Social Currency

Last week, my colleague Emily Upstill wrote about the need for nonprofits to “right size” their mission in order to better communicate what they can (and can’t) realistically accomplish. This post focuses particularly on the issue of funding your nonprofit’s investment in data collection and outcomes measurement. What are the financial implications for nonprofits dealing with the pressure to measure and report outcomes? 

First, how did we get here? 

The language of “investment” is inaugurating a paradigm shift for nonprofits. As the philanthropic sector continues to evolve, charitable giving is adopting a Wall Street lexicon—and this trend will only intensify as nonprofits compete for diminished resources to serve increased needs. Foundations produce logic models asking grantees to demonstrate their long-term outcomes and impact while venture philanthropists and social entrepreneurs encourage “informed donors” to ask about their contribution’s return on investment. 

In the most clear-cut example, Social Impact Bonds (also known as Pay for Success Projects) set forth a defined investor role, one whose returns materialize only when the participating nonprofits can quantifiably demonstrate successful outcomes. NFF recently hosted a webinar on Social Impact Bonds, in which Jeff Edmondson, President of Strive, succinctly summarized the shift, “As we move from a charity mentality to an investment mentality, social impact bonds reinforce the need to use data to drive impact.”

For these philanthropic investors, funding decisions favor nonprofits able to prove their impact with data. At the same time, we’re seeing many nonprofits, formerly dependent on government funding, working in unfamiliar territory to court more individual and foundation supporters. As a result many nonprofits harbor uncertainties about what data and provable outcomes are expected of them.

What’s a nonprofit to do?

It is, of course, easier to measure your financial and program progress if you are clear about what you do: what is your mission, what are your goals, what are the intended outcomes of your goals? Unfortunately, a number of challenges can present themselves—competing stakeholders, an outdated technology infrastructure, a mis-capitalized balance sheet—before the biggest hurdle is even encountered: building your organization’s performance management infrastructure.

NFF has always advocated funding the full cost of a nonprofit’s services, and program evaluation is no different. Approaching evaluation in a piece-meal fashion—i.e., trying to meet different “outcomes” demands of different funders—produces competing systems and processes that each have their own (often heavy) costs.  

A better process starts with a nonprofit’s leaders clarifying the organization’s mission, goals and desired outcomes and then communicating these outcomes to their stakeholders. Aside from the staff time commitment, this may require the help of an external consultant and/or the purchase and implementation of new data collection software. In other words, it takes resources that many organizations simply can’t afford. Yet, this type of investment has the power to fundamentally alter the way an organization works and how it shares the story of that work with stakeholders. 

Although the budget for an outcomes measurement infrastructure does not have to be exorbitant, it’s clear that even organizations that receive general operating support will not likely be able to afford it. More often than not, that support is already destined to cover the gap between other, more restricted funding received and the full cost of a nonprofit’s operations. This is especially true for organizations that are primarily government-funded.

So where will the money come from? For those operating on razor thin margins, a one-time grant or capital infusion will be needed. This is a key theme from NFF’s recent Case for Capital series: nonprofits cannot be expected to address a major shift in their programming and business model without some form of flexible, patient capital.

Capacity-building grants or “special one-time grants” for this purpose are not uncommon, but they tend to be insufficient in size and duration. The type of capital we’re describing functions more like an investment than normal revenue. A capital investor recognizes that this work does not simply involve convening a few management meetings or buying some software. It takes time from many staff, involves experimentation, and may require an overhaul of systems and processes. It’s messy work, but if it is successful, the organization should be able to attract new funders and donors who make evidence of success a condition of their support.

Similarly, existing contributors, both public and private, will be more likely to maintain or grow their support to organizations that can justify their impact claims with concrete data (particularly in an environment were demand for these dollars is growing while supply diminishes).These organizations may have the greatest chance of securing recurring and reliable revenue to cover their full costs.

As government funding cuts continue and a new class of philanthropic investors emerges, the field as a whole needs to understand and support the infrastructure required to deliver on these demands.

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