I have a dependency problem. No, it’s not drugs or alcohol.
My dependency is on something else—philanthropic support. The Center for Effective Philanthropy (CEP), the organization I lead, is hooked on it.
True, the majority of the funding CEP receives is earned revenue, through fee-for-service arrangements with foundations that commission our assessment services. But a decent chunk of what we do—our research on foundation effectiveness (which we make broadly available to foundation leaders and others), our administration of the blog you are reading right now, even some of our work to develop new assessment tools that will ultimately cover their own costs—is supported by foundation grants.
You could argue—and some of our program officers have—that we should be able to cover all our costs with earned revenue. But I think our work would suffer as a result, and, fact is, we’d have to do much less. If we relied solely on earned revenue, we wouldn’t be able to experiment with new tools; our Donor Perception Report for community foundations, for example, would never have been developed without grant support. If we relied solely on earned revenue, we wouldn’t be able to explore our aggregate datasets in the same way or disseminate our research findings as broadly. And, if we relied solely on earned revenue, you might find your reading of this blog interrupted by a pop-up ad from a company selling a cure for male baldness.
Looking more broadly at nonprofits, it’s easy to see why philanthropic support is crucial to the efforts of human services organizations, environmental advocacy groups, educational institutions—the list goes on and on.
What’s the alternative to a mix of philanthropic and government support for, say, Horizons for Homeless Children, which provides high-quality pre-school for homeless children in Massachusetts? Ask the kids to start a social enterprise and cover their tuition? (My 11-year-old daughter, Ava, asks her friends to make contributions to Horizons in lieu of presents on her birthday. When the folks there invited Ava and me to visit last August, she said, “this feels exactly like the pre-school I went to.” I said, “Right. That’s the point! And philanthropy is what allows the kids to go, because their parents can’t pay.”)
Yet, strangely, “dependency” remains a bad word in philanthropy. I am frequently asked by foundation CEOs and trustees, “How do we avoid grantees becoming dependent on us?”
I don’t get this.
For one thing, I don’t see a lot of evidence that there is a real risk of “dependence” by nonprofits on a single funder. Across CEP’s more than 40,000 surveys of the grantees of nearly 300 foundations, we see that, at the median, a foundation grant is only three percent of an organizational budget.
OK, so that’s not much out of an organization’s budget, but what about programs that might depend on foundation support? Not much evidence of dependency there, either. We used to have a question in our grantee survey asking, do you plan to sustain the work funded by this grant beyond the grant period?
At the median foundation in our dataset, 87 percent of grantees said yes and just six percent said that the work could only be sustained with continued support from the foundation. (We actually removed the question from our survey because there was so little variation it wasn’t interesting.)
But, more importantly, my answer to the question of how to avoid dependency is this: “Don’t try.” My reasoning? If you are clear on your goals as a funder, and if you have confidence that a grantee is delivering results that relate to the achievement of your goals, what’s the problem? Dependency, in fact, allows you to achieve your goals.
Look, I recognize that those are some big “ifs” in the above paragraph. But isn’t funding those organizations that are demonstrably delivering results against your shared goals precisely the point? Isn’t that what every funder should be doing? Why stand in the way of this with arbitrary “three years on and then you’re off” rules or endless talk of “exit strategies?”
I think this whole aversion to dependency may be yet another example of where analogies to the for-profit world have created confusion in our sector. We’re so enamored with market analogies that we can’t get our heads around the fact that certain work simply requires ongoing philanthropic support. Other than large-scale government support, there is no “exit” event on the horizon for nonprofits, no analog to the IPOs that allow early private sector investors to cash in and get rich.
Barring the government coming in and funding something, here’s when I think dependency on philanthropic support should cease: when the goals have been achieved or when, after a sufficient timeframe, there isn’t strong evidence of progress.
But, wait, what about earned revenue? I already said CEP generates the bulk of its total revenue this way, and isn’t it on the rise? With studies like this one—from the Zicklin School of Business at Baruch College, City University of New York—suggesting both that earned revenue is a new concept for nonprofits, and that it is increasing, it’s easy to understand why people think that. (The 2010 report, titled “Social Enterprise’s Expanding Position in the Nonprofit Landscape,” asserts that more organizations are seeking earned revenue and contrasts this approach with that of “traditional” nonprofits.)
But the fact is, earned revenue is as old as nonprofits themselves (see Goodwill, colleges, hospitals) and is not, actually, increasing as a proportion of total revenue—as I explain in this blog post laying out the data. The notion that earned revenue is on the rise is a myth.
Further, as Jeff Bradach and William Foster of Bridgespan pointed out in a wise article a number of years ago, efforts to generate earned revenue “can distract nonprofits’ managers from their core social missions and, in some cases, even subvert those missions.” Yet the hype continues, and so does the push from some funders of nonprofits to look to new earned revenue sources, fearing grantee “dependency” on philanthropic support. Earned revenue will continue to be important to many nonprofits, and they should of course seek to optimize it when doing so is consistent with mission. But it’s not the panacea.
In my view, the problem is not too much dependency, it’s not enough dependency. We see in our surveys of grantees that consistency of funding is, at the very least, correlated with grantees’ view that foundations have had a positive impact on their organizations. Our research has also established the value of multi-year, large, general operating support grants to grantees, yet these grants remain the exception, rather than the rule.
I get that “dependency” has negative connotations for many, but I suggest we reclaim and reframe it.
After all, I am all for dependable people and organizations. Aren’t you?
I depend on my work colleagues for their productivity, ideas, and colleagueship. I depend on my wife and daughters for their love and support. I depend on my friends for their camaraderie and humor. And I hope that all these people, in turn, feel they can depend on me.
Really, what’s wrong with that sort of dependency, anyway?
Phil Buchanan is President of the Center for Effective Philanthropy, a frequent contributor to the CEP Blog, and a regular columnist for the Chronicle of Philanthropy. You can find him on Twitter @PhilCEP.
Three cheers Phil, for once again, being a dependable truth teller in the sector. Data on performance and progress should inform future funding decisions, not arbitrary rules that favor control over impact.
Phil, this is SO true and you are a courageous man for saying so. Would that we have an honest conversation that starts here – and moves to the power and need for stronger relationships on which to depend as we move forward addressing the world’s most important and complex challenges.
jb
The nonprofit funding dependency argument is as weak as a Lance Armstrong confession.
Should we all call it a performance reducing substance in philanthropy?
You nailed it, Phil. Let’s focus on impact and effectiveness than the dubious threat of dependency.
But in practice, is it really a fully formed argument or is it simply a facile dodge used to justify pulling the funding plug on an organization for many other reasons?
Most of us have seen the dependency card in action. Like the flu, donor fatigue rarely infects foundation trustees equally. Among trustees, enthusiasm and commitment to the long-term funding of particular nonprofit organization will always vary.
One home remedy for philanthropic attention-deficit disorder is to repeatedly grumble about the horrors of “dependency” and give the less esteemed organizations the boot. Any discomfort in doing so is soothed by the idea that the foundation is offering tough-love to the organization.
There is also little subtlety when a foundation trustee gives the Tony Soprano-like dependency signal as a rationale to bump off current grantee so that the budget can accommodate a shiny new one. Yesterday’s social innovators may be as effective as ever but when they are painted as today’s groveling dependents they quickly fall from grace in that wonderful horse-trading festival we call philanthropy.
To their credit, foundations sometimes have artfully crafted notions of fairness requiring them to “spread the wealth around”. The comically arbitrary one, two, and three year funding policies that nonprofits all love are designed to address this strongly held value.
Subscribing to the argument of dependency is way easier than suffering through the often dicey deliberation about how an organization currently fits or does not fit with the policy objectives of the foundations – which always seem to be from the grantseekers perspective…. “in transition”.
And as much as foundations may squawk about the risks of dependency of nonprofits, they are rarely as critical about the direct and indirect taxpayer subsidies of businesses, the financial sector, and most other institutions in society.
We gotta watch those darn nonprofits like a hawk!
Prentice,
Thanks so much for your incredibly thoughtful, insightful, funny comment. Appreciate it very much.
Also thanks to Fay and Jill for your overly generous comments. Fay makes the point it took me 1,200 words to make in one simple sentence: “Data on performance and progress should inform future funding decisions, not arbitrary rules that favor control over impact.”
Knowing that there are some funders that get this, and yet too many don’t — and continue to worry about “dependence” – my question is this: How do we change things?
Phil
Excellent post and good comments. I would only add that foundations’ fickle desires also push nonprofits back and forth between various fundraising approaches, including but not limited to earned income; program officers and others are forever praising “diversified” revenue streams. The problem, particularly for small, grassroots nonprofits is twofold. First, the skills and talents for raising money through each method are difficult to find in any one person, or in a 2-3 person development shop, and developing new funding streams takes time even with appropriately trained and experience staff. In the interim, the entire organization suffers from uncertainty and a lack of direction.
Second, each of those approaches inevitably results in subtly different program work (or, as you note, in the case of earned revenue, not-so-subtle differences). Small donors vs. major donors, government contracts vs. major foundation grants, earned revenue- program services and emphases will be different depending on which approach a nonprofit utilizes. And constantly switching up programs based on a particular funder or type of funder is a recipe for an ineffective organization. In that sense, I think dependency can actually be a good thing for a nonprofit.
Thank you Mr. Buchanan for this excellent piece. Substitute investment for the word dependency and we get closer to the truth. Our nonprofit organizations often require sustained investments to continue the good work, and we need to find a way to re-frame this from something negative to something positive, vital, important and right. If it could all be done for ‘earned income’ then we could be for-profits, as a key differentiating factor is that nonprofits take on work that CANNOT BE PRICED AT A PROFIT (“The whole purpose of the social sectors is to meet social objectives, human needs and national priorities that cannot be priced at a profit.” Jim Collins in Good to Great and the Social Sectors, 2005). The hype surrounding social enterprises – and earned income as the be all and end all – obscures this reality and has caused many organizations to waste precious human and financial resources on ill-considered projects. Businesses are learning the same hard lesson when responding to new competitive challenges by trying to adopt new business models alongside established ones: “. . . despite the best of intentions and the investment of significant resources, most companies are unsuccessful in their efforts to compete with two business models at once.” (Markides & Oyon, 2010). You cannot simply ‘graft’ methods or approaches from a business to a nonprofit or vice versa, any more than you can make a successful organ donation without thoughtful attention to underlying ‘match’, and the possibility of rejection. Distinguishing truly promising approaches and successful innovations from ‘social entrepreneurship as fetish’ has barely yet been done. This is one of the key reasons the next phase of developing and leading 21st century enterprises is going to be challenging. Please keep writing.
You talk about the overuse of business analogies, but I think a business analogy might be apt here.
If a grantee is providing a funder with results at a lower cost than it can get elsewhere, it is providing the funder with the philanthropic equivalent of profit. And how often do businesses give up a profit making venture?
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Occasionally I’m reminded that foundations must give away 5% of their corpus every year. At what point may we focus on that truth of their lives? Where is it written that they have to give it out differently each year? Wouldn’t their work be even easier–and profoundly more rewarding–if they’d get deep in the trenches with us and either see a problem through to its real solution (social and environmental challenges) or embrace the ongoing successes that slowly make living in this world a delight (the arts, raising children, etc)?
Everyone knows the problem of homelessness (or substance abuse, or food insecurity, or any of the deeply entrenched issues nonprofits address) isn’t going to be solved in a year. So why should we even pretend that my agency’s novel three-year new project is going to fix everything? Why not spend twenty years with my agency until we do have enough housing for everyone?