Outsourcing Administrative Costs to Nonprofits

Flaw #4 in the Project Streamline report looks at the way foundations often “outsource” the burden of evaluation to nonprofits.

Because the “net grant” is often small, it is particularly problematic when grantseekers are required to do what is essentially the grantmaker’s work without compensation. We refer to this phenomenon as outsourcing the burden. Although many grantmakers do not want their grant money used for administrative and fundraising purposes, application and reporting often require labor- and time intensive activities of the grantseeker, activities that frequently can and arguably should be done by grantmakers.

Last time we discussed why it is a mistake for foundations to not consider nonprofits’ costs of obtaining a grant when they think about their strategy. Today I want to point out when “outsourcing” makes sense within the context of philanthropy and when it does not. Outsourcing is generally a strategy that is used when a third party is able to produce goods or services at lower cost (or better quality) than the party in question. In the context of foundation due diligence it is likely that foundations can achieve lower costs since they are making grants in larger volume than most of their grantees are receiving grants. Since, as we discussed last time, it is not relevant whether the cost falls on the foundation or the nonprofit, foundations should be seeking the low cost location for the work to be done.

But I would suggest that a more important issue is that foundations can likely produce higher quality due diligence by performing it themselves rather than by asking nonprofits to supply it. Nonprofit grant seekers have an incentive to paint the very best picture of themselves. Foundations on the other hand, presumably would take a more objective approach to gathering due diligence.

At Ensemble Capital we have our own systematic approach to analyzing potential investments. We gather a lot of data and qualitative information from material provided by the companies we are looking at and we often speak directly to management to get answers to our questions. But if a company submitted a prepared response to our request for information, I would see it for what it was; a marketing job intended to convince us that they were a good investment.