Category Archives: nonprofits

FORGE Goes “Mainstream”

November 17, 2008 – 12:16 am

When Kjerstin Erickson decided to start blogging about FORGE’s problems on the Social Edge website, her board discouraged her. It was actually a pretty dumb idea by traditional standards.  But Kjerstin was actually doing something that to her generation (she’s 25) seems completely natural. She was living her life online.

I’m not of Kjerstin’s generation, I’m about half a generation ahead. But I’m close enough that when I read her very first blog post about her situation, I said that her blog “just became The Most Important Nonprofit Blog”. There was no doubt in my mind that Kjerstin had just embarked on an incredible journey.

I think that what Kjerstin is doing is important. Important in the kind of way that we’ll look back on in a couple years and cite her decision to go radically transparent as a precursor to the way the nonprofit field evolved. That might sound crazy, but I’m not alone. Today, the San Francisco Chronicle picked up the FORGE story. There are thousands of stories of struggling nonprofits right now. Meredith May at the SF Chronicle picked up Kjerstin’s story because of her decision to go transparent.

By Meredith May:

Like many social entrepreneurs caught in the economic crisis, Kjerstin Erickson is lying awake at night wondering if her tiny nonprofit is going to survive.

But in an unorthodox move, the 25-year-old decided to blog about her charity’s financial problems - despite warnings from board members that she’ll send her remaining donors fleeing…

…After Erickson began blogging last month on the Skoll Foundation’s Social Edge Web site, an interesting thing happened.

Her story went viral after it was picked up by the Tactical Philanthropy blog, and the social entrepreneur community took her on as an experiment in “radical transparency.”…

…Now, socially oriented financial analysts, nonprofit consultants and public relations firms offered to help her pro bono. Among them:

– Some top search engine marketers in New York have challenged themselves to raise $100,000 for FORGE in 100 days by coming up with innovative ways to direct more online traffic to the point-and-click giving on FORGE’s Web site.

– A family foundation in the Bay Area has offered to give FORGE $10,000 if it can raise $20,000 from its donor pool.

– Nonprofit consultant Curtis Chang has agreed to prepare a free sustainability plan for FORGE through his San Jose company, Consulting Within Reach…

…”The story of FORGE has yet to be told,” said Erickson, who is optimistic she will be able to turn things around.

“The goal of all of this is not just that FORGE recovers, but we come out a lot stronger because of it and learn the lessons we need to learn - and that everyone learns with us.”

You can read the whole story here.

By Sean Stannard-Stockton | Also posted in Philanthropy, Transparency | Comments (3)

The Alliance for Effective Social Investing

November 13, 2008 – 1:07 pm

Over the last couple of years we’ve spent a lot of time on this blog discussing how to measure the impact of charitable work. For many people, figuring out how to assess “social return on investment” or the amount of “social good” achieved per dollar donated, is viewed as the key to unlocking the social capital markets.

On the other hand, as a “tactical philanthropist”, I’ve spent more time writing and thinking about how social enterprises (nonprofit or for-profit organizations) can achieve impact. In other words, I’m more focused on how an organization executes instead of how a program is implemented. This isn’t too say that program design isn’t important, just that my expertise is more focused on organization evaluation and the financial framework within which it exists.

So I was rather excited to learn recently about the Alliance for Effective Social Investing and to be invited to join the small group of Alliance Members listed below:

The project is the brain child of Steve Butz of Social Solutions. The mission of the new group is to “change how funds are distributed in the social services sector - from giving based solely on anecdotes to informed social investing.” To that end the group is working on a tool to evaluate nonprofits that focuses on an examination of the organization and its ability to create social value. Given the list of participants and their cross-disciplinary backgrounds, I’m excited that something really good will come out of this effort.

Today, the Chronicle of Philanthropy wrote up a nice profile of the tool and the group:

Mr. Butz, 39, argues that existing ratings such as those done by the watchdog group Charity Navigator, which examines nonprofit groups based on financial information they provide to the Internal Revenue Service, tell donors nothing about whether their dollars are used to achieve results.

“Right now, you can find information about which organizations are doing the best job of raising money,” he says. “But you can learn little about which groups are doing the best job for the people they serve.”

Mr. Butz hopes his investment tool can become the “industry standard” for donors who want to ensure that their dollars are making a difference, leading them to approach their giving with the same care a venture capitalist uses to support start-up companies. The tool is based on 26 questions that measure charities according to how effectively they provide services and improve people’s lives…

…Ideally, Mr. Butz would like to see GuideStar, the Web site that publishes financial information about charities, make the tool and its ratings available free to donors. Bob Ottenhoff, GuideStar’s president and a participant in this month’s meeting, says he is “very interested” in the idea…

…Sean Stannard-Stockton, principal of Tactical Philanthropy, which advises wealthy donors, and an adviser for Mr. Butz’s effort, says he thinks it is important to ask all charities, no matter how small, to collect data on their programs’ performance.

“I manage a small business myself and I’m acutely aware that a small organization simply doesn’t have the data collection or analysis ability that a Goldman Sachs or a Morgan Stanley does,” he says. “Yet even small for-profit or nonprofit organizations should and can do data collection on a scale that’s appropriate to them.”

He also says that past efforts to evaluate charities’ effectiveness have faltered because they have tried to measure the value of a dollar spent on different types of groups, pitting soup kitchens against foster-care centers.

“One of the problems we’ve had in the past is trying to compare nonprofits in different program areas, and this bypasses that by saying, Let’s look at the organization itself,” he says.

You can read the full article here.

By Sean Stannard-Stockton | Also posted in Effective Giving, Grantmaking, Impact Measurement, New Philanthropy, Philanthropy | Comments (2)

Information Sharing in Philanthropy

October 30, 2008 – 11:44 am

I’ve been asked to speak at both the Yale Philanthropy conference and the Center for Effective Philanthropy conference next March on the topic of Information Sharing in Philanthropy. Information sharing is a bit of a different topic than transparency (information sharing is about market participants sharing information to the benefit of others, transparency is about connecting with your community and exhibiting authenticity), but you can see the interest I have in the FORGE story.

I just got off a phone call with a friend of mine who reminded me that the current economic crisis was precipitated (to a large degree), by the lack of transparency within the financial sector. For-profit investors are still worried about what they might not know in regards to banks and other financial players. That lack of trust is stifling their willingness to invest. I believe that this lack of trust due to limited transparency is a systematic issue within the nonprofit sector. It is not a near term issue that stifles investment like it is in public financial markets, it is a pervasive problem that fundamentally diminishes the public’s trust in the social sector and minimizes their willingness to fund nonprofits.

Is being transparent going to save FORGE? I don’t know. But I do know that they are earning my trust.

By Sean Stannard-Stockton | Also posted in Information Sharing, Philanthropy, Transparency | Comments (0)

More FORGE

October 30, 2008 – 11:06 am

A Tactical Philanthropy reader “Leanne” has taken the conversation to the next logical step and is offering to connect FORGE with funding leads. Leanne write:

I sent a link to a foundation a few days ago to the info. email on FORGE’s website. I know some of us have access to funders and information/connections that might not be on Kjerstin’s radar. If she was up to it (are you?) would you guys be willing to send her your leads?

This would be a huge leap in eliminating the “scarcity mentality” that exists between NFP’s. I, for one, would love to show the world that there is enough funding for everyone and that, by combining forces (be they brain power or brawn)those of us who are invested in changing the world, can do so.

So, Kjerstin and the rest of you guys, what do you say about getting a little help from your friends?

If I represented a funder, I would be very interested in all of the buzz around FORGE and the radical transparency decision they made. I would also hope to see FORGE succeed because I care about the concept of transparency within the social sector. However, I would be uninterested in funding FORGE’s $100,000 budget shortfall unless there was a larger strategy for building the orgs fundraising capacity in a way that fits their new impact model. But I think that larger strategy is doable. I’m meeting with Kjerstin tomorrow.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Fundraising, Information Sharing, New Philanthropy, Philanthropy, Transparency | Comments (0)

FORGE & Transparency

October 29, 2008 – 9:00 am

A great conversation is running in the comments section to my FORGE update. If you care about nonprofit transparency, I think this is a conversation you need to be a part of. We have a real life social experiment going on. This isn’t a theoretical argument. If FORGE doesn’t take the right steps, they’re going to fail. And the input of this community is going to have a real impact on FORGE’s strategy since their executive director is part of the debate in the comments section and she has asked to meet with me this Friday.

Follow along here.

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Fundraising, Information Sharing, New Philanthropy, Philanthropy, Transparency | Comments (0)

FORGE Update

October 28, 2008 – 7:07 am

Last week I wrote about the nonprofit FORGE, who’s executive director Kjerstin Erickson has been using her blog on the Social Edge website to chronicle the effect of the financial crisis on her organization. For FORGE, this isn’t just an experiment in radical transparency, they are in very real danger of going out of business. Admitting this publicly, might 1) attract attention to FORGE and bring in more donations, 2) scare donors away who don’t want to fund an organization who might not exist next year, 3) result in a totally unexpected outcome that could be positive or negative.

Yesterday, Kjerstin started sharing details of their fundraising year to date and how they are dealing with their failed direct mail campaign (which was mailed out in the midst of the meltdown in the financial markets). I don’t know Kjerstin, but as I mentioned last week she engineered a way to grab the money raised in my One Post Challange last year. After I blogged about FORGE last week, Kjerstin asked to meet with me to talk about her situation on Friday of this week. So today I’m asking the Tactical Philanthropy community what advice you have for FORGE. Leave a comment or shoot me an email. Is Kjerstin doing the right thing by blogging about their troubles? Is she out of her mind? They only need to raise $100,000 by the end of the year. How can they leverage their willingness to embrace radical transparency and their social media savvy to sidestep the financial crisis and continue pursuing their mission?

By Sean Stannard-Stockton | Also posted in Fundraising, Information Sharing, New Philanthropy, Philanthropy, Social Media, Transparency | Comments (23)

The Most Important Nonprofit Blog

October 21, 2008 – 3:03 pm

Forging Ahead, hosted on the Social Edge website, just became THE must read nonprofit blog. The quick synopsis of the blog:

Kjerstin Erickson was 20 when she launched FORGE. She didn’t have a business plan. She didn’t have a revenue model. She didn’t have connections. And she didn’t have a penny. But she now works in three refugee camps in Zambia, helping 60,000 refugees build better lives. This is her story.

My small personal connection is that Kjerstin was successful in winning the grant from my One Post Challenge last year. But I don’t know Kjerstin or FORGE otherwise.

So the story today: FORGE, like many nonprofits is seeing the impact of the financial crisis first hand. And in reaction, Kjerstin is embracing radical transparency. The Forging Ahead post from October 17 is titled “We’re in trouble…”:

So, conventional wisdom says that a nonprofit should never put all of its cards on the table - that showing your weaknesses is akin to shooting yourself in the foot. In order to be strong, you must appear strong, or so the saying goes. If you reveal your vulnerabilities, people won’t have faith in you and won’t want to invest in you.

Well for FORGE, it’s time to send conventional wisdom to hell. The truth is that though our programs have never been stronger, our bank accounts have never been lower. We’re in trouble… and I can’t sit back and act as if everything is okay. For the first time in 5 years, I’m kept up at night not by how to improve FORGE’s impact but by how to avoid laying off 150 of the world’s most vulnerable people and shutting our doors. It terrifies me.

Kjerstin continued on October 20 with “How we got into this crunch”:

In my last post, I talked about the financial hardship that FORGE is currently going through and the emotional strain that comes with determining how to best move forward. The first question that everyone has been asking is “why?” - why are we struggling to meet our baseline budget of $400,000, when there are trillions of dollars out there in the world. Sparing you the obvious answers, I’ll use this post to elucidate the 4 main lessons about things we’ve done wrong and things that have worked against us:

The rest of the post includes lines like, “Unfortunately, along with the positive change in outcomes, we lost a huge amount of guaranteed revenue every year.”, “[we] have been disappointed in how little traffic we’ve been able to drive to [our website]” and “On average, people have been giving about 25% of what they’ve given in the past!  Yeah…that’s really bad.”

I wish FORGE the best and I’m impressed with the guts it takes to write blog posts like these ones. This approach may very well attract new donors to FORGE (because they aren’t just saying how desperate their cause is, they are making a case for why their RESULTS are at risk, but can be sustain via new funding). Or it might scare people away. Either way, it is a fascinating real world drama of a social media savvy, impact focused nonprofit trying to deal with the financial crisis.

By Sean Stannard-Stockton | Also posted in Fundraising, New Philanthropy, Philanthropy, Social Media, Transparency | Comments (3)

Giving vs. Free

July 18, 2008 – 9:16 am

Back in May, Stephanie Strom at the New York Times wrote an article about increasing challenges to the tax-exempt status of nonprofits. I think there’s plenty of rational positions to take on issues like whether universities should be required to pay out a certain percentage of their endowment, whether nonprofit hospitals deserve full tax exempt status and if nonprofits who serve wealthy clientèle (such as the opera) should be given a tax exemption. But there was another theme to the article that I want to explore.

Strom writes about how last year the Minnesota Supreme Court denied a property tax exemption to a nonprofit day care agency because (in Strom’s words) “it gave nothing away.” Audrey Alvarado, executive director of the National Council of Nonprofit Associations agreed with Strom’s interpretation of the court decision saying that the court, “is saying, ‘wait a minute, charities are supposed to give things away for free.’”

I think this is such a disturbing concept. Recently I’ve been writing about how philanthropy is not defined by making the gift of money, it is the impact that the gift achieves. The idea that “free” equals maximum impact is asinine. Nonprofits are not supposed to “give things away”, they are suppose to provide public goods and services (goods and services that benefit society as a whole). The government also has the role of providing public goods and services. But imagine the outrage if the government made it policy to only give things away for free. No more toll bridges, museums all free, welfare checks and college tuition aid given without any expectations of the recipient.

Doing good is not the same as giving something away for free. Let’s set aside the intellectual argument for a minute and just look at how nonprofits actually work. According to the Urban Institute, in 2005 nonprofits collected $1.6 TRILLION in revenue.

The Minnesota Supreme court ruling is so damaging because it reinforces the idea that running a nonprofit is easy (jeez, you’re just giving stuff away, how hard can that be?) and it validates the idea that nonprofits should keep operating expenses very low (if you’re just giving things away, why would you need a complex infrastructure and highly talented employees?).

Giving something away is easy. Doing good social sector work is hard because it has nothing to do with giving things away for free.

By Sean Stannard-Stockton | Also posted in Impact Measurement, Philanthropy | Comments (7)

Online Grant Applications

June 25, 2008 – 10:10 am

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.

By Sean Stannard-Stockton | Also posted in Effective Giving, Foundations, Fundraising, Grantmaking, Information Sharing, New Philanthropy, Open Source Philanthropy, Philanthropic Technology, Philanthropy, Social Media, Tactical Philanthropy, nptech | Comments (2)

Due-Diligence Redundancy

June 19, 2008 – 1:15 pm

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.

By Sean Stannard-Stockton | Also posted in Effective Giving, Foundations, Grantmaking, Information Sharing, New Philanthropy, Philanthropy, Transparency | Comments (1)

Fundraising Gymnastics

June 18, 2008 – 3:46 pm

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).

By Sean Stannard-Stockton | Also posted in Effective Giving, Fundraising, Grantmaking, New Philanthropy, Philanthropy | Comments (2)

Project Streamline

May 30, 2008 – 8:09 am

The Project Streamline report begins:

A national organization has dozens of foundation funders, each with a distinct application process, different requirements, and its own cycle for funding.

As part of their annual report to a funder, staff from a nonprofit service agency have to categorize their clients according to the funder’s specifications, even though the categories are not the same ones that the nonprofit uses.

Three times each year, a family foundation with broad funding guidelines receives 70-80 proposals in the mail. This overwhelms the single staff person, as well as the board members who serve as program officers.

Most grantmakers take their responsibilities to support nonprofit and other public-serving organizations seriously, and spend considerable time thinking about how they can be most effective. Stories of highly productive, warm, and mutually satisfying partnerships between organizations and their funders abound. Yet the grantmaking process is rife with inefficiencies such as those suggested in the above stories, and these inefficiencies mean that everyone is wasting time and money that could be devoted to accomplishing missions.

The Project Streamline report goes on to outline how incredibly inefficient the grantmaking process of foundations are and says:

Determined to address the great waste of time and energy caused by inconsistent and inefficient reporting and application procedures, eight organizations representing grantmakers and grantseekers came together to form Project Streamline. Project partners include the following organizations:

  • Grants Managers Network
  • Association of Fundraising Professionals
  • Association of Small Foundations
  • Council on Foundations
  • Forum of Regional Associations of Grantmakers
  • Foundation Center
  • Grantmakers for Effective Organizations
  • National Council of Nonprofit Associations

Together, these diverse partners commissioned a scan of grant application and reporting practices, their impact on grantseekers and grantmakers, and the implications for the field. This report is the result. Its goal is to spark thinking and dialogue on this topic across a wide range of grantmaking stakeholders of all shapes and sizes. (Emphasis from the original).

The report cites “Ten Flaws in the System” and three “Creative Approaches” to fixing the system. Given the readership of this blog includes a pretty even split of funders and grantees, I thought I’d run with the reports hope to “spark thinking and dialogue on this topic” and start discussing the report here. I’ll start Monday with “Flaw #1″. Some initial comments on the report can be found on the Project Streamline website (is comment #1 ironic? I sure hope so!)

One quote from the report caught my eye. It is one of those things that is both shocking as well as unsurprising to anyone who knows philanthropy.

“The administrative burden placed by funders on community nonprofit organizations is so heavy and so unrelenting, and places so many constraints on their ability to operate that it is a wonder they can deliver any services effectively.”

—Lynn Eakin, from We Can’t Afford to Do Business This Way

By Sean Stannard-Stockton | Also posted in Cross-Disciplinary Conversations, Effective Giving, Evaluation, Foundations, Grantmaking, Impact Measurement, Philanthropy | Comments (2)

Philanthropy: Commodity or Premium Product?

May 12, 2008 – 10:14 am

Saturday was my daughter’s fifth birthday party. At 8:30am she was running at top speed (the only speed she moves at) through her grandparents’ house, tripped and hit cheekbone first into the edge of a flight of stairs. 30 minutes later we were all in the ER where she was getting 7 stitches. They say she’ll be fine. Oh, and we were home with 20 minutes to spare before 17 little girls showed up for a “princess party” in celebration of her birthday (I was one of the only “princes” allowed).

I guess any doctor at any hospital could have sewed 7 stitches. But the two nurses (one an older woman and the other a young man) at the hospital we went to spent a lot of time asking my daughter all about her birthday plans and made it clear that they felt it was a priority for her to get home in time for her party. Amazingly, we all left in good spirits and my daughter was able to fully enjoy her party.

Health care can be a commodity or it can be a premium product. A commodity is an item that is indistinguishable from competing products and therefore consumers make purchasing decisions based mainly on price . Gasoline is a commodity. If a station on one corner is cheaper than on the other corner, most people will always go to the cheaper station. Wine is a premium product. 750ml of wine is always just fermented grape juice. But the quality of the wine leads to vastly different prices.

This weekend, my family experienced health care delivered as a premium product. I would gladly pay a significant premium to entrust the care of my child to health care professionals who were sensitive to the emotional as well as physical needs of my daughter.

So here’s my question: Do nonprofits deliver a commodity or a premium product/service? This isn’t a leading question. Commodities are not inferior to premium products, they are just subject to different kinds of markets and business models. When you deliver a commodity, there is only one way to compete: Eliminate costs, strive to be the low cost producer and slash prices below your competitors. As an investor in this kind of business, you want to find organizations that are highly efficient, productive and know how to squeeze costs out of the system.

When you invest in a premium product company, you want to find organizations that are innovative, visionary and know how to create a product or service that serves people’s needs better than competitors so that customers will pay up and create high profit margins.

So in the nonprofit world, when we look for low overhead expenses, when we ask nonprofits to underpay their employees, when we want every dollar to go to “program” we are making the implicit statement that we believe they are supplying a commodity product. Is this what we believe? Is this what you believe?

By Sean Stannard-Stockton | Also posted in Philanthropy | Comments (4)

George Overholser Responds: Sustainable Nonprofits

April 7, 2008 – 8:55 am

In response to my recent column in the Financial Times, Reader Jeremy Gregg has been asking what makes a nonprofit “sustainable”. George Overholser of the Nonprofit Finance Fund (profiled in the FT story), has sent an email my way that breaks down the distinctions between earned income, donations, and what makes a nonprofit sustainable. I think his line of thinking is a wonderful example of drawing on business thinking without committing the sins of “philanthrocapitalism”.

Although a nonprofit is driven by a mission to help others, it is inescapably in the business of turning funders’ money into program execution.

If I buy a tutoring session [from a nonprofit] for my own kid, that’s called “earned revenue”. If I make a donation that results in a tutoring session for someone else’s kid, that’s “unearned”. But in both cases, the nonprofit firm does the same thing: it turns someone’s money into a useful tutoring session. And it ought to be that good tutoring begets a sustainable flow of loyal paying customers, earned or unearned.

For this reason, I think it’s often best for philanthropists to avoid a “support the organization” mindset, in favor of a mindset that says “buy program execution from the organization”. That way, the earned vs unearned distinction stops being (incorrectly) mapped into the sustainable vs unsustainable distinction.

All this plays directly into the question of sustainability, because an organization that sells a product (superior program execution) is inherently more stable than one that asks for generic support (“we need your help… again!”). Likewise, funders that “purchase” program execution will come back for more (if they think they got a good deal) whereas funders that “support” an organization may begin to ask why the organization can’t seem to get past its difficulties.

All this to say, so-called “unearned” philanthropic revenues can be a fine source of sustainability.

[Not to be confusing, but all of the above excludes what I think of as Builder type funding relationships (as opposed to “Buyer”). Builders are the ones who provide one-time equity-like growth capital. Builders are decidedly not the source of an organization’s financial sustainability. Rather, they help pay the bills while an organization learns to attract Buyer types. Our SEGUE methodology is designed to attract Builder capital.]

When George writes about “Builders vs. Buyers”, he’s making a distinction between “investors” in the nonprofit and “customers” who buy from the nonprofit. This concept was discussed in the FT column and you can read George’s excellent paper on the concept titled “Building is not Buying”.

By Sean Stannard-Stockton | Also posted in Effective Giving, Fundraising, New Philanthropy, Philanthropic Capital Markets, Philanthropy | Comments (9)

Letting Donors Vote for Board Members

March 27, 2008 – 8:43 am

A couple weeks ago we discussed the idea of letting donors vote for nonprofit board members. Some people liked the idea, others were concerned that nonprofits should be serving the needs of the broader public, not simply responding to donor’s desires. I’m mixed on the idea. On the whole, I think that to the extent nonprofits want to access social capital market money, the form of that capital must be designed differently than a donation. A lot of imagination still has to go into this process, but I have a hard time understanding how a nonprofit could ask for an “investment” instead of a “donation” and yet treat the transaction the same. That’s just marketing. If investing in a nonprofit is more than just spin, than the transaction involved must live up to the words that describe it.

Jeff Brooks, at Donor Power Blog, writes regularly about how nonprofits can “empower” donors in ways that help the nonprofit further their mission. Yesterday, Jeff weighed in on the donor voting debate and he’s given me permission to repost his thoughts here:

I think it’s a dynamite idea, even though the choice of board members is not likely to be very exciting to most donors. Really, on what basis would the average donor choose one board member over another?

Even so, I’ve never yet seen giving donors power of any kind not work. My guess is very few donors would exercise their proxy vote. But that they’d appreciate the chance, and that would lead to more giving, higher gift amounts, and better retention. That’s what happens pretty much every time you show donors that you respect them.

Commentary at Tactical Philanthropy seems to be running against the idea, because of the assumption that given the chance, donors are going to do something stupid. Like elect a moron to the board. Or force the nonprofit to betray its own mission.

Worst-case scenario thinking always takes you to such bogus places.

If I ran a nonprofit, I’d look for every way possible to involve donors. I’d want more than their money. I’d want their ideas, their hearts, their thinking.

If you’re afraid your donors are going to screw you, you’re in trouble. While you’re protecting yourself from your donors’ predations, they’ll be flocking to the smart organizations that respect them.

In the comment section to Jeff’s post, some reader suggested that it is unrealistic to think that donors would be able to make an informed decision about which board members to support. I think this is correct UNLESS the nonprofit was able to effectively communicate the organization’s mission, the steps the were taking to further that mission and the progress and setbacks that they faced. That sounds like the kind of nonprofit that I would be excited to support!

By Sean Stannard-Stockton | Also posted in Fundraising, Philanthropic Capital Markets, Philanthropy, Transparency | Comments (2)