By Allen Grossman
There is the assumption, sometimes explicit and other times implicit, that building organizational capacity in nonprofit organizations will contribute to organizational effectiveness or higher performance.
A high-performance nonprofit organization achieves its mission by continuously satisfying the changing needs of its clients in a cost-effective manner.
Few would disagree that more money is needed to build, sustain, grow and improve nonprofit organizations.
Directing more resources to this capacity building will help nonprofit organizations in their pursuit of high performance, yet it is well known that most grants are restricted to program support.
But if high performance is to be achieved and sustained by nonprofit organizations, other structural dimensions of the nonprofit sector must be addressed as well.
Part of the reason for management’s lack of focus on organizational performance may be attributable to internal characteristics of the nonprofit sector such as cumbersome governance structures, scarcity of professionally trained managerial staff, and vagueness of mission.
These organizational factors are certainly inhibitors to performance, but good leadership and more funds for capacity building can help overcome their impact.
These factors, while important, are not the primary reasons why excellent organizational performance is so elusive in nonprofit organizations.
There is a more fundamental systemic reason that defies resolution within organizational boundaries — when capital is made available to nonprofit organizations, and the terms and conditions of its distribution.
It is the absolute amount of capital, the stages at which it is available during organizational development and the conditions of its acquisition that all work together to create a powerful influence on management behavior and organizational culture and, ultimately, on attaining high performance.
Philanthropy’s influence on performance is far from neutral; it actually discourages management from pursuing performance as a primary objective.
The conversation must begin with an analysis of how and why the philanthropic capital markets, for the most part, fail to encourage high performance in nonprofit organizations.
Ironically, nonprofit executive directors consistently report that excellent performance of a nonprofit organization is rarely systematically rewarded with an increased flow of philanthropic capital.
In fact, an opposite situation prevails.
As programs were proven effective and the nonprofit organizations developed plans to grow, foundations — even those currently funding their organizations — were less receptive to their requests for funding.
Nonprofit managers must serve two sets of customers–the client and the funder.
By aligning the needs of the client receiving the services with a funder’s definition of success, performance-driven philanthropy will move management away from worrying about serving two customers with different needs.
Could this refocusing on the client possibly create a risk that is more unacceptable then the conditions that exist in philanthropic markets today?
If existing foundations do not respond to this challenge, it is the sustainability of the service-delivery nonprofits, and the ultimate welfare of the
clients they serve and not the foundations, that are at risk.
Allen Grossman is a professor of management practice at Harvard Business School. This article is adapted from his paper, “Philanthropic Social Capital Market.”