SVP Speaks Up

As I read CEP’s most recent top-notch research piece, In Search of Impact, I was scribbling lots of notes in the margin. In short, I see a number of potential problems and flaws in the perspective of foundations about the issue of program / operating support. We are going to have to collectively begin to make significant changes in the whole structure of the nonprofit capital market if we are to see our nonprofit partners become more effective at addressing society’s problems.

Let me start with a few important notes – my comments are not meant to indicate that Social Ventures Partners (SVP) has been perfect on this issue because we haven’t. Nor is it to suggest that accountability and outcomes aren’t important because they absolutely are. So that you know where I am coming from, SVP is a network of engaged donors that brings together nonprofits and philanthropists to learn from each other and build capacity for positive community impact. Partners from diverse backgrounds pool their financial contributions and skills to provide more resources to nonprofits and produce greater results. Partners currently support programs in K-12, early childhood, out-of-school time and environment. We are now over 240 Partners, each contributing $5,500 annually to fund and work with over 20 children's, education and environment organizations. www.svpseattle.org. Several years ago, we made the decision that all of our grants would be 100% unrestricted funding.

There are four general flaws in the current perspectives of funders about operating vs. program support –

1) Definitions – at the ground floor is the fundamental inability for anyone to clearly, consistently, accurately define and therefore measure what exactly constitutes “operating expenses” or “overhead” or “administration” or whatever you call it. There are no FASB or IRS standards, the way various nonprofits define and report is widely disparate, and we know empirically that a segment of nonprofits simply doesn’t report any expenses as “overhead” on their 990’s at all.

When I discussed this whole issue with the Director of one of our local nonprofit investees, she said simply “we have grown large enough and have enough experience that we know how to position grants and move funds around to avoid calling most of our expenses overhead.” She is, by the way, an effective and respected Director. The larger and more savvy the non profit, the more they are able and know how to play a “shell game” with their grant funding. If you can’t define the category in the first place, why do we fund that way it at all?

2) Focus – Our funding is one of the most significant influences on the behavior and priorities of nonprofit organizations. By putting such a priority on overhead / operational spending as a criterion for success, we are telling our grantees to focus on the means, not the ends. If we told them that their outcomes were the priority, then they would focus more on that. Further, a CEO is quoted in CEP’s report as saying, “Unrestricted support is more comfortable on the grantee, but less demanding … it is unusual to find a grantee that naturally collects this data in a meaningful way.” A large reason they don’t is because we tell them to focus on expenses, not results.

3) Accountability – Related to focus is the issue of ultimate accountability. There has to be accountability, but to what? Again from the report, a CEO says, “only through the provision of program support can foundations responsibly track the use of grant dollars – and connect their funding to the achievement of specific goals.” Another CEO suggests that “program support … provides more clarity … in terms of performance and impact.” The irony in those statements is that by using operating / overhead expense to measure effectiveness, we are not connecting funding to goals or impact at all! The only way to responsibly track our grant dollars is to ask the grantee to assess the ultimate impact and outcomes of their work, i.e. the ends, not the means. Program / overhead spending is trackable (with the caveat of #1 above), but it tells us little about impact.

There is another irony at work here for anyone that has worked in the private sector or at a funder. When an investor buys stock in a publicly traded company, they don’t get to tell that company where or how to spend that money and if they did, it would be disastrous. And does anyone external to a foundation Staff and Board tell us how to spend our funds and on what? The difference, of course, is that there is no single measure like profit in the nonprofit world, but that doesn’t change the fundamental point that funder-designated grantmaking puts nonprofits at many significant disadvantages in terms of optimally allocating its resources.

4) Mission Fit – “We are giving operating support to organizations when their core mission is important to us in achieving our goal,” one CEO says. There is no argument with that statement, but the question would be, what grantees do any of us ever fund that are not core to our mission or that aren’t aligned with our goals? I don’t know of any funder that has so much money that it can now fund nonprofits that are not aligned its goals. Further, there is also a comment that “concerns about grantee dependence,” as another CEO put it, lead to program support. It’s not clear why operating vs. program funding would make any nonprofit more or less dependent. In fact, if one argues that operating funding allows a nonprofit to better build its capacity, it should make nonprofits less dependent.

As I said above, no one, including SVP, can claim piety about its funding practices. My intent here is to provoke and invite dialogue. The points above don’t even address the positives of unrestricted funding for nonprofits and those benefits are significant – more flexibility, improved responsiveness to current community conditions, less accounting work, higher priority on outcomes and impact, etc. And further, there are many other facets of the funder-grantee relationship that need to be examined – term of the grants, size, degree of reporting requirements, etc.

It seems to me that where the “rubber hits the road” here is in the foundation board room when the staff walks in and the trustees say “what did we get for our money?” It’s a fair and good question. Unfortunately, in our need to have an answer to that question, we are focusing on the wrong things and in turn focusing our grantees on the wrong things. We are asking the right question, but getting the wrong answers.

- Paul Shoemaker, Executive Director, Social Venture Partners Seattle