June 4, 2012

Five Red Flags to Look Out for When Researching a Nonprofit’s Strategy and Results

This is the fourth post in our new series on Nonprofit Due Diligence. Click on the links below to read previous posts. Join the conversation by commenting below or on Twitter at #NonprofitDueDiligence. You can follow Give Smart updates at @BridgespanGroup.

By: The Bridgespan Group
In your research of nonprofits, you may come across a "red flag”—something that will make you think long and hard about investing in the organization. Before providing a few examples of red flags related to a nonprofit’s strategy and results, it is important to consider how to respond to red flags when you do encounter them:
  • Not all red flags carry equal weight. For example, in many cases you’ll find that a nonprofit lacks vital systems and supports due to a lack of resources. That’s a red flag, but one you may be able to live with; you might be able to provide the resources needed to fix the problem. Other red flags might prove to be more troubling, for example, if they shed light on fundamental gaps or issues, such as an ineffective program or an executive director’s flawed approach. In those cases, more resources may only exacerbate the problem.
  • More important than these red flags, in other words, is the context from which they arise. Try to figure out whether the challenges you identify are surmountable with the support you plan to provide. Are the leadership team and board willing to tackle (or even acknowledge) these weaknesses? If the weakness lies in capacity, consider your own willingness to fund some or all of the non-program expenses that capacity building would require.
  • Stay open-minded: Approach the process with questions. Don’t leap to judgment when challenges come to light. Engaging in conversation in the spirit of inquiry will reveal the story behind the weaknesses, how they have emerged, and how you might help address them with your support.
With these tips in mind, here are some examples of issues that should trigger further inquiry as you research a nonprofit’s strategy and results (see last week’s blog for some great starter questions):
  • The nonprofit cannot demonstrate a track record of success because the organization is not tracking data.
  • The nonprofit seems to “go it alone” and can’t describe how its efforts fit alongside the work of other organizations in this space.
  • From the data presented, the organization does not appear to be successful.
  • Various members of the organization and board present fundamentally different versions of the mission.
  • The organization does not appear to have a process for learning from its experience.

Remember that the existence of red flags doesn’t necessarily mean that you should forgo investing in a particular nonprofit; instead, it may mean that you want to offer the organization non-financial support in addition to the financial support you were considering.

What red flags do you watch out for when researching a nonprofit’s strategy and results? What have you found to be an effective response to red flags you encounter in your research?

If you’ve found these red flags helpful to your nonprofit due diligence, stay tuned for future posts where we’ll discuss red flags focused on other areas of your nonprofit research.

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