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Seeking a Bigger Bang for the Philanthropic Buck

Feb 01, 2009


Nonprofit Marketplaces cover

The Nonprofit Marketplace explores how to fill the information gap in philanthropy.

Imagine you had $300 billion to give away to good causes. You'd do serious homework before you opened your checkbook, right?

Seems sensible. If only it were that simple. In fact, $300 billion is what individuals, foundations, and businesses in the United States distribute each year to more than a million nonprofit organizations. Remarkably, often philanthropists' decisions are based on little more than hunches. Beyond such informal-and often unreliable-sources of information as word of mouth and marketing brochures, facts about the effectiveness of nonprofit organizations are elusive.

The problem is compounded by the complexity of the philanthropic impulse, with givers motivated by a host of factors other than having an impact. Contributing to a noble cause, pleasing friends, and habit each can play a larger role in giving than whether recipients of the largesse actually make progress toward their goals.

The Hewlett Foundation, working with the consulting firm of McKinsey & Company, has taken a step toward remedying this unlikely state of affairs with the publication of The Nonprofit Marketplace: Bridging The Information Gap in Philanthropy, a 68-page study of how to provide donors with the information about nonprofit organizations necessary to make informed decisions. The report-which is prompting some spirited debate-can be found at http://www.givingmarketplaces.org/, where visitors can comment on its contents.

"The stakes for increasing the effectiveness of philanthropy are very high," says Jacob Harold, an officer of the Hewlett Foundation's Philanthropy Program who helped prepare the report. "If we're going to solve complex problems like climate change or AIDS, we must become much more serious about getting resources where they can have the most impact."

The study concludes that all parts of the philanthropic world-from large foundations and wealthy individuals, to their financial advisors and the organizations receiving support-need more accurate information about how well a nonprofit organization is run. That information should include the organization's real-world impact and the ways it tracks progress toward its goals. The report also suggests some first steps that donors and nonprofits might take for this information to become broadly available.

But getting the information is just part of the solution, the study acknowledges. Some means must be found to increase donors' demand for it. And the connections between advisors who vet charities and the donors who need the information must be strengthened.

A Time of Experimentation in the Philanthropic World

The Hewlett-McKinsey study comes at a time of proliferating discussion and online experiments to encourage more informed charitable giving. Among them are GuideStar, a Hewlett grant recipient that aggregates and shares information about more than 1.7 million nonprofit organizations; GiveWell, an independent charity evaluator that conducts and shares in-depth research; and sites like GreatNonprofits, where the public shares its experiences with nonprofit organizations, a bit like consumer product reviews.

Indeed, a new generation of thinkers and donors, many steeped in entrepreneurial techniques and values, is prompting fresh thinking and a lively discussion about how to make philanthropy more rational and strategic. Publications like the Stanford Social Innovation Review, another Hewlett grantee, and numerous blogs are helping support philanthropy as a field of study. At the Hewlett Foundation, each grant recipient is asked to articulate a "theory of change" that explains how its activities will lead to its stated goals, and how it will measure progress toward them.

"The stakes for increasing the effectiveness of philanthropy are very high," says Philanthropy Program Officer Jacob Harold.

Harold acknowledges that for the report's goals to be realized, nonprofit organizations and donors alike need to become more willing to share information about their goals and performance, something that, to date, they have had little incentive to do.

Paul Shoemaker is a former Microsoft executive and founding president of Social Venture Partners International. The organization, which Shoemaker started in Seattle with other business leaders, has now spread to twenty-three cities. It works to make nonprofit organizations more effective by having donors from the business world donate time and expertise as well as money.

Shoemaker acknowledges the complexity of measuring the progress of all types in nonprofit work, but thinks it may be possible to create standards for some of the most common activities and to get funders and the nonprofits to agree to them.

"You can't create a taxonomy for every issue and every problem out there, but you can acknowledge that 90 percent of the nonprofits take on these twenty areas, and then agree to key indicators of progress," Shoemaker says. "That would solve a big part of the problem.

"It's hard for people to get their brains around it, but it's doable," he said. "We need to identify some ecosystems (of grantmaking for a certain problem) and take it on to see if we can create a system."

Shoemaker said efforts to do this will have to be led by funders. Otherwise, nonprofits will have little reason to change their behavior, and many will lack the resources to undertake such a task.

Encouraging Nonprofits to Chart Progress

"The outcome side does belong to the nonprofits," he adds. "Many of them are not clear enough about their theories of change and about how they track the outcomes of their work. And some organizations that do still don't use this data to improve their delivery of services."

But not everyone is convinced that more and better information about the performance of nonprofits will bring hoped-for improvements.

"I have big questions about the fundamental premise that high-quality information leads to better decisions," says Aaron Dorfman, executive director of the National Committee for Responsive Philanthropy in Washington, D.C. "Larger foundations would be receptive to having the information, but with smaller foundations and individuals it really depends."

Dorfman also says he worries that encouraging some donors to demand information about nonprofits' progress could backfire if the donors aren't sufficiently knowledgeable about what to seek. "It actually could lead to bad behavior on the part of donors."

He is also concerned that large funders demanding the use of certain yardsticks to measure progress could have unintended consequences. "If they get it right, it could be good," he says. "If it stifles innovation, it could be a bad thing."

Dorfman is more supportive of the study's call for nonprofit organizations to do more to track their own progress toward their goals and to share that information. "Having better information about performance will make nonprofits more effective even if it doesn't shift where the donor dollars go," Dorfman predicts. "And that shared information will help everyone in the sector."

Shoemaker says the changes will come one way or another.

"I think there is certain inevitability to some of this," he says. "These discussions have been going on for decades, but with Internet technology and the growing sophistication of foundations, more things are becoming possible.

"At some point, the world's problems are so intense that we just have to do some of these things," Shoemaker says. "We're not going to solve them unless we do."