What Causes Systemic Change?

I got an email from a reader in regards to the posts I’ve been trading with Paul Brest. The reader suggested that some major funders believe that systemic change does not come from funding individual nonprofits and that it can only come through more comprehensive foundation programs. I’m sympathetic to this point, but I believe it is almost certainly wrong.

Over the last 20 years, hierarchical models have been collapsing and being replaced by flatter organizations and systems. I talked about this when I first described The Second Great Wave of Philanthropy in 2006. This shift is currently celebrated in the concept of The Wisdom of Crowds, but it also was evident in the collapse of the Soviet Union and the success of free markets. It is evident in the changing approach to organizational management and it is the theme of Thomas Friedman’s book The World is Flat.

In a flat heirarchy, it is most critical that the system itself is robust and has a self-reinforcing mechanism to allow the best and the brightest of the level playing field to exert the most influence. In a heirarchical system it is most important that those in charge make the correct decisions and that they are able to exert enough control over the heirarchy to execute their plans.

What I’m arguing for is a decentralization of social impact creation along with a prolonged investment into the nonprofit infrastructure so that the Wisdom of Crowds does not dissolve into The Madness of Crowds. While investing in any one nonprofit may not result in systemic change, a profound shift by major funders from contracting with nonprofits to execute the foundation’s theory of change (a hierarchical model) to investing growth capital into nonprofits that compete for grants/investments by showcasing their ability to execute high impact programs would result in radical systemic change.

I’m deeply indebted to George Overholser, of Nonprofit Finance Fund, for his paper Building is Not Buying and the many conversations he and I have had about the under-capitalization of nonprofits. What George so eloquently explained in Building is Not Buying is that there are two types of funders, those that want to buy program execution from nonprofits and those that want to invest in nonprofits in order to build them. The world of philanthropy today is dominated by two major types of funders, non-strategic Buyers who give money to nonprofits in the hope that the money will result in social good and Strategic Buyers who design their own theory of change and then contract with nonprofits to execute the various moving parts of the funder’s program. This has resulted in a nonprofit industry without access to the capital it needs to grow into self-sustaining, high impact organizations.

Organizations need both customers (buyers) and investors (builders) to grow and thrive. What they are missing today are investors. They need funders who will make long term investments in the healthy growth of their organization. Success comes when a funder like the Edna McConnell Clark Foundation invests in the growth of Nurse-Family Partnership or Doris and Don Fisher invest in the Knowledge is Power Program (KIPP) as Paul Brest profiled in his recent post.

Neither of these organizations will result in systemic change by themselves. But if funders would embrace the role of investor/builder instead of the role of a designer/architect, the social impact potential of nonprofits would explode and we would achieve the systemic change that so many funders seek.