Earlier this year, we conducted a third-party assessment of the nation’s largest philanthropic leadership program—Neighborhood Builders, operated by Bank of America. Now in its eighth year, Neighborhood Builders selects “high performing” community-based nonprofits, and provides them with a meaningful unrestricted grant ($200,000) and multiple three-day sessions of leadership training for the executive director and an emerging leader. It also fosters relationships within a network that has grown to 1,200 nonprofit leaders. The bank invests in this program as part of a broader commitment to strengthen communities where it does business.

Our research found that the program is having a strong, positive impact on participating leaders and organizations, and through them, the individuals and communities they serve. For instance, Chinese American Service League, a Chicago-based social services organization, attributes its ability to grow through the downturn in large part to the fundraising knowledge it gained at the training, the financial management advice it received from a peer organization it met at the training, and fundraising and accounting software it purchased with the unrestricted grant. 

Here are some important take-aways from this assessment that others running or funding leadership development measurement programs might find valuable:

1. Develop a detailed theory of change. It isn’t worth spending a dime on measurement until you’ve carefully defined which leaders you intend to target, what specific training and other programming they need, what they will gain, how those gains will be applied, and what should ultimately result. Ask yourself: Do you want to be accountable for long-term outcomes? At what levels (the leader, the organization, the community, etc.)? Over what time period? Should every participant receive the same set of services and benefit in the same way? For Neighborhood Builders, detailing the theory of change clarified the intermediate outcomes it sought (improvements in aspirations, leadership knowledge and skills, peer relationships, and stature with other funders) and the longer-term outcomes for improved leadership and organizational performance. 

2. Measure with mixed methods. Start with basic data tracking, leader by leader, along the theory of change: characteristics of the leaders, the amount and type of programming they access, their assessment of whether the programming was delivered as intended, etc. Then make sure to gather intermediate and longer-term outcome data after sufficient time has elapsed. While questionnaires and surveys will tell you whether outcomes were achieved, qualitative methods such as interviews, focus groups, and document review are often necessary to determine whether the outcomes resulted from the program, particularly in the absence of a comparison group. Indeed, for Neighborhood Builders, we relied on in-depth interviews using common qualitative evaluation techniques such as most significant change and alternative explanation elimination to assess the program’s influence on outcomes.

3. Continuously measure to improve impact. High-performing nonprofits use measurement to enable innovation and improvement. By gathering and analyzing your data leader by leader, you should be able to determine which types of leaders benefit the most, what programming most drives outcomes, etc.; and then adjust your approaches to achieve greater impact. Our assessment of Neighborhood Builders identified nearly a dozen potential programmatic improvements, including how to better select leaders and which follow-up services (such as ongoing peer networks and skills-based employee volunteerism) to add or strengthen. These improvements can be piloted, measured, and then adopted at scale if they work.

4. Build rigor over time. Leadership programs don’t need to build a full-scale measurement system right from the start. The best programs are intentional about whether and how to improve the rigor of their measurement over time, based partly on what they want to do with the results. Do they want to improve at their current size? Attract more resources to scale it? Inform the field? By engaging evaluators early, these programs can understand their options and implement changes now to prepare for the future. In the case of Neighborhood Builders, those options include building a comparison group, validating self-reported data, and measuring the program’s return on investment.

Measuring the results of leadership development is a lot harder than, say, understanding the impact of a tutoring program on student test scores. Yet, to avoid measuring and funding leadership development is to deprive the social sector of one of its greatest performance improvement tools.

What experiences can you share about measuring leadership development in your organizations?

In fact, privately derived earned income is the single largest source of revenue for the entire nonprofit sector. According to the Center on Nonprofits and Philanthropy, private-sourced fees for goods and services made up more than 45 percent of total nonprofit sector revenue in 2010.

Specifically, there are major segments of the nonprofit world where earned income dominates the funding picture. Just think of:

• Hospitals and primary care facilities. For example, the Cleveland Clinic gets more than 70 percent of its annual revenue from private-source program fees, mainly patient services.
• Private colleges and universities, particularly smaller ones. Haverford College (Philadelphia PA) and Juniata College (Huntingdon PA) both get more than 70 percent of revenue from private-source earned income, principally tuition and fees.
• Private nonprofit retirement communities. Kendal-Crosslands in Kennett Square, Pa., and Bay Village in Sarasota, Fla., routinely get more than 95 percent of their revenue from private earned income sources, mainly resident payments.

And there are other sectors where earned income may not dominate, but where it is still a large—sometimes the majority—source of funds. Just think of:

• Arts, culture, and humanities organizations. The Philadelphia Museum of Art gets about 12 percent of its funding as private-source earned income, while both NPR and Shakespeare and Company (Lenox, Mass.) derive about 55 percent of revenue from that source.
• Housing. Habitat for Humanity’s local organizations routinely get 20 to 50 percent of their funding as earned income, as does Common Ground of New York City.

All of that said, for an organization that doesn’t have a significant earned income stream, it may seem daunting to establish one. However, the steps that the authors of “Finding Your Funding Model” shared (understand your current state, benchmark peers, weigh costs and benefits, and develop a plan) provide an excellent roadmap to get you started. While they wrote to help organizations create an income model that “typically revolves around a single type of funding…which constitutes the majority of the organization’s revenue”, I believe their basic framework can work just as well to establish a new revenue stream, even if it is just a supporting player.

If you’re looking to start or renew an earned income strategy, a useful metric is what we call the Private-sourced Earned Income (PEI) index. The PEI index is simply the ratio of the organization’s total, privately derived earned income to its total cash revenue:

PEI Index = Private-sourced Earned income/Total Cash Revenue

Two interesting organizations to compare around earned income are Guidestar and the Wikimedia Foundation (which operates Wikipedia). Both provide information and insights to the public, but differ significantly in the role earned income plays in their funding mix. Wikimedia has a core value that “knowledge should be free” and depends on voluntary gifts from many small donors for support (see the Wikimedia Strategic Plan) with earned income being a small fraction of total revenue. Guidestar, on the other hand, is committed to long-term sustainability through earned revenue (primarily from the sale of products and services) so that while 98 percent of its visitors use the site for free, subscriptions and licensing fees from the remaining 2 percent accounted for about two-thirds of total revenue in 2008.

The PEI indexes of these organizations reflect this difference in approach. Guidestar’s is relatively high (0.67 for 2009) and the goal (according to board member Feather Houstoun) is to continue to grow it until earned income fully supports core operations (with gifts and grants supporting infrastructure and innovation.) Meanwhile, the Wikimedia Foundation has a PEI index of only about 0.03 (see 2011-2012 annual plan). And even though its PEI index is expected to grow (forecast to be 0.05 for 2011-12), it will almost certainly always be small compared to the equivalent Small Donation Revenue (SDR) index, which is about 0.79 for 2010-11 and forecast to grow to 0.85 for 2011-12.

In conclusion, while earned income currently may not play a big role in your funding picture today, it’s well worth exploring. The pot of money out there and the potential for enhancing financial sustainability are too substantial to ignore. And if it’s a good fit with your overall mission and strategy, then there are models and metrics to help your organization make it work.

Too often social entrepreneur organizations adopt a hero culture, where we take advantage of each other in pursuit of our great cause. I work equally with corporate and nonprofit organizations, and I’ve been stunned by the fact that nonprofit cultures are usually more toxic and unjust than my for-profit clients.

During strategic planning with these nonprofits, I’ll ask, “What’s the biggest barrier to your success?” More times than not they respond, “Our organization.”

The unspoken, but very clear social entrepreneur narrative goes like this: “Because we are good and our mission is noble, I can ask you to work long hours, pay you badly, and ask you to sacrifice more for the cause. So suck it up.”

Through these actions the nonprofit sector is saying is: “We need to be unjust to bring more justice into the world.”

Many young people who are growing out of their post college years at a nonprofit aren’t just disappointed at their experience with social change—they’re bitter. It’s no wonder that more and more of them are telling me they’d prefer to find for-profit social entrepreneur companies than to pursue work at nonprofits.

While more and more social sector organizations are using professional coaches to develop their talent, few invest in the hard work to develop a just organizational culture. But until they invest in developing talent in conjunction with improving the organization, the results will be disappointing.

Social entrepreneurs, who pride themselves on their reputation of being champions for justice, have a difficult time admitting that their own organization is unjust. And it’s rarely in anyone’s interest to call them on it.

But there are nonthreatening ways to do this. The Leadership Circle recently developed an amazing assessment tool. Its Leadership Circle Cultural Survey offers an “MRI of leadership culture,” and I would argue that it is one of the best tools to gauge the health of an organization. Though it is primarily corporations that use it, it can provide a powerful tool for the social entrepreneur sector as well. Basically, it graphs where the organization’s leadership thinks the organization’s culture is, compared to where employees and board members think it is. The gap presents a nonjudgmental starting point for an organizational strategy plan.

It’s next to impossible to make the world a more just place while your own world or organization is unjust. All true world-changing organizations must have a written strategic plan that supports both personal leadership development and improvement to the organization’s leadership culture.

The social entrepreneur sector must better itself before it can better the world.

So it’s worth exploring the potential your measurement work has to draw in funders. How? First, choose funder types that value the results you can bring to bear, and then provide the decision-makers at those funders with the data and information they need—in the format and at the frequency they need.

This perspective emerges from research Peter Kim and two other colleagues undertook that identified three defining characteristics of a funding model: the primary type of funding, the funding decision-maker, and the funder motivation. In the recent SSIR article “Finding Your Funding Model,” they share that the vast majority of today’s large nonprofits got big not by diversifying their funding sources but by raising most of their money from a single type of funder—such as corporations or government or high-net-worth individuals—that most valued the results the nonprofit was generating. Further, these nonprofits became exceedingly good at catering to the needs and motivations of the decision-makers at those funders by focusing their efforts, instead of pursuing every possible lead. Understanding why and how these individuals make decisions, it turns out, is the single best way to unlock dollars.

How can you begin the process? The first step is determining which funder type is the most natural match for your mission. Consider the experience of a multi-service, youth-serving nonprofit we recently worked with. Its leaders reviewed historical financials, benchmarked peers, and analyzed anticipated trends in funding sources. It ultimately landed on school districts as the natural funder, given the academic outcomes the organization generated for youth, the availability of multi-year funding streams for these youth, and the support the organization musters for its work among teachers and principals in various districts. 

Once you have a primary funding type in mind, the task becomes determining who actually makes the decisions at each funder. A common pitfall is assuming the decision-maker is the person who writes the check or screams the loudest. That was initially the case for our youth-serving client, but upon deeper inspection, they were surprised to learn that in their largest district of service, a mid-level administrator at the central office held undue sway over how the budget team allocated funds to nonprofit providers.

With the decision-makers in your sights, it’s important to home in on exactly what motivates them—don’t assume you know, even if you’ve spent considerable time with them in the past. At the youth agency, a more direct discussion with the primary decision-maker revealed how the district saw the organization fitting within their forthcoming strategic plan. Most importantly, its leaders learned that the primary outcome they had been reporting to the district—high school graduation rate—was of far less significance than quantifying how much money the organization was saving the district each year by preventing youth from dropping out. A simple reframing of an outcome it already measured would go a long way to helping the decision-maker internally advocate for the organization. And further, the decision-maker shared the importance of having the organization’s students and parents share testimonials at the annual board meeting where the budget was debated—a tactic it had never used before.

Important questions to answer at this stage: Does the decision-maker care more about the benefits you create for clients or benefits you create for the funder? If the former, what balance of rigorously collected, aggregate data and individual success stories is ideal? And how frequently, and through what medium, does the decision-maker prefer to communicate? A key pitfall to avoid is focusing on measures that are relevant to funders but that distort the reality of what you are trying to achieve. The youth agency we worked with was comfortable reporting a new metric because it was consistent with the aims of its program, and the expected return of greater funding outweighed the cost to track and report it. 

Every nonprofit leader dreams of having funders who say, “Don’t create anything special for us—we’ll be happy reviewing the indicators you already use to manage your organization.” Unless that scenario becomes the norm, the best nonprofits can do is to more intentionally find the “natural funders” that align with their outcomes, and to determine how best to communicate their outcomes in a way that inspires and influences the decision-maker.

How have you used measurement to support your funding efforts?

As a leader of one of the largest capacity-building organizations in the country, I want to let you in on a little secret. You can ignore nearly all these findings and best practices.

Nonprofit consultants and the industry’s media are largely to blame for this proliferation of noise. It is not due to bad intentions. It is simply a natural outgrowth of specialization, survival and marketing.

Consultants become specialists (in social media, strategy, governance, and so on)—and they need clients to survive. Unfortunately, some turn to the tried and true marketing formula of: think up a potential “next big thing,” tell a few success stories, share a few supporting trends about adoption, and make the case that if you don’t keep up with the Jones’s and hire them, your nonprofit will get left behind. The media eats it up, the consultant gets speaking gigs at conferences, and pretty soon their practice or idea or approach is accepted as fact. But it isn’t.

Our sector wastes an insane amount of time implementing best practices that have painfully low—if not negative—return on investment (ROI).

Here are five examples:
1) Volunteers. Recruiting and managing volunteers generally isn’t worthwhile unless you use at least 50 per year, they do at least 50 hours of service each (or fewer volunteers and more hours each), and you invest in volunteer management systems. Short of that, it’s almost certainly a waste of time.

2) Websites. Most nonprofits (the small neighborhood ones) would likely be fine with just a Facebook page. A template site would do the trick for slightly larger group. Only 25 percent of nonprofits need customized web design.

3) Board. There is a tremendously high fixed cost to training your board to facilitate donations (in kind or cash). If your board can’t generate a large part of your budget (say, 20 percent), you are likely to find them getting in the way of fundraising success and eating up senior staff time (and increasing burn out). If that’s the case, your organization would likely see more success with a smaller board focused solely on audits and the legal requirements of governance.

4) Social Media. Does it drive your advocacy, fundraising, or program success? It does for likely less than 2 percent of nonprofits. Everyone else is wasting a ton of time and energy on it. Much like my local car wash that urges me to “like” it on Facebook.

5) Strategic planning. You need a strategic plan, but for most organizations it can be a lot lighter than most MBAs want to admit. It doesn’t need to be perfect and frequently should be more of a living document.

My bottom line advice is that you should only invest in things you need to achieve your goals and be very careful of anything that you should do. If you are not positive which category an investment falls into, don’t ask a consultant. Ask your peers about their experience.

Meanwhile, across the Hudson River in New York State, Governor Cuomo has formed an investigative task force to “investigate the executive and administrator compensation levels at not-for-profits that receive taxpayer support from the state….The Governor’s action follows reports of startlingly excessive salaries and compensation packages for executives at not-for-profits that depended on state funding.” The Governor became increasingly involved in this issue as a variety of scandals broke regarding excessive executive pay.

If you ask individuals outside of the nonprofit world, I am sure that the common response to whether the head of a need-based nonprofit should have pay limitations would be yes—especially in our current climate. The challenge to this thinking is that governors and national elected officials are influenced by these scandals. These cases represent a very small number of actual executives. More data would prove that nonprofit executives earn much less than the amounts that are arousing public policy momentum. According to the 2010 Guidestar Compensation Study, human service executives earned a median annual pay of just over $122K. What is more interesting is that of the over 3,000 nonprofits surveyed, just 0.004% earned more than a million dollars and only 4 percent earned more than $500K, with sizes of organizations peaking in the multi-billions. I would say that this is hardly a national epidemic of nonprofit jet-setting executives.

The larger issue in all of this is that it is that yet again, government having its way with the nonprofit sector. In previous Stanford Social Innovation Review articles, I’ve talked about how the sector is left out of major pieces of legislation and how groups like NPR and Planned Parenthood are under attack. Now there is a focus on executive pay at the state level. Government has routinely picked battles with the nonprofit sector, and the sector has taken a beating—mostly without a fight. The sector holds a great deal of power, but right now, it is not mobilized and therefore carries very little weight.

We need to take these latest battles seriously. I am not sure what other wake up calls we need.

The facilitator of the focus group was taken aback. “How do you have time to come to this two-hour focus group but don’t have the time to go online?”

The leaders in the room saw the return on investment for a well-organized meeting with their peers to be much greater than anything they could do in the digital commons. They were more confident that they would get actionable insight into management techniques. But perhaps more importantly, the meeting provided an emotional and psychological benefit that is rarely met: a space for candid conversation about successes and failures in a safe, supportive environment.

Face-to-face conversations with other leaders—commercial and nonprofit—remind us that failure is, in fact, the norm and does not preclude success.

“If [CEOs’ successes] were graded on a curve, the mean on the test would be 22 out of a 100,” Ben Horowitz of Andreessen Horowitz recently wrote on TechCrunch. “This kind of mean can be psychologically challenging…because nobody tells you that the mean is 22.”

If the buck stops at the CEO, every failure in our organization ends up piled on my desk—whether it’s a typo on the website, a bad hire, or a missed market opportunity. After just a week, the failures stack up so high that it is hard to see past the mountain of complaints.

I remember when I was running product management at a venture in the Bay Area a dozen years ago, my reaction was the same: “Who the hell is running this place?” Now as CEO of my own organization, the disturbing answer is: me.

For Ben and other fellow CEOs from the Hip Hop Generation, these challenges are hard to accept. If, as Eminem said so well, “Success is my only ^&$%ing option and failure’s not,” it’s hard to stay the course as the failures mount every hour. You suspect that your team and board also see the growing list of shortcomings and wonder how you could have let them happen. How can you not feel incompetent?

One of the greatest gifts of my career was being asked to the join the board of Public Architecture. While passionate about its mission, from day one I was deeply concerned with nearly every aspect of its work. It failed to follow the most basic best practices in staffing, fundraising, and strategic planning.

And yet I soon realized that they were achieving astounding things that felt out of reach for my own organization, where we put such pride in doing things “right.” It placed the seriousness of all my daily failures in a new light.

Success, it appears, is about doing a few things right in the presence of countless inevitable failures. This is the difference between management and leadership: The act of management is ultimately about control, while leadership is about letting go and trusting others and the universe. It is about being able to take risks in the face of bad odds and having the resilience to see a 22 percent success rate as a realistic standard.

This, I suspect, is why the heads of nonprofits find so much value in coming together in person. Nonprofit leaders need to be able to get out of their bubbles and see that they are not alone in facing continuous failure. This can’t be done online.

While we need to continue to build formal peer-to-peer support groups for nonprofit leaders, I recommend another path. Nonprofit executive directors should join more nonprofit boards where they can not only gain perspective, but also provide critical support to one of their peers. 

When I am helping nonprofits with strategic planning, I sometimes ask the executive director what past decision made them wish they could take a mulligan. The answer in the vast majority of cases is a bad hiring decision.

You wouldn’t expect this answer if what you knew about nonprofit leadership was gleaned solely from the sector’s journals, blogs, and conferences, where the secret of success seems to be about determining the best theory of change, scaling and funding models, vision, or other, sexier topics.

But for one client of ours—the country’s leading advocacy organization for its issue area—four successive poor hires for one mid-level position had profound consequences on its scorecard: The pattern derailed a key part of the agency’s strategy, drained staff morale, and undermined the agency’s reputation in its community. And when it comes to fixing a bad hire, several executive directors have described to us how draining it is to have to manage a termination process.

Venture capitalists have long known the preeminent importance of having the right personnel. “Bet on the jockey, not the horse” is the phrase they use. The right people can fix wrong theories, models, and visions. But the best theories, models, and visions can’t fix the wrong people.

Hiring the right people is never an easy practice for any organization. But I suspect many sectors are prone to some industry-specific blind spots and bad habits. Think: a sales organization that is easily seduced by smooth talkers, or an academic institution that believes an advanced degree equals leadership ability. 

In that vein, here are three costly hiring mistakes nonprofits tend to make, plus some suggestions for how to avoid them, since in real life, you don’t get to take a mulligan.

1. The Multi-Headed Full Time Employee (FTE)

Mistake: Nonprofits generally have a multitude of needs and a scarcity of affordable FTEs. A common form of coping, especially among smaller nonprofits, is to carve out positions that break down something like this: 1/2 grant writing and donor development; 1/4 website and social media; 1/4 administrative support. The results are invariably disappointing. Few people have a strong set of such disparate skills or enjoy such a dispersed focus. And management easily loses track of what this multi-headed employee is supposed to be doing.

Solution: Discover the joys of outsourcing. Spend money on experts who are actually good at and focused on the competency you need. Yes, it might seem more expensive at first, even when factoring in taxes and benefits. But don’t forget the value of higher-quality work, more flexibility, and not having to manage in-house staff.

2. The Aspirational Hire

Mistake: An executive director probably doesn’t get into the nonprofit game unless they have great expectations for people face great obstacles to success.  They believe a low-income kid can go to college, a homeless man can find a home, and a terminally sick population can get better. They have to be willing to grab hold of even small signs of hope and ignore any number of predictors of failure.

This aspirational thinking is a crucial ingredient for any leader of social change. It also is the recipe for making bad hires. In my experience, the post-mortem on some bad hire often involves the phrase, “She can grow into this role” from the hiring process. While some level of aspirational thinking is good in hiring, the tolerances have to be much, much lower: A 50 percent success rate with your mission population is probably fantastic; a 50 percent success rate in hiring is definitely fatal.

Solution: Get professional HR help. The human resources field has evolved best practices for gauging the tolerances for any role and potential hire, in a sober and clear-eyed manner. Ask your board or other people in your network—it’s very likely they know someone who might be willing to volunteer on a specific hiring project.

3. The Thin Pool Hire

Mistake: It’s axiomatic that the quality of your hires will be only as good as your hiring pool. And for too many nonprofits, that pool is just too thin. 

Most for-profit companies have recognized that for many key positions, the pool needs to include people outside their specific industry. These companies recognize that some skill sets transfer across boundaries: management, marketing, HR, finance, etc.

Nonprofits generally haven’t recognized this truth. Look at the staff bios on most nonprofits, and you’ll see that corporate pedigrees are rare. But while nonprofits don’t have the pay to drive recruiting, they usually offer a better cause and more flexible lifestyle—both significant (and under-leveraged) assets in attracting talent. But the bigger point is that nonprofits just aren’t trying. They’re not looking beyond their own industry, and so their talent pool is always going to be thin.

Solution: While a search firm such as Common Good Careers can be helpful if you can afford it, the reality is that even search firms are most helpful if you already have an established network. And the larger point here is that nonprofits need to broaden their network beyond the nonprofit world.

Building your talent pool can be integrated into the work of building your donor pool. As an executive director, you should be looking for ways to build relationships with people in the corporate world that don’t involve immediately asking for money. Asking for help on talent scouting is a natural way—that happens all the time in the corporate world—to engage people with your cause.

Reflecting on that work, I recently began to think about the nonprofit sector in the United States and what it would be like if our situation were like Trinidad’s. What if we could start the American nonprofit sector all over again—what would we change or re-do? What would we create? I had a couple of thoughts:

• Redesign the government-nonprofit relationship. Since 2001, as the sector has grown, federal and state governments have become increasingly involved in the nonprofit sector. During this time, government has developed an often unfair and uninformed relationship with nonprofits—nonprofits have been victimized politically, have been treated unfairly in governmental contract relations, and have little say in legislation but are slated to play a major role in its implementation. The main reason for this is that both sides are unsure about how they can help each other. I think many would welcome the chance to sit down and recast this relationship.

• Rethink nonprofit tax designations. I am not a tax specialist, but I have seen a number of efforts to create nonprofits or social ventures using something other than “501c___”. Some think the nonprofit tax code is confining, and that it has confused or thwarted business and new efforts to conduct nonprofit work. I am sure this is just scratching the surface, but imagine if we scrapped the current code and started anew.  What would a new nonprofit tax code look like?

• Improve nonprofit leadership education. A huge percentage of current nonprofit leaders will be retiring soon. Over the last decade, there has been an explosion in the number of graduate and certificate programs related to nonprofit leadership. Is the sector more professionalized? Are new leaders ready to manage our organizations? I’m not sure, but if the sector was just beginning, how would we calibrate leadership development?

• Recast organizations and services in light of globalization. In the nonprofit arena, globalization is often a new concept. Last year, I wrote about how some US nonprofits are hiring employees who work remotely from countries like South America and India. If we could start over, how much would we consider and organize around the influence of globalization?

I am not suggesting that the nonprofit sector as a whole is not great—in fact, I think it is the best of the three. I also understand that many of the movements and innovations within the sector have happened as a result of addressing a challenge—for example, failed nonprofit efforts and wasted funding has caused increased focus on impact and outcomes. But what if the US nonprofit sector was just starting out? I often ask organizations this question when I am helping them develop a strategic plan. If the sector were an organization that could strategically plan for itself, what would we re-do or change? What would we create?

I am interested in your thoughts.

Dr. John Brothers is the principal of Cuidiu Consulting and a senior fellow at the Support Center for Nonprofit Management. He teaches social policy at Rutgers University and nonprofit management at New York University. Dr. Brothers is the co-author of Building Nonprofit Capacity, which will be published in October 2011 by Jossey-Bass.

The Sea Change-Lodestar Fund‘s mission is to facilitate and fund sensible collaborations among nonprofit organizations. It is prepared to help cover a portion off the one-time costs associated with nonprofit mergers and collaborations. It makes two main types of grants:

• Exploratory grants (generally $25,000 or less) to explore and evaluate a potential collaboration
• Implementation grants (up to $250,000) to cover a portion of the one-time costs associated with implementing a collaboration

MacIntosh explained: “Implementation grants are always made alongside funders of the collaborating organizations, often specialized in sector or from the local geography where the merger or collaboration is happening. Our fund believes in having a high engagement level with the leadership of the collaborating nonprofits, quick turnaround, and a thorough evaluation and approval process.”

When I asked MacIntosh why Sea Change was collaborating with the Lodestar Foundation on this fund, he replied, “We each bring different things to the table. Lodestar is unique amongst foundations in its focus on collaboration. We were thrilled when they approached Sea Change about working together, and put the issue of nonprofit mergers and collaboration on our radar screen. The team at Sea Change has deep financial and transactional experience in both the nonprofit and for-profit worlds, so this was a very natural step for us to take in our effort to help nonprofits have more impact while also seeking opportunities to make leveraged grants. Sea Change does much of the front-end work, the analysis, the site visits, and speaking to the leadership. We have raised some outside funding for this work, though Lodestar remains the biggest funder and Sea Change the second biggest.”

But I wondered how the fund defines “sensible collaboration.” MacIntosh explained, “We define collaboration as when two or more nonprofits combine some or all of their important activities in a formal, long-term, or permanent way. It can take many different forms, including mergers, acquisitions, and various forms of alliances and partnerships. A sensible collaboration is one that has the potential to increase the efficiency, effectiveness, or sustainability with which they pursue their missions. We want to help organizations that have gotten to the point of exploring something or consummating a collaboration, to do it.”

The really nice thing about this fund is that it is set-up to fund what it calls the “unavoidable but uninspiring” costs of collaboration, such as IT integration, re-branding, severance costs, and lease-breaking—costs that many funders would find an anathema. The fund is not a passive donor, however; it gets intimately involved in some of the transactions when it feels it can add value as an outside party. If the fund feels it cannot add any value it is less likely to fund the transaction. Guidelines state: “Our due diligence process is intensive…”—so be sure you want a partner if you approach the fund for support.

And in this age of focus on cost cutting and efficiencies in nonprofit mergers and collaborations, MacIntosh had this to say: “The whole question of cost-savings is more nuanced than many people believe. In our experience, saving money is neither necessary nor sufficient motivation for collaboration. Often the level of potential cost savings wouldn’t be enough to justify the collaboration, but it’s often enough to put the transaction costs in a healthy context. The ability to save money doesn’t mean you actually save it, but instead you reallocate your resources to the program side. After all, the goal is not to reduce the budget, but to produce great contemporary dance, educate more children, etc.”

The Sea Change-Lodestar Fund for Nonprofit Collaboration, based in New York City, takes proposals on a continuous basis from across the country. It’s great to see new, creative funding opportunities like this one for nonprofit mergers and collaborations.