Real Costs. Real Outcomes with David Greco Pacific Ballroom February 5, :45am – 10:15am

REAL COST. REAL OUTCOMES David Greco Project Director, Real Cost Project 2

“The world has changed, and so must we. It’s time for a new approach.” - Clara Miller, President, F.B. Heron Foundation 3

WHICH OF THESE EXISTED IN 2005? 4

A rapidly changing social sector: ► Technology & Data ► Big Money ► Government ► Market Solutions ► Impact Investing ► Regionalization & Collaboration 5

87% <$1MM 54% <90 days of cash 65% <10% overhead Million Nonprofit Organizations Weak Infrastructure Strained Capacity Limited Impact Less Quality Fewer People Served 6

7 MONTHS OF CASH CALIFORNIA NONPROFITS OVERALL NONPROFITS SERVING LOW-INCOME COMMUNITIES <1 Month13%14% 1 -3 Months40%46% TOTAL (<3 MONTHS)53%60% 3 Months +47%40% ABILITY TO MEET DEMAND CALIFORNIA NONPROFITS OVERALL NONPROFITS SERVING LOW-INCOME COMMUNITIES YES44%35% NO56%65%

Revenue < $500K79%80% Revenue < $100K52%53% Deficits26%30% 8 Orange County Nonprofit Sector

9 THE CONSEQUENCES Limited Capacity & Weak Infrastructure Pursue Off-Strategy & Non- scalable Funding Distraction & Fragmentation Lack of Liquidity ‘Doom Loop’ Inability to Meet Demand Funding Does Not Cover the Full Cost

STOPPING COUNTERPRODUCTIVE ACTIVITIES AND BEHAVIORS 1.What can you do to make sure that you achieve the worst result imaginable with respect to achieving impact. Adapted from Liberating Structure’s Making Space with TRIZ 10

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STOPPING COUNTERPRODUCTIVE ACTIVITIES AND BEHAVIORS 1.What can you do to make sure that you achieve the worst result imaginable with respect to achieving impact. 2.Is there anything that we are currently doing that in any way, shape, or form is on the list? Be brutally honest! 3.What first steps will help us stop what we know creates undesirable results? Adapted from Liberating Structure’s Making Space with TRIZ 12

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NATIONAL PARTNERS 14

15 Statewide reach focusing on Southern and Northern California Grantmakers In-depth interviews conducted Qualitative approach spanning multiple funder types RESEARCH OVERVIEW Annual Budgets from $400,000 to $9 Billion Giving Networks Public Endowments Individuals CorporateFamilyCommunity Staff Roles including Board Members, Executive Directors, and Program Officers.

WHAT WE LEARNED 16 POLICYPEOPLEPRACTICE Lack of formal policies around overhead or indirect costs No standard definition of terms No shared or common language Discretion left to program, grants management, and/or financial staff Little or no formal training on determining full cost Practice driven by cultural norms and perceived ‘best practices’ in the field Radical differences in approach and practice

A NEW APPROACH. A NEW PRACTICE. WHAT WILL IT TAKE TO GET THERE? 17 What are the outcomes? What do those outcomes really cost? What role do you want your money to play?

Simply put, the real cost includes all necessary costs for a nonprofit organization to deliver on mission and to be sustainable over the long term.  Program Expenses  Administrative and Operating Expenses  Reserve and Capital Expenses. 18

REGIONAL FORUMS San Francisco – June 9, 2015 Los Angeles – June 15, 2015 Orange County – June 19, 2015 San Diego – June 23,

KEY TAKEAWAYS Culture of Philanthropy: The uneven power dynamic creates a culture where nonprofits feel they cannot be transparent on issues around financial challenges and the true cost of delivering services. Restrictions and Program-based Funding: Many institutional foundations are organized and staffed around specific program areas. This system institutionalizes practices that 1) reinforce the idea that programs – not overall organizational capabilities – are what matters most; 2) restrictions are necessary to link funding to specific program results; and 3) accountability is necessary for the program officer to justify the grant. Shift to Outcomes: There was a great deal of agreement that focusing on inputs such as cost is not providing the opportunity for nonprofits to effectively deliver on mission. Rather, foundations should ground their grantmaking by focusing on what are they trying to achieve. Organizational Innovation and Growth: Supporting indirect and overhead costs can have lasting impacts on organizations by allowing leadership the ability to remain flexible in changing times. 20

INSTITUTIONAL BARRIERS Lack of understanding of nonprofit financial management. Lack of established best-practices models around funding the full cost of programs. Lack of trust and a belief that many nonprofits don’t understand how to run “like a business” – especially among trustees and foundation board members. SECTOR-WIDE BARRIERS A pervasion culture and mindset that “Overhead is Bad”. Lack of a shared language and common definitions around overhead and full costs. Lack of open and transparent conversations between funders and nonprofits. Deeply ingrained practices, beliefs and perceptions. Lack of established best-practices models around real cost funding. Lack of understanding of nonprofit financial management. Lack of skills and training around measuring and evaluating outcomes. 21

OVERCOMING BARRIERS Executive Buy in: Simply, change happens at the top. In order for lasting and impactful change to occur in funding methods, executives and boards of trustees must fully understand the issues and be prepared to implement changes. Engaging Grantees in a Real Cost Conversation: Before changing grantmaking practices, grantmakers need to examine their current practices – both formal and informal – and to engage in conversations with their grantees as to what does it really take for them to achieve their outcomes and how the funder’s grantmaking practices are helping or hindering the achievement of outcomes. 22

What do you need to help you move forward?  What support do funders need?  What support do nonprofits need? 23

For More Information: Real Cost Project – Northern California Grantmakers – ncg.org San Diego Grantmakers – sdgrantmakers.org Southern California Grantmakers – socalgrantmakers.org David Greco, Project Director Phone: