JP’s Philantherapy Blog

16.01.08

Distinguishing Social Value & Product Value

A colleague recently sent me this article (below) recently and I just had to comment. Its basic premise is that Bill Gates has done more to advance ’social value’ through Microsoft than he ever will through his philanthropy (despite the fact that even Gates seemingly disagrees with this premise).

The logic that this Economics Professor inhabiting a prestigious Ivory Tower uses to justify his claims is based on the premise that all you have to do is let capitalism reign and social value is created as its byproduct…. because only market forces can seemingly solve all the world’s problems…. This assumes of course that everyone is first and foremost a consumer and not a citizen or a human being.

I think the author is confusing ‘product value’ and the consumers who can afford it with ’social value’ and the many that cannot.

Social value is not intrinsically tied to either products or even cash contributions but to institutions of civil society and rule of law which supports the translation of these things into social value…

A hammer benefits me in the same way that software does if I buy it. And Black & Decker benefits too… But how does that translate to helping the villager in Somalia who is a victim of starvation, poverty or war particularly if he can’t afford to buy that hammer?

If you had a business that was 1/3 successful and the other 2/3rds were abysmal — a write-off — would you call that a healthy business? Yet that is exactly how the “world market” operates under global
Capitalism — 1/3 of the world benefits and 2/3rds don¹t seem too — even with China and India aggressively now in the mix. Don’t get me wrong. I am hardly a socialist — just a realist. So why are 2/3s of the world’s population still living in poverty and why hasn’t that 1 trillion in “social value” the author indicates Microsoft products have created compounded by the many other businesses have also provided to their CONSUMERS translated into a perceptible social metric - also taking into consideration the number of people using Microsoft products without even buying them?

It doesn¹t because the simple assertion of turning product value into social value through product sales is, I think, naive. The argument only holds for consumers who live in appropriately structured societies (with institutions of civil societies and rule of law) that can afford to benefit in the first place. The author makes the point himself using the US as an example in his article rather than far needier places….

The author states: “Mr. Gates has pointed out that it’s difficult to give away such a large sum of money in a productive way. This isn’t exactly true. He could cut a $300 check to everyone in the U.S., or donate the money to the U.S. Treasury with the aim of reducing the national debt. The last method is easier but has different effects on income distribution.”

To the extent MS products are used by socially conscious orgs to resolve issues he has a point… But even here, those who are helped by people using MS products are often NGOS that need to be sustained
by other than business means. But if a poor society does not have the rule of law or strong institutions of civil society and thus cannot benefit to the same extent from purchasing these products do we simply write them off or try to help them in another way– through subsidies? And if you help someone literally survive or get an education they would not otherwise have through these subsidies are you creating more social value or less than little Johnny Jones buying a new upgrade of his operating system?

Using the author’s argument everything has a price and should be defined in terms of social value to consumers — These are just some of my concerns regarding this premise:

1) Is our fourth estate [the media] doing better or worse since the market place
stepped in and decided news had to be either bottom line neutral or show a profit?

2) If you can’t afford to pay in the author’s reality what happens to you in terms of healthcare, education, etc…?

3) Let’s say any American Tech Company and its investors get rich off of putting up an oppressive Internet security net for an autocratic government that nonetheless practices capitalism? Do we hail their productivity gains and the creation of social value in the number of arrested dissidents / malcontents this government decides to label as criminals?

4) In the author’s opinion does promoting a pricey proprietary product like software or drugs at the expense of a low cost/no cost alternative still meet the definition of creating overall social value or serving the greater good?

5) I don’t see anywhere in the author’s calculus that includes the downside of capitalism on the social value equation. Exactly what money are these corrupt governments living off in countries the author’s says philanthropies subsidize poorly with charity? Is it the taxes of all those poor people who can’t afford to pay? Is it really primarily aid? What percentage of this revenue is in fact generated from corporate contracts and kickbacks to corrupt officials in the name of creating consumers or plundering natural resources in the name of profit? Surely the author would agree these realities are antithetical
to creating social value and indeed cancel them out?

Let’s call a spade a spade. Capitalism practiced in its purest form has no conscience. It is designed to maximize the bottom line and shareholder value. Every other objective simply distracts and pollutes this one. While capitalism creates economic opportunities for the population, and thus consumers, it doesn’t necessarily create social value the way a hospital or a library or a cultural institution would — the type of things the Gates philanthropic arm and government invests in by the way.

Any social value that the market or a consumer culture creates is actually a supplementary benefit of a capitalistic process — an afterthought if you will and not the stated bottom line objective. That is probably why the US Founding Fathers, coming primarily from the Merchant Class, set up a sophisticated governmental sector with checks and balances dedicated to serving the public. It’s instructive that what they did not do is hand over the social contract with citizens for local businesses to satisfy…. Nor would I be that particularly comfortable if the Fortune 500 were running my government — although some would argue they already are and that is why we have the problems we do… I am surprised someone like the author who thinks that capitalism creates social value would even focus on it as a significant/important byproduct. Which is why I think he is confusing product value with social value.

Just my opinion of course….

Jun 19, 2007
Wall Street Journal, Print Edition

ROBERT BARRO

Bill Gates is the richest man in the world, helped create a revolutionary computer software company, and earlier this month collected an honorary degree from Harvard University. But he may not
understand the vital role wealth creation plays in society.

In collecting his degree, Mr. Gates delivered a commencement address that focused not on the information age, the rise of personal computers or the relentless efficiency his software has brought to nearly every industry. Instead, he focused on his own personal philanthropy. His implicit theme was that so far what he has accomplished may have been good for him and Microsoft shareholders, but it has been no great contribution to society. He suggested that with a personal fortune of about $90 billion (including what he has transferred to his foundation) it is time for him to give something back.

I find this perspective hard to understand. By any reasonable calculation Microsoft has been a boon for society and the value of its software greatly exceeds the likely value of Mr. Gates’s philanthropic efforts.

Here is a sketch of a simple model of Microsoft’s social value. The market value of the company’s stock recently hit $287 billion. In 2006, its revenue was $44 billion, with earnings of $13 billion. This money was generated by creating something consumers value. Only Microsoft’s competitors could believe that this much market value, revenue and earnings would have been created by delivering products that have little value to society.

Suppose that a copy of a new version of Windows sells for $50 (and is typically charged as part of the price of a personal computer). Microsoft’s revenue from Windows would then equal $50 multiplied by the number of copies consumers snap up. Microsoft’s earnings are the revenue less production and development expenses. But that’s not the social value. That comes from the increase in productivity created when businesses and households use the software. The social benefit equals the value of the extra product, less the total paid for the software. Almost by definition, the benefit has to be positive. Otherwise, why would consumers willingly pay for Windows?

A conservative estimate, in a model where software serves as a new variety of productive input, is that the social benefit of Microsoft’s software is at least the $44 billion Microsoft pulls in each year. When capitalized with the same ratio (22) that the market applies to earnings, this flow corresponds to a valuation of $970 billion. Thus, through Microsoft’s future operations, Mr. Gates is creating a benefit
to the rest of society of about one trillion dollars — or more than 10 times his planned donations. And this counts only the likely future benefits, giving no weight to the past.

Mr. Gates has pointed out that it’s difficult to give away such a large sum of money in a productive way. This isn’t exactly true. He could cut a $300 check to everyone in the U.S., or donate the money to the U.S. Treasury with the aim of reducing the national debt. The last method is easier but has different effects on income distribution.

But Mr. Gates’s plan is, instead, to use the Bill and Melinda Gates Foundation to reduce world poverty, with an emphasis on advances in health.This is a noble goal. But it will likely just supplement the much larger existing programs of aid and debt relief that have been carried out for many years by international organizations and governments. These programs have, at best, a checkered record. Although Mr. Gates
is probably smarter and more motivated than the typical World Bank bureaucrat, he likely won’t do much better.

To find policies that are likely to alleviate poverty, it is best to look at actual successes and failures. In recent decades, the biggest single accomplishment is the post-1979 (post-Mao) economic growth in China. Xavier Sala-i-Martin (”The World Distribution of Income,” Quarterly Journal of Economics, May 2006) finds that the number of persons below a standard poverty line fell in China by about 250 million from 1970 to 2000. This massive poverty reduction occurred despite an increase in the Chinese population of more than 400 million and rising income inequality within China. The second-best story is
the economic growth in India, where the poverty count fell by around 140 million people from 1970 to 2000.

Also illuminating is the greatest tragedy for world poverty — the low economic growth in sub-Saharan Africa. In this case, the number of people in poverty rose by around 200 million from 1970 to 2000.

These examples suggest that the key question for poverty alleviation is how to get Africa to grow like China and India. An important clue is that the triumphs in China and India derive mainly from improvements in governance, notably in the opening up to markets and capitalism. Similarly, the African tragedy derives primarily from government failure. Another clue is that foreign aid had nothing to do with the successes and did not prevent the African tragedy.

One reason for this is that foreign aid is typically run through governments and, thereby, tends to promote public sectors that are large, corrupt and unresponsive to market forces. Perhaps the Gates Foundation will run more efficient aid programs than we’ve seen in the past, but I wonder.

Ironically, Mr. Gates’s inspiration to “give back” apparently comes from the world’s second richest person, Warren Buffett, who recently promised to donate much of his fortune to the Gates Foundation.

I say ironic because one can make a much better philosophical case for a give-back of Mr. Buffett’s $52 billion than for Mr. Gates’s $90 billion. Mr. Buffett’s money came mostly from being a good stock picker. Whether his fortune is the product of luck or skill, the social benefits are hard to pin down. These benefits have to derive from improving company management practices or investment decisions.

Of course, Mr. Gates is free to do what he wishes with his $90 billion. But I think he is kidding himself if he believes that the efforts of the Gates Foundation are likely to provide society anything like the past and future accomplishments of Microsoft. And, frankly, I would have preferred to get the $300 per person “Gates Grants.”

Mr. Barro is an economics professor at Harvard University and a senior fellow at the Hoover Institution at Stanford University

Cialis tablet
Physican’s desk reference phentermine

Posted by Jonathan Peizer @ 6:27 pm

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17.04.07

When Virtual Interaction Reinforces our Connections with Each Other

For years I’ve heard people criticize the increasing popularity of humanity interfacing online rather than in person as the end of real connections between people and the empathy that proximity provides. My response has been that cultures naturally evolve and that generations that grow up pre-book, pre-radio, pre-tv or pre-PC naturally look suspiciously at the next generation’s use of a new technology and mourn what’s been lost.

What I’ve not done is to necessarily argue the point. The recent shooting at Virginia Tech illustrates when the online culture actually draws people closer to each other — in circumstances where they were not connected at all to begin with. Many of the people who were victims had their own facebook.com and myspace.com sites and traditional media picked up on this early to define the victims not in terms of statistics (30+ killed) but as human interest sound bites. However, if you spend more than 30 seconds reading these profiles written in the victims own words before they ever knew they would be victims, you get a better sense of them as human beings — their likes, dislikes, personalities, personal thoughts and pictures – as well as their many friends who use the virtual space these victims created as memorials to murdered human beings they want others to know better. I can’t think of anything more empathetic or humanizing… and it’s a microcosm of what’s happening online in many instances — people writing about events and describing themselves in the context of events happening all over the world. Unfortunately it takes these significantly terrible events like wars, assassinations and random murders to draw attention to the phenomenon of “virtual humanization” of those whom we would otherwise empathize with only in the abstract, as statistics, because we know nothing about them otherwise.

Posted by Jonathan Peizer @ 9:51 am

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18.12.06

Time’s Person of the Year

Person of the Year: You — Yes, you. You control the Information Age. Welcome to your world.

Time’s Person of the Year selection raises some provacative questions. I admit it’s a great way to sell magazines and reinvigorate a rather traditional yearly rite of passage. The question of who really is in control and how control is managed and focused is still an open question to me.

Time’s Person of the Year selection raises some provocative questions. I admit it’s a great way to sell magazines and reinvigorate a rather traditional yearly rite of passage. The question of who really is in control and how control is managed and focused is still an open question to me.

What does all this really mean in the long term? Perceptual psychology teaches us that people have a natural inclination towards organization to effectively process the amount of stimuli they are exposed to and help make sense of the world they live in. Studies have shown the new generation can multitask and perceive/process multiple streams of input better than their elders – at the expense of long term focus/interest on any single activity, (like activism on any one issue for extended periods of time perhaps?). “Belonging” to organized groupings seems to also be a natural human [in fact multi-species] trait, as is hierarchical organization, coordination and leadership issues that often crop up when a phenomenon [or pop culture meme] requires any real direction to move forward and evolve. So MoveOn starts out grass roots and then becomes a more traditional enterprise, YouTube starts out bottom up and then is brought by Google and assimilated into its offerings, etc..

Regarding the power of *YOU*, multiple bloggers can complain about Joe Lieberman enough to get his rival more primary votes, but better organization still leads Team Lieberman in winning the real objective. Similarly MoveOn’s disparate organizing activities in 2004 were trumped by a far more organized fundamentalist get out the vote organization. The 2006 elections showed that individuals can voice their displeasure individually – if the situation becomes so desperate that, without much organization, people come to a similar conclusion and act on it on their own. However, did all this technology move people more quickly to reject the war from 2002-2006 than it did people to reject Vietnam from 64-68? And does the technology simply make it easier to sway the masses while giving them a false impression that they are really in charge?

For example: FLOGS - fake blogs that pose as consumer creations but are actually produced by professionals to sell products. The New York Times reported today of a flog exposed last week, when bloggers discovered a video blog presumably the creation of Charlie, an amateur hip-hop artist in praise of the Sony PSP was in fact created by coporate conglomerate Zipatoni, an agency owned by the Interpublic Group of Companies. The New York Times reported on another exposed flog, the travel diary of a couple, that did not disclose they were paid for their upbeat posts about Wal-Mart. It was created by Edelman, part of Daniel J. Edelman Inc., on behalf of Wal-Mart Stores.

I wonder if the “Great Man” theory is still not at play – maybe the definition of “Great Men” has simply changed or expanded – Maybe Jimmy Wales of Wikipedia or the YouTube or MySpace people are “Great Men” for starting such grass roots venues but more charismatic “Great Men” are still needed like Bill Clinton or Barak Obama (as opposed to Howard Dean or perhaps Hillary Clinton) to inspire/cultivate the masses towards action through these venues? Or maybe Great Men are now “Great Conglomerates” with advertisers manipulating our consumer culture and Eisenhower’s dreaded Military/Industrial Complex manipulating our citizen culture - through technological innovation that makes it easier for both get to and interact with us.


Not that I am ready to give up on my bread and butter - technology - and become a Geico Caveman - - I am just not ready to give into a rose-colored panacea that seemingly lulls me into a false sense of who is in charge and the life-changing benefits of a “thing”. Just because a new form of interactive, networked and seemingly grass-roots technology is introduced, we must not forget that however easy, cool and innovative it seems, it is still only a process. Who controls the discussion and subsequent actions using any technology [process] is a separate issue. When the world actually becomes a better place for most people, by a measurable factor, and our control of the Information Age is identified as a significant contributor that helped people make better life decisions — for themselves, their communities and the planet — then i’ll be a true believer. To my mind individual control of the Information Age is justifiable as the “It” thing of the year if it results in the technological equivalent of a polio vaccine - something that makes the world a better place — YouTube, Myspace and the ability to better find, post and distribute stupid pet tricks video clips doesn’t quite cut it — although outing what stupid politicians say on the campaign trail to insure they don’t get elected to do further damage is certainly a step in the right direction .

Posted by Jonathan Peizer @ 8:40 am

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16.11.06

Web 3.0 Ohhhhh Noooooo, Mr. Bill!!!!!!

It’s been some time since I blogged — a steady flow of consulting work will do that to you sometimes

In any case, just when nonprofits thought it was safe to go back in the water and surf the Internet again — having learned what they needed to know about Web 2.0 at Techsoup’s NetSquared meeting — now comes Web 3.0! If web 1.0 was about networking, and Web 2.0 about collaboration then Web 3.0 can be defined as being about the smart web — turning the search for information on the web into its ability to more intuitively present you back with knowledge instead. It’s still a work in progress, and controversy, as noted by the deleted and protected pages on wikipedia . Still its made its debut in the traditional press.

Is there anything specific you need to know about it? At this point its more important that you know the idea is out there. Technological information and change marches on, seemingly waiting for no man or non-profit institution. It’s a constant effort to not necessarily buy into every generation of resource one might think they need, but at least to understand what resources are being developed in order to make smart decisions about them. The real takeaway from Netsquared should not have been that participants learned everything they needed to know about web 2.0, but that they maintained an awareness of technological innovation in general, assuming Web 3.0, Web 4.0 and Web 5.0 were around the corner….

Posted by Jonathan Peizer @ 1:46 am

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17.06.06

Making the Most Out of Disintermediating Platforms

The Internet has been promoted as ushering in a new era of disintermediation. The spin is that the Internet eliminates the middleman between the knowledge/service/product provider and the consumer. Both sides can deal directly with each other without the need for other intervention.

The term “middleman” or intermediary, describes some sort of [hopefully value-added] facilitator between two transactors. The middleman role is not an end in itself, but a process between the “buy” and “sell” side of an equation. The middleman is only useful if the two sides are interested enough in making a transaction and employing some sort of service provider that actually adds value to facilitate it.

What the Internet has done is actually to create a new type of middleman — one that scales better and maybe is a bit more transparent — I am refrring to the software platforms that facilitate these transactions. However, even with platforms as straightforward as Ebay and Wikipedia, increasingly more sophisticated terms of use, arbitration, support etc.. are required to facilitate the transactions as these services become ever more popular. That is because we are still dealing with human beings on both sides of the equation with particular expectations that need to be satisfied in order to continue to use the platforms.

I’ve noticed in the social value space that this lesson is often missed. The platform often becomes the primary project driver and objective to the detriment of the buyer and seller side of the equation. In a variety of projects in areas as diverse as devlopment project matching, technology transfer and developing world artisans selling their wares to developed world markets, the focus is on the middleman platform and not on the two sides necessary to facilitate the transaction.

In the private sector, platforms like these are only built to meet buyer ans seller demand and bottom line objectives. The company makes its own decisions whether to invest its resources into the project and how to generate returns on that investment. In the philanthropic world by contrast, the resources that support the platform and those building and maintaining it exist in two different organizations (grantee and grantor) — often with different objectives.

Convincing the donor to buy into the middleman platform based on the donor’s program objectives becomes the project goal because that is often its costliest, tangible deliverable. Donors often assume what they are spending their money on constitutes the most important, core objective of the project. To focus on the buy and sell side when trying to make a convincing case to the donor begs the question — “Why do you have to build this costly platform? Can’t you do it another way?” In the absence of standard business metrics to make a case and the parameters of the donors funding criteria often differing somewhat from real demand, the case for support and funding ends up becoming the platform rather than the solution it is trying to facilitate. The unfortunate result is that the buyer and seller side of the equation become a project and funding supplement - with not enough attention and resources devoted to support the original users the platform is being built to support.

Getting someone to use an Internet platform to buy into a slum redevelopment in Guatemala is quite a bit more difficult and sophisticated a process than getting them to buy baseball cards or pez dispensers. It is therefore incumbent on developers of these intermediary platforms for the social sector not to forget the *three* sides of the transaction they are trying to facilitate and always answering the following questions with appropriate training, services and support resources:

1) Convincing the seller to use the platform (what is in it for the seller?)
2) Convincing the buyer to use the platform (what is in it for the buyer?)
3) Developing an intermediary platform that supports the buyer and seller demands as they’ve described them.

Concentrating primarily on the platform to the detriment of the buyers and sellers using it is a recipe for failure.

Posted by Jonathan Peizer @ 10:11 am

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02.06.06

Alternatives for the Reluctant Blogger

The reluctant blogger — that would be me. I think too much of the blogosphere is dedicated to self-importance or self-help. I am referring to blogs that are:

1) Narcissistic: “I have something to say about my life or what I think” blogs
2) Wannabee: “I want to be a talking head just like Bill O’Reily or James Carvill” blogs
3) Clinical: “Blogging my angst is less expensive than Ritalin or renting a psycho-couch by the hour” blogs

So I try to blog only when I think something I have to say might be relevant to others. Still, my blog is called Philantherapy and it’s about what “I” think is relevant — so you can see the problem. For me blogging is an exercise in self-consciousness — its benefit is that I like to write, and it provides a less formal outlet for short missives than writing articles. I exercise publishing control whereas readers exercise consumption based on their interests in what I have to say — or not. I try not to be too inane by writing often, and if I am, turning me off is as easy as resetting ones RSS configuration - kind of like turning channels on a TV without the hassle of searching for the remote.

On the other hand, there ARE blogs that I find are VERY useful, for example blogs that do fact checking or investigative reporting. Bridge-blogs like Global Voices that bring alternative voices to the table from people and places we don’t hear about often enough but should. Or the World Changing blog, bringing interesting people, ideas and innovations together to move society forward. Since I have a habit of exercising my narcissistic tendencies by giving things new names to things lets call these “creative content” blogs.

Still though, my problem with the blog is that it is [too often] a platform for broadcasting a single point of view. As a social tool I think it is far more polarizing than collaborative and a device that lends itself to hubris and grandstanding. I am not saying blogs are bad mind you (health care costs being what they are in the US, any savings on Ritalin and psychoanalysis are good things. I’d also prefer many people simply blog their views than god forbid acting upon them!). What I am saying is that I don’t find them a natural medium for respecting multiple viewpoints in a cooperative way.

On the other hand there are Wiki’s, and these are far more attractive to me as positive socialization tools. The nature of the Wiki requires the contributor to reach an agreement on his or her contributions with others. Opinions must be listened too and compromises made to socialize successfully and appropriately on a Wiki. The output of a wiki is truly shared knowledge. The genius of a Wiki is that disagreement and lack of compromise is punished by having ones opinions wiped — completely written over or erased by an opposing viewpoint. A standard flame war on a Wiki is not about a long thread of diatribes and accusations that other can pile onto, but rather the absence of information as opposing contributors continue to erase each others ideas — until they realize such strategies for getting their points across or attaining catharsis is about as useless as two monkeys hitting each over a head with a bone. On the other hand, dialogue and compromise (e.g. acting civilly and with respect for the opinions of others) is rewarded on the Wiki with shared knowledge everyone is happy with.

Anyone who has tried posting to Wikipedia and come up against a contributing stranger with an alternative viewpoint understands what I am saying. Sometimes disagreements are resolved by the two opposing contributors presenting reasoned arguments to each other and reaching a compromise — other times, other readers and contributors or moderators must weigh in. The point is that the technology fosters collaboration rather than broadcasting polarizing viewpoints and having them stand as gospel. The guy with the best putdown or most autistic ability to continue a thread until they are sure they have the last word does not win on a Wiki…

Now before people write to me that flame wars on particularly controversial topics do take place on Wiki — yes I acknowledge that monkeys with bones and very hard heads exist everywhere — on the other hand, the depth, breadth and localization of Wikipedia supports my main point that, by and large, Wikipedia fosters civil discourse that results in a significant formating and distribution of knowledge that contributors must collaborate and agree on before the end product is published and maintained.

Unfortunatly, just as the the O’Reilly Factor is more popular than the PBS Newshours, blogs are more popular than Wiki’s — but I think that’s less about content and more about ease of use. Wiki’s are still unwieldy animals to edit for average users, while blogging tools have made things far more easy for the masses. On the other hand, negotiating compromise often requires far more energy to be expended than simply spouting off — which could also explain the dichotomy. On the plus side, we are creatures of communication and interaction by nature and more user friendly Wikis may result in broader use of. I think Wikis are to blogs what the Internet was to television. For those SAT enthusiasts who require perfect comparisons… please don’t write – MY blog, My comparisons – my point .

I was at the Netsquared conference this week where one speaker indicated that blogs are an interim step to something better (just as many technologies are). I tend to agree. I just hope the next iteration of these social tools target both user ease and friendliness and the ability to generate knowledge and foster action through mechanisms that foster cooperation to achieve solutions.

Until then I’ll continue to pump out these narcissistic, angst-ridden nuggets of genius… in moderation….

Posted by Jonathan Peizer @ 11:51 am

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16.05.06

Addressing the Systemic Flaw in Traditional Nonprofit Capacity Support

When I was at OSI I had a white board in my office that I used to quickly explain the nonprofit capacity conundrum and how it affected technology and other capacity implementations. Discussing the issue with others my thinking has evolved somewhat and I thought it would be a good idea to publish it on my blog as a reference – it’s not new thinking as much as it is a succinct assessment of the challenges, solutions and strategies still needed to develop a shared understanding and fix the systemic flaw in capacity support that defines the traditional Donor-Grantee capacity support relationship.

The Nonprofit Capacity Conundrum

There is a distinct difference in the way capacity is supported in the for-profit and non-profit sectors. Nonprofit capacity support is often dictated by an external donor base and not internal organizational need as it is in most other sectors. Nonprofits are used by donors as intermediary vehicles to meet Donor mission objectives. Capacity support is regularly viewed as a necessary evil or overhead expense that must be minimized. There is a logic in this from the Donor’s perspective (see earlier blog below) if one appreciates they have their own capacity to support and in all practicality, use numerous NGO’s for short periods (1-3 years) as operational intermediaries to meet their mission-oriented funding objectives. Even membership organizations typically have a constituency more interested is supporting the nonprofit’s mission objectives over its operating needs to support those objectives.

This creates a unique situation for the nonprofit sector, making it the only sector that does not have control of its own institutional capacity investments. More importantly, the entire philanthropic support system is weighted heavily against capacity support in favor of mission based grants.

The results: Consider the success, or lack thereof, of a business that could not invest in itself because the funds it generated were restricted.

Under-Investment and its Effect on Nonprofit Technology Use

Because technology is often a part of an organization’s operational capacity investment (even if it used to meet mission goals) it often suffers from a lack or resourcing along with other priority operational areas like finance, legal, human resources etc.) I always find the Donor admonition to “be sustainable” somewhat disingenuous when the granting activity of most often does not allow the nonprofits they support to make the appropriate investment in expertise to do so.

Such is the problem with technology use in the typical nonprofit. Successful use of technology is often more about having a good technician or technologist than any specific technology, the latter changing as often as one changes their underwear these days. However this personnel is often out of reach of most NGO’s which simply cannot afford to employ them on staff. As a result, a corporation can take new technology, and spread its benefits throughout the corporate body with its technology staff acting as enzymes to break it down and digest it. Extending the digestion metaphor to the poor nonprofit – it is typically “technology intolerant” because it doesn’t have the technical expertise to absorb and support new technology. The result is…. well, its better not to take the digestion metaphor any farther… Even small businesses have the resources they need (and the tax incentives) to reinvest in themselves and employ consultants to emulate the same support.

New Models of Capacity Investement

This reality requires a new way of looking at capacity support in the nonprofit sector — as a skill and a service provided by an outside resource along with the technology itself. We must assume that these operational services are required to allow any organization to function effectively and sustainably. If the current donor support model can’t scale to address the capacity needs of most nonprofits, then a new way of addressing the capacity issue must be developed — with an external model of shared capacity support rather than an internal model of individual institutional support.

Technology is not the only area that would benefit from the shared capacity support model. Management support (finance, board development, HR, etc.) and Communications Support (Marketing, Promotion, Advocacy) are also lacking in many nonprofits and suffer from the same underinvestment.

It should not be surprising that organizations like NPower or the Erider’s Network have sprung up as external NGO’s with a service mission to support the technology capacity of other NGO’s. Compasspoint has done the same in the management support area while CIMA and Greenmediatoolshed have focused on communications issues. In fact one can track the evolution of these entities and say that management support organizations for nonprofits are about a decade old, technology support organizations about half a decade old and communications support organizations a relatively newer phenomenon.

The Benefits of These New Models and Challenges Still To be Addressed

These nonprofit support organizations naturally evolved to deal with a chronic problem that I would argue exists as a systemic dysfunction in the Donor-Grantee capacity support equation. But even this nonprofit support model – which should scale far better to support the needs of more nonprofits – has its issues:

One problem is that these organizations function as vertical specialists in their areas of expertise. Even in an area like technology, there are different areas of specialization one finds in a single organization. It should not be surprising that these support organizations are being created along these same specialty lines. So for example, a tech support provider like Npower has a different sets of skills and expertise than a nonprofit software developer like Benetech. Both organizations compliment each other in providing a more holistic solution to the nonprofit client — if they worked together – but where is the strategic funder impetus to assist them in doing so in the early stages of development of these support providers?

Similarly, most technologists consulting for nonprofits (and even corporations) will tell you that it’s often not an issue of technology but various management processes that must be changed before a proper technology solution is implemented. Sometimes the specialist in that area is another vertical nonprofit support organization like Compasspoint doing management and not technology support. How does one connect an Npower and Compasspoint to work more closely together?

These are just examples. The point is that a more cohesive tapestry of support organizations will end up providing a more cohesive, efficient, scaleable and less costly set of services to the non profit clients that Donors support to meet their mission objectives.

The reasons for doing so are clear. The capacity support NGO’s solve several problems inherent in the Donor-Nonprofit relationship.

1) They allow nonprofit problems in an area like technology to be aggregated and analyzed across organizations, with best practice solutions delivered back and shared.

2) They allow important and valuable meta-data to be collected on a variety of issue affecting the sector.

3) They solve the donor side of the capacity support problem in a far more rational way. It’s easier for donors to provide funding for a capacity support organization with a mission to help other NGO’s than to assess the individual capacity needs of hundreds of the client nonprofits they support.

4) Nonprofits often compete with each other for mission based funding with a capacity component. As a result they often don’t share best practices with each other. Delivering capacity support through a non-competing intermediary (as far as the primary mission-based funding goes) allows more practical dissemination of operational best practices. It also assures a more consistent expertise is applied to the operational problems of various NGO’s some of which may analyze their problems as costing $2,000 to fix and others assuming the same problems cost $200,000.

Despite the benefits described above, a second problem in this model is that to support themselves as self-sustaining entities, many nonprofit support organizations cater to mid-size nonprofits that can pay at least something [less than] commercial market prices for the support they provide — leaving smaller grass roots nonprofits to fend for themselves. Such problems might be resolved if the nonprofit support providers were tied more closely into associations that support grass roots organizations working on specific issues. If more Donors employed them to solve the needs of organizations in their portfolio this would also solve some of the problem — which brings me to the last issue of concern:

Supporting service NGO’s to grow and work together is still not looked upon as a long term and large scale strategy by most philanthropies because of the vertical focus most have solving issue based problems. Most philanthropies focus on the mission issues the NGO’s they support are working on rather than looking at dysfunctional operational processes across all the organizations they work with and applying these service NGO’s to fix the [often similar] issues. The end result if they did so would be that all their grantees functioned more effectively in meeting their end mission objectives at a far more reasonable and efficient cost than supporting the individual capacity needs of each of the entities separately.

Posted by Jonathan Peizer @ 10:58 pm

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01.05.06

A Protest By Any Other Name…

Watching the recent immigrant protests I was reminded how many in my own [Baby Boomer] generation bemoan the fact that young Americans don’t get out on the street anymore the protest significant issues, like the war in Iraq, the way the Baby Boomers once did at their age. This lack of action has translated into a perception of apathy on the part of this younger generation by some of their elders. However, I think the baby boomers may have missed something quite fundamental. Take a look at this:

Conspiracy Film Rewrites Sept. 11

When we were kids we went *out* to play…. and to protest…. These kids growing up didn’t…. they went to play… online, and that’s how they are protesting too…..

And the nature of the protests are far more sophisticated – no more magic markers on poster paper with slick one liners to catch a passing TV camera – Why do that when you can blog or record and edit your own multimedia version of events and share them with others of a like mind?

The question is whether this form of protest will be any more effective in changing things… The Internet may be more effective at organizing and distributing but the leadership gap is still significant trying to channel this into something more than viral marketing of conspiracy theories and coordinating meaningful action to do something about perceived injustice. I’m speaking here of the grass roots concern and protests that videos like this speak to, and not the canned “grass roots networks” that organizations like Moveon.org try to convince us they coordinate. On the other hand, looking at the world today, one could seriously question if my generation actually changed things for the better with their public protests… Many of our leaders are guilty of the same aggregeous behavior they once protested — and I find them far more cynical then those of the “Greatest Generation” whom they were protesting at the time.

Posted by Jonathan Peizer @ 7:54 pm

Filed under: Uncategorized

29.03.06

The “Quadrupal Win” Fiscal Agency Program of FJC

Managing Capaciteria.org as a free non-profit resource, I have approached some donors (and some have actually approached me) to support the endeavor. The problem is I am not a 501(c)3 nonprofit — As a recovering funder, I am not very comfortable with the appropriateness of such a small operation becoming one to manage a single online resource.

That left fiscal agency. What is fiscal agency? The best definition is here. To put it simply in terms of function: It’s a 501(c)3 institution that accepts the reporting and disbursal responsibilities of taking in grant funding and dispersing it to nonprofit projects like the Capaciteria that are not 501(c)3’s themselves. This allows project to receive funding and donors to insure there money is spent on nonprofit 501(c)3’s. There can be more services to it than that, but this will suffice for the purposes of a straightforward description.

If a project such as Capaciteria.org is lucky enough to be associated with a nonprofit, the non-profit in question can assume fiscal agency responsibilities as well. However, there is some sophistication to this process and most non-profits are not in a position to take on fiscal agency policy, liability and administrative responsibilities.

That leaves a class of nonprofits that have specifically set themselves up to provide this service. These are not that easy to find and many have geographic, institutional or programmatic restrictions as to what they will support. While I understand from reliable sources that there is a list of 300 National Fiscal Agencies that exists, it is tightly held — although I am working on seeing if it can be published somewhere — (like Capaciteria.org ) as it would be very beneficial for folks to know about.

In my case, I had to ask around, but as a recovering funder I think I had better access to the kind of resources and information that led me to good possibilities than the average non-profit or nonprofit project might. The reason I am blogging on this is to even the playing field a bit.

What I found was the Fiscal Agency agreements vary wildly — from institutions that take 3%-14% of one’s grant as a fee to entities like the Council of Community Services of New York State which charges a reasonable $100 fiscal agency fee to join the service and then charges only for processing the actual grants and associated reporting in quarterly hour increments of $9…. with no percentage of the grant taken.

Surely I thought, I had found the holy grail of fiscal agencies — both for myself and the donors who prefer that all their money be used programmatically…

That is until I found a fiscal agent that actually provides the donors funds to the grantee with interest! The Foundation for Donor Advised Funds has one of the coolest and most progressive Fiscal Agency programs I have encountered and every funder or nonprofit project seeking a fiscal agent should know about it:

FJC actually has its fiscal agency program tied to a low interest NP loan fund – so while they take 3-5% on funds received (depending on amount of administrative work required) and charge and additional 1% annually of the average daily balance maintained in the account – The loan account the money can be parked in earns a return of approximately prime + 3%; returns for the year ending 12/31/05 were 9%. The grantee can draw down funds as needed – which means if cash flow isn’t an issue – not only does the grantee have the potential to recover administrative fees (allowing more of the donor’s money to be spent on programs) but grantees can actually earn additional interest income. Based on 2005 performance numbers, if a grantee was charged an administrative fee of 5% and left the majority of funds contributed to their account at FJC for the year, after the 1% annual average daily balance fee was calculate, the grantee would have recovered all administrative fees and made an additional 3% of interest income. Meanwhile the original funder’s money is put to work immediately either as a draw down of the grant by the grantee or as a part of the loan fund to other NP’s administered by FJC. Jeannine Corey [corey@fjc.org] at FJC explained to me the accounting they use to post loan interest, and how they back these investments with bonds, annuities etc to make the entire enterprise very low risk. One can also choose to park funds in a money market account but that doesn’t create the win-win-win-win situation for 1) funder 2) FJC 3) grantee and 3) NGO helped by the loan fund using the more progressive option.

FJC provides a beneficial service that allows non-profit projects without 501(c ) 3 status to be supported, uses that support in low interest loans to other nonprofits and ensures donor support is being maximized in multiple ways — from helping a number of non profits to covering FJC fiscal agency fees with interest on the low loans they provide to other nonprofits. Now that’s intelligent philanthropy! Applications are accepted on a rolling basis and are generally turned around within 4 weeks.

Posted by Jonathan Peizer @ 11:32 am

Filed under: Uncategorized

17.03.06

Is There a Formula for Capacity Support Decisions?

I have had a nonprofit capacity fetish for some time now – identifying it as the holy grail of more efficient and effective work and the source of most of the problems in the sector — from how nonprofits cooperate, to how they deploy technology.

I have been trying to make sense of the following conundrum: There is a both a logic and illogic in donors not funding nonprofit organizational capacity even though it is the most important investment any institution can make *IN ITSELF* to insure it accomplishes its objectives.

The Logical Reasons:
Donors use 3rd party nonprofits as intermediaries to accomplish their mission funding goals. Missions can change from year to year. Even the same problems can evolve necessitating adding or changing nonprofit partners. If a donor is already supporting its own internal capacity it cannot be expected to fund the capacity of X number of partner organizations which it may or may not work with from year to year – After all, proper capacity support is a long term investment that often must be supported on a much longer time trajectory than the typical mission focused funding cycle or 1-3 years of support.

The Illogical Reasons:
If a donor supports nonprofit organizations to satisfy its mission funding goals and those organizations under-invest in their own capacity, some percentage of efficiency, efficacy and productivity is compromised. Ergo, when a donor invests in the mission based objectives of a nonprofit that has not invested properly in its own capacity, the donor is effectively insuring that X percentage of that investment will be wasted.

So the question is, is there a quantitative formula that can determine when it is a financially sound decision and when it is not for a donor to invest in nonprofit capacity?

Lets use the simplest case assumption:
The investment in a single nonprofit over a fixed period of time to accomplish one donor’s mission based goal.

The formula would compare:

The cost of investing in organizational capacity to accomplish a donor’s goal more effectively and the % of productivity, efficiency and efficacy gained.

-versus-

The cost of *NOT* investing in organizational capacity and the % amount of productivity, efficiency and efficacy lost (and. grant money wasted).

In such a scenario, a donor focusing on accomplishing purely its own objectives could justify not making capacity investments if the cost of doing so were actually more than the efficiency / efficacy / productivity gains. In that case, it would cost less for a donor to waste some of its funding on inefficiencies and save that money for further mission funding then it would to make a capacity investment in a nonprofit – potentially increasing its efficiency and efficacy but still leaving less for the donor to accomplish its broader mission based objectives.

In the real world the variables for such a formula would be far more complicated. Among other things one would have to factor in:

1) The number of years a mission based project would run.

2) The number of nonprofit supported

3) The extent and level of capacity needs to address

3) The weight/importance a donor attaches to a well supported nonprofit not only handling its project better but also future projects for that donor and others.

4) The weight/importance attached to efficiency versus efficacy. This is a tricky variable in the nonprofit space. A nonprofit can be extremely efficient but still not be effective (for example: the way it attacks the problem may not work as well or it may have credibility issues). Conversely a nonprofit can be effective (have credibility, and deal with the issues it tackles appropriately), but still be highly inefficient in the way it accomplishes its goals. Because the currency of the sector is “trusted source relationships” versus hard currency, the divergence between efficiency and efficacy is far more pronounced in the nonprofit sector. Market forces like competition and bottom line interests insure that a for-profit that is efficient but not effective goes out of business. One that is effective but not efficient may also suffer the same fate. By contrast efficient and inefficient nonprofits alike may still attract donors if the former “looks effective” while the latter is effective. Productivity becomes a question as well. Does it mean efficiency or efficacy — or some percentage of both?

I hope this little musing of mine leads to some more thought from the more metrically minded on what such a formula might look like. My concern is that these decisions are being made now with far less strategic thought – with the typical decision being not to fund (or limit funding) for nonprofit capacity whether it’s a net gain or loss to a donor’s investment.

Posted by Jonathan Peizer @ 10:10 am

Filed under: Uncategorized