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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Grant Craft: The Case for Implementation Support

on June 18, 2013
in Blog

Philanthropic practice seems to have evolved a bifurcated focus at the beginning (grant approval) and the end (outcome metrics) of a grant. My question is what about the middle, or grant implementation, where philanthropic support is most likely to help a grant succeed? Is philanthropic intervention during the implementation process just meddling, or an opening to providing more useful support because of increased requirements now imposed at the front and back end of a grant?

Donor focus at the beginning of a grant, on its approval and processing, has evolved over the decades and increased in sophistication along with institutional philanthropy. New financial rules to foster transparency account for some of the additional complications. However, many philanthropic institutions don’t simply fund a grantee’s program anymore. Instead, they create a set of gate keeping parameters which amount to developing their own program criteria grantees must satisfy to be eligible for funding. This is somewhat ironic when the grantor typically only resources the effort, while the grantees are responsible for actually satisfying demand. The latter is assumed to be in a better position to understand what is required on the ground. Nevertheless with over 1.5 million charitable organizations competing for resources in the US alone, its understandable why philanthropies have evolved their giving over the decades into developing sophisticated gate keeping criteria in order not to be overwhelmed. This is not something that will change any time soon even if it’s real effect is creating two different demands that are often not completely aligned — Donor funding criteria and the local demand a nonprofit must satisfy.

The increased focus at the end of the grant and outcome metrics is a relatively new trend over the last decade and a half. It is a result of new donors with technology and venture capital backgrounds infusing their ethos into the field of philanthropy in addition to the general societal trend over the last three decades to commoditize most things from education to health. Of course there were grant evaluations in decades past and every so often a “measurement movement”. However grant evaluations were often pretty loose and often thought of as self-serving, confirming the foundations reasoning for providing a grant in the first place. Technology and the Internet have contributed to our evolution into a networked, “dashboard-friendly” society seeking easy measurements to help us quantify success — quickly. So I think this movement in philanthropy is here to stay as well. The problem of course is that in business, we base outcome metrics on the immediate straightforward business transaction, like buying a house or a car. In philanthropy however, the actual transaction is often secondary to the long term societal benefits being sought, and they often occur long after a grant expires. For example, providing housing for the homeless in order to enable someone to have an address and to find a job; bring up a stable family in a safe environment; have children connected to a school district; etc… The result is that these short term outcome based evaluations serve some purpose in better measuring the success of the immediate philanthropic transactions during the life of the grant (e.g. a homeless person receives a home), but are often no better than the earlier evaluations in measuring long term successes that might happen years later and that the grantor is often not around to evaluate. The majority of grants given have 1-3 year life spans.

Somewhere between the traditional foundation evaluation and these new outcome-based approaches is a happy medium, but we have not found it yet. Part of the reason I think is the failure of many philanthropic institutions to get involved in the grant implementation process. One of the ironies of metric or outcome-based grant making is that it does not provide what its private sector equivalent often does, intervention during execution. Venture capitalists don’t just number crunch and measure the projects they invest in. They incubate them, provide them advice as well as resources, help them network, etc. to assist them in their success during implementation, especially in their early stages. Many foundation grants are also involved in supporting innovative pilot solutions where this help is needed, and drawing upon a foundation’s network of other more mature grantees and its expertise would be useful.

Unfortunately, the traditional approach and ethos in philanthropy has been “hands off” during the implementation process, because donor etiquette suggests that doing so is overly interfering in a grantees work. The result is a rather odd situation of the grantee having to modify its program to satisfy initial philanthropic criteria to get the grant. Once the grant is received, the grantee is often in the position of additionally satisfying donor outcome metrics with limited administrative resources because the grant often caps administrative capacity needed to do a good job at it. The net result is a different kind of interference that materially impacts a grantee’s work. So why not additionally support the grantee with advice, networking, etc. during the implementation process when a donor can actually make a difference in helping a grant stay on track while satisfying all the extra requirements it imposes on its grantees.

I fully appreciate many grantees also look at philanthropic intervention during the implementation process as an intrusion – and it is understandable in the current philanthropic environment. After all, most grantors and grantees understand that the sausage making that goes into translating a donor’s grant criteria into the actual program needs followed by the additional sausage making to translate what�s really happened on the ground into satisfying donor metric requirements is often a process that neither wishes to evaluate too closely. In the traditional relationship between program officer and grantee both parties understand the realities of what must be done to overcome underfunded capacity and criteria that doesn’t necessarily match need. However, this is precisely why intervention during implementation is so important, because often the grantee’s job is made more difficult at the outset trying to satisfy both the donor’s criteria and real demand.

To intervene in the implementation process requires a different relationship between grantor and grantee. One of trust and equality were the donor understands its role as resourcer and its dependence on the grantee as implementer, in the same way the grantee understands the donor’s important role as resourcer. If both the resourcer and implementer work in concert during the implementation process there is a far better chance of a successful grant not only in meeting its early transactional outcomes but its longer term goals as well. After all, how many venture investors pour money into projects based on specific funding requirements they have defined only to disappear — and then reemerge at the end asking if their outcome metrics have been satisfied?

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Relying Primarily on Fund Raising? The Numbers STILL Don’t Add Up

on March 18, 2013
in Blog

Note: This is an update from the original 2010 article as new data has presented itself.

I continue to be astounded by the high number of fundraisers being sought on nonprofit job boards. Many nonprofits still think that fundraising for subsidy support as their main source of income is the appropriate strategy. Once a upon a time there were a few high net worth donors and a few grade “A” organizations in each major issue area (health, education, youth, etc..) to give it to. Organizations could count on long term subsidies that supported their capacity because they were the only kids on the block…

As the statistics clearly show, those days are long gone…

According to the Urban League National Center for Charitable Statistics (NCCS) as of 2013 there are:

* 1,551,705 tax-exempt organizations, including:
– 963,255 public charities
– 97,941 private foundations
– 490,509 other types of nonprofit organizations, including chambers of commerce, fraternal organizations and civic leagues

In addition there are 317,751 congregations in the United States. This is relevant because In 2011, according to the National Philanthropic Trust the majority of charitable dollars went first to religion (32%) and then to education (13%), human services (12%), and grant making foundations (9%).

That equals about 1.54 million nonprofits of one sort or another competing for the same diminished pot of total funding. I say diminished because the share of the total giving pie in the US peaked in 2007 at approximately 306+ Billion dollars. Since the recession started in 2007, total giving has been consistently under $300 billion and in 2011 was $298 Billion. Assuming those 317,751 congregations are collecting 32% of $298 billion charitable dollars, that leaves $202.64 billion to be divided among 1.54 organizations or put another way and average of $131,840 per organization. Of course the money is not given equally. The statistics note that education and human services get a larger share of the pie. Moreover, the largest most visible charities will necessarily get more from the general public as will those with established institutional donor relationships. These are interesting statistics to consider when analyzing the annual cost to employ a fundraiser versus the average amount of the total giving pie available to each nonprofit.

While total giving has diminished the number of new nonprofits competing for dollars continues to grow….

According to the Urban Institute’s nonprofit section, the nonprofit sector has been growing steadily in size for more than a decade. Between 2001 and 2011, the number of nonprofits increased 25%; from 1,259,764 million to 1,574,674 million today. The growth rate of the nonprofit sector has surpassed the rate of both the business and government sectors. That means an average of 32,000 new nonprofits were created every year. The annual numbers were higher until the recession, over 40,000 per year, but there has been a decrease of about 30% new nonprofits created partly due to the recession and partly due to an IRS rule change.

Giver Profiles:

According to the National Philanthropic Trust, in 2011, the largest source of charitable giving came from individuals at $217.79 billion, or 73% of total giving; followed by foundations ($41.67 billion/14%), bequests ($24.41 billion/8%), and corporations ($14.55 billion/5%).

Individuals who make up the largest portion of giving, typically give in small amounts. “But wait! You say, what about high net worth Individuals?”. Well, they typically give larger amounts to their specific pet causes, and if you’re lucky enough to be one of them that’s great. Only 50 people were responsible for $7.4 billion dollars of total giving in 2012 According to the Chronicle of Philanthropy. BTW that doesn’t count another half billion provided by the Gates’ as part of an earlier 2004 pledge to their foundation. Which brings us to our second largest class of private givers, foundations. Often, really high net worth individuals, companies, etc. set up these institutions to provide funding for the organizations they wish to support; fire walling their donor from their other activities into a neat institutional package the IRS can deal with and that has specific tax treatment rules of its own.

According to the National Philanthropic Trust, the number of foundations increased dramatically (242%) since 1980, but that increase has slowed significantly, 33.6% since 2000; and 6% since 2005. More importantly, according to the NCCS data most foundations are quiet small.

  • 60,000 of 98,000 active foundations have assets under $1 million
  • Another 30,000 have assets between $1-$10 million
  • Only approximately 3,000 have assets between $10-$25 million
  • Only approximately 2,500 assets above $25 million

These organization also operate on the IRS 5% rule — e.g. they are required to give at least 5% [but not necessarily more], of their total assets out annually. And that’s what most do. According to a Foundation center report. The majority stick to that minimum. Between 2007-2009 over 2/3 of the largest 979 foundations surveyed provided only between 4% and 6.9% of their total assets in any given year, with the vast majority (446) paying out between 5%-5.9%. Of the approximately 98,000 foundations the top 50 alone were responsible for about $14.5 billion of 2010 giving according to a Foundation Center Report — That represents 35% of the total foundation giving pie!

According to NPTrust Donor advised funds [typically pooled funding from higher net worth donors who do not create their own foundations] have become more popular. There were 161,873 donor-advised fund accounts in 2010 holding nearly $30 billion in assets. Annual contributions into donor-advised funds were $7.77 billion in 2010 and Donors recommended grants from donor-advised funds totaling $6.18 billion to charities in 2010. However, the average donor-advised fund account size is also quite small relative to NGO need: only $185,087 in 2010.

Do the Math:

Given the statistical increase in nonprofits and corresponding decrease in overall giving, relying on subsidy funding or grants as an NGO’s primary source of revenue is unsustainable over the long term; which may be why the number of nonprofits is finally decreasing. While there were still new entities applying, 2011 saw an almost 16% decrease in overall nonprofits.

More importantly, its why many nonprofits opt for a different alternative to primary dependence on subsidy support. In 2010, the NCCS reported that:

  • 73% of public charity revenue came from program service revenues, which include government fees and contracts.
  • 22% of public charity revenue came from contributions, gifts and government grants.
  • 5% of public charity revenue came from “other” sources including dues, rental income, special event income, and gains or losses from goods sold.

If an NGO’s revenue model is not similarly balanced, but instead heavily skewed to reliance on subsidy funding, then at best organizational development and growth will be a continuing challenge, at worst the organization may have to shutter its operations or merge with another more financially sound entity. What I always advised my grantees as a foundation program director, funder and consultant was to find a program-related income stream based on their mission that could support as much of their general operating expenses as possible. General operating expenses are typically underfunded by foundation support even in the best of circumstances, and individual member supported organizations are expected to keep these costs down as well. A nonprofit looking at long term strategic sustainability should be trying to cover its own operating costs to the largest extent it can while soliciting subsidy support for its ongoing and new programmatic work.

Finally, given the realities of donor support (which typically funds programs first, operations second) and the increased competition for less funding, most nonprofits should be looking to hire new business strategists rather than relying solely on fund raisers to seek subsidy supports. Nonprofits need more individuals that can effectively create and relate sustainable income streams to program missions. No, I am not advising that the answer is a Fortune 500 business specialist for every nonprofit, but rather someone with experience generating rather than simply soliciting revenue for a nonprofit. There is a genuine argument that both are necessary. However, the statistics skew towards insuring an organization can effectively generate revenue through its mission.

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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25 Tips for Evaluating (And Writing) Successful Technology Grant Proposals Now Available

on March 14, 2013
in Blog

This manual is written for grant evaluators in various issue areas trying to make sense of technology grant proposals they receive as well as non-profit grant writers trying to solicit support for their proposals. the ICT challenges and tips presented cut across issue areas and are valid for both the traditional ICT circumstance as well as the Web 2.0 world of social networking and mobile access. Having spent over a decade evaluating and supporting technical proposals as a Program Director and CIO at a large funder, I wrote this manual to share some tips and tricks I learned evaluating technology proposals and implementing ICT projects globally.

Find it and what others are saying about it, here

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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How to Incentivize Measuring Outcome and Supporting Nonprofit Capacity at the Same Time

on October 14, 2012
in Blog

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.

The Problem

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.

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Charity Is Not Perfume

on September 14, 2012
in Blog

I just finished reading the Essay by Dan Palotta in the Wall Street Journal entitled Why Can’t We Sell Charity Like We Sell Perfume?. The gist of the article is clear by the title. While I could argue each one of his specific points, the bottom line is that I think the article fails to recognize the unique dynamics of the three major sectors; private; nonprofit; and public (government) and just as importantly people�s expectations of them.

I think what the author is really asking is “Why doesn�t the nonprofit sector operate/behave more like the private sector?” The answer is that the currency each of these two sectors values is entirely different.

The Nonprofit currency – is the trusted source relationship
The For profit currency – is the bottom line

So when after 9/11, when the Red Cross made a completely logical BUSINESS decision to take some of its 9/11 donations and put them aside for the next crisis — it caused a scandal resulting in the removal of the ED and a reshuffling of its board.
WHY? Because the people donating didn�t value the bottom line business decision but rather THE TRUST they put into the Red Cross to use everything they gave for the 9/11 crisis — even if it wasn’t needed for that crisis.
The nonprofit sector is designed to satisfy the more ethical, spiritual, moral, selfless side of our lives and the trust we have in our fellow people.
The private sector satisfies our more tangible and selfish needs � for creature comforts to make our lives easier, more comfortable and subjectively satisfying.

Given the different objectives of the two sectors, it is reasonable to understand why they’d work differently. That doesn�t mean you can’t adapt certain strategies between sectors, but you have to first appreciate the different dynamics of the two to do this effectively. Otherwise you stumble into the Red Cross conundrum.

The author could have written another article asking why the government doesn�t operate as a business. The answer would be that the government’s responsibility is to protect/fulfill the needs of ALL ITS CITIZENS while a business is committed to meeting the far narrower desires of its consumers and bottom line requirements of its investors. In a perfect world the private sector and government should work complimentarily and not exactly like each other (just as the private and nonprofit sector do) – one is the engine of the economy and the other regulates and protects all our interests so the engine doesn�t overheat and explode in our collective faces.

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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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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The Politics Of Truthiness and the Internet

on March 14, 2011
in Blog

Truthiness is about having the right to one’s own opinions and facts. It becomes a problem when objective facts diverge from the opinions of supposedly trusted sources promoting their perspective as the truth.

When Stephen Colbert exercises truthiness (a term he takes credit for coining) he is doing so on Comedy Central and framing it as a caricature of the truth. He and John Stewart act in the tradition of court jesters speaking truth to power through comedy — And they make it clear that is the case.

Contrast this to a qualitatively different use of truthiness; when Glenn Beck makes truthy assertions on a news channel, relates much of what he doesn’t like about progressives to either national socialism or communism, and indicates in all seriousness on his radio show that he is channeling god. He is using truthiness to advance an agenda that he is serious about, on a channel that defines itself as news with the moniker “We Report, You Decide”?. I use Beck as the most egregious example rather than Keith Olbermann on The Left because Beck is helping to spur an actual political [Tea Party] movement while Olbermann just doesn’t have that impact. However, truthiness disguised as news on both the left and right is equally problematic. Unfortunately cable networks are in a ratings war and use infotainment to supplement news. Infotainment does not necessarily have to be truthy but if truthiness serves up better Nielsen numbers it’s used – In fact, this sentence could sadly be the mission statement for FOX or MSNBC.

Truthiness has both a dark and light side:

In the case of faulty conjecture on Intelligence data, it has cost thousands of lives in the last decade.

Truthiness can also be useful for serious issues if it acts to self-correct; That is, if it spurs objective inquiry to get to the truth. This occurred in the vaccination debate where perceived truth based on conjecture that vaccines caused autism led to further scientific research — which disproved the original conjectures and even led to a legal opinion against them in the so-called vaccine court.

Truthiness seems to be used more, and more effectively, on the conservative side of the debate to question objective science like global warming and evolution, as well as a range of other objective truths, (like Obama being born in Kenya, the so-called Clear Skies Act actually reducing air pollution controls, the mandated use of death panels in the Health Care Bill, WMD in Iraq being a slam dunk, etc.). It’s not that The Right is neccessarily better at truthiness, it’s that it is far better at its dissemination; effectively framing its message and forwarding its agenda. Thats because it tends to be more organized, is narrower in its range of disagreements and is better at subordinating individual viewpoints to achieve the group objective. By contrast, the definition of a liberal firing squad is a circle � gaining consensus is like herding cats. One would be hard pressed to argue that the Obama administration has used truthiness as an official tool either more or more effectively than the Bush administration. Another definition of truthiness is that it is the truth you feel. Bush famously worked from the gut while Obama works from the mind.

The viral nature of the Internet combined with emergent social networks offers a unique host to transmit truthiness — like a virus. It’s not that difficult to imagine an intelligently placed truthy rumor causing enough panic to become a security threat in its own right. It’s far easier to imagine truthy information masquerading as junk fact or science and echoed on page after page on the Internet (for example that vaccines cause Autism). Online social networks accelerate this trend by bringing like-minded people together in large numbers, allowing opinion promoted as fact to quickly become fact if repeated enough times and by enough people. There has never been a medium that’s had a more profound effect on mass group dynamics and interaction in 1) real time and 2) without regard to the limitations of geography.

What is also interesting about truthiness in democratic societies and online is that it is not forced by Church or State but democratically promoted by the group and to a more or lesser extent influenced by the celebrity of the truthiness-teller. Witness Sarah Palin’s Twitter and FaceBook following.

What interests me personally about truthiness is that I defined my career at OSI promoting Open Societies through the provision of access to information on the Internet. As the Internet has evolved however, I see the need for mediation that turns information into knowledge and limits the more damaging effects of junk information one receives along with useful information online. Truthiness in broadcast media lasts a news cycle or two and is then lost. Truthiness on the Internet has staying power, and gains new life with every search result. A good green tea metaphor for truthiness is that it flows through the Internet like a free-radical with the potential to cause cancer if not subjected to the antioxidant of objective facts.

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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Baby Boomers, J�accuse!

on March 8, 2011
in Blog

My late French grandmother is smiling down from heaven now that I have finally used her mother tongue, and for social commentary no less�

On Sunday night (March 07) 60 Minutes did an extremely disturbing heart-wrenching piece called Homeless children: the Hard Times Generation. It described 2 million more kids in the U.S. (about 16 million or 25%) now live below the poverty line. This is the largest number since the Great Depression. While pundits try to convince us that adjusting [their] tax rates back to Clinton-era levels is the equivalent of socialism and class warfare, that in this country formerly middle class kids are reduced to doing their homework in the dark with flashlights and candles because their parents can no longer afford to pay the electric bill. Such scenes are more typical of news reports from Afghanistan — or at least they used to be.

Listening to their stories, one realizes this Hard Times Generation is being taught to appreciate and empathize with the plight of others in ways the generation that placed them in their current predicament seems to have forgotten. I accuse my generation of Baby Boomers, brought up in post-war wealth, with the hard fought limitless possibilities presented to it, for the plight of this new Hard Luck Generation. We bare collective responsibility because of the decisions made on our watch when we were primarily at the helm. Every generation has a shot at running things, and the Swan Song of the Baby Boomers as we reach retirement is:

  • The Great Recession
  • Massive debt due to an unsustainable credit binge that everyone indulged in
  • Monumental economic disparity where the top 1% now account for 33% of the National Income
  • Loss of ground in health and education statistics vis-a-vie the rest of the world
  • Loss of standing in the rest of the world due to diminished wealth and perceived strength
  • An unsustainable energy policy that President Carter warned us about
  • Servitude to a military-industrial complex that President Eisenhower warned us about

Ok, we are the generation responsible for the PC, IPOD, the Internet, and incredible new advances in science and technology. Who knew dinosaurs had feathers, hobbits existed in Indonesia and that depression could be cured with a pill (if you were willing to accept suicidal tendencies as a mild side effect)? We are also the generation that reintroduced religion and the fuzzy separation of church and state back into our politics after such activism had receded many decades before. We are a generation that used religious dogma to politically divide our citizens while eschewing religious charity to help our fellow man or be good stewards of the earth.

We are also a generation that fought for civil rights and gender equity. That�s worth a gold star or two, right? Unfortunately, the equity balances we created for gender and race were frittered away creating new economic class inequity that threatens to undermine our society. According to Sam Pizzigati, associate fellow at the Institute for Policy Studies in Washington D.C. “Over the past 30 years, the income of the top 1 percent, adjusted for inflation, doubled. The top one-tenth of 1 percent tripled, and the top one-one-hundredth quadrupled. “Meanwhile, the average income of the bottom 90 percent has gone down slightly.” Wages for most Americans didn’t improve from 1979 to 1998, and the median male wage in 2000 was below the 1979 level, despite productivity increases of 44.5 percent. To make up for lost income, credit card debt soared 315 percent between 1989 and 2006, representing 138 percent of disposable income in 2007.

Our parent�s generation won the World War and the Cold War for us, and we repaid them by going on a personal and national spending binge, with money we didn�t have. We are now in hoc up to our eyeballs to a debt-holder with same the communist ideology they regarded for decades as the single greatest threat to our way of life. So how in only a few short decades did we move from the �Greatest Generation� characterized by self-sacrificing citizens to this more �Shameful Generation� of Baby Boomers characterized by self-indulgent consumers?

Back in the 60�s and 70�s our generation fought for its rights. Now it�s fighting just as hard for the right to keep all the tangible stuff it�s accumulated over the decades. The shift started as an SNL parody, Al Franken�s �Me Generation� in the 80�s, followed by a movie featuring Gordon Gecko and his famous creed �Greed is Good�. Outrageous stuff nobody could truly take seriously. However, Al Franken is now in the Senate and Wall Street took Gecko very seriously, and what started out as parody and entertainment is no longer funny. Our political and private sector leaders have let us down — and those leaders, fellow baby-boomers – are us�

Too many of us don�t vote, and too many of those that do are willing to vote against their and the country�s long term interests in the vague hope that the policies promoted will allow them to aspire to the top 1% — and screw the rest. We talk about the future debt burden to our children while we let the kids featured Sunday night on 60 Minutes fall through the cracks now. We expect the same level of services and fight any attempt to raise taxes or lower entitlements by throwing elected leaders with practical solutions out of office� Can anyone spell I-N-S-A-N-I-T-Y???

Some blame Ronald Reagan for the national shift. While he may have started the pendulum swinging in the �Right� direction it would be rather hard to reconcile his policies, politics and the way he interacted with the other party with his fellow Republicans today. His generation still believed in shared sacrifice and the shining city on the hill — for all Americans. Those who came after him and attempt to speak in his name think more in terms of gated-communities in the valley — for themselves.

The America of today is the result of a cynical, selfish and entitled generation; a generation that turned its back on the same tenants that allowed our society to grow, flourish and provide prosperity to the greatest number of people in the post-war era � Ironically the same era that bred it. What are these values that we now eschew?

  • We no longer value �Made in America.
  • We no longer believe banks are in business to invest in the economy and not themselves.
  • We promote business schools that teach short term shareholder gains at the expense of long term national economic interest.
  • We no longer value limited disparity between rich and pure.
  • We think we value education even while we revile the educated.
  • We think we value science while we employ our political system to undermine it.
  • We aspire to ethical standards and a national ethos no higher than a typical episode of Survivor, and The Apprentice.

Societies don�t function stably for very long with the kind of disparities we now allow – with millions of people falling into poverty and unable to afford healthcare and a decent education. There are a lot of things we used to think would never happen in America. We should not be so naive to believe we will escape social unrest as a reaction to deepening economic disparities at some point in future if we don�t try to correct them. My dear grandmother comes to mind again recounting the history of our Russian branch of the family and the great-aunt who was never quite the same after her husband was killed and she was stoned by fed-up peasants in full revolt as she beat a hasty retreat from the Revolution in 1917.

I have greater hope that this new generation can right things. It knows economic despair, is by nurture more collaborative, and can empathize with its fellow citizens more than Baby Boomers seem to be able to anymore. And maybe if we leave them bankrupt, less educated, unable to afford healthcare and living in a devastated hell scape of extinct species, depleted energy and natural resources it will spur them to exceed even our �Greatest Generation� in turning things around. After all, we Baby-Boomers were left with just the opposite and look how we left things?

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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WikiLeaks /Amazon Threat to Internet Speech? NOT!

on December 3, 2010
in Blog

In her CNN commentary, Rebecca MacKinnon argues that the future of freedom in the internet age depends on holding companies that now act as arbiters of the public discourse accountable to the public interest. I�d argue that in an age of broadened media discourse and citizen journalism it might be useful to distinguish which ones have this responsibility and at what level.

I had the opportunity and pleasure to work with MacKinnon at the Open Society Institute when I was dealing with these issues of media censorship as Director of its Internet Program and then as CTO of its Information program. In this instance I must point to what I feel are a few flaws in her argument using Amazon caving into pressure to pull WikiLeaks in the larger context of our First Amendment rights being threatened in the US by online corporate control.

As her founding status in Global Voices Online and the Global Network Initiative indicate, MacKinnon has been at the forefront of the citizen journalism movement. This movement presumes, I think correctly, that the ability to participate in journalism has been democratized. The Internet has created more, not fewer spaces and opportunities to participate. Anyone can take part and in a variety of ways — in this case even a private company that hawks books and electronics as its core business, with a hosting business on the side.

It’s precisely because news dissemination is no longer the monopoly of traditional newspapers, radio and television that that Amazon situation should not be considered as the sky falling. Amazon made a decision to drop certain content it hosts during the Christmas rush to limit the bad press of being perceived as a national security risk in its own country. Presumably, it simply didn’t help its large screen TV sales… Today however, there are a variety of other citizen journalist sources, corporate and private, and about a gazillion other hosters online that can pick up the gauntlet without incurring the same legal risks Amazon decided it would not take — And any American with Internet access and the will can find them. To underscore this, in the comments section on MacKinnon’s commentary on CNN a commenter freely offered that while the WikiLeaks domain may have been killed it still had an active IP address that he provided. Placing that IP in my browser transferred me to yet another IP, and via the magic of the Internet, to the WikiLeaks site.

As MacKinnon correctly points out, “Speech within the kingdom of Amazonia is not protected in the same way that speech is constitutionally protected in America’s public spaces.” She also points out that the new virtual realm “is largely made up of virtual spaces that are created, owned and operated by the private sector” — maybe largely, but certainly not completely. The fact that public spaces continue to exist on a growing Internet is a net addition to sharing information that did not previously exist in the pre-Internet era when corporate monopolies largely controlled news dissemination.

MacKinnon has decided to draw a line in the sand about a company’s self-censoring a form of free speech that is near and dear to her heart. I haven’t heard her commenting as vociferously on the sexual content (also classified as free expression in our country) that these same companies regularly self-censor as part of their user agreements — and which could at least be argued to be less life or career threatening on a global scale than WikiLeaks data might turn out to be.

MacKinnon points a number of times to the Internet age responsibilities of “companies that are now the arbiters of public discourse” � but as opposed to what? The responsibilities of the pre-internet age media outlets that used to control the public discourse?

As the citizen journalist movement has broadened the discourse to include new players, I’d argue that we must be realistically aware of their limitations related to the public interest even as they participate in the public discourse. Anyone that has read an Assange interview or one about him could reasonably question his balance of public interest versus self-interest. Similarly, most companies exist to make a profit. The extent of their public interest is defined by their accountability to 1) their shareholders, 2) the demands of their customers and 3) regulation which define the legality of their operations. Amazon made a legitimate business and legal decision weighing the number of customers who would stop buying Wii’s because it censored certain speech versus those who would not purchase because it was labeled a threat to their national security. Assange made a similar calculation about his reputation in publishing the leaked and potentially illegal data.

Ironically, a controversial case like WikiLeaks truly showcases the value-add of traditional media companies that do exist to serve the public interest. Unlike the larger group of participants that now engage in citizen journalism around the world, an entity like the New York Times has the investigative, analytical and legal wherewithal to put 250,000 raw emails into context for its readership and vociferously defend its constitutional right to publish them. In pursuing Amazon the erstwhile Senator Lieberman went after a rather soft target. He didn’t presume to mix it up with the New York Times.

I noticed as well that MacKinnon chose a traditional media outlet, CNN, to get her opinion out to a broad audience as did WikiLeaks in choosing traditional media outlets to share its data. So maybe this discourse is less about the new public interest responsibilities of citizen journalist participants both public and private, and more about valuing and protecting the institutions that have traditionally existed to serve those interests. Traditional media outlets do have an important place in this new era of citizen journalism and it would be a shame to view them as archaic and obsolete precisely because their public interest credentials are so clearly defined. They still present powerful public forums to make one�s case.

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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