The Game Has Changed

 In Culture, Foundations, Giving, Money, Philanthropy, Technology, Young Givers

When I worked with Bob Buford, I asked him how he had become so successful in the cable television business. His quick response was they had concentrated on being a dominant supplier to a specialized niche. That meant his company was not the only game in town but was so good at what they did that people thought of them first. They occupied the mental box marketers call “top of mind.” While winning this space may not eliminate competition, it makes it harder for others to win away your customers.

For decades nonprofits have occupied a similar box in the minds of private foundations and donors. I remember well an interview with Curtis Meadows in 2007 when he was named “Grantmaker of the Year” by the Council on Foundations. Curtis said there was a unique partnership between foundations and nonprofits in that the success of funders was dependent on the work of nonprofits.  He would always thank the nonprofits for allowing the Meadows Foundation to be a part of their work. “We always say to our applicants, in all honesty, thank you for giving us the chance to play some small role in the achievement of your dreams because some of them are our dreams too.”

In other words, if a foundation wanted to accomplish its mission it was practically limited to funding nonprofits. Yes, there has always been intense competition among the 1.5 million nonprofits but, in a sense, they had found a way to be a dominant supplier to a specialized niche. Foundations needed them and, in some cases, the mission of foundations had become funding nonprofits and not necessarily having a mission of their own. It has been a useful arrangement for all involved.

But that is changing. If Curtis were to make that talk today he would be addressing a far more diverse audience of partners and not just nonprofits. While it is true that foundations in the past have been limited by the restriction of giving to 501(c)3 organizations, nonprofits are discovering their assumption that a tax-deductible organization has a monopoly on giving is quickly eroding. People—especially younger people—are far more open to not being concerned about the tax-deductibility of their gift. They are giving for results—political or social—and not for tax-deductibility. Today’s donors are more open to options than the previous generation whose first question was often, “Are you tax deductible?” In fact, according to Lucy Bernholz, the dominance of nonprofits may have peaked.

First, we might take a lesson from the explosive growth of outside political funding. Since the “Citizens United” ruling in 2010, political giving has gone from $250 million in 2010 to more than $1 billion in 2012. None of this is tax deductible. Yes, it is passed through nonprofits (social welfare organizations), and while they pay no taxes on these funds, the donors do not get a deduction. Political donors are demonstrating what we have known for years. The great majority (85%) of donors are not motivated by tax deductions. We just had no idea that major donors felt the same way.

Second, while Americans have a tendency toward creating and funding institutions and organizations, this is not true in the rest of the world. In fact, there is a distinct bias against nonprofits in many countries because they threaten the authority and role of the government. Our tradition that nonprofits assist the work of government and that government funding in grants and fees is essential for their survival is not true in many other countries. As a result, individuals desiring to create change and “do good” have had to be very creative and devise new, innovative structures to accomplish their work. In fact, there is a movement away from formal organizations toward informal alignments, “flash causes,” crowd funding, networks, affinity groups, business enterprise, and very loose affiliations highly focused on particular issues and results. “Digital activists themselves seem somewhat agnostic regarding enterprise form.”

The dynamics and nature of technology are shaping a world that values sharing, connecting the dots, speed and open information more than structure. This is intimidating to those who are used to nonprofits being the major option for funders. Nonprofits are not going to close their doors in the next five years, but they are going to feel the dramatic change.

Someone once said that the mark of the end of an evolutionary cycle is the unsupportable size of what is soon to be obsolete. Dinosaurs were never bigger than right before they became extinct. The nonprofit world has grown every year for the past several decades partly because the funders felt they needed tax-deductible organizations to address problems and issues and partly because there were few, if any options.

In his book, “Who Says Elephants Can’t Dance?,” Lou Gerstner wrote that the inherent danger of success is getting so good at something that changing became unthinkable. Companies would build up an internal commitment to their existing businesses and rather than changing they find it easier to just keep doing the same things that brought them success. “They codify why they’re successful. They write guidebooks. They create teaching manuals. They create whole cultures around sustaining the model. That’s great until the model gets threatened by external change; then, all too often, the adjustment is discontinuous. It requires a wrench, often from an outside force.” And, even though it’s painful (“like setting your hair on fire and putting it out with a hammer”), it is the only way to respond when the game has changed— and it has.

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  • Avatar
    Gail McGlothin
    Reply

    Good food for thought!

  • Fred Smith
    Fred Smith
    Reply

    Thanks, Gail. I’m reading this at noon so that reminds me to eat today.

  • Avatar
    Greg Grubb
    Reply

    Fred, thanks for sharing these thoughts! The trend in this country is for decreasing government involvement in social concerns, right? And there doesn’t seem to be much appetite among donors for organizational innovation, it seems to me. In fact, the ongoing proliferation of new nonprofits says that this type of entity is perceived to be more needed than ever. I’m just not seeing the informal alignments to be demonstrating effectiveness, yet. For example, the new wave of “collective impact” efforts seems to demonstrate that an “organizational backbone” or “quarterback organization” is a necessary component. What are you seeing? Let’s talk…

    • Fred Smith
      Fred Smith
      Reply

      Gregg – I think the informal alignments are not as prevalent or even effective in this country because we have the option of creating so many organizations – large and small – to address whatever cause or condition we see. Should that change then we will start to see people find new ways of doing things. However, outside this country those informal alliances are much more influential and effective. For now, so much of the funding of our larger non-profits comes from government contracts for fees and services as well as federal and state grants that doing away with them would harm the government as much as the nonprofit sector. However, that may not always be the case. Yes, let’s get together any time and talk about any and all of this.

  • Avatar
    Justin Narducci
    Reply

    Great post Fred. I think part of the equation here is a vibrant value dynamic. In the past, part of the value dynamic associated with nonprofit giving was tax deductibility of the gift. There was then a trend toward transparency and finding value in honesty of the orgsnization. These are all good things. But… There is more. Now we are are rightly in the era of impact. The equation for giving might be something like this = tax implications + transparency + impact. Think about kiva. Value dynamics inherently evolve and ultimately should make the end product better to the beneficiary. That is the common goal donors and organizations share. If we’re not continuously improving our service to those who need it most, then we’re really just making noise.

    • Fred Smith
      Fred Smith
      Reply

      I could not agree more. Mere tax-deductibility is simply providing a convenience for the donor but not necessarily accomplishing anything. However, when the donor is more interested in results than deductibility then the game changes. I’m not saying we are there. But, I think we are headed toward a different relationship between donors and nonprofits which will be healthy overall but only if not taken to the extreme.

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