Stanford Social Innovation Review has a superb article on the cycle many NPOs have of starving themselves of critical infrastructure they need to be effective in their mission.
Superb summary: “The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit. At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations. At the third step, nonprofits respond to this pressure in two ways: They spend too little on overhead, and they underreport their expenditures on tax forms and in fundraising materials. This underspending and underreporting in turn perpetuates funders’ unrealistic expectations. Over time, funders expect grantees to do more and more with less and less—a cycle that slowly starves nonprofits.”
The article is here. Check it out!
Thanks to ECFA for pointing out this article in their newsletter on 9-9-10.
On the last page, the authors describe some steps that NPOs can take to start breaking the cycle.
My thoughts on the author’s cycle:
Step 1 – Funder’s expectations – I don’t have contact with funders, but hear from my clients all the time that the expectations are rather strong.
Step 2 – Feel pressure from those expectations – Absolutely. I rarely see any grants on the books that allow for any administrative costs. Sometimes grants are specifically for infrastructure, but those are rather rare. This leaves ministries in the situation where they have to cover all the infrastructure out of unrestricted contributions. This sends an extremely powerful message that infrastructure is not important.
Step 3a – Underspend on infrastructure – Yes, very widespread. In my travels through the nonprofit world, I cannot recall ever seeing an NPO with too much infrastructure. Many have enough support to do their mission well. Most nonprofits I have worked with are underfunded in the infrastructure they need to get the job done, let alone to excel in their mission. Monitoring effectiveness, measuring outcomes (which lets you know if you are even making any difference in the world), providing great training to program staff, and being strategic in program focus all require a lot of infrastructure. Yet those are exactly the things funders are expecting more and more.
Step 3b – Underreport supporting services on financial reports—Not from my clients. Nor at any of the CPA firms in Southern California that I keep in touch with. At my firm and the other firms I am familiar with, the functional reporting is as accurate as estimating allows. However, when I look at the 990s of other ministries, I see things that I wonder about.
Very good article with good research to support it. If you are in leadership or development, I recommend it.