Nonprofit Philanthropy: More Charles Darwin than Adam Smith?

on September 12, 2013
in Blog

In a recent survey of 121 nonprofit leaders, the Center for Effective Philanthropy found that nearly half (48%) of nonprofit leaders say their foundation supporters are blind to the biggest challenges charities face and could do more to help them meet rising demand for services, train leaders, and deploy new technology, according to a poll released this week. Ellie Buteau, vice president of research at the center and author of the report, says foundations’ lack of awareness of their grantees’ challenges stems from poor communication.

I beg to differ on foundation blindness to needs, but do believe communications are a problem. Specifically too many nonprofits don’t understand how foundation’s operate and thus don’t position themselves for support in a way that best serves their needs and those of the foundation as well. Foundations aren’t blind to nonprofit needs, they simply have different objectives. I describe how to best understand them below:

After a dozen years in philanthropy, I believe Darwin’s Theory of Natural Selection has more relevance to the nonprofit and donor grant negotiation process than Adam Smith’s ideas of supply and demand and the theory of Natural Price. A nonprofit organization’s perception of funding needs often differs significantly from those of the donor it is trying to convince. The nonprofit by necessity must understand what factors drive donor decision-making to obtain support successfully.

Natural selection is a process that affects the capacity of individual entities to survive as the result of heritable traits that give it the upper hand. Natural price theorizes that all products have a value intrinsic to what is involved in producing them and factors of supply and demand determine cost and, ultimately, real value.

Let’s consider a nonprofit homeless shelter. From an economic perspective, the assumption is that nonprofit shelters exist, and their services are valued, because of demands posed by homelessness and other factors that cause people to seek refuge. For supporters of supply and demand, this all makes sense. The problem is that the money needed to support those shelters fully does not come from the people using them but from third party donors. At this point, the 800-pound gorilla in the room tips its hat to Darwin. What motivates an institutional donor to give? Is it really supply and demand? Or rather, is it ‘perceived’ demand that facilitates a peculiar form of natural selection requiring potential grantees to create survival strategies aimed at obtaining support for their projects?

In our homeless shelter example, we assume that the shelter is functioning properly and satisfying a real need. If true supply and demand were at work, a donor institution would sense a need for a shelter based on demand. It would either start an operational program to create and manage shelters or form a separate nonprofit whose mission was to do so. That process sometimes occurs. However, in the more common scenario, a committed individual who sees a need for shelters, forms a nonprofit on his own to create and manage them. The nonprofit then seeks money from third party donors to support the project. In this defined ecosystem, an entity (grantee) with few resources satisfies a real demand and then turns to another entity with resources (donor) for support. The issue then becomes if the donor evaluates the request based on real demand or perceived demand created by their selection process.

Donors typically have well defined initiatives with specific criteria supporting some projects while excluding others. For example, ‘We only give to shelters that house over fifty adults, or that remain open more then 12 hours a day, or exist in X geography, etc.’ Government programs defined by divergent political constituents also operate with a variety of programmatic and administrative criteria that accomplish the same type of exclusionary exceptions. Why do donors do this? The answer is simple and rather logical if not particularly gratifying. There is a lot of need out there. All donors have a finite amount of resources they can dedicate. This necessitates some type of criteria and process to distinguish support of one initiative over another. Consequently, there are two things donors inevitably create, allocation parameters for their funds and gatekeepers to insure that defined parameters are met. Hence Institutional donors define their funding criteria separately and are one-step removed from the nonprofit providing shelter services despite the fact that they are critical to resourcing the endeavor.

Philanthropy is a very personal and subjective undertaking especially for institutions supported by living donors or family boards. How well donors define their selection criteria to meet real demand is a function of two primary factors; their actual understanding of the problem they are trying to address, and their real interest in actually fixing it. Other objectives may exist, for example size of tax write-off, extent of recognition or kudos, satisfaction of a political constituency, and so on.. Whatever these factors are, one can express how far a donor support criterion digresses from the demand side of the supply and demand argument with this formula:

Divergence from Demand = Extent of misunderstanding related to need *
other factors that have little bearing on actual need * restrictiveness of final grant parameters set

The other process-helpers donors create are gatekeepers in the form of grant giving staff or grant evaluation boards. Their job is to shield the donor directly from the many grantees requesting support by conforming to the parameters on the right of our equation that ultimately decide which grants to accept and not accept. A skilled intermediary knows how to limit the negative factors in this equation to support proposers while also satisfying the parameters and the donor. An adequate intermediary conforms to the parameters and a poor intermediary exacerbates the parameters, making divergence from demand even worse. Note that poorly conceived criteria may make even intermediaries classified as adequate ultimately very poor at meeting demand by doing nothing other than their stated job of conforming to them.

This is where Darwin and natural selection come into play. Our shelter grantee assumes it has created an entity that meets a demand. It further assumes that any donor it approaches with an initiative that in some way supports shelters, will naturally see the appropriateness and justification of supporting its shelter. However, we exist in an ecosystem where donors do not operate on that logic. The donor-gatekeeper’s inclination [and job] is to check the initiative not against actual demand, as defined by the NGO’s shelter mission, but rather by perceived demand defined by the donor’s own selection parameters. Most nonprofits do not consciously appreciate this fact – or at least do not demonstrate that they do in their negotiations with donors. The typical conversation concentrates on why the donor should support their proposed initiative in its present form, rather than focusing on how it conforms to the donor’s defined selection parameters. I have often found myself reworking the argument for quality grant requests so that they conform to the perceived need of a donor initiative rather that nonprofit’s perception of demand as they see it.

Outside of an absolute disqualifying factor, (if for example, the NGO’s shelter is in Utah and only enterprises operating in California are supported), there is always room for successful donor negotiation if a nonprofit is opportunistic – or more precisely Darwinistic enough to appreciate how natural selection takes precedence, replacing demand. Natural selection favors two types of nonprofits in these negotiations.

1) A nonprofit that generates an engaging enough argument, through personal connections and relationships, (often gained through earlier successful interactions) to convince the donor gatekeeper its project matches donor guidelines.

2) A nonprofit that focuses less on marketing its initiative to meet user demand and more on promoting it to meet donor criteria. It can do this in writing or in person and relies less on a personal relationships in favor of solid marketing strategies

The critical factor for success of both types of nonprofits is their instinctual understanding of the justifications needed to bridge the gap between actual demand and the selection criteria they must meet. These qualities are often associated with the most successful nonprofits because they know how to navigate the current funding ecosystem and successfully accomplish a necessary survival challenge. They do good work on the ground and make the appropriate case for support to donors operating at 30,000 feet above the ground.

The loser in this negotiation process is often the earnest nonprofit that approaches the donor purely based on its need and not the donor’s requirements; and often comes away without life support. Unless of course the need and donor requirements actually match perfectly without any negotiation – a unique and uncommon state of Zen in the typical donor nonprofit interaction. Natural Selection overtakes the laws of Natural Price and Demand in this interaction.

Of course there are also successful nonprofit ‘spinners’ and ‘schmoozers’ who can make a successful case for support but that accomplish little of value in satisfying demand. They are not the focus of this article, although they are the gatekeeper’s responsibility to evaluate properly and cull, because they waste resources otherwise spent on needy nonprofits that actually meet demand.

It is not my intention to denigrate either the donor or grantee in this article, but to point to an existing ecosystem that affects both the funding negotiations and donor resourcing. One can try to educate donors to do two things: refine criteria so that it is demand-driven, and hire effective, inventive gatekeepers. However, donors come in many shapes and sizes and will always create limiting criteria to match limited resources. Just as importantly, they do not approach nonprofits for resources; the system works the other way around. It is therefore incumbent on nonprofits to understand the donor landscape and better navigate funding negotiations even as they satisfy real demand.

In a perfect world, donors would create actual-demand versus perceived-demand criteria. This would free nonprofits to concentrate on making a needs-based case for funding rather than telling donors what they want to hear, as many nonprofits must do to secure funding. On the other hand, for a donor to do this, it would probably need the experience gained by the nonprofit meeting that demand rather than the alternative experience it has creating the wealth and resources neccessary to grant to such activities.

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Heisenberg and the Elusive Measure of SROI

on January 10, 2012
in Blog

I was having a recent discussion with Steven Wright, fellow traveler and Aspiration Board Member and the Director of Social Performance Management Center at Grameen Foundation. We were discussing metrics and Social Return on Investment (SROI) when he posited, “There is no such thing as a social return [on investment]. The specifics of that return are impossible to generalize in to ‘units of good’ — so the metaphor falls apart.” Recognizing the problem he was alluding to as valid I nevertheless had a slightly different take on the issue that I wanted to share.

I believe social returns actually do exist in the world of strategic philanthropy, social entrepreneurship, corporate giving or whatever incarnation of support is provided with the intention of concurrently creating economic and social value. Social returns only look elusive because of the way we seek to measure them, the tools we use to quantify them and the timeline we use to address them. In short, the “units of good” we attempt to describe are an incomplete measure of social return leading to the conclusion that they really don’t exist.

The problem is not unlike the Heisenberg Uncertainty Principle. This Principle states:
Certain pairs of physical properties, such as position and momentum, cannot be simultaneously known to arbitrarily high precision. The more precisely one property is measured, the less precisely the other can be measured.

Our situation differs from the Heisenberg Principle in that our two measured properties differ. One is physical and the other behavioral. However, by trying to measure both in a similar way using Return on Investment (ROI) metrics as a foundation for defining SROI, Steve’s “unit’s of good” issue rears its ugly head, and we end up imprecisely measuring social return.
As I said, Return on Investment (ROI) and bottom line consumerism deal with tangible transactions [the physical] whose benefits are measured at the time the transaction is made. On the other hand, Social return on investment (SROI) often deals with benefit derived from complex human reactions [the behavioral] that are less tangible and occur over significant lengths of time after the transaction. So let’s compare the two, ROI and SROI, with practical examples to understand the implications of both the physical transaction and associated behaviors related to both:

Return on Investment (ROI): The Short Term Transaction
In our ROI example, Mr. Jones buys a big house. He does so to maintain a standard which also displays his affluence and houses his growing family. As a result of this expensive purchase he makes specific career decisions; works harder into the night; competes harder for that promotion; competes to send his kid to a better school; participates in the community and at the PTA to better them, etc…. All this is completely beside the point however in our ROI example…..

We really don’t care what Mr. Jones does beyond his decision to purchase the house, the primary goal of measuring and reporting on return on investment (ROI) for his real estate agent happens at the time Jones closes on the home. The agent doesn’t even care about Jones’ other associated transactions (the expensive furnishings, the Mercedes in the driveway) — unless he also happens to own a car and furniture dealership…

Social Return on Investment (SROI): The Long Term Behavior
As a Vietnam vet Mr. Smith has been having a tough time of it and is homeless, until the Housing for the Homeless Program puts him in subsidized housing. Having a roof over his head allows him to get a job he would otherwise not be able to have because he didn’t have an address. It also limits his exposure to illness which takes pressure off the health care system. Once gainfully employed Smith seeks help for his depression and relationship issues and wins back the return of his daughter from foster care. He can now pay his own rent for the home as well. The mission of the Housing for the Homeless program relates to all these goals: Lifting people out of poverty and making them net contributors to society by putting them in homes with all the supplementary benefits this accrues. The transaction involved in getting Mr. Smith in his home is only a tactic Housing for the Homeless uses to achieve these broader mission goals. Once participants like Mr. Smith get into homes they pay back the original investment in them either in small installments from their new paychecks or through community service.

Applying the same transactional approach to metrics as in our ROI example — we can measure how many homeless were transacted into subsidized housing, and how many subsequently got jobs and paid back the initial investment in them. To what extent the burden was relieved from the health care system is a bit more difficult to quantify as is the success of counseling for many, but it is still possible… Even more difficult to measure is Smith’s increased self-confidence; the fact that Smith told his reunited daughter “you have a future too” and raised her differently; that his daughter subsequently decided to go to med school and 15 years later became a doctor serving her community instead of running away from her foster home and becoming homeless herself; that having his daughter back, Mr. Smith joined the PTA and helped develop a new after school program assisting youth in his community. These subsequent behaviors are not easily measured or tracked in terms of units. The benefits accrue over years – but they are still legitimate socially returned benefits of the program with quantifiable value.

So, in contrast to ROI, measuring real SROI is about the long term behaviors that result from the initial transaction and only partially about the actual transaction itself. Unfortunately, many SROI metrics measure real SROI as effectively as Twitter can relate the core points of a PhD Thesis. Too often, they convey immediate, one dimensional sound bites of an initiative.
The quality of one set of SROI measures over another is often more about how many objective statistics can be related to a specific initiative. For example, technical initiatives like getting kids online often just generate more good objective statistics than feeding hungry kids and trying to track changes in their educational proficiency over time. In the former example, you can not only track how many kids get online but invade their privacy to find out what they are doing with their new found access. Other SROI measurements distinguish themselves by clever assumptions that project rather than really measure impact over time.

So why do we try to quantify complex behaviors that occur over years by applying short term transactional metrics more suited to ROI? I would suggest it is to justify real time, short term, funding decisions that determine whether social initiatives are supported or not.

This raises a reasonable question: Are current approaches to SROI measurement really about proving actual social return on investment? Or are they more about justifying further investment in socially responsible programs by rationalizing decisions with metrics that entities investing their dollars are just more comfortable seeing — no matter how imperfect the measurements really are?
It is completely reasonable for program investors to want to measure something that objectively quantifies success, and for those who receive a program investment to quantify and show results. However, to make believe what is being measured in many cases is real SROI without addressing the limitations, realities and reasons for measurement is what I think causes the dissonance between the resourcers and the resourced in the continuing SROI debate.


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.

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