I have to give Brad Shear of the Facebook group Non-Profit Happy Hour a significant tip of the hat for calling attention some interesting information about the non-profit starvation cycle buried in a Harvard Business Review piece about Business Management needing the influence of philosophers. I would likely not have read the piece long enough to come across the information.
Briefly, the non-profit starvation cycle is characterized by grant makers funding a program but only allowing a small portion of the money to be used for the overhead costs necessary to execute the program.
In the HBR article, authors Roger Martin and Tony Golsby Smith discuss a scenario they ran into regarding assumptions being made about donors and foundations.
The consulting firm accepted this framing of the problem and believed that the strategic challenge was figuring out how to persuade donors to increase the percentage allocated to indirect costs. It was considered a given that donors perceived indirect costs to be a necessary evil that diverted resources away from end beneficiaries.
We got the firm’s partners to test that belief by listening to what donors said about costs rather than selling donors a story about the need to raise reimbursement rates. What the partners heard surprised them. Far from being blind to the starvation cycle, donors hated it and understood their own role in causing it. The problem was that they didn’t trust their grantees to manage indirect costs. Once the partners were liberated from their false belief, they soon came up with a wide range of process-oriented solutions that could help nonprofits build their competence at cost management and earn their donors’ confidence.
This is the first time I ever read that donors acknowledged the problem and their role in perpetuating it. That was cause for optimism.
I disliked reading that there such a level of distrust that the grantees would manage costs well. I would venture to say that insufficient funding contributed to a situation where organizational staff members were filling too many roles to properly focus on cost management. Though I don’t doubt that some organizations needed to improve practices regardless of staffing levels.
I am curious to know about what the process-oriented solutions were and if they required significantly more effort or if the solutions helped the organizations manage their costs more efficiently while roughly investing the same effort. Probably more importantly, were the solutions indeed successful at earning a higher level of trust and funding from the donors?