Driving Nonprofit Impact with Dollars, Choices

According to the Stanford Survey on Leadership and Management in the Nonprofit Sector—a study that we conducted while developing our book Engine of Impact—more than 80% of nonprofits struggle with at least one core leadership and management issue. More than half of nonprofits, for example, struggle to perform well in the areas of board governance, fundraising, and impact evaluation.

While donors may feel powerless when facing this troubling data, we argue that the nonprofit sector is poised to become more effective — if donors can optimize their power. Donors present a huge potential force in not only supporting but leading the nonprofit sector. By voting with their checkbooks, donors can exert the power to encourage, even demand, that nonprofits address and overcome core leadership and management challenges. How can donors best optimize their power today?

First, assess organizations carefully when deciding which nonprofits to fund. This is a surprisingly rare practice. According to the 2015 Money for Good survey, only a third of donors research the performance of an organization before making a gift, and only 9% of donors actually compare one organization to another when they are making their giving decisions.

To identify nonprofits that have “earned the right” to receive funding, donors should start by assessing the elements of good leadership and management in the nonprofit sector. (We explore these elements at length in our book, Engine of Impact. We wrote the book in part to help donors identify and support high-performing nonprofits.) These elements include the following:

– A clearly focused mission: Remember that focus beats diversification in the nonprofit sector, and beware of nonprofits trying to do 52 things on a limited budget.

– A well-articulated strategy: Target those organizations that have taken care to develop a planned set of actions to achieve their mission.

– Impact evaluation: Look for organizations that gather data and evidence to show their intervention is actually working.

– Board governance: Look for organizations that deliberately fill their board with members who have relevant expertise, as well as a fierce commitment to the organization and its mission.

Second, structure donations thoughtfully. Provide unrestricted, multi-year pledge funding that will enable organizations to build capacity. The nonprofit sector remains a fragmented landscape of organizations, despite the existence of significant economies of scale. In the face of the world’s vast unmet needs, most nonprofits organizations have not properly scaled their impact. This is due, in part, to a dysfunctional donation structure. In short, donor practices today are totally at odds with what high-performing nonprofits need to scale and grow effectively.

Donors typically make one-year donations, limiting organizations’ ability to plan and build capacity for the future. Moreover, because large donations are often restricted, organizations and leaders can’t invest in building overall capacity, including the impact evaluations needed to assess an intervention’s effectiveness. In the Stanford Survey, only 11 percent of nonprofit executives and staff indicated that more than half of their donors are willing to pay for impact evaluation. Laura Arrillaga-Andreessen, founder and chairman, Stanford Center on Philanthropy and Civil Society, and founder and board chair emeritus, Silicon Valley Social Venture Fund, offers this astute advice to philanthropists: “It’s not only about demanding a higher level of accountability and transparency about results [from grantees]; it’s also providing the resources to help the organizations and individuals that you are funding to accumulate that data and disseminate it appropriately.”

Donors large and small across the globe have the opportunity to wield their power to transform the way nonprofits operate. People respond to incentives—in the nonprofit sector, no less than in the for-profit sector. By channeling resources toward high-performing organizations, and by structuring support in ways that enable each organization to fully leverage those resources, donors can reshape the sector and equip a growing number of nonprofits to achieve significant impact at scale.

Originally published in Forbes