In January last year, on the back of a $19 million loss, New York’s largest nonprofit human services provider, Federation Employment and Guidance Services (FEGS), abruptly shut its doors. FEGS was a $250 million nonprofit organization that provided essential services to 120,000 New York households for more than 80 years. And while it hasn’t been the only nonprofit to go bankrupt in recent years, the collapse of an organization at this scale sent shockwaves through the nonprofit community and proved that there remain persistent, systemic issues that threaten the stability of the entire sector.

A commission comprised of local heavy-hitters—including seasoned academics, nonprofit CEOs, auditors, and funders, and led by the Human Services Council (HSC)—found that numerous issues lead to the collapse. These issues are unfortunately not new, but we believe two of them are particularly urgent and pertinent to the social sector more broadly: 1) the risk of funder-prescribed approaches, and 2) the problems that arise when nonprofits say yes to new programs because they need the funding.

When Funders Are Too Prescriptive

The commission examined many grant-making processes and reported repeatedly observing funders designing programs in a top-down setting, with little or no involvement from the organizations responsible for implementation. This approach is a legacy of the shift from governments providing services to outsourcing. It may also stem from the sensible desire to hold organizations accountable for outcomes. However, in the social sector today, funders frequently prescribe the exact model they want to fund, rather than the outcomes they are trying to achieve. This approach ignores the fact that organizations delivering services are local experts and are intimately familiar with the communities they serve, what they need, and which approaches are more likely to succeed.

We can see this tendency in many federally funded programs, including the Department of Health and Human Services grants for opioid abuse and Department of Education’s Promise Neighborhood grants in the United States, and the bidding process for neighborhood houses in Australia—all highly prescriptive bidding processes designed to scale-up specific innovations. These initiatives ask how local providers can mimic other programs, rather than what local providers can do to drive outcomes (or what they are best positioned to deliver). In their article, “The Re-Emerging Art of Funding Innovation,” Gabriel Kasper and Justin Marcoux observe this tendency in philanthropic providers, noting that in the foundation world, “Funders are often treating grantees as mere subcontractors, paid to execute pre-designated plans and outcomes.”

This approach not only misses the opportunity to leverage the expertise of these providers in program design, it also stifles critical innovation and doesn’t encourage nonprofits to look at problems in new ways. We know that innovation and impact increase when individuals and organizations have autonomy as to how to solve a problem, with clarity about what outcomes they are trying to solve for. In addition—perhaps most pertinent for organizations facing financial distress, such as the 18 percent of human services in New York that are insolvent and the further 60 percent that face cash flow crises—programs developed in this manner are often inadequately funded, leading to systematic underinvestment in infrastructure, declining efficiency, and enormous organizational stress.

When Nonprofits Say Yes

The burden of responsibility for this issue doesn’t lie just with funders. Social sector organizations—especially those facing the daily grind of funding challenges—are far too willing to say yes to grants, even ones they don’t believe are well designed or well suited to their unique capabilities. In conducting research for my (Liana’s) book, Mission Control: How Nonprofits and Governments can Focus, Achieve More and Change the World, it became clear that in countless nonprofits around the world, this habit leads to mission creep, overstretched organizations, and diluted impact. This pattern also played out in the organizations the commission reviewed.

In some cases—leaders pursue inappropriate grants simply to meet critical short-term funding needs. Despite knowing the approach may not be well-positioned for success, organizations often bid anyway, for fear that if they speak up, someone else may get the funding. Some will accept an unsuitable grant with the hope that they can tweak the program to improve delivery, and then go out of their way to hide the tweaking so that they seem to meet funder’s terms. Neither solution leads to efficiency or increased impact.

The Alternative

To address this issue, funders must be clear on the outcomes they want to achieve without getting too specific about the desired approach. They should engage the sector in problem-solving early on, before beginning the competitive process. If funders can be upfront and honest about what they are able and willing to invest in addressing a problem, nonprofits can bring feasible approaches to the table that fit the available resources. Real conversations about the costs of delivering services at the beginning of the process—while there’s still time to make adjustments—will ensure rate structures that actually cover costs and increase organizational sustainability.

In turn, as noted in Mission Control, nonprofit leaders must invest time and energy in identifying their “sweet-spot, at the the intersection between what they are good at, what works, and what the world needs.” Leaders should get clear on their focus and channel their energies. They can work independently or in collaboration with other partners who bring other relevant expertise, but they must be comfortable saying no. There is no upside for organizations in accepting a grant or contract that doesn’t fit with their strengths or is not well placed to succeed; it not only reduces the chances of impact, but also risks bringing an organization to its knees.

There are some signs of change. The Australian Federal Department of Education’s incubation of Children’s Ground, an award-winning, child-centered model for ending long-term poverty, provides a very different—and thus far successful—blueprint for tackling complex problems. The department responded to a promising idea for a long-term approach that emerged from the community. It provided space, introductions, advice, and resources to build the idea until it reached maturity, and the idea ultimately launched with private philanthropic funding. The government in Philadelphia is also experimenting with incubation. The city’s FastFWD program puts public objectives on the table and lets vendors propose solutions; it has so far resulted in 10 public safety pilot projects for the government.

Another promising solution, put forward in the HSC report, might be the establishment of an objective request for proposal rating system, which would evaluate the potential financial risks and programmatic issues of new government initiatives, and circulate ratings and findings concerning their feasibility. This information would enable providers and boards to make informed determinations as to whether a program is in the best interests of the organization and its clients, or represent a potential liability.

Recent closures of nonprofit providers across the country have led many to blame a lack of adequate government funding for the current state of the sector. But the problems that continue to plague this field are also due to pervasive cultural issues including top-down program design and a lack of proper assessment from organizations themselves. The path forward is not as simple as just asking for a bigger slice of the budget. Both funders and nonprofits need to take steps to fix this system so they can continue to provide vital services and create programs that have the greatest impact on communities.

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