Aug 27, 2020 | By Russell Pomeranz

Is It Time to Recalculate the Costs of Philanthropy?

Against the backdrop of COVID-19, depression level unemployment, and a reenergized movement to address systemic racial and gender inequality, there has been a crescendo of philanthropic grants to support nonprofits working on a continuum of causes—from the current public health crisis, to the impacts of income inequality, to justice reform. These grants span the gamut from big to small, restricted to unrestricted, one-time to multi-year, and are funded by a wide range of foundations, major and small donors, and a group of large corporations professing their commitment to long-term solutions to these deeply-entrenched social issues.

But if the ultimate goal is structural, long-term change, how does this rising tide of philanthropic contributions impact nonprofits trying to effectively fulfill their missions and meet day-to-day expenses, all while building a sustainable business model? In the grand scheme of every organization’s unrestricted net income bottom line, what does the philanthropic math add up to? What is the net gain of philanthropy given its often overlooked financial and mission costs?

Amidst these multiple crises, it is no coincidence that management from nonprofits is asking why holes in the social safety net remain as pronounced as ever, despite the trillions of dollars given in philanthropy over time. While respecting the presumably noble intentions behind the recent outpouring of philanthropic giving, nonprofits on the receiving end of this institutional generosity must ask whether these funds can be used to build a sustainable business model capable of the kind of systemic, transformational change—not just anecdotal help and stopgap solutions—that’s necessary to meet the mission challenges of the times. Organizations need to ask whether it’s still realistic to build their business models and development strategies around the support of a limited number of wealthy donors whose contributions are too often tied to investments in programs or fixed assets that do not align with the organization’s actual mission aspirations.

Perhaps there is a need to recalculate philanthropy based on the purely practical benchmarks of revenue and financial position, with the goal being the achievement of mission independence and sustainable growth. When nonprofits can map a path forward that includes significant unrestricted net assets, flexible spending rates, limited debt on investments, and a strategy for running unrestricted surpluses, they will have a far greater probability of achieving mission aspirations. COVID-19 and the drive for social, economic, and racial justice has quickened the pace of interrogation, challenging bedrock assumptions about the core financial and mission roles that philanthropy has played historically in the nonprofit sector. This article takes the approach that asking the right questions helps nonprofit leadership understand not only philanthropy’s role in the organization’s business model leading up to today, but also how that role might be recalculated in the coming months and years to add up to empirically durable, long-term mission outcomes.

1. What Are the Ethical Underpinnings of Philanthropy, and How Do They Impact Nonprofit Missions and Business Models?

Is philanthropy, as it currently operates, fair, diverse, and equitable?

  • How does philanthropy impact organizations’ missions and business models when boards are constructed based on members’ ability to give, and not necessarily based on expertise in nonprofit programs, finance, development, entrepreneurship, or leadership?
  • How might the base of philanthropic contributors be widened and democratized? Does the fact that “philanthropist” typically conjures a wealthy donor mean that organizations are implicitly or explicitly placing a ceiling on the socioeconomic breadth and diversity of individuals who might want to support nonprofit missions?
  • Is it fair that donors and board members tend to receive the lion’s share of recognition at public events and fundraisers, when it is typically rare that these individuals are racially, socioeconomically, or generationally representative of the people the organization serves? If cost accountants could do the time allocation math on these types of black-tie events, would they find that seeking alternative sources of revenue may prove to be much more cost-effective?

Despite the magnitude of philanthropic giving that occurs, does it bolster organizations’ impact on societal change, or does it perpetuate programs that have indeterminate or even status-quo-reinforcing results?

  • Is it possible that tax-deductible donations from wealthy individuals earmarked for specific uses—for example, buildings, historical artifacts, or programs that are only tangentially related to the mission—actually end up incurring greater expense or debt in the long term? What is the allocable cost of diverting staff time and organizational resources away from programs that may be more foundational to the core business model?
  • Do development departments’ pursuit of big donations from ultra-wealthy philanthropists seem ironic at best, or a conflict of interest at worst, given the fact that many nonprofit organizations’ missions deal with addressing problems caused by social and financial inequality? As we watch the income equity gap continue to widen at historic rates, and watch equity markets soar, does it seem odd to task the same people who have benefited from that inequality to help produce long-term, structural solutions to it?
  • Might it be possible to have a recalculated philanthropy in which donors invest in or “purchase” mission services, regardless of any tax incentive for doing so? The same way consumers buy from their favorite store, visit their favorite restaurant, or support their home team, might nonprofits be able to build a more sustainable revenue stream from donors who are, in effect, buying a stake in a mission they care about?
  • What is the impact on nonprofit business models, especially earned revenue opportunities, when the philanthropic community supporting them lacks a fundamental confidence in the nonprofit business model, where the business is owned by the mission? When for- profit companies endeavor to tackle issues nonprofit missions and business models are uniquely built for, how likely are those for-profit companies to forego shareholder benefits in exchange for societal impact benefits? What are the chances that for-profit “impact investments” are based in public relations and marketing strategies rather than a deeper commitment to addressing systemic issues?

2. Taking Stock: How the Current Approach to Philanthropy May Be Undermining Organizations’ Business Models and Mission Independence

How might current approaches to philanthropy be propping up programs that do not have a proven track record of long-term, empirical success?

  • In what ways was the business model not working even before these crises? What are the possible explanations for why so many nonprofits have continued to operate cash- poor—some even close to cash extremis— despite years in business? Why have they been unable to run unrestricted net asset surpluses, build up unrestricted net assets, or even create a long-term financial strategy to achieve mission goals? How well did organizations understand their financial position going into the COVID crisis and how did that impact short- and long-term decision-making?
  • In what ways might a lack of diversity on the board and finance committee have resulted in short-term budgetary, financial, or mission investment decisions that have undermined long-term mission impact as well as future revenue streams? What is the effect when non-diverse finance committees and boards are ambivalent about the organization’s more ambitious and compelling mission aspirations or, perhaps more likely, the financial imperatives for funding them? What other factors might cause boards or finance committees to emphasize a narrow, short-term strategy of keeping cash on hand at the expense of making long-term mission, program, and leadership investments?
  • To what extent have your revenue streams bent to the whims of donors with philanthropic agendas that don’t necessarily align with the mission as articulated by the mission experts? Has that emphasis historically overlooked or discouraged potential grassroots investment from a multitude of contributors? In what ways has the culture of philanthropy perpetuated some of the same economic, racial, gender, and LGBTQ biases and inequities that the mission works to address?

How might current approaches to philanthropy be limiting investment in new and innovative programs due to known or unknown financial and mission risk?

  • To what degree is it necessary to pursue additional or replacement revenues to build a balanced budget? Are philanthropic contributions for COVID-19 and social justice reform crowding out existing philanthropic revenues? Do other programs need to be sacrificed, postponed, or wound down given current donor priorities and focus? To what extent have organizations been willing to draw on unrestricted net assets or increase spending rates to meet the programmatic challenges of the times?
  • Are grants and contributions expected to be used for programs that can empirically demonstrate mission effectiveness in the short and long term, or does anecdotal impact suffice? What amount of financial resources would be necessary to gather and measure data about short- and long-term program impact? Where does funding for this crucial research and evaluation come from? Are organizations willing to use unrestricted net assets to fund research and evaluation? How might philanthropists be convinced to invest in programs that work over time, knowing such efforts will rationalize cost structures in the long term?
  • Is there sufficient access to capital—including internal, unrestricted capital—to enable
    the nonprofit to move quickly, flexibly, incrementally, dramatically, and strategically to fund program and leadership needs without having to wait for restricted philanthropic funding streams? Who is in charge of knowing what the capital requirements would be to meet mission goals over the short and long term? What is the impact on the long-term business model when programs are undercapitalized and unable to invest in immediate societal needs? What is the impact on the business model if the moment passes due to capital constraints?
  • Who in the organization keeps track of how financial and program decisions in the short term ultimately connect to a long-term financial and mission strategy? Who is involved in relaying to the finance committee and board the importance of balancing short-term financial concerns with long-term mission and financial goals?

3. Looking Forward: How Would a Recalculated Philanthropy Impact Organizations’ Missions and Financial Bottom Lines?

How can nonprofit leadership, including and especially nonprofit boards and finance committees, become more diverse, equitable, and mission-driven?

  • How would a transformation in the diversity of nonprofit boards and finance committees impact the organization’s business model and dependence on restricted (or even unrestricted) philanthropy?
  • What would be gained if boards and finance committees, rather than being selected for their ability to contribute to the organization, were instead paid for their role based on their expertise?

How might organizations’ long-term revenue streams change over time?

  • What would it look like to supplant philanthropic contributions with diverse, earned revenue streams, including possibly cultivating a loyal and mission-engaged army of smaller donors? What would happen if philanthropic contributions were considered just another unrestricted revenue stream? What are the revenue implications of nonprofits’ greater access to earned revenue streams, with less regard for 501c3 limitations? Why couldn’t nonprofits make cars, operate railroads, run restaurants, etc.? How might finance and program departments go about reexamining what the impact would be on program and organizational financials if restricted contributions were to completely end?
  • What would the revenue and expense implications be if nonprofits “followed the data” over time?

What if a recalculated approach to philanthropy focused on raising unrestricted capital for the sector and/or specific nonprofits?

  • How would organizational leaders define the limitations of their current levels of philanthropy—too little, too restricted, too diffuse, too narrow? What is the probability that the business model can survive long-term when key program and financial metrics are abdicated to philanthropic donors, including board members? What is sacrificed when these individuals undervalue (or completely ignore) the program aspirations of the “mission experts”, the nonprofit professionals who have the knowledge and experience to succeed at addressing their particular set of mission issues?
  • For nonprofits with planned investments and objectives, is there a process in place for identifying priorities and allocating philanthropic contributions accordingly so that they align with rather than distract from stated mission objectives? How can the compelling investments be incorporated into the fiscal year budget and into a long-term mission and financial strategy?
  • How might philanthropic support be more effective if it came exclusively in the form of unrestricted capital rather than supplemental funding for existing programs or government programs? What would happen if syndicates of philanthropic organizations were organized to ensure nonprofits are sufficiently capitalized rather than allowing too many underfunded programs and organizations to continue delivering less-than-optimal results?
  • What if restricted philanthropic giving were eliminated over time? What would happen if, instead, contributors who wanted to support a particular program had their contribution set up as a contract, similar to government contracts, with clear mission metrics? Why couldn’t such support include, as a baseline, some funding for research and evaluation?

Conclusion: What Does a Recalculated Philanthropy Add Up To?

For many nonprofits, building a sustainable and optimal long-term business model, and enacting missions that achieve systemic, evidence-based results, will likely put them at odds with the system of philanthropy as it currently operates. That is why philanthropy, given its original, altruistic intent, needs to evolve beyond a focus on self-preservation and recognition and instead provide organizations the revenue streams, financial independence and stability, and program continuity they need to tackle the crises of global health, social justice, and economic inequity bearing down upon us all.

If a recalculated relationship to philanthropy—one that is more fair, effective, diverse, and that takes its cue from nonprofits’ core mission goals and the business model that supports those goals—can be adopted, then both the nonprofit sector and the donors who, in good faith, truly want to make a systemic difference will find themselves on the right side of social impact history.

The question is whether ambitious nonprofit organizations and the nonprofit sector as a whole will have the motivation and drive to answer these tough but necessary questions about how to recalculate the role of philanthropy going forward. In a moment of profound opportunity for real and durable change, who will make the first call?

This article originally appeared as part of Blackbaud’s Nonprofit Accounting Series.