Posted on October 21, 2008

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Philanthropic Triage During an Economic Downturn: Linking Financing to Impact

In any economic downturn, the demand for philanthropy increases as the supply of philanthropic capital declines. The current financial crisis is no exception. Its breadth, severity, and potential duration bring new urgency to the need to manage philanthropic dollars wisely.

The forces at work are clear and painful: a reduction in the supply of philanthropic investment simultaneous to an increase in nonprofit demand for that investment. On the supply side, the wealthy have less wealth to give. Private foundations, which are required by law to spend 5 percent of their net investments each year, have seen their asset bases shrink. While some experts have called on foundations to increase endowment draw-downs, overall foundation payouts will almost certainly contract.

Likewise, corporate foundations have seen a similar, dramatic decline in their available philanthropic capital. Indeed, several corporations known for their largesse (e.g., Wachovia, Lehman Brothers, Merrill Lynch) no longer exist. Finally, the declining fortunes of large companies will be reflected in individual donation patterns. For example, in a recent Washington Post article, Marsha Stein, executive director of CityMeals-on-Wheels, noted that Bear Stearns employees alone donated $500,000 annually to her nonprofit. That support came into question almost overnight.

On the demand side, we have already seen the increases in foreclosures and joblessness. The interconnected web of employment, poverty, education, child welfare, homelessness, and health means that the demands on nonprofits charged with addressing these issues will increase. Moreover, many nonprofits will soon see reductions in government funding as federal, state, and local tax revenues shrink in concert with the financial contraction.

The result is an environment in which philanthropists and nonprofits need to focus relentlessly on the impact of every dollar spent. The goal is "high impact" philanthropy, in which the nonprofit sector maintains or even expands its impact despite a shrinking pot of available dollars.

"Operationalizing" high impact philanthropy is not easy. Physicians, firemen, and paramedics have long used a triage process to allocate resources immediately to those most in need where resources are insufficient to meet all needs. Modern approaches to triage have become more scientific, taking into account physiological findings and in some cases, employing algorithms that have been field tested and committed to memory to produce the greatest positive outcome given limited care.

The philanthropic world, however, has no such "philanthropic triage" process. As our recent study shows ("I'm Not Rockefeller: 33 High Net Worth Philanthropists Discuss Their Approach to Giving"), philanthropists access little information and evaluation to make rigorous assessments regarding where their dollars can have the greatest impact.

What, then, are philanthropists and their nonprofit partners to do? The answer should not be to automatically cut costs across the board. Nor should it be to categorically reduce "costs per beneficiary" or "overhead ratios," two metrics that some funders cite as indicators of efficiency. Such lack of prioritization, disconnected from the real outcomes of philanthropic investment, risks wasting precious philanthropic dollars. To extend the triage metaphor, it would be like pumping antibiotics into a patient without any real attempt to diagnose his condition. Worse yet, it can actually cause unintended harm by rewarding nonprofits for pursuing activities that negatively influence the issues they are trying to address.

For example, given the costs of teacher contracts and benefits, replacing a school's longstanding teachers with a corps of substitutes would undoubtedly save money. Yet research indicates that such a practice would likely result in poorer educational outcomes for students. Such an uninformed and misguided effort to stretch dollars can result in harming the very people those dollars were intended to help.

To make capital allocation decisions, philanthropists and nonprofits need to look at their "costs per impact" to understand how much it costs to produce the good they create. Imagine, for instance, that Children's Literacy Program A requires $100 for every at-risk kindergartner enrolled in their program. That $100 per beneficiary figure is two times the cost per beneficiary of Children's Literacy Program B, which serves very similar children in the same city. That disparity is not surprising. Program A has invested in professional staff who are trained in research-based literacy instruction and serve as mentor-coaches to the kindergartner's teachers, while Program B relies on community volunteers who have been given eight hours of training and who typically work with the students in once-a-week pull-out programs.

Of one hundred kindergartners who receive Program A's services, 40 percent more will be reading by third grade than would have been expected to do so without the program. Of the one hundred kindergartners enrolled in B, however, 15 percent more than expected read by third grade. Their respective cost-per-impact profiles indicate the differences in both their respective costs and success rates. For Program A, the estimated cost for each incremental at-risk student reading by third grade is $250. For Program B, the estimated cost for each incremental at-risk student reading by third grade is more than $300.

Now, if my goal was to increase community involvement in our schools, then Program B is a better choice. But if I had $250,000 and wanted to see more at-risk kindergartners reading by third grade, Program A clearly delivers bigger bang for my buck, despite its higher cost per beneficiary and likely higher overhead ratio.

This kind of analysis requires asking three questions before thinking about allocating scarce dollars: What change are we targeting? What activities are required to produce that change? How much does that change cost? It is only by knowing the answers to those questions — and using them to inform rational capital allocation — that the philanthropic sector has a chance of doing the most good it can given its currently limited resources.

As the economy improves, such clarity and focus employed during these lean times offers the promise of even more effective philanthropy in the future when nonprofit financing is increasingly tied not to donor intent or crude cost metrics but to impact.

Katherina M. Rosqueta is executive director of the Center for High Impact Philanthropy in the School of Social Policy & Practice at the University of Pennsylvania. Prior to joining the center, she worked for five years as a consultant at McKinsey & Company and ten years in community development, nonprofit management, and venture philanthropy. She served as a founding team member of New Schools Venture Fund; founding executive director of Board Match Plus, a San Francisco program dedicated to strengthening nonprofit boards; and program manager of Wells Fargo's Corporate Community Development Group.