporting process in this way, but nonprofits continue to do it because they find that it works.
This might be the best example yet of the difference between looking at philanthropic giving through the lens of consumer behavior (donors are “buying” the “good” that nonprofits “sell”) vs. investing (donors are “investing” in the nonprofit organization and the “return on investment” is the “good” the nonprofit does). As I mentioned in prior posts, I tend to use the investing framework. A smart friend of mine disagrees and uses the consumer model. My friend George Overholser, who is one of the best thinkers on this topic, thinks that some donors are “customers” and others are “investors”. George probably has it right. But as he suggests in his paper Building is Not Buying, it is important for funders to recognize if they are builders (investors) or buyers (customers) and act accordingly.
The “flaw” outlined above sets funders up as customers. Investors in a business don’t ask the organization to bend and mold to what the investor wants. Investors compete to invest in organizations that they think are doing a great job already. Warren Buffett is famous for investing in a company and then getting out of the way so they can keep doing what they were doing before he came along.
Customers on the other hand ask organizations to do whatever they want. As a customer, you don’t care what the most cost efficient way for Starbucks to serve you a cup of coffee is. You want the best purchasing experience and best cup of coffee at the best price (and who cares if Starbucks is making or losing money as long as you get what you want). Smart businesses don’t try and serve every customer, they seek out the niche of customers who the business can serve profitably.
So looking at the “flaw” above I’d suggest that if a foundation views themselves as an investor, then the flaw is spot on. It is inconsistent to believe you are a philanthropic investor while at the same time requiring your grantees to perform “fundraising gymnastics”. If on the other hand you are happy being a philanthropic consumer — paying nonprofits to do social good — than I don’t see anything wrong with the fundraising gymnastics routine. As a customer, you have the right to ask the organization you are purchasing from to serve your needs. But smart nonprofits will refuse to serve those “customers” who are not profitable (ie. those customers whose net grants are not worth the trouble).
Flaw #6 from the Project Streamline report:
Despite funders’ stated desire to use reporting and evaluation for monitoring compliance and measuring impact, results from a 2004 study of funders’ attitudes and practices found that only about half of foundations surveyed used results strategically, either to influence future grantmaking or to share with the field. Our research came to the same conclusion: grantmakers indicated that they use most of what they collect primarily to monitor compliance.“We assume that they feed everything to a giant fiery furnace.”
—Nonprofit Executive
I can imagine nothing more boring than requesting, organizing, recording and filing information that was of no use to me. That’s called busy work and it is the kind of work that is given to people who simply need to be kept out of trouble. If you are a program officer at a foundation and you are engaging in this kind of busy work; demand better. You are too smart to waste your time this way and your are wasting the time of smart people at nonprofits who have better things to do.
Today’s podcast is with Brian Gallagher, CEO of the United Way of America. In the interview, Brian discusses how United Way is transitioning from a fundraising organization to having a focus on community impact. He comments on the prediction I made in the Chronicle of Philanthropy that the nonprofit field would adopt a United Way impact statement as a potential reporting replacement for the 990. And he explains the way he thinks the changes at the United Way will affect nonprofits.
Sean Stannard-Stockton: Hello and welcome to the Tactical Philanthropy podcast. I’m Sean Stannard-Stockton, author of the Tactical Philanthropy blog and principal and director of tactical philanthropy at Ensemble Capital. My guest today is Brian Gallagher. Brian is the Chief Executive Officer of the United Way of America. United Way of America is the national organization charged with leading the 1,300 local United Ways. Brian has spent his entire career, going back to 1981, at the United Way, and as chief executive since 2002, has been busy redefining the role of the organization. In May of this year, the United Way announced a new 10-year plan that focused the organization on a specific set of new goals. Brian thanks for being here today.
Brian Gallagher: Sean, it’s great to be with you. Thanks.
Sean Stannard-Stockton: Why don’t you begin by talking about the transition of the United Way from a fundraising conduit to an organization focused on community impact and explain the role of your new 10-year plan, titled “Goals for the Common Good” in that shift.
Brian Gallagher: Sure. You know, we really started – local United Ways started this shift 10 or 12 years ago, probably, to get to the real beginning. As a United Way movement, we started it formally just before I came into the CEO role. And fundamentally, it was because of the economic shift in the country. As we move from an industrial to a service to a global knowledge economy…
You have to watch the video just to hear Bill compare the grantmaking process of most foundations to someone trying to milk a cow upside down. The Project Streamline report seems to suggest that description is pretty accurate.
Because the “net grant” is often small, it is particularly problematic when grantseekers are required to do what is essentially the grantmaker’s work without compensation. We refer to this phenomenon as outsourcing the burden. Although many grantmakers do not want their grant money used for administrative and fundraising purposes, application and reporting often require labor- and time intensive activities of the grantseeker, activities that frequently can and arguably should be done by grantmakers.
Last time we discussed why it is a mistake for foundations to not consider nonprofits’ costs of obtaining a grant when they think about their strategy. Today I want to point out when “outsourcing” makes sense within the context of philanthropy and when it does not. Outsourcing is generally a strategy that is used when a third party is able to produce goods or services at lower cost (or better quality) than the party in question. In the context of foundation due diligence it is likely that foundations can achieve lower costs since they are making grants in larger volume than most of their grantees are receiving grants. Since, as we discussed last time, it is not relevant whether the cost falls on the foundation or the nonprofit, foundations should be seeking the low cost location for the work to be done.
But I would suggest that a more important issue is that foundations can likely produce higher quality due diligence by performing it themselves rather than by asking nonprofits to supply it. Nonprofit grant seekers have an incentive to paint the very best picture of themselves. Foundations on the other hand, presumably would take a more objective approach to gathering due diligence.
At Ensemble Capital we have our own systematic approach to analyzing potential investments. We gather a lot of data and qualitative information from material provided by the companies we are looking at and we often speak directly to management to get answers to our questions. But if a company submitted a prepared response to our request for information, I would see it for what it was; a marketing job intended to convince us that they were a good investment.
Nonprofits don’t really receive grants. They receive “net grants”—the total amount of funding minus the true cost of getting and managing the grant. Nonprofits must weigh the possibility of funding against the cost of seeking it……The grant and organization size were not found to be good predictors of the time spent during application and reporting: small and large grants can be equally time consuming, according to CEP’s data. In fact, nonprofits in our study reported that smaller foundations can be harder to work with: despite small grants, they often have highly specialized requirements.
In a recent post I mentioned that a friend of mine (who’s opinion I respect very much) disagrees with my use of “investing” as a frame for understanding philanthropy and thinks that philanthropy is better understood through models of “consumer behavior” (ie. donors do not invest in nonprofits, they “buy” the “social good” that nonprofits are creating). [quick tangent: George Overholser thinks both views are correct and differentiates between the two viewpoints in his article "Building is not buying"]. When thinking about the concept of “net grants” it is useful to look at the issue through the investing frame. If you are buying a product, you do not care about the seller’s costs. You just want to get the best value. But as an investor in a company, you want to help them as much as possible. Therefore you should be interested in reducing their costs. You want the size of your “net grant” to be as large as possible.
If you are buying the services of my firm Ensemble Capital, you don’t care what our company’s “client acquisition” costs are. But if you are investing in the company, you care very much about these costs. Another way to think about it is this; all of the money in a foundation has already been given to nonprofits, it is just being held for future delivery. This is factually the cases since the IRS only grants an income tax deduction for gifts to nonprofits because the gift is considered a “completed gift” to a nonprofit. That money literally belongs to the public. So whether a cost is paid for by a nonprofit or paid for by a foundation, the end result is the same. We know that foundations care very much about keeping their own administrative costs down, so the logical extension of this decision would be to minimize the cost to nonprofits of obtaining grants.
I think the concept of “net grants” is a powerful one and something foundations should understand when they think about their grant making. Realize too that the costs of the nonprofit that actually obtains the grant are not the only relevant costs. If 100 nonprofits spend $1,000 each to pursue a $100,000 grant, they the net grant would be $0. Nada. Nothing gained. In effect the foundation has just taken $1,000 away from the 99 nonprofits that failed to get the grant and delivered the money to the winning grantee.
