Commentary

Many foundation people will tell you they focus on strategic grantmaking and its outcome. But I've noticed that the foundations they work for often still have indirect-cost guidelines that are mired in a mode that I call "peanut butter philanthropy."

Once upon a time, the central idea for most grantmakers—foundation, corporate and public sector funders alike—was to spread money around. Two $50,000 grants were better than a single $100,000 one; better still, ten $10,000 grants. The object was to help as many of the needy as possible. This "spreading around" was achieved in part by minimizing the portion of each grant used for indirect costs.

The result has been the current profusion of fragile nonprofit organizations. I've recently seen a 300-person agency where employees don't even know how much vacation they get, because there's no human resources staff; a social service agency that can only produce financial statements when a volunteer board member prepares them in his spare time; and an arts organization that stops marketing when the roof leaks or the network goes down, because one employee does three different jobs.

Strategy vs. Spreading

Although the peanut butter principle once dominated—and it remains alive and well—there has always been a completely different grantmaking paradigm, known as strategic philanthropy. This paradigm holds that foundations ought to be having an impact on the broader world. To achieve outcomes that affect an individual's life prospects, a community's desirability as a place to live or a nation's democratic process, foundations must make fewer, larger longer-term grants and develop expertise in a focused area. And they must invest to create organizations capable of achieving such outcomes; thus the interest in organizational capacity building.

Yet one vital aspect of peanut butter philanthropy remains sacrosanct—minimal funding for indirect costs. Unfortunately, it has the power to undermine all the other changes that have occurred.

To see why, look at how so-called "capacity-building" grants are being used: an $8 million consumer advocacy agency fielding 7,000 hotline calls per year is getting voice mail and an upgrade to its phone system so calls will be routed to an extension that's not busy; a $2 million agency serving the homeless is buying computers, so each of their current computers aren't shared by two full-time case managers; a 75-person agency that deals with the mentally retarded is paying staff to attend required annual recertification training.

Most striking about those examples is how ordinary and basic to running an organization they are. Private-sector corporations expect, as a normal part of operations, to train staff, upgrade phones and computers, engage in strategic planning and do a host of other things for which nonprofit organizations must seek out special funding.

Why? It's because of that one clinging aspect of peanut butter philanthropy: the limitation on "wasteful" administrative costs. A search of foundation websites turns up allowances of 10 percent, 5 percent and even 0 percent of each grant for indirect costs. According to The Foundation Center, capacity-building funding made up less than 3 percent of foundation giving in 2000. At that level, it can never bridge the gap between current indirect-cost guidelines and what strong organizations will need on an ongoing basis to deliver the outcomes sought by strategic philanthropy.

The message is clear: Foundations that are serious about strategic philanthropy, outcomes and the need to help create effective grantee organizations must revisit and revise their administrative cost guidelines.

Until then, they're trying to operate a strategic philanthropy machine with peanut butter stuck in the gears.