I’ve been pondering a solution to the problem of incentivizing two behaviors in the nonprofit-donor relationship that each want from the other. Donors need program outcome measurements from nonprofits and nonprofits need capacity support from donors. Unfortunately, current sector dynamics don’t incentivize these behaviors and often do the opposite of de-incentivizing them. The real trick is to find a solution that works within the current system of donor-nonprofit support that is easy to implement and not too disruptive. Otherwise, it could not easily be adopted by the approximately 120,000 donors and the 1.5 million charitable organizations in the US alone.
Related to the capacity issue, most donors prefer funding program objectives and have clear limitations as to how much nonprofit overhead capacity they will fund, often in the form of percentage ceilings in their grants. In our current system it’s also not in the donor’s interest to support a nonprofit’s organizational capacity over the many years it may need to develop when that nonprofit may only be a grantee for a couple of years. Thousands of new nonprofits literally sprout up each year to meet similar challenges and as a donor’s program criteria changes so do the nonprofits it supports to facilitate its objectives.
Related to the measurement issue, as the number of donors who’ve made their money from metrics-based endeavors like finance and technology has increased, nonprofits have come under increasing pressure to demonstrate measured outcomes and value for the investment made in them. Nonprofits have also been encouraged to manage themselves more like businesses. This is somewhat ironic because unlike businesses that can invest product and service revenue back into their own operations to grow and in turn better measure their progress, nonprofit mission support and back office operational investment are not so well aligned. That’s because nonprofit donors are first and foremost interested in the nonprofit’s ability to meet their funding criteria, not necessarily supporting the operational capacity that nonprofits rely on them for as well. It’s no wonder then, that many nonprofits see this focus on objective metrics as a donor-driven exercise and an increased and underfunded mandate on them. After all, the ability to measure impact is also related to an organization’s internal capacity to do so. If it relies on multiple donors for support a nonprofit potentially has the added burden of tracking and analyzing multiple and disparate measures based on individual donor need.
The Simple Solution
What if the standard grant was modified so that extra support (above and beyond the agreed upon program and operating budget) came at the end of a grant as long as a nonprofit produced credible outcome metrics that it had agreed upon with the donor? The metrics would not have to be positive in terms of program outcome, just honest, to receive the support. And this extra support would be for a nonprofit’s general operating expenses.
The donor could still decide to limit the extra support to a percentage of the grant. However, if all the donors a nonprofit relied upon provided this bonus support in return for these objective metrics, any percentage limitation would be less of a problem in aggregate. Overall the nonprofit’s capacity support might double if it received its standard operating support in a grant and produced credible metrics to meet the bonus funding requirements of each of its donors as well. This would incentivize the nonprofit to internalize metric reporting in order to increase its capacity support while also providing an incentive for the donor to increase capacity support in order to get the metrics it required – a win-win situation.
The nonprofit with increased capacity support would also be in a better position organizationally to provide these metrics — and much more. Another result of this “bonus” capacity funding support in return for broader nonprofit metric reporting might be a natural reduction in the overall funding pool available because of the extra funds provided. However with about 45K new nonprofits coming online each year and competing for limited resources in an already crowded field of 1.5 million would that be such a bad thing? Fewer nonprofits with the ability to provide accurate metrics would be more highly rewarded with an increase in their capacity support, while those nonprofits that could not provide such measurements would see their support diminish.
The result would be more objective reporting from healthier nonprofit institutions, more satisfied donors and potentially fewer nonprofits that were unable to report on their outcomes. And all this could be accomplished within the framework of current institutional giving practices by better aligning the incentives without significantly modifying the grant giving workflow process.
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.