Before the Next Recession, Philanthropy Needs to Redefine Efficiency

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There will be another recession. Some economic indicators are already pointing in that direction, like the U.S. Treasury Bond yield curve. It may be mild or severe, and it may be sooner or later. But while we can’t predict the timing or severity, we can be certain that it’s coming. And so, we should be ready.

As president of a network of Jewish philanthropists, I know how badly our community suffered during the last economic recession: According to one estimate, Jewish nonprofits suffered a $1 billion loss between 2007 and 2012. For us, it was a double whammy: The recession hit right when many Jewish philanthropic funds and nonprofits were reeling from the fallout of the Madoff scam. But in every sector of the nonprofit economy, recessions set off spirals of negative consequences: Individual donors struggle, nonprofits raise less money, and foundations’ endowments decrease, all at the same time that more people need services and support.

Have we learned the lessons of the last recession? Are we ready for the next one?

We’ve learned certain lessons well. A Madoff-style scam is more unlikely today, both because people remember the trauma and because organizations have enacted policies to prevent the same thing happening. In other ways, however, the American Jewish philanthropic field is insufficiently prepared. We need to manage endowments more conservatively; in bullish markets, it’s tempting to lean hard into volatile investments on their way up, in order to maximize returns. But when volatility turns sharply down, we realize the value of more stable assets, which trade volatile rewards for protection from volatile losses. Relatedly, we need more viewpoint diversity in our executive teams and boardrooms so that institutions don’t succumb to groupthink. It wasn’t popular in the booming 2007 market to suggest investing conservatively or getting out of the bubble before it bursts. A culture that welcomes dissent will be better prepared for a crisis.

But here’s the most important point: If we want to be prepared for the next recession, we need a new definition of efficiency.

During and after the Great Recession, organizations became more “efficient,” doing more with less money and staffing. But if that kind of efficiency saves money, it comes with its own price. According to Leading Edge’s 2018 Employee Experience Survey, only 37 percent of Jewish communal professionals feel that “there are enough people to do the work we need to do.” Many report burnout among the factors driving them to want to leave the field. This puts Jewish organizations at risk of sizeable turnover costs, loss of institutional memory and top skills, and productivity costs spawned by low morale.

Another risk of idolizing efficiency is that it leaves no “fat” to trim from budgets in a crisis. Take a Jewish day school, for example, whose funders and leaders pursue efficiency: to keep tuitions to a minimum, scholarships to a maximum, and to serve more students. But under standard peak efficiency, a crisis will invariably create more demand for tuition support as families suffer, and a hyper-efficient school budget will have no wiggle room to accommodate that increased demand. In this situation, the extreme efficiency will become a “shock amplifier.”

This kind of “efficiency” only helps in the short term; long-term efficiency is best served by resilient institutions. And while organizations can take on too much risk by chasing short-term efficiency, community-level inefficiencies can consume resources that could be better used making the system more resilient.

For example, the Jewish community has bad organizational “birth control” and “hospice care”: We spawn too many new organizations—when an issue becomes fashionable—but never close them, even when they’re duplicating work. In the startup economy, many innovative organizations might launch at the same time, duplicating each other’s efforts, but 90 percent of companies will fail and close. By not closing redundant organizations, the Jewish community makes itself more vulnerable to a crisis. While funders force individual organizations to become ultra-efficient—and therefore less resilient—we tolerate massive community-level inefficiency in the form of redundant organizations. When the next recession comes, the response will likely be to tighten the screws even further—within organizations—instead of making the system more efficient as a whole.

What does long-term efficiency look like?

• Contingency planning. Conduct “war games” to plan for different scenarios, both within individual organizations and the community more broadly. “Wind-tunnel” organizations to see how they would fare in a recession. What programs would be at risk? What vulnerable populations will need more support?   
• Rational and robust overhead. Organizations will need tools and personnel to proactively prepare for hard times, and crisis response requires training, planning, and staffing. A contingency plan is not just a piece of paper; it’s the hours of time spent by employees who aren’t consumed by other urgent business.  
• Rainy day funds. Despite its importance, organizations may be nervous about devoting their meager resources to a rainy-day fund, just as donors may not see the need for an emergency chest. One way to establish budgetary cushions to absorb the blow of a crisis might be to make the funds communal, mitigating the risk to individual organizations.

Funders Must Take the Lead

Community-level efficiency must start with funders. Only funders can contribute to the critical capacity organizations need; only funders can encourage and finance mergers; only funders can constitute community-based funds; and only funders can think twice before funding new, duplicative organizations.

There are bright spots to share. Prizmah, 70 Faces Media, and Upstart each brought together multiple organizations to streamline the field, excellent mergers prompted and supported by funders. A recent article on overhead by Lisa Eisen of the Schusterman Foundation and Barry Finestone of the Jim Joseph Foundation is a prominent sign that more and more Jewish funders are beginning to take note of the need for robust support to organizational overhead. And Jewish education funders like the AVI CHAI Foundation, UJA-Federation of New York, and others have been devoting more resources lately to day school endowments.

But much more remains to be done. Funders themselves need the same contingency planning and exercises as nonprofit professionals. We need a strategy for times of crisis, and we have to work with grantees to make sure that there’s alignment between our contingency plans and theirs.

The next recession will come. What we do will shape much of how it affects our communities. As Churchill said, “It’s forgivable to be defeated, but it’s unforgivable to be surprised.”

Read more stories by Andrés Spokoiny.