Toward a Theory of Limited Nonprofit Organizational Effectiveness

1. Toward a Theory of Limited Nonprofit Organizational Effectiveness K. Wing, T. Pollak, P. Rooney ICSTM 2004 Philadelphia, PA

2. A Conundrum • Funders increasingly concerned about organizational effectiveness of grantees • Yet, major funders frequently fail to fund administrative or infrastructure costs at levels that would permit grantees to be effective • Such anomalies frequently imply existence of systemic structures • Theory building may identify potential high-leverage interventions

3. Nonprofit Fundraising and Administrative Cost Project • Supported by: • Atlantic Philanthropies • Ford Foundation • Charles Stewart Mott Foundation • David and Lucille Packard Foundation • Rockefeller Brothers Fund • Housed at: • Urban Institute Center on Nonprofits and Philanthropy • Indiana University Center on Philanthropy

4. Study Goals • Understand how nonprofits raise, spend, measure and report funds for fundraising and administration • Work with practitioners, policy makers and the accounting profession to improve standards and practice

5. Multiple Research Phases • Analysis of IRS Form 990 data, n=228,000 • Survey of fundraising and accounting practices, n=1500 • Detailed case studies, n=9

6. Case Study Findings • Functional classification of personnel expense a low priority (i.e., program, M&G or fundraising) • Glaring functional expense reporting errors • Nonprofits responding to pressure to keep real and reported overhead low

7. Case Study Findings, Cont’d • Nonprofits vary widely in the strength of their organizational infrastructure • Inadequate infrastructure reduces organizational effectiveness • Restricted funding and small size lead to inadequate infrastructure

8. Ability of NPO to raise funds Ability of NPO to raise funds for infrastructure Organizational Effectiveness Organizational spending for infrastructure Staffing, Salaries and Supports 1: The Virtuous Cycle of Effectiveness

9. Ability of NPO to raise funds Reported infrastructure costs Ability of NPO to raise funds for infrastructure Organizational Effectiveness Perceived pressure to keep infrastructure costs low Organizational spending for infrastructure Staffing, Salaries and Supports 2: Reported O/H Cost Balances Ability to Raise Funds

10. Ability of NPO to raise funds Reported infrastructure costs Ability of NPO to raise funds for infrastructure Underreporting Organizational Effectiveness Organizational spending for infrastructure Conscious actions Staffing, Salaries and Supports Perceived pressure to keep infrastructure costs low Quality of functional expense tracking 3: Underreporting Adds Complexity

11. 4: Adding the Major Funder Major funder’s funding decision Major funder’s preferred level of infrastructure spending Ability of NPO to raise funds Reported infrastructure costs Ability of NPO to raise funds for infrastructure Underreporting Organizational Effectiveness Organizational spending for infrastructure Conscious actions Staffing, Salaries and Supports Perceived pressure to keep infrastructure costs low Quality of functional expense tracking

12. 5: Making Underreporting Endogenous Major funder’s funding decision Major funder’s preferred level of infrastructure spending Ability of NPO to raise funds Reported infrastructure costs Ability of NPO to raise funds for infrastructure Underreporting Organizational Effectiveness Organizational spending for infrastructure Conscious actions Staffing, Salaries and Supports Perceived pressure to keep infrastructure costs low Quality of functional expense tracking

13. Ability of NPO to raise funds Organizational Effectiveness Major funder’s funding decision Major funder’s preferred level of infrastructure spending Ability of NPO to raise funds for infrastructure Staffing, Salaries and Supports Reported infrastructure costs Organizational spending for infrastructure 6: Limits to Growth is Too Simple

14. 7: The Final Model Ability of NPO to raise funds Organizational Effectiveness Major funder’s funding decision Major funder’s preferred level of infrastructure spending Ability of NPO to raise funds for infrastructure Staffing, Salaries and Supports Reported infrastructure costs Organizational spending for infrastructure Underreporting Conscious actions Perceived pressure to keep infrastructure costs low

15. Model Implications • Infrastructure spending a key driver of organizational effectiveness • Infrastructure spending level driven by major funder preferences • Major funder preferences not set with reference to organizational effectiveness criteria… • But through fundraising dynamic where nonprofits compete on price with low O/H… • And problem exacerbated by underreporting

16. Alternative Explanations • Exogenous Funder Preferences (Limits to Growth): • “Peanut butter” approach • Ideas of admin as waste leftover from volunteer era • Endogenous Funder Preferences: • Competing for funding on low O/H basis, nonprofit staff internalize values for low overhead, and retain those values when they become funders

17. Conclusions • Nonprofits with restricted funding, esp. small ones, clearly struggling with inadequate administrative and fundraising infrastructure • Inadequate infrastructure reduces organizational effectiveness • Current spending on O/H driven by major funder preferences, expressed in funding policies • Current funding policies may be reinforced by significant underreporting

18. Contact Information • Thomas Pollak, Assistant Director, National Center for Charitable Statistics, Urban Institute, 2100 M Street NW, Washington, DC 20037, 202-261-5536 tpollak@ui.urban.org • Patrick Rooney, Ph. D., Director of Research, Center on Philanthropy, Indiana University, 550 West North St, Suite 301, Indianapolis, IN 46202-3272, 317-684-8908, rooney@iupui.edu • Ken Wing, Kennard T. Wing & Co., 224 Kathmere Rd., Havertown, PA 19083, 610-789-8727, kennarwing@aol.com