The following is a conversation between Jeri Eckhart Queenan, Partner at The Bridgespan Group and Denver Frederick, Host of The Business of Giving on AM 970 The Answer WNYM in New York City.
Denver: For the first time, a group of major foundation leaders has agreed to experiment with a set of best practices and policies to address the starvation cycle that undercuts the effectiveness of their grantees. And here to discuss this with us is Jeri Eckhart Queenan of The Bridgespan Group. Thanks for being here, Jeri!
Jeri: My pleasure, Denver. Great to talk with you.
…every philanthropist is committed to solving society’s most pressing problems…
Denver: It was The Bridgespan Group that coined the term “starvation cycle” back in 2009. What does that refer to?
Jeri: It refers to the way that we price grants. And let me start by saying every philanthropist is committed to solving society’s most pressing problems; that’s why we’re having this conversation. And in order to solve society’s most pressing problems, we need strong, vibrant, high-performing nonprofit organizations.
What the starvation cycle is about is the way we fund those organizations. It turns out that over 80% of all funding that goes to nonprofits is in the form of a project grant: we restrict the dollars to a project or a program. That’s okay; that serves a useful purpose. It’s the way we price them, and it turns out that we price them at a discount. We price them at about 85 cents on the dollar. This is the starvation cycle. What it leads to is a lot of scrambling, underfunding…not the strong infrastructure and capabilities we need to solve those problems that brought us all to the table to begin with.
On average, they’re about 30% of the total, and we are, on average, funding them at about 15%. So, the shortfall is about 15%. It’s pretty significant. It’s very significant. If you were a corporation, you would go bankrupt trying to scale a model like this. Seriously.
Denver: So, on average, what is the gap between the indirect cost – and I think that’s what you’re referring to – of a nonprofit, compared to how much of those costs are covered through a foundation grant when they fund one of these projects?
Jeri: So, on average, the indirect costs – those are the common pool of costs not specific to the nutrition program or the education, but the leadership, the communications, the knowledge, the IP, the measurement, all those things…those are the indirect costs. Those costs drive impact; they’re essential to drive impact. On average, they’re about 30% of the total, and we are, on average, funding them at about 15%. So, the shortfall is about 15%. It’s pretty significant. It’s very significant. If you were a corporation, you would go bankrupt trying to scale a model like this. Seriously.
Part of what led these five foundation presidents to make this change is they saw the evidence. We pulled together the evidence that shows this funding shortfall and, furthermore, linked it to financial stress in their most strategic and important grantees. So, the most important grantees of the Ford Foundation, the Hewlett Foundation, the MacArthur Foundation – these are brand names, we all know these nonprofits – they have much weaker income statements and balance sheets, much weaker financials than we would like to see in a strong organization because of this funding shortfall. We’ve done it to them.
Denver: Well, this has been talked about for a long time, and I’m just delighted to see something is really being done about it.
With the different approaches taken by these foundations and others, you’re not going to come up with a solution that fits everyone. Rather, you have to come up with, I guess, a menu of solutions. What are some of the items on that menu?
Jeri: Correct. So there’s no silver bullet here, and in part because there is a tremendous diversity of nonprofits. They have different cost structures, and they should have different cost structures, just the way corporations do. So, we need a way to accommodate that.
Well, the article that can be read in a couple of the publications lays out a menu of six options, and let me just take the two extremes. One is you could have an accountant – presumably the accountant who’s doing an audit – calculate the true indirect cost of that organization, and then any philanthropist or foundation could use that true indirect cost to calculate the correct price of the grant. It’s not that hard. The federal government does it. It doesn’t take that long, and it’s not that expensive. And once it’s done, it can be reused over and over again. We piloted that with the foundations, and some of them are adopting that approach.
At the other end of the extreme is what I would call flexible funding, enterprise-level funding. This includes unrestricted funding. It includes more flexible funding that’s maybe specific to a program, but you’re leaving it up to the organization to decide how to allocate those dollars. Many foundations like Hewlett and Ford, in particular, feel that this is really the right way to go with the kinds of strategies that they are putting in place on climate change, social justice, et cetera. And so, they’re moving away from project grants– not totally, but predominantly– and focusing on making sure that that unrestricted funding and that flexible funding is at a level that it covers the true costs.
Denver: Finally, Jeri, where do you see us going from here? And what do you see as the next steps to create the systemic change that is so desired?
Jeri: Well, it’s going to take more funders, more foundations, more philanthropists joining this movement – and already another eight have joined the original five. And of course, there are foundations who already use these practices, and we want to applaud them and recognize them. There is a coalition of intermediaries, of accounting firms, of nonprofit financial management firms who are working on this together with these foundations, and we just need more of us to join this effort and actually change our behavior.
Denver: Well, a great report, Jeri. Thanks so much for being here!
Jeri: My pleasure, Denver. Good to talk with you.
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