How Money is Killing Many Nonprofits

Deeply problematic government funding practices are killing many nonprofit organizations. What’s worse, very often these nonprofits are facilitating their own demise.

There are several reasons for this annihilation. This column narrows in on “mission derailment” as one explanation and provides suggestions for how boards can approach and manage this threat. The column in Issue 3 – 2010 will address a second reason, the chronic underfunding and exploitation of nonprofit social service providers.

The need is urgent for reform of the nonprofit human services financing model as it relates to government contracting. In a two-part series of articles in Issue 4 – 2009 and Issue 1 – 2010, the Alliance for Children & Families Magazine looked at how the economic downturn has exacerbated the problem, as well as suggestions for reforming the system.

To explain the first problem of mission derailment, this article adapts and expands upon a column Tom Harvey wrote for the New York Nonprofit Press in October 2003. At the time, he was senior vice president of member services at the Alliance for Children and Families.

Political Process: Threat to Mission

Nonprofit social service organizations increasingly have something in common with their clients: their problems are tied to forces beyond their control.

Typical community-based social service organizations derive more than 60 percent of their funding from government sources. For residential child welfare organizations, the figure is closer to 90 percent.

To the casual observer, such levels of government support may seem attractive and a source of promise for stability. In reality, such dependence on public funding comes with great risk to a nonprofit’s identity, mission, and even its viability.

Consider the rational process nonprofit boards of directors use to define their organizations. Contrast that with the highly political process used to allocate government dollars for social services.

Nonprofit social service organizations historically define themselves by their missions, each uniquely tailored to address identified community needs. A rational planning process is used to assess what those needs are, how to raise the funds necessary to meet those needs, and how to allocate the resources that are developed. The organization’s mission is at the center of, and the test for, both problem identification and resource development.

Now, consider how public monies flow to nonprofit social service providers. A political process determines specific program priorities for implementation. If a nonprofit organization views such funded programs as consistent with its mission, it can contract to deliver the services to identified clients. This seems like a benign process, but it is not.

That’s because public monies are not allocated on the basis of rational planning, but on the basis of political planning. The process involves a rivalry of interests to determine priorities.

In recent years, clients of social welfare programs and nonprofit social service providers rarely have had a qualitative role in influencing this process. As a result, publicly supported social programs may be influenced more by tax advocacy groups than by experts in child welfare and social services.

To protect themselves, most nonprofit providers will use “consistent with organizational mission” as the prism through which to decide the appropriateness of adding a publicly funded program to its programming roster.

This may be a sound principle if such contracts involve a relatively small part of an agency’s overall budget.

Yet, when publicly funded programs constitute 60-90 percent of the budget, mission becomes reduced to an assessment process. The organization, in turn, becomes more of an agent of the public sector than of its own mission.

In this respect, the organization’s mission can be either subverted, or even killed.

While this column focuses on government funding, it’s important to keep in mind that similar effects can result from other influential funders, including foundations and donors.

Tools for Boards

At this point, it needs to be emphasized that advocacy is a good thing. The United States’ political system works, in a way, because of it.

However, what is good for the community may not always be good for the agency. Nonprofit boards must constantlybe alert so that they do not take their eyes off of mission despite the pressure to grow, serve more people, and do more good.

This is not to say that missions never change. They should be regularly refreshed and reenergized, and available funding is surely one element of mission reconsideration. But mission is the dog and funding is the tail—not the other way around.

We recommend a yearly “how fit is it” session, in which the fit of funding and mission is examined.

Boards can use the index of difference, a tool adapted by John Tropman, for this purpose. In the example below, the organization planned to divide its efforts fairly equally among two adoption programs and a foster care program. It actually wound up drifting into spending 85 percent of its resources on the foster care program because that’s where the money was. The organization’s actions end up being 45 percent out of whack with its original strategic goals.

The agency may need to revise its strategic goals; that is certainly an option. Or, it may wish to limit foster care activities and seek other sources of support for its adoption programs.

For some boards, the index of difference analysis may be more than they want to undertake. So, any approach which uses thoughtful review will work.

It is simply important to remember that the mission of the agency is to make the social contribution it has promised to make. Money is the servant of mission, not its goal.

How Money is Killing Many Nonprofits