Unrestricted Operating Support, One Foundation Makes the Leap

September 24, 2009

A recent article in the Stanford Social Innovation Review gives an overview of what authors Goggins Gregory and Howard refer to as the “nonprofit starvation cycle.”

This cycle is defined by a nonprofit feeling pressure to reduce their overhead to the point where it begins to erode the organization’s basic ability to function by cutting too far back on investments in both people and technology. The article posits that this cycle is an artifact of the fixation that  many funders have with keeping the percentage of dollars spent on overhead low.

This focus on overhead is understandable, as the percentage is a marker of “efficiency” more readily attained than other more slippery or subjective definitions of programmatic success.

Regardless, the consequences, as outlined in the article, are grim, and are tantamount to a hollowing out of  infrastructure in the nonprofit world. In closing, the authors call for a shift of focus from overhead to outcomes in the funding world.

At least one foundation has heard this call and is taking bold steps to refocus on outcomes and bolster operating support. The Boston Foundation announced recently that they will now be emphasizing “unrestricted operating support” as their primary funding strategy.

The move is being heralded by social entrepreneur Dan Pallotta as the nonprofit equivalent of “the fall of the Berlin Wall.” In addition to the shift to unrestricted funds, The Boston Foundation will be absolving grant term limits, and removing deadlines so that nonprofits can operate on their own timetables.

For more information on the Boston Foundation’s new funding strategy, read Dan Pallotta’s article in Harvard Business Publishing or visit The Boston Foundation’s website and read the press release explaining the organization’s new strategy.

-Cary Lenore Walski, MCF web communications associate

Join the Conversation: Do you see The Boston Foundation’s shift as a harbinger of a new trend in philanthropy towards increasing operating support? What other grantmakers do you know who are employing similar strategies to improve outcomes?

Sometimes less is less. The case for focusing on outcomes, not overhead.

August 27, 2009

I remember the question clearly, because it totally shifted my thinking:

“Could you do more if you had more money?”

Many nonprofits are feeling the squeeze from funders to keep overhead low. But at what costs?

Many nonprofits are feeling "the squeeze" from funders to keep overhead low. But at what cost?

The question was posed to me after I made a presentation on the costs of our website redesign to the board of the nonprofit that I volunteer for. I can’t remember who asked the question, but I was grateful that she did. It felt like a weight had been lifted.

I had been so focused on keeping our budget tight that I hadn’t stopped to ask, are we cutting corners? What could we do if we did have more money? What opportunities to better serve our beneficiaries were we missing by being so conservative?

At that moment I realized that I had internalized a “do more with less” mindset, without really considering the consequences of doing so. According to the article “The Nonprofit Starvation Cycle” in The Stanford Social Innovation Review, many nonprofit leaders have also internalized this thinking, often due to the unrealistic demands of some of their funders.

What are the consequences of our “do more with less” fixation?

Article authors Ann Goggins Gregory and Don Howard report that the result has been a hollowing out of nonprofit infrastructure that has crippled the ability of many organizations to fulfill their beneficiaries’ needs.

Their solution? Fixing funders’ unrealistic expectations about how much it costs to run a sustainable nonprofit organization. Unfortunately, the power dynamics inherent to the grantmaker-grantee relationship make it very difficult for nonprofits to be brutally honest about how much it costs, particularly in terms of overhead expenses, to run their organization.

But if the nonprofits can not be relied on to stand up for themselves, what can funders do? Gregory and Howard recommend that funders shift their focus from costs to outcomes.

This shift is fundamental to getting away from the current culture of “low pay, make do, and do without” that has created dysfunction in some organizations.

The one question you should ask grantees.

Gregory and Howard recommend that funders clearly establish that they and their grantees share the same goals. Once goals are clear, funders should ask grantees to answer honestly this question, “What will it take to deliver these outcomes consistently, or to deliver these outcomes at an even higher level of quality or quantity?”

Outcomes, not overhead.

This question, and the question that I was asked at that board meeting, both get beyond the question of money and refocuses the listener on the question of results. Because ultimately, none of us, neither grantee nor funder, is in it for the lowest overhead, we’re in it for outcomes.

For a more complete description of the Nonprofit Starvation Cycle, and actions that funders and grantees can take to break it, read the article at The Stanford Social Innovation Review website.

Join the conversation: Are you taking steps to ensure that your grantees are making sustainable choices and spending adequately on technology and staff? Do you think we can even begin to address the issue of under reporting and underfunding overhead within the current economic context?

– Cary Lenore Walski, MCF web communications associate

Photo CC Accent on Electric