Flaw # 7 from the Project Streamline report:
The most commonly cited effect of the foundation funding system is that nonprofits continually reinvent their programs—at least on paper—in response to foundations’ preference for the “new and different,” and reluctance to pay core operating support. Application and reporting requirements also cause nonprofits to develop strategies that are the opposite of what foundations intend. For example, nonprofits learn to work around grantmaking staff to ensure that their proposal is considered. They devote time and energy to board mapping, described by one nonprofit representative as “looking for the second cousin twice removed” who can help the nonprofit avoid the standard hoops and get straight to the funder’s board. Grantmaking staff find it troublesome when a nonprofit organization circumvents the normal application and reporting process in this way, but nonprofits continue to do it because they find that it works.
This might be the best example yet of the difference between looking at philanthropic giving through the lens of consumer behavior (donors are “buying” the “good” that nonprofits “sell”) vs. investing (donors are “investing” in the nonprofit organization and the “return on investment” is the “good” the nonprofit does). As I mentioned in prior posts, I tend to use the investing framework. A smart friend of mine disagrees and uses the consumer model. My friend George Overholser, who is one of the best thinkers on this topic, thinks that some donors are “customers” and others are “investors”. George probably has it right. But as he suggests in his paper Building is Not Buying, it is important for funders to recognize if they are builders (investors) or buyers (customers) and act accordingly.
The “flaw” outlined above sets funders up as customers. Investors in a business don’t ask the organization to bend and mold to what the investor wants. Investors compete to invest in organizations that they think are doing a great job already. Warren Buffett is famous for investing in a company and then getting out of the way so they can keep doing what they were doing before he came along.
Customers on the other hand ask organizations to do whatever they want. As a customer, you don’t care what the most cost efficient way for Starbucks to serve you a cup of coffee is. You want the best purchasing experience and best cup of coffee at the best price (and who cares if Starbucks is making or losing money as long as you get what you want). Smart businesses don’t try and serve every customer, they seek out the niche of customers who the business can serve profitably.
So looking at the “flaw” above I’d suggest that if a foundation views themselves as an investor, then the flaw is spot on. It is inconsistent to believe you are a philanthropic investor while at the same time requiring your grantees to perform “fundraising gymnastics”. If on the other hand you are happy being a philanthropic consumer — paying nonprofits to do social good — than I don’t see anything wrong with the fundraising gymnastics routine. As a customer, you have the right to ask the organization you are purchasing from to serve your needs. But smart nonprofits will refuse to serve those “customers” who are not profitable (ie. those customers whose net grants are not worth the trouble).