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Commentary: Is Grantmaking Getting Smarter?

March 28, 2012

(J McCray is chief operating officer at Grantmakers for Effective Organizations, a coalition of more than three hundred and seventy grantmaking organizations committed to building strong and effective nonprofit organizations. McCray is responsible for overseeing GEO's strategic planning, financial management, internal learning, and field research on grantmaker practice.)

Cognitive_bias1Recognizing that flexible funding was particularly important during tough economic times, the Seattle-based Medina Foundation, which funds social service organizations in the Puget Sound region, increased its level of general operating support to an all-time high of more than 80 percent during the depths of the recession. One longtime grantee, a large multi-service organization that historically had applied for programmatic funding, used its unrestricted grant to expand a home foreclosure program to meet overwhelming demand -- something it would not have been able to do with restricted public-sector funds.

Because most grantmakers still designate the vast majority of their grant dollars for discrete projects rather than organizations, these kinds of situations are not common. Yet we know that nonprofit resilience is based on an organization's ability to adapt to a changing environment and that fewer restrictions on grant dollars typically means more working capital to innovate and rainy day funds to cope with the unexpected.

In an uncertain economy, what is the difference between a nonprofit organization that's able to adapt and thrive and one that struggles to survive? Through our research with funders and nonprofits alike, and supported by the research of many other influential groups, we have learned that the former tend to receive the right kind of support from their funders -- support that is flexible, sustainable, and enables organizations to invest in themselves. It is precisely these kinds of nonprofits that have the greatest chance of making a difference at times of great need.

So how has philanthropy responded to the challenges nonprofits have faced over the last three years? Part of the answer comes from a national survey conducted by Grantmakers for Effective Organizations of more than seven hundred and fifty staffed grantmaking foundations in the United States. We conduct this survey every three years to examine trends in the key funding practices that help bolster nonprofit performance and also to answer the question, Is grantmaking getting smarter? It turns out the answer is yes and no.

When faced with tough decisions about what to do with their limited funds, grantmakers over the last several years worked to speed up their decision-making process and reduce the burden on nonprofits by streamlining reporting requirements and cutting the red tape to get money out the door faster. Indeed, grantmakers responding to our survey managed to shave the median turnaround time from receipt of a full proposal to approving a grant from ninety days in 2008 to sixty days in 2011, and they reduced the turnaround time required to make an initial grant payment from twenty-one to fifteen days. Faster turnaround in terms of grant processing and payout enables nonprofits to plan ahead with more certainty and to work smarter to minimize cash-flow issues.

At the same time, our survey found that grantmakers did not change their approach in some critical areas. The study reveals that many grantmakers chose to preserve some of the kinds of funding we know are connected with long-term nonprofit success, including general operating and capacity-building support; a significant number even increased these types of support. Most grantmakers that increased these types of support said their reasons for doing so were unrelated to the economy, which suggests to us that unrestricted and capacity-building support are becoming core elements of foundation grantmaking strategy. The Hartford Foundation for Public Giving, which funds comprehensive capacity building through its Nonprofit Support Program, is one example of a grantmaker that has learned that long-term capacity-building support is essential to helping grantees improve their organizational performance.

But while the vast majority of grantmakers provide some level of general operating support, the median percentage of annual grantmaking budgets devoted to general operating support remained level at 20 percent -- a number that, according to the Foundation Center, has not changed in almost a decade.

We also asked about evaluation, which can be a powerful tool when used to foster organizational learning. While about 70 percent of respondents said they evaluate their work, they were less likely in 2011 to identify strengthening future grantmaking as a very important reason for conducting evaluations. Indeed, it appears that funders still view evaluation predominantly as an exercise in accountability rather than to foster learning both inside and outside their organizations.

Likewise, multiyear support can be a stabilizing force for nonprofits during volatile times, enabling them to concentrate their efforts on advancing their mission. Unfortunately, multiyear support did not fare well over the past several years, with only half as many funders reporting that they awarded grants over two years or more on a regular basis. One of the more hopeful pieces of news from the survey, however, was that over half of those who reduced their multiyear commitments said the cutbacks were due to the economy and were temporary.

Ultimately, both the resilience we need to see in the nonprofit sector and the recipe for future success rely heavily on the relationship between grantmakers and their grantees. We have seen in our work that feedback channels and other mechanisms to boost communication are vital in cultivating empathy and fostering smarter decision-making. And we've seen many grantmaking organizations embrace feedback mechanisms to track progress and strengthen relationships with their grantees and community organizations. For example, the Los Angeles-based Durfee Foundation gathered feedback from its grantees to create the Springboard Fund, which provides multiyear grants and assigns seasoned leaders to mentor newer nonprofits.

It turns out that when grantmakers have strategies in place for listening to and learning along with grantees, they are more likely to provide the types of support that both grantmakers and grantees agree are essential to boosting nonprofit success. Indeed, funders who always use grant reports to foster learning between the foundation and its grantees were three times more likely to increase multiyear grantmaking than those who never did. Similarly, those who always sought external input on foundation strategy from recipient communities and grantees were nearly three times more likely to increase general operating support than those who never did. And funders that always sought advice from grantees or external input from community stakeholders with respect to their strategy were about twice as likely to increase capacity-building support.

These are lessons nonprofits and their supporters can learn from and build on. Ultimately, the decisions that foundation leaders make today will have critical implications down the road for the effectiveness and sustainability of the nonprofits we support and the communities we serve.

-- J McCray

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