Any nonprofit executive will tell you their biggest concern is not programs, or board management, or even money; their biggest concern every day is that they will have to send someone away who is really in need of their service. Today this fear is a reality for many nonprofit executives who have to send people away every day. The answer to this problem, to the surprise of many people, is NOT more money. It is better efficiency. The nonprofit sector is broken… in spite of record donations and millions of hours of volunteer time (a resource the nonprofit sector is uniquely able to utilize), the sector is inefficient and unable to properly serve its local communities. Which is why the strength and efficiency of nonprofits has become such a common and important topic of study.
While the value of strengthening nonprofits to improve their performance is obvious, how to do this effectively, and who should be responsible for the local implementation, are not. In the last 10 years experts and interested nonprofit executives have begun to realize that foundations hold the most appropriate position in communities to best effect change in nonprofit performance. Many foundations have since taken a serious role, resulting in an increase in visibility and frequency of capacity-building activities in philanthropy. While there are still a majority of foundations not involved in capacity building, the ones involved have provided outcomes proving increased efficiency, outcomes and longevity when combining capacity building strategies in addition to capital infusion.
Capacity building in philanthropy isn't new, but increased activities mean new opportunities to learn and replicate best practices in local communities. Research done by many foundations over the last 10 years has proven what most nonprofit executives already know – that nonprofit organizations struggle to keep vital infrastructures intact, and in tight times are inclined to piratize whatever modest commitment they may have made to them, rather than cut back further on direct services. Moreover, our current grantmaking practices (which often includes a reluctance to pay for core administrative costs) may contribute to what Mark Kramer, in a Chronicle of Philanthropy editorial, calls the "culture of inadequacy." Nonprofit leaders have come to believe that they will never have the resources to "do things right," so they simply accept that they will always be under-resourced and struggling for survival. Is this really how we want our most essential service organizations to operate?
For foundations, this “culture of inadaqacy” (due to reluctance in funding capacity building) creates an additional problem: organizational capacity is directly related to whether a new program will survive and prosper once its original funding has ended. Thus foundations which do not fund capacity building activities actually deepen their own "exit problem." If they want to see a program endure, much less replicate and build to scale, investment in nonprofit capacity building is essential. And isn’t program longevity and scale the very thing our foundations are trying to achieve? This can never be executed without adding capacity building to the standard of service.
SCOPE OF CAPACITY BUILDING ACTIVITES BY FOUNDATIONS
Capacity-building activities in philanthropy are wide-ranging. Just to give a few examples: a foundation pays for the services of a consultant to help one of its grantees with board development and strategic planning. A nonprofit obtains a grant from a foundation to support purchase of computer software and hardware for improving its financial and client information systems. Another nonprofit is invited by a foundation to participate in a capacity building grant-making initiative, through which it receives both direct financial support and technical assistance consultation in a number of management areas – with all this help coordinated through an intermediary organization.
Sometimes capacity building focuses on assisting other philanthropies, which in turn fund and serve the nonprofit community. For instance, a community foundation receives support from a private foundation both to build its asset base and improve its management infrastructure. The community foundation then sets up and staffs a local nonprofit MSO to offer capacity building services to nonprofits in its geographical area.
TRENDS IN FOUNDATIONS AND CAPACITY BUILDING
Recent increases in the visibility and frequency of capacity-building activities in philanthropy arise from several trends. First is the considerable attention to venture philanthropy, with its counterpart in the nonprofit world – social entrepreneurism. Although not inherently linked (I don’t personally believe running nonprofits as you would a business would improve their outcomes), capacity-building in practice is supported by many donors because they view it as the “business” approach to nonprofit.
Second is the increasing commitment by foundations to evaluating funded projects and their measurable outcomes. The lack of nonprofit organizational capacity shows up in evident ways when rigorous evaluation is done.
And third, there are profound changes in the nonprofit world that both promote and demand increased strength of these institutions. They include more demands for service in the face of government cutbacks, fewer resources, privatization of services (which puts fragile nonprofits more at risk – their revenues may increase, but so does their financial risk under tightly-defined service contracts offered by public agencies), increasingly professional management, and the growth of university-based nonprofit management training programs.
Ultimately, foundation interest in capacity building comes from the desire for leverage – for increasing the impact of philanthropic resources invested in nonprofits. A recent article in Harvard Business Review by Michael Porter and Mark Kramer sets this larger context persuasively,identifying four special assets of foundations: financial resources, expertise, independence, and a long time horizon. How can these assets be leveraged? Porter and Kramer suggest four strategies that are used by most foundations today:
1 – selecting the best grantees (each of which is made stronger by capacity building)
2 – signaling other funders about how to conduct their work more effectively (promoting capacity building)
3 – improving the performance of grant recipients (capacity building)
4 – advancing the overall state of knowledge and practice (advocacy)
FOUNDATIONS & CAPACITY BUILDING IMPLEMENTATION
In order to effectively achieve their mission to increase the impact of philanthropic resources invested in nonprofits, they must leverage more than dollars. In an article in Harvard Business Review, authors Michael Porter and Mark Kramer assert: "Foundations can create still more value if they move from the role of capital provider to the role of engaged partner, thereby improving the grantee's effectiveness as an organization. The value created in this way extends beyond the impact of one grant. It raises the social impact of the grantee in all that it does and, to the extent that grantees are willing to learn from one another, it can increase the effectiveness of other organizations as well." It essentially takes the nonprofits currently being “fed” and teaches them to fish, thereby significantly improving local nonprofits strength and longevity (perpetuity being a major piece of the mission of foundations).
Once foundations accept that capacity building is essential to the success of the sector, and that they are best positioned to implement capacity building consistently and effectively, they still must determine how to implement such a large-scale change. There are essentially three ways this can be done (and each has been used and is still in practice somewhere):
- The foundation can oversee capacity building itself, by hiring professionals and implementing it directly with their own staff. The biggest challenge with this evolves in large part around the inherent imbalances of power between foundations and nonprofits. These power balance concerns manifest in many technical ways: for instance, community foundations that also operate capacity building programs must be careful to build appropriate "firewalls" between their grant-making and capacity-building functions. Otherwise there may be not only ethical problems, but also a practical reluctance of nonprofits to use the foundation's capacity-building service, which typically requires them to be candid about their operating problems and organizational shortcomings. This reluctance by nonprofits can lead to "the assurance of a mediocre approach." In addition, foundations that handle capacity building in-house have higher operating expenses that are passed on to the donor. Community foundations must keep their fees as low as possible in order to compete with the for-profit National Advised Funds (NDAF) such as Schwab, Fidelity and others.
- The foundation can build relationships with local professionals whom they then hire to train and consult nonprofits. This, however, takes significant oversight which will mean higher overhead and higher donor fees, and does not create a sufficient “firewall” to allow nonprofits the comfort to provide information about their weaknesses and get the most out of their capacity building activities.
- The foundation can partner with one or more management support organizations (MSOs) who handle the capacity building audits, trainings and consultations requested by the foundation, while still maintaining a separate status. MSOs can be for-profit or non-profit, and are the most common vehicle for capacity building activities. The MSO would apply for grant money to implement capacity building, so the foundation could keep overhead costs down and maintain a healthy distance allowing nonprofits to fully open up to the MSO ensuring the best possible outcomes.
All three of the options above are currently being used by foundations around the country. Most, however, have found that option 3 (partnering with an MSO) seems to have the least number of challenges and allows foundations to concentrate on their other activities.
ADDITIONAL MOTIVATIONS FOR FOUNDATIONS TO USE CAPACITY BUILDING
Foundations have taken on capacity-building activities for various reasons. For instance, at the David & Lucile Packard Foundation, which has had a major capacity building program since 1983, these activities reflect the donor's commitment to applying business principles to nonprofits. The Boston Foundation's efforts starting in 1987 grew out of the observation that many of the homeless and battered women's shelters they were funding in Massachusetts were "crashing and burning" in their first five years of operation.
Intertwining themes of values and necessity tend to re-occur as the most common inspirations for capacity-building efforts; but the fact is that theory-driven, model-based capacity building with good evaluation behind it simply has the best chance for success.
Some additional reasons for capacity building, specific to foundations, include:
1. Foundations, in their typical role of supporting nonprofits and communities through grant making and other mechanisms, have a vested interest in strengthening nonprofits. Paul C. Light in Sustaining Innovation demonstrates empirically what's already well known intuitively – that strong, healthy nonprofits are more able to be innovative. "Give me food, and I eat for today. Teach me to fish and I will eat forever" is a maxim that applies to nonprofit innovation as well as to the overall operation of the nonprofit organization. Since much foundation grantmaking is oriented to funding innovative programs, capacity building can increase the number of "innovative ideas and applications".
2. Readiness of nonprofits for new funding is an important issue that can be easily addressed through capacity building assessments. It is difficult for nonprofits to resist applying for funding, even though they may be ill-equipped to engage in the changes the funded project will require. For instance, a nonprofit may be overwhelmed with change from turbulent life in the community, or even from other funded change initiatives they are already involved with. In the latter situation, "hyperinnovation" can result, to use a term from Madeline Landau at the University of California, Berkeley. Finite energies of nonprofits and community leaders can be dissipated if spread too thinly over too many initiatives.
3. According to Porter and Kramer, "Affecting the overall performance and strength of grant recipients is important because foundation giving represents only about 3% of the nonprofit sector's total income. By helping grantees to improve their own capabilities, foundations can affect the social productivity of more resources than just their slice of the whole." In an ideal world, all philanthropic activity is intended to contribute in some way to nonprofit capacity building, of course, but some strategies have more "leverage value" in this arena than others.
CHALLENGES OF CAPACITY BUILDING
Capacity building is something that many experts believe will significantly improve the presently poor outcomes of the nonprofit sector, but everything has its challenges.
Funding: There is also both historical and current resistance to the use of philanthropic funds for capacity building. Christine Letts, Allen Grossman & William Ryan, in their book High Performance Nonprofit Organizations, assert that in too many cases funders see "investment in the infrastructure of nonprofit organizations as overhead – the connotation is that these are deadweight costs that take money away from program beneficiaries."
In the capacity-building paper, Finishing the Job, the Edna McConnell Clark Foundation amplifies this statement: "The role of organization builder is not a familiar or comfortable one for many foundations…. Wary of becoming life-support systems for undercapitalized institutions, foundations have tended to concentrate on refining methods and generating ideas more than on funding and building the productivity, versatility and staying-power of the institutions that implement ideas and distribute services." In particular, it is noted, funders (including both foundations and government) have been reluctant to pay for core administrative costs – such as for staff training, information technology and strategic planning. This has led to the inefficiency and low effectiveness of the nonprofit sector, often due to the fact that nonprofits are beyond lean and are trying to function with little to no overhead. (A business run this way would be closed in a matter of months, so why would we want to operate our nonprofit sector in a way that doesn’t work?) What donors must understand is that capacity building is about a nonprofit reaping an increased result, NOT about management for its own sake.
Role conflicts in capacity buildingrefers to the unique "three-way relationship" that exists between foundations as funders of capacity building, nonprofits and their communities, and providers or intermediary organizations. There are bound to be some tensions, especially as capacity building programs grow in scope. These can best be handled if roles are defined clearly from the outset (plus providing simple structures by which role conflicts can be discussed and resolved). Important questions that should be asked at the onset of capacity building include:
- Should a capacity audit be required before nonprofits can apply for a grant?
- How much information from a capacity audit should be provided to the foundation? To the donor?
- Will the foundation provide capacity building grants, or only fund capacity building as a part of a program grant?
- Should capacity building initiatives offered to grantees be mandatory or voluntary? What about capacity building initiatives that directly impact the foundation’s grant?
- Should donors be required to pay for the capacity building related to their donations?
- Should a partner MSO be funded by an annual grant or by project/hour?
- Should nonprofits receiving foundation support be required to be a member of the partner MSO (if they are a membership organization).
These, and several other issues (direct or indirect), are among the complex matters funders, nonprofits and providers will need to consider and decide upon together.
STRENGTHENING NONPROFITS: CAPACITY BUILDING AND PHILANTHROPY, by Thomas E. Backer, PhD of the Human Interaction Research Institute, 2010