In my last post, I profiled Paul Brest’s new annual letter about the merits, or lack thereof, of general operating support grants. In the weeks before the annual report was released, Paul emailed a copy of the essay to a group of people who work in philanthropy. Paul Shoemaker of Social Venture Partners replied with extensive comments and a debate ensued between Shoemaker and Brest.
With the permission and encouragement of both Pauls, I’m republishing an excerpt of the debate below. Just to be clear, any emails sent to me are strictly off the record unless permission is requested. Brest’s email was a private email among a group of people. I republish it here only after Paul B. suggested the idea and Paul S. gave his permission.
Please see yesterday’s post for the “medical school example” referred to below. Note that Shoemaker does not write in all caps because he is yelling at Brest, but to distinguish their remarks during inline comments within the emails (although Shoemaker does love using all caps, emoticons and bold, italicized text in most of his emails!).
Paul Shoemaker: In the scenario, e.g., where the funder is interested in cancer research within a medical school, who else then funds the overall school’s “overhead,” administrative, etc. expenses?
Paul Brest: That’s just what overhead rates are for. In the case of universities the overhead rates are well defined.
Paul S: “OVERHEAD” RATES, IMHO, ARE LARGELY A FALLACY. NO ONE HAS ANY DEFINTION OF OVERHEAD THAT IS REMOTELY CONSISTENT. AND ONE PERSON’S OVERHEAD IS ANOTHER PERSON’S INVESTMENT IN HUMAN CAPITAL. EVEN IF SUCH RATES WERE DEFINABLE, HOLDING A NON-PROFIT TO X RATE, PRE-DEFINED, IS ARTIFICALLY CONSTRAINING AND LESSENS THE NON-PROFIT’S ABILITY TO ADJUST ITS SPENDING BASED ON CURRENT CONDITIONS AND OPPORTUNITIES. I JUST DON’T THINK OVERHEAD RATES ARE A VALID, USABLE, TRULY DEFINABLE THING.
Paul S: I know the analogy never translates 100%, but one thing I constantly recycle in my mind is some entity – VC, bank, individual investor, etc. – putting money into a private sector company but telling them they can only use the money for X, but not Y. How does that company ever build a whole, fully-functioning company, even if only some of their investors attach such requirements?
Paul B: The nonprofit and business sectors aren’t identical. If I were to use a business analog, though, a project grant is more like purchasing services than investing in the company.
Paul S: THEY ARE CERTAINLY FAR FROM IDENTICAL, I AGREE. BUT EVEN WHEN I AM PURCHASING GOODS OR SERVICES FROM A FOR-PROFIT COMPANY, I CANNOT THEN TELL THAT COMPANY HOW TO SUBSEQUENTLY AND SPECIFICALLY USE THOSE FUNDS (E.G. USE MY MONEY FOR R&D, BUT NOT SALES & MARKETING). AND IF THE FOR-PROFIT WORLD DID WORK THAT WAY, IT WOULD BE SIGNIFICATLY LESS SCALABLE AND EFFECTIVE THAN IT IS TODAY (AND NO, I DON’T THINK CAPITALISM / FREE MARKETS ARE “PERFECT” BY ANY MEANS J). THE FUNDAMENTAL PROBLEM WITH ANY KIND OF RESTRICTIONS ON FUNDING ARE HOW MUCH THEY HANDICAP AND CONVOLUTE THE NON-PROFIT’S ABILITY TO OPTMIZE ITS OWN SPENDING TO ACHIEVE ITS GOALS AND SOCIAL OUTCOMES.
Paul B: And now a question for you. If you made, say, a $1000 GOS [general operating support] grant to a university the chances are that about a penny would go to cancer research. So what should someone who wants to support a university’s cancer research program do?
Paul S: THE WAY I WOULD HOPE THE WORLD WOULD WORK IS THAT A NON-PROFIT / UNIVERSITY, ETC WOULD BE VERY CLEAR ABOUT THEIR GOALS, WHAT THEY INVEST IN, HOW THEY WILL USE THEIR FUNDS, ETC. AND THEN A FUNDER WOULD MAKE GOS / UNRESTRICTED GRANTS BASED ON THAT INFORMATION. IF ALL FUNDERS BEHAVED IN THAT WAY, THEN ULTIMATELY MY GOALS FOR CANCER RESEARCH WOULD BE MET.
I WOULD NOT BE ABLE TO SAY MY $1,000 LED TO X, BUT THE ULTIMATE PURPOSE FOR MY $1,000 WOULD BE MET. AND IF I LATER LEARNED THAT THE UNIVERSITY WAS NOT INVESTING IN THAT RESEARCH EFFECTVELY, I WOULD DECIDE TO DISCONTINUE FUNDING (UNLESS THERE IS SOME OTHER “PRODUCT” THAT I STILL VALUED). MAKING MY GRANT FOR CANCER RESEARCH A “PROJECT GRANT” DOES NOT, ON THE WHOLE, MAKE MY GRANT ANY MORE EFFECTIVE WHILE IT DOES RESTRICT / CONSTRAIN THE ORGANIZATION’S ABILITY TO BUILD A FULLY-FUNCTIONING ORGANIZATION.
Paul B: [referencing the medical school example] A grant to Stanford Medical School is not GOS under the IRS definition; only an unrestricted grant to Stanford University as a whole is. Stanford will allocate a GOS grant among millions of activities based on what it sees as the needs of the time: teaching Italian, particle physics research, the women’s lacrosse team, the law school, overseas campuses, you name it. Even if Stanford had the best cancer research center in the world, the institute would only receive a trivial part of a GOS grant to the University, given these other needs. If a donor particularly interested in cancer research could only give GOS, he or she would wisely seek an institution that only does cancer research so all of the funds would go for that purpose.
The way Stanford keeps its core operations functioning, even when most grants are restricted, is by charging overhead costs. With respect to government grants, overhead is defined extremely precisely by OMB Circular A-21 and the rates are negotiated with universities. (There’s a similar circular for nonprofits other than universities.) Individual donors and foundations try, usually successfully, to circumvent the overhead rates. Well, shame on us! I tried to get IS [Independent Sector] interested in the overhead problem some years ago, but it never caught on. It would be great if organizations like SVP [Social Venture Partners] and GEO [Grantmakers for Effective Organizations] got interested. They’d certainly have my support.
Paul S: OK, within a monolithic / huge institution, especially public, like a university, I see some of your logic for non-unrestricted support. Yes, an unrestricted grant in such a scenario has the potential to be spread across a great range of potential purposes. I will say that, taken to the extreme, if EVERY funder to a university ONLY funded their piece of research, etc. they wanted to focus on, we would be back to the same fundamental problem of “who will sufficiently fund the administration, infrastructure” then?”
But on institutions of significant complexity / diversity of work AND scale, I can see some logic, Paul. I am almost ready to say I’d be willing to live with the downsides you correctly describe in return for the upsides of completely unrestricted funding (with explicit organizational, published goals and institutional accountability). I also confess I’m too ignorant about funding streams for large public educational institutions
I will say that “With respect to government grants, overhead is defined extremely precisely by OMB Circular A-21” is an expression that, prima facia, seems doomed to inaccuracy, inaccuracy, severe rigidity, and a lack of understanding that will lead to all kinds of debilitating handicaps and restrictions. Same goes for “a similar circular for nonprofits.” And if in fact, they often successfully circumvent the overhead rates, and we all know they do, then what a ridiculous waste of time and resources in the first place.
For 98% of non-profits. I’ll stand my ground J (and I know you’d stand with me on much of that). I will also add that so many of these discussions about GOS / unrestricted vs. project-specific grant focus on the negatives and risks of unrestricted grants and not enough on the significant positives and benefits. Much less staff resource wasted, much greater flexibility in resource allocation / optimization, trust placed in the hands of non-profits who are closer to the real work, ability to fill in gaps in infrastructure, etc. There are more. And the ultimate purpose for unrestricted funding is it is a significant advantage of helping a non-profit build a much stronger, sustainable and salable organization.
Paul, when you say “I tried to get IS interested in the overhead problem some years ago, but it never caught on. It would be great if organizations like SVP and GEO got interested. They’d certainly have my support” I was vaguely aware of that, but I’d love to hear more and in fact, maybe we are ready to take that on collectively
3 Comments
As mentioned in the previous blog entry, project grants can (and in my experience often do) include funds for overhead. Of course you also run into the old adage that all funds are fungible; with appropriate accounting.
Perhaps in the case of a large foundation such as Mr. Brest’s, many of hte organizations supported are of a large size themselves and have 10 or more yearly grants of a meaningful size that all have 5-10% set for overhead. In these organizations cases, their overhead is covered.
I think that Paul S. has hit the nail on the head in regards to how best monitor GOS grants. Monitor the organization against their goals (performance management). An organization sets a strategic path, tactics, goals and objectives (or so we hope) and then executes against those plans. The first best way to evaluate a potential grantee is against its own plans.
Did you know that Honda’s have a higher overhead rate than Rolls Royce? Does this mean that Honda’s are a worse deal for those who simply want a car that works?
That said, are we sure that funder-imposed overhead restrictions per sae are the problem?
I can think of plenty of for-profit industries that operate just fine on a cost-plus or open book basis, where the amount of overhead permitted is negotiated with the customer. A lot of home-builders work this way, for example.
Maybe the question is: Why don’t funders build in ENOUGH of an overhead allocation? (Or, conversely, why can’t nonprofits learn to operate healthily at the overhead rates their funders want?)
Suspect answers:
* Multiple reporting relationships, each with different definitions of overhead, and each with different timing, render the accounting systems unable to describe what the true cost structure looks like…. thus….
* Nonprofits don’t know what their unit costs are and are all too happy to say yes to grants that only MIGHT be below-cost
* Organizations fail to say “no” to unhealthy grants (they need to make payroll and don’t have capital on-hand that lets them turn down “bad” business)
* Organizations lack the culture or governance they need to say “no” to unhealthy grants (short-term alleviation of beneficiaries pain outweighs long-term benefit to beneficiary of having a healthy nonprofit provider)
* Certain funders (like the government) are so big that they have “too much” negotiating power.
* Precisely because there are other funders to backfill, big funders are able to get away with squeezing PAST the point of death. (Walmart squeezes its vendors within an inch of death as well. But its vendors are for-profit, so they don’t have the subsidizers that would allow Walmart to get away with squeezing BEYOND the point of death)
* Funder unwillingness to accept “price per unit of execution” as their frame of reference (many nonprofit programs cannot be “unitized”, though) (many can, on the other hand — We buy tutoring for our own kids on a price-per-session basis. Why not do the same when we buy tutoring for someone else’s kid?)
There are many more!
To me, the answer lies in creating a class of equity-like stakeholders that provide both the “no” capital and the equity-ethic that makes it possible for organizations to say “no” when they need to, and… to use the focus and excellence that gives them to gain the negotiating power they need.
I think we are confusing means and ends. GOS is a means. The foundation I run makes lots of “lightly restricted” GOS grants (I don’t think that is an oxymoron). We agree with the NP on the desired End, for example, reduce childhood obesity. We ask the NP how they will best accomplish this shared End; invest when we agree, and then give the NP opportunities to change tactics and strategies as they learn. Yes, we want to be in the loop if those changes are major, but we are following their lead. The grant is an admission that we (the funder) do not know how to produce the shared end. If we did, we should run the program ourselves.
This is a combination of trust-based and outcome-based funding. We have a great advantage because we are also place-based. I see few national funders (but there are some), that are allowed by their Boards and leaders to find the “sweet-spot” on the outcomes-based to trust-based funding continuum. But like GOS, they are both means. I’d suggest they are strategic means rather than tactical, but they are still means.
The sweet-spot for each End and related circumstances, will be different. But rather than arguing all-GOS or no-GOS, we should be figuring out how to find the sweet-spot a higher percentage of times.