In many ways, these are changing times in U.S. philanthropy. The emphasis on data and measuring impact more closely, pushing for scale and large-scale solutions, social investing and performance metrics, crowd-funding and digital networks has created the sense that the social sector - and nonprofits along with it - has reached an inflection point that may soon fundamentally shift the way funds are raised and spent on causes and social change.
Yet these trends often disguise some underlying fundamentals that aren't changing. The big constant, of course, is the steely resistance of overall U.S. philanthropy to grow; it has remained at or just below two percent of GDP for a couple of generations. So the pot is not growing - yet both the number of nonprofits and their expected contribution to the social safety net are. Competition is growing, demand is growing, and so are the expectations of many grant-makers for data, reporting, scale, and impact. These trends have been constants over the last decade, and don't appear to be shifting anytime soon.
This puts increasing pressure on the one unit that is not particularly in favor in the salons of civic power and philanthropy: the organization.
From my consulting work, I know that organizations are increasingly facing financial pressure away from program oriented gifts and grants, and toward their capacity to create growth and sustainability, and manage that process well with talented and committed people. Of course, there are exceptions in the highly capitalized precincts of the elite institutions of higher learning and culture - but among the nation's roughly 1.5 million nonprofits, the stress of raising undirected general capacity funds against a landscape that increasing favors targeted, results oriented grants can...
So I'm proposing the most important philanthropic buzzword for 2015 and beyond - that's right, capacity.
I'd love to see more philanthropists, foundations, and giving companies focus on building organizations for the long term, investing in staff ability and systems, and providing resources for organizational stability. When well-meaning board members tell my clients that organizations should "operate more like businesses," this is what I think of.
This is the third of a series of occasional posts in this space on this growing challenge to the traditional “powers that be” in major American philanthropy. In the first installment, I argued that the barbarians aren’t at the gates – the people are, and they’re pretty well connected and informed. Last month, I argued that it's time to face the limits of that empowered crowd, alongside the promise.
This time, the focus is on the organization and the fight for financial capacity. I'm actually less concerned with major foundations asking more of nonprofits - while also providing more leadership and guidance - than I am about a younger generation of philanthropists moving away from general support dollars and toward specific programs - or branded "impact initiatives" from every family foundation whose board members admire Gates or Rockefeller or Robin Hood. With so much of the heat in the social sector focused on concepts around impact and scale that, quite frankly, few funders are equipped to really direct or help with, nonprofits may face an even more competitive future while being asked to do more.
What's that? Fine, you say - philanthropy is a marketplace and nonprofits are (and should be) competing for finite resources based on their ability to get things done? I agree and have argued this very point for years - but I think it's just as important to note that unlike for-profit enterprises, the "market" for nonprofit services and social entrepreneurship doesn't include the same risk and reward model as capital markets. There is little in the way of mergers and acquisitions; they're still relatively rare. And the equivalent of a big IPO for social capital doesn't quite yield the same layer of free-flowing venture capital either.
As David Callahan, a philanthropy critic and founder of the research site Inside Philanthropy, told me this week, the incentives in the philanthropic equation often run counter to the successful flow of funding - and not just because funders are demanding more (though he agrees they are, and often without much scrutiny):
"A thought to think about: One reason that nonprofits struggle to get to scale is that there are too many competing and duplicative organizations, and no incentive or mechanism for consolidation. In the private sector, entrepreneurs with small businesses have an incentive to sell out, which is a driving force in consolidating markets and creating big businesses that get to scale. In the nonprofit sector, the incentives are the opposite: No executive director wants to lose their job, which results in less income and autonomy."
Funders, said Callahan, "need to invest in capacity, yes, but also incentivize consolidation for the sake of efficiency."
Pre-eminent philanthropy critic Pablo Eisenberg, in a year-end column for the Chronicle for Philanthropy, argues than what nonprofits really need to succeed is more money. He took the sector's nonprofit trade groups to task, and focused squarely on the need for greater funding and the bigger demands nonprofits face.
"Without doubt, the foremost need for nonprofits is money," wrote Eisenberg. "Small and midsize groups are under an especially big strain as demand rises, and the years of a bad economy continue to cause aftershocks in both government and individual giving. As the government has shrunk its role, the public expects more of nonprofits, but such groups can’t shoulder that burden unless they have more dollars at their disposal. If organizations like Independent Sector, the National Council of Nonprofits, and BoardSource really wanted to do something meaningful for charities, they would find big sources of new money — and one smart way would be to push Congress to increase the annual distribution requirements for foundations."
Nonprofit sector analyst Steve MacLaughlin of Blackbaud, the largest provider of technology, agrees that nonprofits are increasing seeing a greater need for unrestricted funds.
"Yes, it’s been growing the past few years," said MacLaughlin, who directs the company's Media Lab research shop. "In part that's because a lot of grant funded dependent organizations are faced with the challenge of funding new or existing operations from other sources. No doubt that's also compounded by the shift by some organizations to restricted giving programs (campaigns for goats, water wells, scholarships etc) as a way to engage donors. Get too good at that without also funding the basics, and you’re in trouble."
No doubt, and I've been in the room as boards and executives try to cope with this imbalance. Yet follow the money, they must.
I hope to see U.S. philanthropy increase as a new generation becomes involved. More funds are needed, and frankly, more institutional stability is needed. That's why I'm hoping that among the other much cooler buzzwords in philanthropic circles this year, capacity takes its seat at the table.
