What If Funders Really Acted Like Purchasers?

In my previous article, I argued that funders should think and act like purchasers rather than investors, and that doing so would address one of the key drivers of the nonprofit starvation cycle. Thinking of the work of funders as akin to that of a purchaser or customer initially may not seem as attractive as the funder-as-investor analogy. “Making an investment” in a cause or social good sounds much more meaningful than being a customer of a nonprofit. However, in addition to offering a clear rationale for avoiding the starvation cycle, the funder-as-purchaser model provides a powerful lens for critically re-examining many of the current practices of funders. It also offers new frameworks and nomenclature to spur new thinking and advancements in the nonprofit sector.

Re-examining Current Practices

If a true purchaser-seller relationship between funders and their grantees were established—where funders are able to let go of micromanaging the use of grant dollars—there ultimately would be no need for grants that fund the internal operations of nonprofit organizations. In a true purchaser-seller scenario, nonprofits would presumably be able to negotiate a profit margin in grant funding above the actual costs to deliver results. Because nonprofits are not able to distribute any proceeds to individual owners or investors, they would use these gains to expand the reach of their programs; internally fund new programs; and invest in infrastructure, staff, and technology to position the organization for future success.

Therefore, grants that fund the internal operations of nonprofits, such as capacity-building grants—which are currently the en vogue means for funders to support nonprofit investments in infrastructure and back office operations—would no longer be needed, because the restrictions to fully fund these needed expenses would be removed. In fact, all grants that purport to fund nonprofit operations (including capital grants, which fund construction of facilities) rather than the results they produce theoretically would not be needed.

Another current practice to re-examine using the funder-as-purchaser model is the rule among some funders to cut off funding to nonprofits after a certain number of years. The rationale for refusing to fund a nonprofit after three to five years is that funders do not want to have grantees too dependent on their funding. Examining this practice from a purchaser perspective exposes the faulty reasoning behind such policies.

Purchasers pay for services or goods because they are presumably getting the best bang for the buck or the highest quality they can afford. Purchasers who have chosen a seller based on these criteria would continue to buy from this seller until someone else was able to offer better goods for the same price or the same goods for a lower price. Paternalistic concerns of the seller’s welfare would not be a valid consideration in the decision-making process. Employing this rationale would ensure that high-performing organizations continue to be funded and not arbitrarily cut off, while helping funders squarely focus on what should be the most important criteria—results.

Employing New Frameworks

In addition to re-examining current practices, funders can utilize new frameworks offered by the funder-as-purchaser model to spark new ways of thinking about their roles and impact within the nonprofit sector. For instance, funders could more precisely explore the issue of how innovative program models gain wide adoption and funding within the nonprofit sector through a purchaser’s perspective. Rather than thinking of themselves as “venture capitalists,” funders who support start-up organizations or new program ideas can view themselves as “innovator” or “early adopter” purchasers along the Rogers’ new innovations diffusion curve. Using this framework, funders can better analyze questions such as, “How do innovative program models gain wide adoption by the mainstream?” or “How can ‘early adopter’ funders better leverage their position as opinion leaders within the nonprofit social system to influence adoption by the majority?” Or, ”How can influential funders organize and create mechanisms within their social system to identify and vet the best new innovations, and give these ideas their best shot at success?”

Another line of inquiry could be to examine how powerful purchasers, such as Toyota, influence the management practices of their vendors. An integral component of the legendary just-in-time production concept is the establishment of supplier keiretsu—a close-knit network of vendors that adopt the same production and management best practices of the company to work in harmony with the company’s processes. Can funders use lessons from automakers to influence the operations and management practices of their suppliers of social good? And more expansively, can funders use the principles of supply chain and value chain management to coordinate a large and complex web of social good producers to target some of society’s toughest and most diffuse challenges such as homelessness, air pollution, or education reform? In coordinating and organizing the activities of a wide array of suppliers of social good, do funders then transform themselves from being passive purchasers to actual producers of social good?

The questions that arise are myriad and vast. What would the nonprofit world look like if funders really acted like purchasers?

Read more stories by Paul Park.