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, n228,000
• Survey of fundraising and accounting practices,
  n1500
• Detailed case studies, n9

6
Case Study Findings

• Functional classification of personnel expense a
  low priority (i.e., program, MG or fundraising)
• Glaring functional expense reporting errors
• Nonprofits responding to pressure to keep real
  and reported overhead low

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Case Study Findings, Contd

• Nonprofits vary widely in the strength of their
  organizational infrastructure
• Inadequate infrastructure reduces organizational
  effectiveness
• Restricted funding and small size lead to
  inadequate infrastructure

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1 The Virtuous Cycle of Effectiveness
9
2 Reported O/H Cost Balances Ability to Raise
Funds
10
3 Underreporting Adds Complexity
11
4 Adding the Major Funder
Major funders funding decision
Major funders 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 funders funding decision
Major funders 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
6 Limits to Growth is Too Simple
14
7 The Final Model
Ability of NPO to raise funds
Organizational Effectiveness
Major funders funding decision
Major funders 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
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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

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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

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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

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Contact Information

• Thomas Pollak, Assistant Director, National
  Center for Charitable Statistics, Urban
  Institute, 2100 M Street NW, Washington, DC
  20037, 202-261-5536 tpollak_at_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_at_iupui.edu
• Ken Wing, Kennard T. Wing Co., 224 Kathmere
  Rd., Havertown, PA 19083, 610-789-8727,
  kennarwing_at_aol.com