In 2008, donors in the US made about $300 billion in charitable contributions to a total of around 1.5 million nonprofits. We call this huge flow of philanthropic dollars the "nonprofit marketplace." Unfortunately, the nonprofit marketplace doesn't work very well.
As a society, we aren't maximizing the social impact bang for our philanthropic bucks. The nonprofits that raise the most money are those with slick marketing campaigns or aggressive fundraising drives, not necessarily the organizations creating the most good. (Though that is not to say that nonprofits with slick marketing can't be effective--many are.)
The nonprofit marketplace doesn't exhibit the single most essential characteristic of a well-functioning market: open exchange of high-quality information that helps people make good decisions. The current economic crisis gives ample evidence of the consequences of opacity in a marketplace.
An individual willing to spend $300 on a digital camera can find better information than one ready to give $1 million to fight deforestation. You are much more likely to get a good answer to Canon vs. Nikon than The Nature Conservancy vs. Rainforest Action Network.
As Paul Brest discussed in a recent post, financial ratios are not by themselves enough information to make a good philanthropic decision. What matters is impact: lives saved, jobs created, species preserved. When direct evidence of impact is not available, we can use proxies: clarity of goal, strength of strategy, opinions of stakeholders, and interim data about progress.
At the Hewlett Foundation, we recently partnered with the consulting firm McKinsey and Company to lay out a roadmap to a stronger nonprofit marketplace. A detailed whitepaper and an active discussion can be found at www.givingmarketplaces.org. To make this system work better, we suggest that we will need cooperation from many constituencies:
- Nonprofits can be more open and explicit about what they're trying to accomplish, how they're going to get there, and how they track their progress.
- Banks, investment funds, financial advisors, estate attorneys, and others who help people interact with their money can help their clients and customers access good information and make good decisions.
- Foundations can proactively share what they're learning about nonprofits and social issues and support critical intermediary organizations like Guidestar.
- Individual donors can take the time to make sure that they are making smart decisions that wring as much social and environmental good as possible out of every dollar they give.
- Intermediary organizations that organize the market can gather stakeholder opinions, develop open standards for sharing information, and collaborate in their efforts to weave together supply and demand.
The economic crisis may have numbed us to numbers in the hundreds of billions--but we should not forget just how much money is at stake here. We will only succeed in addressing complex problems like climate change, AIDS, or homelessness if we get our philanthropic dollars to where they will be best used.