06/03/2013 09:05 am ET Updated Aug 03, 2013

How Smarter Giving Can Create a More Effective Nonprofit Sector

I recently had the rare opportunity to sit on a stage before a roomful of people representing billions of philanthropic wealth. These were people who could change countless lives with the stroke of a pen -- and they had committed themselves to doing just that.

It's not everyday that I'm in that kind of company, but I had been invited to participate in a keynote panel at The Center for Effective Philanthropy, an organization that helps some of America's largest foundations maximize the impact of their charitable dollars. When names like Rockefeller, Gates, Kellogg and Ford are looking for ways to give smarter, they turn to CEP for data, ideas and best practices.

My topic that day was "Nonprofit Performance Management: Why It Matters and What Funders Can Do." As a consumer of philanthropic dollars, I've thought often about that question, and I thought about it even more in the days and weeks leading up to the conference.

There was a time, after all, when performance was an afterthought in the nonprofit sector. Everyone was trying to do good, so it seemed almost insensitive to ask if they might do better by approaching the task in a different way.

Today, however, that question is no longer insensitive -- it's required. Needs are growing at the same time that funds are shrinking, so every dollar has to work harder or else we risk losing ground in spite of our efforts. On some level, all of us in the nonprofit world understand that good intentions are no longer good enough. We know that we have to move toward quantifiable, efficient, and replicable outcomes, but too often the old systems and old assumptions keep us doing things the old way.

As I told the funders at CEP, real change will depend on a concerted effort by all of the players on the field -- philanthropies, government, and nonprofit leaders. We must recognize that we have a shared goal in scaling effective practice, and none of us can afford to wait for the others to take the lead.

For philanthropists, specifically, the challenge lies in coming to grips with their new role as capacity builders rather than innovators. This represents an historic shift: Traditionally, foundations have put their money to work at the concept stage, then moved on to the next new thing after a 3- to 6-year funding cycle. Nonprofits that established a "proven" track record during this cycle could count on government funding to step in and take a program to scale, all under the notion of promoting the public good.

The problem is that governments can no longer afford to fund every program deemed "effective" under this relatively short funding cycle. Bringing the best programs to scale will require painful, but necessary choices about funding the most effective programs and defunding the less effective programs. Demographic shifts and the resulting growing financial demands on entitlement programs make this point unavoidable. When public funding becomes a zero-sum game, elected lawmakers should rightly demand the highest level of data before making the tough decisions.

In addition to a longer time frame, this kind of data-centric organizational development requires capital and expertise -- two things that many nonprofit leaders understand they are lacking. If philanthropies hope to facilitate the shared goal of scaling effective practice, they must be prepared to make significant investments in nonprofits' infrastructure and in the professional development of leadership.

Building capacity in nonprofit programming is what I've often referred to as "the unsexy work of making social change." The new idea is sexy, as is taking an idea to scale. But what about the middle phase of refining practice and making incremental changes day in and day out? That work is often viewed as boring and mundane, even though it's the make or break phase of the entire process.

As shrinking government spending raises the stakes for nonprofits and their clients, philanthropists can no longer be content with their pre-2008 role as investors in innovation. Instead, they will need to partner with nonprofit organizations throughout the "unsexy" professional development/capacity building phase, helping them clear the higher evidentiary bar for showing what works.

Armed with better data and more conclusive evidence, government decision makers will then have to rethink their criteria for taking a few programs to scale... but that's a topic best left for next time.

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