The news in the philanthropy world this week is not good. It seems that our fears about the effect of the economic downturn on philanthropy are being confirmed in spades. The Ford Foundation and Robert Wood Johnson Foundations, two of the largest in the country, are both reducing their staffs by 30%+ and making other cuts in expenses in order to maintain previous years’ giving levels. The report on 2008 charitable giving released by Giving USA last week shows the largest percentage decline on record, although as Sean Stannard-Stockton of the Tactical Philanthropy blog wisely points out:
Charitable giving behaved more or less as it normally does when the economy sours. This is, by most measures, the worst recession in a very long time and so we’re seeing charitable giving get hit. But it is only declining in line with the way it normally behaves. Things are tough, but there was no apocalypse.
Still, the news is troubling.
Although foundation giving makes up only 13% of the charitable giving pie, their reaction to an economic crisis can have a dramatic impact on charitable giving overall. Foundations are in some ways viewed as the philanthropic experts and can set trends that can transform the impact of philanthropy. Take the Gates Foundation for example. Last year they received $10.4 million in unsolicited donations simply because other philanthropists think that Gates is a philanthropic leader.
So now is the time for foundations to lead the way towards more effective philanthropy–philanthropy that builds and scales organizations rather than buys services, as Michael Selzer, writer, educator, nonprofit leader and PhilanTopic contributor, points out in his recent post. Michael argues that the economic crisis provides a natural impetus to foundations to become builders of organizations rather than buyers of services, and in fact he poses a provocative question:
A growing number of foundations are beginning to think of themselves as “builders” rather than “buyers”…buyers award grants with an eye to achieving specific programmatic outcomes, while builders, always mindful of outcomes, seek to help grantees strengthen their organizational capacity so as to achieve greater impact in the future. To the extent that “buying” is limited to a relatively short-term transaction rather than a longer-term interest in the organizational well-being of the grantee, it is not an especially productive activity. Which leads me to ask: What foundation would want to be a buyer rather than a builder in today’s environment?
Michael goes on to somewhat equate “building” funds with general operating support, pointing out that only 20% of all grants go to operating, whereas 50% of all grants go to specific programs or projects. He offers a list of ways for foundations to increase their “builder” funding while still supporting specific programs. His list includes giving grantees the latitude to adequately account for indirect costs, expediting grant approval processes, expanding grant periods to more than a year, and sharing responsibility with grantees for securing remaining program costs if the foundation is only funding part of the program. Michael calls these “extraordinary measures” for “building the capacity of the nonprofit sector for the long haul.”
I disagree. Nothing in his list seems extraordinary to me. The economic crisis and the resulting effects on philanthropy and the nonprofit sector does call for extraordinary measures, a resetting of both realms: the nonprofits and the philanthropists who fund them. And because foundations lead the charge in the philanthropic realm they have an obligation to take a hard look at how they do things and try some truly extraordinary measures. A list of truly extraordinary measures that foundations could take includes:
- Increasing the use of program-related investments (PRIs) to include capacity building projects like upgraded nonprofit fundraising functions.
- Exploring mission-related investing, investing part of a foundation’s corpus in social businesses that meet the foundation’s mission, to a much larger extent as a way to expand the reach and impact of the foundation.
- Increasing the percentage of capacity building and unrestricted grants that the foundation makes. Instead of 20%, let’s bump that number up to 40%.
- Exploring becoming a spend-down foundation that doesn’t exist in perpetuity, but rather spends their corpus in order to have a larger impact on social problems in this generation.
- Increasing growth capital investments–large ($500K+), 3-5 year investments that pay for the infrastructure required for a proven nonprofit to scale.
- Reducing the strings and reporting requirements placed on nonprofit grantees.
- Decreasing the push towards funding of new programs and investing more money and time in the infrastructure of proven programs that could grow to serve more people.
That’s not to say that there aren’t foundations out there that are doing these things. There absolutely are, but they are in the minority. Foundations as a group could help transform philanthropy by becoming builders more often than buyers. These are challenging, demanding, restructuring times. They call for bold, risky, extraordinary action. Foundations can lead that charge.
Continuing my argument from previous posts here and here about how nonprofit finance must change, today I want to focus on the other side of the story: how nonprofit organizations themselves can be smarter about funding. I want to explore a couple of ways that nonprofits are inefficient in generating revenue.
First, foundation funding. The Foundation Center has been compiling a detailed list of various foundations’ responses to the economic downturn. This is interesting and helpful to a point. But the vast majority of nonprofit organizations probably will never receive a grant from any of these foundations anyway. In fact, according to Giving USA’s annual survey of nonprofit charitable contributions, foundation funding made up only about 12% of the $306 billion that nonprofits received in charitable contributions in 2007. And if you look at the overall sources of revenue for the nonprofit sector, earned income and government funding make up a much larger piece of the overall revenue picture than charitable contributions.
Foundation funding is a small piece of the entire nonprofit revenue landscape. So I’m not sure why some nonprofit organizations spend so much time and money hiring grantwriters, going after long-shot grants and worrying about the state of the foundation community. Nonprofits would be better served to take a more holistic view of their revenue engine and opportunities for growth. Is earned income a possibility? Can they tap into more individual giving, which makes up 82% of the charitable giving pie? Instead of hiring a grantwriter, how about hiring a seasoned revenue generator who has experience and results in all aspects of revenue creation, who could take a look at the assets (relationships, donor base, mission, services, etc.) a nonprofit has and how they could be translated into a more diversified and sustainable funding mix. Such a person would cost more than a grantwriter, but the return on the investment would be far superior.
Which brings me to one of the favorite and lowest ROI fundraising activities in the sector: events. Galas, fun runs, parties seem to be a staple of the nonprofit sector, but are they really generating much net revenue? Indeed, the net revenue of nonprofit events is often not calculated. That is to say, when you factor in the direct (food, band, decorations) and indirect (staff time, value of board/other volunteer time, etc.) costs of the event, what is the true profit? I think most nonprofit fundraisers would be surprised. And there are two other drawbacks to events. First, there is an increasingly competitive landscape for events. Each weekend in my city there are several nonprofit fundraisers. How many invitations must philanthropists get per month? Surely they are exhausted by it.
But secondly, and even more disturbing, is that events move a nonprofit away from their core mission, their reason for being and thus their reason for raising funds. Instead, the nonprofit asks their donors to focus on the party and what’s in it for the attendees. Through a gala, a nonprofit teaches its donors not about the important change the organization is creating, but rather that the organization exists to provide them a good time.
In order to transform how nonprofits are financed and thus to increase our effectiveness and productivity at solving problems, two things have to change. First, the legal and financial structures that hold nonprofits back from innovating, growing and becoming sustainable must change. And second, nonprofits themselves have to be smarter about using the tools they do have more effectively. They must calculate the return on investment of the revenue generating activities they undertake and discard those that are no longer productive.
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