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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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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Closing the �Division in Vision� Divide: Reorienting the Philanthropic and Nonprofit Relationship

on June 16, 2010
in Blog

The recently released Disrupting Philanthropy Report explores the implications of networked technologies for philanthropy and provides excellent examples of the changing landscape. However, its most compelling observations may be that the best examples focus on reorienting the relationship between philanthropies and grantees and how they share information and collaborate. While much has been written about the need for nonprofits and philanthropies to change, it often focuses on one or the other as a distinct actor. This overlooks the symbiotic relationship that exists between them unique to the nonprofit sector.

In the traditional philanthropic relationship foundations act as resourcers and NGO�s as implementers. The two are dependent on each other to get the job done. Contrast this with a private or public center entity which resources and implements its own projects from its own revenue sources. The problem in the modern philanthropic resourcer-implementer relationship is that both have slightly different mission objectives — The NGO based on constituent demand and the foundation based on grant criteria which may or may not reflect local demand and is designed to filter the cornucopia of potential grantees. Consider the outcome when an architect (the grantor) and a builder/contractor (the nonprofit) both have a slightly different vision of the end product they support and neither can complete it without the other. A tangible example of this metaphor exists: The Twin Towers collapsed in New York almost a decade ago, and a gaping hole has existed in the ground for much of the decade since. Similarly, many of the problems funders and nonprofits tackle have existed for decades and grown even more complex.

What has caused this �division in vision� and how does it affect the way philanthropy operates?

At the start of the modern philanthropic movement a century ago institutional donors supported a handful of nonprofits addressing major social issues. Identifying �the right� nonprofit handling it best was easier, and philanthropic gate keeping criteria reflected this. The focus was on vetting institutions and supporting their missions. With fewer nonprofits meeting the need, selected charities could also rely on long term funding to support their operations. Fast forward a century with almost one million registered nonprofits, another half million identified charities and about 45,000 new nonprofits starting each year, according to the Urban Institute. Foundation gate keeping has gotten far more sophisticated, and in the process has changed the nature of the foundation-nonprofit relationship. Traditional philanthropy is still based on resourcing the right institutions to meet a mission objective. The difference is that identifying these institutions has become a full time job.

Many philanthropies now create their own complex set of program criteria to insure that a finite amount of resources are directed at deserving institutions. Criteria are sometimes determined by a funder before real demand in the field is even assessed. The result is that grantees are expected to meet the philanthropic institution�s mission objectives before receiving support rather than demonstrating why their mission goals warrant support as the main determinant.

The successful modern grant proposal is often a study in effectively subordinating the nonprofit�s mission objectives, and instead making the case for why its activities perfectly match the mission of whatever philanthropic institution it is requesting support from. The practical effect of meeting foundation missions first is that the nonprofit acts more like a subcontractor to the philanthropic grant giver than a gift recipient meeting its own needs. Moreover, funder initiatives often last only a few years before changing, and with so many grantees, few can expect long term support.

Unfortunately, the philanthropic relationship is still perceived by both sides to operate as it historically has. Much philanthropy still consider the grants they give with strings attached as outright gifts to support nonprofit missions rather than appreciating they are designed to meet their own mission criteria first. Many nonprofits also act as if the grants they receive are outright gifts. They eschew grantor requests for metrics as overly burdensome and wonder why these supposed gifts don�t support their real needs, which include administrative costs to allow for healthy operation and institutional growth. This gap between perception and reality causes much of the dysfunction in the relationship as the two missions compete for dominance. The unacknowledged subcontractor relationship has continued for many years because of what a funder colleague dubbed �the Dance of Deceit�. Here are its steps:

Differences in mission are purposefully underplayed when the nonprofit applies to meet the funder�s criteria and win a grant. Once the grant is won, the nonprofit applies the funds to meet its mission goals and constituent demand. When reporting back, it then retranslates actual use of the funds into satisfying the funder�s criteria. This process is an open secret and has allowed the subcontractor relationship to tacitly operate because philanthropies are typically less focused on how the nonprofit implements its grant and more on the processing required to initially win the grant. Grant selection is a full time bureaucratic process in many philanthropic institutions. A combination of grantees reporting back what grantors wish to hear and often self-serving grant evaluation processes allow grantors to declare mission success. However, the system has started to show strains over the last decade because the chorus to really demonstrate donor and nonprofit accountability and grant impact has grown, exposing the reality of the relationship and its limitations in trying to satisfy two institutional missions.

To address the problem systemically and pull philanthropy into the 21st century the issues cannot be addressed from either the funder or nonprofit side exclusively, but rather by changing the nature of the collaborative relationship between them. The best examples in the Disrupting Philanthropy report speak to addressing philanthropic issues through information sharing, collaboration, smarter investment and metrics that better measure outcome and impact� None of these are new, but they all speak to addressing the issues by focusing on constructive, open, and honest nontraditional relationships between philanthropic institutions and nonprofits. The new ingredient in all this is a highly networked world with technology that promotes collaboration and the ability to create solutions to address this relationship in new and effective ways.

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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Gifts, Grants, Donations and Expectations

on April 14, 2010
in Blog

A philanthropist friend and I were recently discussing why nonprofits don�t �own� the success metrics donors attach to their grants. I argued a nonprofit focuses on its organizational mission and survival while a granter focuses on its program mission when providing support. The granter�s mission often differs somewhat from the nonprofit it employs through a grant to implement it. When the granter adds additional metric �hoops� to jump through to a grant, they reflect the donor�s needs and not the nonprofits, often hanging like a Sword of Damocles over it. Even more ironically, they force the nonprofit to meet extra performance criteria while the general capacity support it desperately needs to perform more efficiently is limited by the same grant imposing the metrics!
Contrast grants and their donor-imposed program criteria and limitations on overhead expenditure with pure donations given to nonprofits based on a request for support or a self-defined need. Donations are also intended for program use, but can satisfy general support and overhead needs as well. Metrics are not attached to donations as a prerequisite to receiving funds although a number of 3rd party entities like,, etc. measure and assess nonprofit efficacy and efficiency. The difference is the onus is on the nonprofit to use and report on donations it gets wisely after they have been received.

Grants and donations are technically both gifts but they have very different meanings and foster different perceptions and behaviors.
Websters online defines the noun donation as:

  • Making of a gift especially to a charity or public institution
  • A free contribution

It defines the noun grant as:

  • Something granted; especially: a gift (as of land or money) for a particular purpose.

So both are gifts, but by definition grants have strings attached, while donations don�t.
My philanthropist friend pointed out, �Donors typically use grants and gifts interchangeably�. I agree, and in my experience in the sector, nonprofits typically equate donations and gifts. The result is that when granting institutions and nonprofits use the word gift, they have different perceptions of what that term means. To a donor it�s perfectly reasonable to give a gift with strings attached that first must meet its goals (a grant). What the nonprofit expects is a gift with no strings attached to meet its goals (a donation). The interchangeable use of these two terms as gifts creates perceptual dissonance in the way nonprofits react to grant-imposed requirements like metrics. Nonprofits assume all gifts are designed to meet their mission and operational goals. Grants just seem to have those additional pesky requirements that must be satisfied or at least paid lip service to.
Granters perceive grants as they are defined; gifts for a particular purpose with requirements to meet � specifically their program goals and measurements. Many nonprofits actually have to massage their goals to meet granter criteria before they can receive their �gift�. My philanthropist friend pointed out that �Some donors attach strings to grants and others don�t�. If donors are giving gifts with no strings attached then these �free contributions� as Webster defines it, are actually donations and not grants. In these instances, both donors and nonprofits have the same understanding of a gift. Unfortunately, what is actually a donation is mislabeled a grant, because the lawyers say that�s how it must be structured.
More typically however, grants have one or more of these characteristics and reflect a donor�s perception of a gift but not a nonprofit�s:

� They must first meet donor program funding objectives before being provided
� They have prerequisite criteria attached to them before the nonprofit receives funding.
� They have strict expenditure requirements/limitations.

Nonprofits benefit from grants � through a symbiotic relationship that hopefully accomplishes their goals after meeting the granters. Granters might wince at this description because they try to do the right by gifting to nonprofits. However, if nonprofits must first modify their goals; meet granter criteria to receive funding; and are restricted from applying funds to meet their capacity needs; it�s fair to say they are meeting granter objectives before their own.

It�s the difference between giving your kid a toy you know he�ll love because it�s what he wanted and giving your kid a toy that you feel will suit him best based on your idea of an appropriate toy. Yes they are both gifts, but the intent differs, and in your generosity you are meeting your needs first � otherwise you�d just give the little darling what it wants. Meanwhile junior is happy he got a toy � but it�s not exactly what he wanted, and why is that [thinks junior] if you were already generously giving out toys?
My philanthropist friend referred to a �Dance of Deceit� that occurs when nonprofits and granters engage in negotiations that knowingly bend grant criteria rules. The steps involve granters finding loopholes around their criteria to satisfy real need and nonprofits reclassifying overhead costs as program expenditures so they can use funds as if they were unrestricted donations. The dance of deceit allows both sides to feel the granted gift functions more like a donated gift.

Unfortunately, to make grants feel like donations, both sides engage in variety of dysfunctional activities that are open secrets in the sector. How else can one rationally explain the �Dance of Deceit�; or focusing on a nonprofit meeting criteria during grant processing, but not following up to ensure it has during implementation; or nonprofits reporting back their expenditures in the right buckets by juggling a variety of income sources and using creative accounting to make the numbers work; and finally that old favorite, the self-serving evaluation that allows both granter and nonprofit to declare success whether real or imagined.

The sector would be better served if all parties acknowledged the difference between donations and grants and whom they are primarily designed to serve. Expectations would be more realistic on issues like capacity support and metrics. For example, we might ask, �Is the nonprofit sector better served by individual targeted program grants with prerequisites success metrics, and do they really foster broader efficiency and efficacy in a nonprofit; or are donations better at meeting these needs, with objective third party institutions applying general efficacy and efficiency metrics across the sector?�

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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Technology Turnabout – The Nonprofit Haves and Philanthropic Have Nots

on February 1, 2010
in Blog

A funny thing happened on the way to implementing 21st century technology in the nonprofit sector. Nonprofits pulled well ahead of their philanthropic underwriters in the innovative use of technology to support their missions. In April 2010, the Nonprofit Technology Network (NTEN) will be hosting another of its ever expanding, content -rich conferences on nonprofit�s use of technology. The event is typically under-attended by foundation folks, although the original intent of the founders was that NTEN would spur technology innovation for philanthropies as well. By all accounts, the NTEN conference is a dynamic, inspiring and educational annual event. In sharp contrast, I was part of an effort some years ago by a variety of philanthropic personnel using technology in their respective program areas to spur more innovation in that space. The group was called the Innovation Funders Network (IFN). Having failed to get philanthropies on the NTEN bandwagon, the thinking was that more insular foundations needed a sandbox of their own in order to share ideas and develop technology innovation. IFN lasted only about three to four years (and two conferences) before disbanding for lack of interest and financial resources.

In fairness to the philanthropic sector, there is an extremely competent TAG group affiliated with the Council on Foundations whose membership primarily includes the administrative IT staff of medium and large foundations. The Council on Foundations undertook an effort last year to identify the priority issues facing philanthropy in the 21st century on a broader programmatic scope � an effort I was also a part of as a consultant. A paper was produced and is now being actively promoted to its membership, and more broadly to make philanthropies aware of the priority issues. What will come of the effort implementation-wise is a work in progress. However, it�s telling that the number one identified priority was the simple application of standard data fields and taxonomies to the grant application and reporting process. It�s a process similar to most foundations requesting input from grantees, but made highly unique and over-complicated because philanthropies in aggregate still spend millions if not tens of millions of dollars to develop their own unique grant tracking systems and processes.

Despite the downturn, many philanthropic institutions still have the money to spend on technology, and many are using it to benefit their back office processing. Too much money is not always a good thing however, when it spurs development of unique, traditional, one off solutions. There are a number of additional reasons to explain the dichotomy of resource-poor nonprofits making the most of cutting edge technologies to effectively support their program missions while philanthropies lag in this area:

� Ironically, an issue that has always been a challenge to nonprofits � high turnover and low salaries � is now an advantage in the area of technological innovation. Young people at the start of their careers continue to populate the nonprofit workspace. The difference now is that they were weaned on social networking technologies and ubiquitous, affordable consumer devices and it is a part of their communication DNA. By comparison, philanthropic staff tend to be one to three generations older and not as familiar/comfortable with the new technologies or their application.

� Behaviorally, the new technologies work for the nonprofit and against the traditional philanthropic organizational culture. It�s the nature of nonprofits to reach out, engage and network with their constituents and the current set of online technology tools are specifically designed for this purpose. By contrast, traditional philanthropy creates a firewall between itself and its grantee, limiting outreach and social networking with constituents.

� The affordability of current technology cannot be overemphasized. The historic barrier to nonprofit access of these tools was financial, both in terms of the tools and the trained personnel to use them. There now exists a ubiquity of useful web applications, from surveys to online solicitations � including specialty applications for nonprofits like advocacy and human rights. Nonprofits and philanthropies both like to think of themselves as unique, but the former has been far more inclined to use standardized affordable technology than its philanthropic counterparts who still have the resources and inclination to build unique solutions.

It is both inspiring and a healthy evolution of the sector that nonprofits now have the access, impetus and personnel to apply the new technology tools. What is distressing is that their philanthropic counterparts still lag behind in their understanding and use of these same tools. Philanthropy in the 21st century is being reshaped by online networked technologies and new types of philanthropic initiatives. witness the Iranian post-election crisis and Haiti relief. It�s incumbent for traditional philanthropy to get ahead of the technology curve if it doesn�t want to become a historic artifact of the 20th century.

For a list of nonprofit actors spurring technology use among nonprofits see: – Mission Driven Technology Support for Non Governmental Organizations. – For the latest review of said tools. challenges website sponsored by Techsoup featuring the latest cutting edge applications for the social sector and other similar challenges. � Nonprofit Technology Conference and website. – A social network of nonprofit software tool users sharing their favorites. – The largest International distributor of software to the nonprofit sector.

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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