slide3“The reason support is provided for program over administration can be logically rationalized from the donor’s perspective in the traditional funding paradigm. A donor supporting a portfolio of organizations does not necessarily view any individual nonprofit as the solution to the social problem that it defines as its objective, even if the individual nonprofit sees itself that way. Investing in nonprofit capacity creates a double overhead cost for donors who use nonprofits as intermediaries to accomplish their issue-based objectives. Donors already support their own overhead so they are reticent to support the additional overhead of interchangeable intermediaries they employ.” (GEO Impact Journal, Planetworks Journal, October 2003)

The economic downturn spurred by the dot com crash served to highlight the limited institutional capacity most nonprofits rely upon to survive. Many with exceptional programs considered closing for lack of funding and a limited ability to continue supporting themselves. While the business environment is cyclical, and the economy is slowly turning around, capacity issues are still a chronic problem for most nonprofits globally. This will continue, in good times and bad, until the dynamics of traditional donor funding of capacity is dealt with realistically. The sector must embrace new paradigms that have evolved naturally over the last few years with the help of new technologies and a few visionary institutions. Progressive donors underwriting nonprofit service providers willing to support to their fellow organizations are creating the new strategic paradigm of nonprofit capacity support. nonprofit clients who receive appropriate capacity support deliver on their mission more effectively and have far more opportunity to devise ways of supporting themselves with less need for donor subsidies.

While a subset of nonprofits rely on generated income to support their activities, most rely primarily on donor subsidies. These subsidies come from a variety of sources, but there is one characteristic typically consistent among all donor groups whether support comes from private foundations, individual donors, governments or membership. Donors are interested in supporting program activities and not accountants, technicians, administrators and organizational infrastructure. Individuals who manage nonprofits are often more interested in focusing on the organization’s compelling mission than they are on building, managing and subsidizing these organizational support structures.

The irony is that most donors and grantees aspire to the same state of civil society Zen mythically referred to as – sustainability. In this karmic state, the donor withdraws support gradually while the nonprofit takes on more responsibility for supporting its own operational activities. Ying and Yang are achieved when the nonprofit generates enough income to support its operational budget, and only approaches donors to support its programmatic activities. As in most things Zen, it’s all about knowing your positions. A nonprofit cannot be expected to assume the position of ever supporting itself if:

1. The nonprofit does not value the importance of capacity.
2. Donors do not appropriately support capacity.

The reason support is provided for program over administration can be logically rationalized from the donor’s perspective in the traditional funding paradigm. All donors are faced with the same issue: How can a single donor demonstrate noticeable effect in tackling a problem of social value? Noticeable effect is important to donors because their constituents, board members or living donors expect the money they expend to demonstrate tangible results. The vast majority of donors answer the “how to achieve noticeable effect” question by creating well defined niches and funding criteria based on geography, sector and sub-issues within the sectors they choose to support. Donors purposefully try to define a unique niche for themselves, so their first instinct is not necessarily to partner with others and leverage their funding. Spreading the burden of capacity support among donors would be more easily accomplished if it were.

Nonprofit grantees are often viewed by donors as the tools used to turn dollars into action on the ground intermediaries assisting donors to achieve noticeable effect. A donor supporting a portfolio of organizations does not necessarily view any individual nonprofit as the solution to the social problem that it defines as its objective, even if the individual nonprofit sees itself that way. Institutional support can change from year to year if another organization comes up with a novel way of achieving noticeable effect or if a donors criteria for support changes. Most funding is earmarked for programmatic activity and is heavily weighted against capacity support of the intermediaries used to achieve a donor’s objective. Funding a computer or accountant creates, at best, a secondary case for demonstrating noticeable effect on the ground.

In the commercial context, generating income requires investing in institutional capacity. There is a clear cycle of benefit. Investment creates organizational efficiencies, reduces expenses and most importantly, meets the primary objective of generating more profit — which can be recycled into further capacity investment. This clarity of relationship and purpose does not translate well in the nonprofit context. Investment in nonprofit capacity does not necessarily generate new revenue to re-support the activity unless that is the purpose of the original subsidy. However, that is not the primary objective of most donors, solving social problems is. Moreover, investing in nonprofit capacity creates a double overhead cost for donors who use nonprofits as intermediaries to accomplish their issue-based objectives. Donors already support their own overhead so they are reticent to support the additional overhead of interchangeable intermediaries they employ. Operating foundations solve this conundrum by supporting their own program activities through self-subsidy. In most cases however, donors support their own capacity and fund/rely upon nonprofits to meet programmatic objectives. This effectively splits capacity and program support between two or more institutions.

While supporting nonprofit capacity might seem a rational investment, it is one step removed from the limited amount of funding a donor has to meet its goals. Aside from that, it’s not sexy, does not read very well in the annual report of accomplishments and does not provide that ‘feel good’ effect to either the institutional donor or granny who is just trying to help those poor starving kids. Logically, without capacity support, a nonprofit cannot operate its programmatic activity as effectively, let alone come up with an infrastructure that allows it to generate revenue to sustain its own activities.

Unfortunately, the donor grantee-relationship is not appropriately defined as a partnership of equals providing different types of resources to meet the same objectives. This exacerbates the problem because both sides typically dance around the issue of capacity rather than addressing it realistically. Both sides understand capacity is not high on the funding agenda so donors are pitched want they want to hear by nonprofits who want their initiatives funded — initiatives that provide solutions to the social ills both are trying to resolve with limited support for the capacity that supports the initiative. It’s not just donors that are constrained by the capacity their funding priorities allow them to support. Many nonprofits rely on a few very committed individuals who believe strongly in the issues they are addressing. Less importance is attached to developing a well-managed institution with long term sustainability plans and management structures designed to outlive their association with the institution. The result is that capacity is often handled by grantees padding a fraction of whatever capacity support they really need into the request for program support.

Without the possibility of investing in their own institutional capacity, most nonprofits go wanting. This has some significant ramifications. For example, technology solutions can be introduced into the commercial environment because companies invest in human capacity to digest and integrate it into their organizations. nonprofits typically do not, and as a result can’t deal with new, raw technology introduction effectively. Technology must be introduced in a package that includes technology and the service and support which effectively allows it to be utilized and maintained. This new mechanism of external support constitutes the core difference of newer and more effective nonprofit capacity support paradigms. It does so by realistically dealing with the fact that internal capacity expertise often does not exist in the typical nonprofit and therefore technology products, financial services, etc. must be bundled along with capacity support services in order to make them work.

These better nonprofit capacity support solutions do exist and have been evolving naturally and quietly over the last few years, thanks in part to technologies like the Internet. New technologies have allowed institutions to network, share, aggregate and distribute information far more easily. Defining the capacity support issue as a sector-wide problem, a few bold institutions and donors have addressed it using technology and other tools to aggregate the capacity support needs of client nonprofits. Rather than supporting internal capacity of individual nonprofits, a model of external capacity support around aggregated demand has evolved. nonprofits are buying into a high quality capacity support service delivered at a reduced cost by other nonprofits.

There are nonprofits that manage themselves well and take great care in developing appropriate infrastructure. There are also donors that focus on supporting individual organizational capacity. However, this does not change the fact that the institutional funding paradigm on the macro-level is not designed to efficiently handle capacity support to the vast majority of NGO’s that need it. Donor support must be delivered to support capacity in the same way it is set up to effectively to support program activities and these newer paradigms of capacity support discussed above more effectively accomplish this.

I have written about nonprofit intermediary support organizations from a technology perspective in the past; organizations like NPower, Tech Soup, Aspiration, One Northwest, Ninth Bridge, etc. They aggregate user demand for IT services and deliver a variety of superior support including online tools, high touch technology support, software development assistance and discounted IT products. These providers are referred to as Technology Support Organizations (TSOs). This same capacity support paradigm has evolved to address other nonprofit activities as well. Intermediary organizations identified as Management Support Organizations (MSOs) have evolved to provide organizational, fiscal, evaluative and other necessary management capacity support services to non profits. Innovation Network, Alliance for nonprofit Governance, Bridgespan and Compasspoint fall into this category.

Finally a third set of intermediary Advocacy Support Organizations (ASOs) has evolved. Organizations such as Media Rights, Greenmedia Toolshed and the Center for International Media Action provide nonprofits with advocacy and promotional expertise to better craft and distribute their messages. Lack of capacity is not the only obstruction to effective nonprofit message crafting and advocacy. These activities are often part of a mission driven program to affect a particular social ill so they suffer less from lack of administrative overhead support. Rather, lack of expertise is often the result of nonprofit’s general cognitive dissonance related to promoting and marketing their activities. In a sector where the currency of choice is the trusted source relationship, nonprofits rely on their work and not what they advertise about it to enhance their standing with peer organizations and donors. As a result, promotional and advocacy skills are often underdeveloped, and become capacity issues.

I label the range of capacity support organizations operating across disciplines as Intermediary Support Organizations (ISOs). The benefits of ISO nonprofits providing high quality services to other nonprofits are significant:

The ISO model is far more efficient because it allows for the introduction of standards of service/support delivery and sharing best practices across institutional clients. nonprofit clients typically compete for funding and are often pressed for training time. They don’t necessarily learn from each other or from donors without a trusted source intermediary providing them support and delivering best practices as a part it.

ISOs provide pragmatic service at a lower entry cost to fellow NGOs than most of their for-profit counterparts. They are also far more trusted because the provider organizations share a basic set of mission principles similar to the nonprofits they serve. This is very important in a sector where the currency of choice is the trusted source relationship.

Many ISOs collect significant and invaluable meta-data on a statistically relevant number of nonprofit clients. This data can be used to identify strengths and deficiencies on a sector-wide basis. Objective data polled from nonprofit clients allows for developing more effective support strategies for the entire sector rather than relying on circumstantial data, conjecture or assumptions.

ISOs offer a realistic opportunity to solicit donor support for capacity using a behavioral funding pattern they already subscribe to rather than changing the entire paradigm. Donors are already comfortable supporting intermediaries because they use nonprofits to fulfill their programmatic goals in much the same way. The programmatic mission of an intermediary is defined as supporting the mission of other nonprofits working on issue areas through delivery of capacity services.

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

ISOs provide a much more efficient way to insure that all the nonprofits a donor uses to meet its objectives operate at peak efficiency. Most donors fund initiatives vertically, by program area. However, capacity issues cut horizontally across the entire portfolio of nonprofits they support to achieve these objectives. Donors can opt to employ intermediaries to fill in the capacity gaps of their entire portfolio rather than approaching the issue from the perspective of individual institutions which change from year to year. Individual institutions also benefit of course, but the important point is that both the practical and perceptual needs of donors and nonprofits are met with this approach.

It’s far easier to solicit donor support for a single institution whose mission is to support the capacity of a thousand NGO’s in a consistent manner than it is for one thousand institutions to solicit that same donor for their individual and inconsistent capacity needs.

The natural evolution of ISOs to cover a variety of needs suggests to me that a revolution in the support for nonprofit capacity is taking place. However, this new paradigm of support needs to be leveraged far more strategically by donors, nonprofits and the ISO sector. Issues that individual ISOs address are all related, and reflect a problem suffered by NGO’s globally. In defining the good, better and best of all possible worlds going forward I’d make the following observations:

Supporting discreet intermediary organizations for a particular sector, geography or problem area IS GOOD.
The development of leading ISOs to cover each area of capacity support is necessary. Intermediaries should be nurtured in their initial development across sectors, geographies and capacity problem areas so that they have the greatest impact on the most NGO’s. These models need to be adapted to different local circumstances (i.e. the developing world). International E-riding, which provides technology support to various sectors and geographies, is an example of this already happening.

Supporting a coalition of intermediary organizations dealing with capacity issues in a single problem area like technology IS BETTER.
Grant Maker’s for Effective Organization’s (GEO) is a coalition of domestic US grant makers focused on moving philanthropy forward and strengthening the capacity of supported grantee organizations. The Alliance of nonprofit Management is another such organization as is the nonprofit Technology Enterprise Network (NTEN), a coalition of organizations focused on nonprofit technology support. More associations of support organizations are required to help them network and be more effective within their specialty area.

Recognizing and supporting ties between MSOs, TSOs and ASOs IS BEST.
This is still a largely un-addressed issue. Both the funding community and the nascent intermediary support sector must appreciate that the work of TSOs, MSOs and ASOs are interrelated. While these new capacity paradigms are being developed external to NGO’s, they have to operate together cooperatively as they would if they were housed as internal functions in a single organization. Collaborations and interchange needs to be supported.

While this new model of capacity support may not help all nonprofits everywhere at once, it will assist far more nonprofits to address their capacity needs than the current less strategic approach does. As with most initiatives necessitating a paradigm shift, progressive donors acting collaboratively will be necessary to underwrite the initial investments. However, this model of capacity support is built upon the objectives of ISO sustainability through aggregated demand over the long term. There are already working models and data that suggest this is a far more efficient approach than the traditional system of donor capacity support, which, over decades, has clearly proven itself wanting.

– Jonathan Peizer –