Despite many in the philanthropic sector promoting the need for nonprofits to function more professionally in terms of organization, management and accountability, few address the capacity issue strategically and in ways that help nonprofits upgrade their skills in these areas. The private sector appreciates that investing in organizational infrastructure and administrative expertise is fundamental to achieving bottom line objectives. A clear cycle of benefit exists as well. Organizational efficiencies are created, which reduce expenses and assist in generating more profit a percentage of which are recycled into further capacity investment and productivity gains. Unfortunately, this clear association of benefit to investment does not translate well in the co-dependent grantor-grantee relationship.

A philanthropy investing in its own organizational capacity will not necessarily affect grant outcomes of its nonprofit implementing partners. On the other hand, investing in the long term capacity of its nonprofit partners may not be in keeping with philanthropy’s mission objectives either when the mission focus is tackling various issue area needs it defines with short term (1-5 year) interventions working with multiple nonprofit partners. Completely separate from the philanthropic mission objective, the nonprofit implementer is focused on its constituent’s need and sustaining its operations with missions typically far broader than the narrow parameters of any individual donor grant.

In no area of the grantor-grantee relationship are the objectives more divergent, and the needs more urgent. How can a nonprofit ever hope to achieve its mission objectives effectively and efficiently without proper institutional investment What’s more, chronic underinvestment in nonprofit organizational capacity directly affects outcomes and insures that a certain percentage of philanthropic investment is wasted on inefficiency. Yet, the sheer number of nonprofits vying for support and the tens of thousands of new ones created each year all but insures this situation will not improve using traditional philanthropic approaches.

Why chronic underinvestment is is nonprofit capacity allowed to continue when it’s clear to all that it is required and that impedes operational efficiency?

The short answer is that the institutional dynamics of philanthropy are already geared to throwing money at problems to fix them rather than exercising more traditional and methodical organizational management approaches to avoid them. External factors and responsibility to constituents, and stakeholders that pressure other sectors to adhere to more orthodox and methodical approaches to organizational management don’t apply in the same way to philanthropies. They are not responsible to their grantee constituents in the same way the private sector answers to their stockholders and nonprofits to is stakeholders. A company that does poor customer service sees a bottom line impact. A foundation that doesn’t answers its proposers and grantee requests suffers very few consequences. The result is less pressure to employ orthodox operating principles to avoid problems both internally and externally, and both an institutional culture and more resources available to fix problems after they occur.

Underinvestment in nonprofit capacity is therefore allowed to continue because foundations can afford the inefficiency. It’s still cheaper to have 20%-25% of a grant invested in a nonprofit implementing partner lost to inefficiency than it is to support its capacity investment requirements over a five to ten year period. Such an investment does not typically meet the philanthropy’s short term issue area objectives, and if opens it up to the same type of support requests from its multiple nonprofit implementing partners.
The other important point to consider is that chronic underinvestment in capacity often impacts nonprofit efficiency far more than is does efficacy. Many nonprofits are quite effective at meeting mission objectives for themselves and their philanthropic partners while operating inefficiently. Why? Nonprofit dynamics explain this dichotomy. They are often staffed with dedicated, mission-oriented folks that will work by candlelight with pencil and paper if no electricity and a computer exist to get the same job done. In the absence of capital businesses go bankrupt, but nonprofits often linger on with the most tenuous of resources because of the sheer will of individuals to continue the mission. Nonprofits are not based on the premise of generating financial resources to survive, and as a result, lack of them doesn’t necessarily stop them from operating. it just stops them from operating efficiently. Thus philanthropies can still report “mission complete” in the annual report working with their less than efficient, under-resourced nonprofit partners who may still be effective at their work. If efficacy was affected by said under-resourcing in the same way efficiency is, chronic nonprofit capacity issues would have been addressed long ago. Ironically however, like the chronically drunken employee who can still operate effectively enough to keep his job, the ability of capacity-poor nonprofits to still produce results while covering up their operating inefficiencies allows the problem to continue without having to address it strategically sector-wide.

This problem is even further exacerbated by the drive for nonprofits to demonstrate how low their overhead expenditures are as a percentage of program execution. The irony is that nonprofits are never invested in at the outset to the degree they need to hire expertise and implement the organizational management techniques and methodologies that would make them more efficient. Rather, operating in their inefficient forms they are asked to reduce their administrative costs as a percentage of program execution even further to demonstrate their efficiency!

To be fair, there are nonprofits that manage themselves well and take great care in developing appropriate infrastructure. There are also grant-makers that focus on supporting individual organizational capacity. However, this doesn’t change the fact that the institutional funding paradigm on the macro-level is not designed to efficiently handle capacity support to the vast majority of NGOs that need it. Capacity Support must somehow be delivered in the same way it is set up to effectively to support program activities.

The Revenue Solution

The private sector avoids chronic capacity underfunding by generating revenue to invest in its own capacity and grow its business. Nonprofits can do the same, within limits. Specifically, revenue generation is limited to generating related income to support nontaxable activities if a nonprofit wishes to legally maintain its nonprofit designation. This is a problem to a lesser or greater extent depending on the nonprofit and the issue area it is addressing. A nonprofit involved in health and education for example, has many opportunities, and a rich tradition of examples to draw upon to develop fee-based goods and services that fit its mission. Constituents are also used to paying for these services delivered by nonprofit hospitals, clinics, student exchanges, etc.. On the other hand, a human rights organization with a mission to disseminate information as broadly as possible might have a more difficult time monetizing its information if selling it undermined its mission by creating a roadblock of cost.

The human rights organization example touches upon an important philosophical point that some nonprofits use as an excuse to limit their opportunities for generating income. Just because some revenue-generating opportunities potentially compromise mission, doesn’t mean all do. Opportunities must be explored in the new reality that we live in. Depending on donations to cover 100% of operations may have worked historically. However, it’s getting more difficult in this new economy with so many more institutions competing for funder dollars, and greater pressure for nonprofits to show they operate both effectively and efficiently. I advise nonprofits to develop revenue solutions that cover as much of their overhead costs as possible so they can begin investing in themselves. Overhead is what individual and institutional donors alike typically don’t like to fund. Programmatic support is far easier to get, especially if a nonprofit can show it is viable even without the donor’s support over the long term – another benefit of self-generated revenue.

The current philanthropic-nonprofit grant relationship with nonprofits often needing to meet donor grant criteria to receive funding already operates like a subcontracting relationship in many cases. Nonprofits should analyze if some of the expertise they offer to philanthropies to implement programs might well be better packaged as legitimately sub-contracted services for a fee.

New Models of External Capacity Support

Aside from nonprofits generating their own revenue to invest in themselves, the way in which nonprofit capacity support should be delivered and underwritten by donors must be fundamentally altered to make it more efficient. Defining the capacity support issue as a sector-wide problem, a few bold institutions and donors have addressed it using technology and other tools to meet the capacity needs of client nonprofits. Rather than supporting internal capacity of individual nonprofits, a model of external capacity support around aggregated demand has evolved. Nonprofits are buying into a high-quality capacity support service delivered at a reduced cost by other nonprofits.

The emergence in the last decade of Technology Capacity Support Organizations (TCSOs) has benefitted the sector and helped it better make use of technology and tools. These support NGOs are dedicated to providing a variety of ICT assistance specializations, from technical support to training to application development, hosting and sales of discounted software. NPower, TechSoup and Aspiration all fall into this category of NGO support organizations. These entities generally operate on sustainability paradigms that are a combination of revenue generation and donor subsidy. Overheads are kept low and deals are struck with for profit technology vendors so ICT services and products cost less to nonprofit recipients.

Support intermediaries for nonprofits are not limited to the technology discipline. Management Capacity Support Organizations (MCSOs) in fact predate them and have evolved to provide organizational, fiscal, evaluative and other necessary management and administrative support services to nonprofits. Innovation Network, Alliance for Non-Profit Governance, Bridgespan and Compasspoint fall into this category. NTAPs are therefore not simply a product the Internet revolution but rather an evolutionary trend that recognizes the traditional capacity support funding paradigm, technical or otherwise, is simply less effective than it used to be.

A third set of intermediary Advocacy Capacity Support Organizations (ACSOs) has evolved more recently. Organizations such as Media Rights, Greenmedia Toolshed and the Media Action Center all provide nonprofits with advocacy and promotional expertise to better craft and distribute their messages. These activities are often part of a mission driven program to affect a particular social ill so they suffer less from lack of administrative overhead support. Rather, lack of expertise in this area is often the result of nonprofits general cognitive dissonance to promoting and marketing their activities. In a sector where the currency of choice is the trusted source relationship, nonprofits rely on their work and not what they advertise about it to enhance their standing with peer organizations and grant-makers. As a result, promotional and advocacy skills are often underdeveloped, and become capacity issues.

The fact that all these nonprofit capacity service agents exist and have evolved over the last couple of decades on their own with little strategic guidance prove the compelling nature of the external NGO capacity support model.

Intermediary Capacity Support Organizations (ICSOs)

I classify the range of organizations operating to deliver these services as Capacity Support Intermediaries (ICSOs). The benefits of ICSOs providing high-quality services to nonprofits are numerous:

• ICSOs allow for the introduction of standards of service/support delivery and sharing of best practices across institutional clients. Nonprofit clients typically compete for funding and are often pressed for training time. They don’t necessarily learn from each other or from grant-makers without a trusted source intermediary providing support and delivering best practices.
• ICSOs provide pragmatic service at a lower entry cost to nonprofits than most of their private sector counterparts. In a sector where the currency of choice is the trusted source relationship, the CSI providers share a basic set of mission principles with the nonprofits they serve.
• ICSOs collect significant and invaluable metadata on a statistically relevant number of nonprofit clients. This data can be used to identify strengths and deficiencies on a sector-wide basis. Objective data polled from nonprofit clients allows for developing more effective support strategies for the entire sector.

• ICSOs provide a more efficient way to insure that all the nonprofits a grant-maker uses to meet its objectives operate at peak efficiency. Most grant-makers fund initiatives by vertical issue area (health, education, etc.). However, capacity issues cut horizontally across the entire portfolio of supported nonprofits. Grant-makers can opt to employ intermediaries to fill in the capacity gaps of their entire portfolio rather than individual institutions.

• ICSOs offer an opportunity to solicit grant-maker support for capacity using paradigms philanthropies are comfortable with. Grant-makers already support nonprofit programmatic goals. Supporting the programmatic mission of a nonprofit CSI delivering capacity services to other nonprofits is similar. Alternatively they can be subcontracted to service grantees.

• ICSOs create a much cleaner cycle of benefit and reinvestment for all involved. After an initial donor investment, most CSIs are built on models of sustainability that cover their administrative costs through services rendered to the nonprofit community. Nonprofits buy into this more efficient capacity support at lower entry costs, improving their effectiveness and leaving money to spend on other necessary activities including self-investment.

• ICSOs provide a far more cost effective model to solicit grant-maker support for a single institution whose mission is to service the capacity of a thousand nonprofits in a consistent manner than for one thousand institutions to solicit that same grant-maker for individual and different capacity needs.

Good, Better and Best Solutions

The natural evolution of ISOs to cover a variety of needs suggests that a revolution in nonprofit capacity support is taking place. This new paradigm however must be leveraged far more strategically by grant-makers and nonprofits. Issues that individual ICSOs address are all related, and reflect a problem suffered by NGOs globally. In defining the good, better and best of all possible worlds going forward:

Supporting discreet intermediary organizations for a particular sector, geography or problem area is good. The development of leading ICSOs to cover each area of capacity support is necessary and is happening. These models need to be adapted to different local circumstances (i.e., the developing world). International E-riding, which provides technology support to various sectors and geographies is an example of this.

Supporting a coalition of intermediary organizations dealing with capacity issues in a single problem area is better. The nonprofit Technology Enterprise Network (NTEN), a coalition of organizations focused on nonprofit technology support is an excellent example of this. Another more general example is Grant-maker’s for Effective Organizations (GEO) is a coalition of domestic US grant-makers focused on moving philanthropy forward and strengthening the capacity of supported grantee organizations.

Supporting ties between MCSOs, TCSOs and ACSOs is best. This is still a largely unaddressed strategic issue. The work of these entities is interrelated. Although developed external to NGOs and delivering services to them, they need to operate together more cooperatively.

This new model of capacity support will not help all nonprofits everywhere at once. However, it will assist far more nonprofits to address their capacity needs strategically than the current approach of funding bits and pieces of a single nonprofit’s capacity in shell game that allocates part of program grant to administrative overhead. As with most initiatives necessitating a paradigm shift, progressive grant-makers acting collaboratively will be necessary to underwrite the initial investments. However, this model of capacity support is built upon ICSO sustainability through aggregated demand over the long-term. There are already working models and empirical data that suggest this is a far more efficient approach than the traditional system of grant-maker support of capacity.

Jonathan Peizer is the Principal of Internaut Consulting supporting foundations, nonprofits, governments and socially responsible private sector initiatives. He is the former CIO/CTO and Director of the Open Society Institute’s Global Internet Program.