December 5, 2011

In Lean Times, Donors Must Not Lock Charities Into a 'Starvation Cycle’

In this Chronicle of Philanthropy op-ed, Bridgespan's Dickie Steele and Tom Tierney share three steps philanthropists and the nonprofits they support can take to get the most from every dollar invested.

By: Thomas J. Tierney, Richard (Dickie) Steele

If you had a leak in your water line, would you repair it? What if you lived in a dry area where water was especially precious, and you couldn’t afford any waste? Then you would take action even faster.

Well, philanthropy’s pipe is leaking, badly. Scarce resources (both money and time) are routinely wasted by grantees and donors that don’t work together effectively, and as a result, our communities—the causes and people we are trying to serve—are unnecessarily shortchanged.

We cannot ignore this leak. Nor can we pump more money into the line to compensate for what’s being lost; times are too hard.

Instead, we need to repair our pipes: Philanthropists and the nonprofits they support must get the absolute most from every scarce dollar they invest.

These three steps could lead to big improvements:

Provide sufficient resources for every project. To achieve the greatest possible results, nonprofits need the right management skills and experience, adequate staffing, appropriate systems to support programs, and enough money to support realistic timelines for demonstrating progress.

Unfortunately, many nonprofits don’t have those resources. Too many nonprofit organizations are strongly led but under-managed. Their leaders may be inspirational, but their backgrounds often don’t include management training or sufficient operational experience; nor are they necessarily inclined to place management activities on a par with carrying out programs.

Consequently, nonprofit executives often fall short when it comes to delivering on critical responsibilities—for instance, translating their visions into practical priorities, setting realistic budgets, defining decision-making roles, and developing future leaders.

They may not accurately assess their organization’s capacity needs or convincingly communicate those needs to grant makers.

What’s more, too few donors want to pay the overhead costs required to develop and maintain an organization’s ability to run its programs.

That’s why many nonprofits are trapped in a “starvation cycle,” in which a donor has unrealistically low assumptions about operating costs and organizations are compelled to conform to those expectations.

Leaders cut overhead to the bone, underreport administrative expenditures to make operations look “lean,” and ultimately reinforce the expectations that kicked off the cycle in the first place.

Too many grant makers (including government agencies) have come to believe that less overhead is automatically better—and that all nonprofits, independent of their scale, strategy, or field, should limit overhead to an arbitrary 10 to 15 percent. This despite the fact that in the business world, overhead—selling, general, and administrative expenses as a percentage of sales—averages 25 percent across all industries and 33 percent for service industries—and varies sharply among businesses.

Commit to genuine partnerships. Donors and grantees need to agree on a definition of success and on how that success will be achieved. They should embrace a single approach, whether it is the grantee’s, the donor’s, or one they develop jointly.

At the Case Foundation, for example, every commitment has its own grant document, which includes statements on both sides about what the nonprofit and the grant makers will provide, what they hope to see in return, and what they’ll do to evaluate progress.

Donors and grantees must each treat the other as they would want to be treated if the roles were reversed. This simple notion is incredibly difficult to pull off, given the inherent power imbalance.

Consider what many grantees must do to get money. The true “cost of capital”—the full burden nonprofits incur to secure a grant and carry out a project, including management time, reporting requirements, and other disruptions—can be unbearably high.

Yet driven by financial needs, grantees conform to all manner of donor requests, regardless of whether doing so adds value to a project.

In a productive relationship, donors impose a reasonable cost of capital on their grantees, while adding nonfinancial value through other forms of assistance such as fund-raising support, board development, or executive coaching.

Yet it is often hard for donors to appreciate the different worlds of those with money and those who need it. And it is equally tough for nonprofits to speak truth to power as they seek grants.

As in any healthy human relationship, a true donor-grantee partnership requires mutual trust, mutual respect, and honest communication.

Unfortunately, it is far more common to see “train wrecks,” donor-grantee relationships in which both sides lack trust and alignment and may even operate at cross-purposes.

Consider one nonprofit that was successfully expanding an after-school program for poor youths when it was approached by a donor from another state.

The donor offered big money to expand to a second city a thousand miles away. The nonprofit’s leaders had not contemplated such a strategic move—in part because they were still learning what mattered most about their program, refining it, and proving it.

But, worried about fund raising, they accepted the grant. Then the donors decided not to pay the full costs of expansion, and, unfortunately, the nonprofit’s leaders couldn’t yet show the donor why the entire program needed to be copied (or which elements were critical).

The new location struggled, as did the original when resources were spread too thin. Good intentions, absent partnership, did harm to all involved and crippled a promising program.

Focus on learning, not just scorekeeping. One of the most powerful trends in philanthropy is the increasing emphasis on measuring results. Yet the vast majority of measurements involve grantees providing information to justify their activities and meet donor reporting requirements.

Such compliance efforts can mask underlying challenges and inflate accomplishments, especially given grantees’ incentive to emphasize progress and donors’ desire to feel good about their contribution (not to mention the general complexity of measuring a project’s impact on society).

Donors and grantees must together commit to improving results continuously. When donors and grantees collaborate effectively, they identify (and explicitly agree on) the elements of the grantee’s work that are the most central to the strategy; they gather and analyze relevant data to evaluate those elements; and they apply what they learn. Doing this takes time and costs money—an investment that both donors and nonprofit leaders must make if they are serious about improving performance.

Consider how measurement translates into getting better at the One Acre Fund, a nonprofit that provides seeds, fertilizer, training, marketing, and insurance to more than 70,000 farmers in East Africa.

The One Acre Fund consistently has 20 to 30 experiments under way—on fertilizer configurations, ratios of training staff members to farmers, repayment schemes, and the like—to explore opportunities to increase profit on each acre planted.

By continually analyzing data about these experiments, the One Acre Fund tests, creates prototypes, and quickly refines new approaches. 

As a result, the organization can adopt the best ideas and improvements in time for the next crop season. Such an investment in continuous improvement—in this case, enabled by unrestricted grants—yields exceptional returns.

Both donors and grantees must accept the fact that essential learning often comes through trial and error.

That’s a tough hurdle to cross—for nonprofit leaders, who don’t want to appear imperfect when competing for funds and for donors, who are loath to “waste” money.

But bear in mind one scenario, in which a donor provided money for one year’s worth of programs without taking into account the fact that the results it sought would take more than one grant-making cycle to achieve—and might require some course corrections along the way.

Essentially, the donor said, “We’ll pull the funding if you don’t meet your targets,” which led the nonprofit’s leaders to decide that they couldn’t reasonably hire the staff and make the infrastructure improvements they needed to progress toward the goals in the first place.

Absent an upfront commitment to getting better, no one wins, not the donor, not the grantee, and not society.

It is deceptively easy to shake hands, write a check, or accept a contribution—and blissfully ignore the pitfalls and opportunities associated with the donor-grantee trap.

But while this path of least resistance may feel inevitable, and may not directly damage either donor or grantee, such ineffective collaborations certainly harm our communities. Let’s fix our leaky pipes and get the most out of our all-too-scarce resources.

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