Unraveling an Unsustainable Funding Model

Sector Transformation Article 3 Header1

Unraveling an Unsustainable Funding Model

Written by: Annika Voltan, Executive Director, CSCNS & Sandra McKenzie, Co-founder, Forge Institute

This article is the third installment in a series focused on generating ideas for a healthy Community Impact Sector transformation and recovery in Nova Scotia! 

In our introductory article, We Need a Healthy Community Impact Sector - Here's Why You Should Care, we took a big picture view and made the case for why a thriving sector should matter to us all.  The second article in the series, Overworked and Undervalued: Sustaining The Community Impact Workforce, looked at workforce strengths and challenges as part of the call for fresh ideas and models to ensure sector sustainability and vibrancy. Now we’re applying a lens to the complex funding environment that nonprofits operate within.  

 

Nonprofits are not Businesses 

In our first article we discussed the three pillars that make up society: government, the economy and the community impact sector. Together they build the place we call home.     

Key to understanding how the pillars interact is knowing that being a nonprofit is not just, “A business that doesn’t make money.” The 2009 Stanford Social Innovation Review’s article, “Ten Nonprofit Funding Models”, explains that running a nonprofit is generally more complicated than running a comparable size business. When a for-profit entity finds a way to create value for a customer, it has found its source of revenue - the buyer. When a nonprofit finds a way to create value for a beneficiary (protecting a child, housing the unhoused, or saving an endangered species), it has not identified its economic engine. In these cases, the beneficiary is unable to cover the cost of the service. The nonprofit must find the funds to provide the service through other means, which is a separate, additional step.  It is also why the term “funding model” replaces “business model” when discussing nonprofits.   

Governments are also not businesses. They are the operating arm of a democracy and provide the services which citizens have agreed are foundational to civil society. The products and services that have markets and paying customers are left to the private sector. Other services are left to nonprofit and voluntary organizations. Achieving sustainability in the nonprofit funding model is therefore critical for the delivery of the social safety net of the valued programs and services that are not covered by the other pillars.   

 

Some of These Things are Not Like the Others  

Early feedback on this series underscored the importance of explaining the vast differences between the organizations that make up the Community Impact Sector. Exploring these differences is especially important in the context of addressing systemic funding issues. Organizations do exist in the sector that are sufficiently resourced, or that do work outside what is/should be funded by government.  

In its report, The State of the Nonprofit Sector in Nova Scotia, APEC includes a chart summarizing recognized classifications for nonprofit organizations obtained from Statistics Canada (Appendix A). It runs the gamut from the macro (universities, hospitals, political organizations, unions and places of worship) - through to the micro (women’s shelters, food banks, service clubs and hockey associations) - and everything in between. More work is required to disaggregate the sector to understand organizational roles and need. 

For the purposes of this article, our comments focus primarily on three sub-sectors: social services, development and housing, and culture and recreation. We are emphasizing the needs of organizations that act as inexpensive vehicles to deliver government services (e.g., child protection, emergency shelters, refugee assistance, material assistance (such as food, clothing, transport assistance, etc.) and supports that are essential to community well-being (e.g., social development, skills training, recreation, supports for equity-seeking groups, etc.). These organizations are typically small, can’t rely fully on corporate sponsorships/donors or earned income, and are rooted in the local community. 

This sector is diverse and complex. We believe that greater understanding of the nonprofit mosaic will lead to more informed conversations about how to develop the Community Impact Sector to improve the lives of all Nova Scotians.    

 

A Tangled Ball of Yarn 

Issues related to funding models in this sector are not new. Organizations across the country have been advocating for change for years. In 2009, Gregory and Howard wrote about “The Nonprofit Starvation Cycle”, where they highlighted “A vicious cycle is leaving nonprofits so hungry for decent infrastructure that they can barely function as organizations—let alone serve their beneficiaries”. In a recent CSCNS survey related to capacity needs in the sector, 57% of organizations expressed that current funding models are the top challenge they’re facing in the external environment. If we want these organizations to effectively meet community needs, this cycle needs to be broken.  

We have established that nonprofits are not all the same and they are not "businesses that don’t make money.” They deliver social safety net programs and services on behalf of the government. We trust them with our most vulnerable citizens. Yet, despite their essential role in service delivery, we have created the bureaucratic equivalent of a ball of tangled yarn for them to navigate to get the funding that is, in many cases, already allocated for their use. 

Researchers from McMaster University report that operating on small budgets is standard for many front-line, nonprofit organizations and doing more with less is a badge of honour. “Leanness” is baked into the sector’s DNA. They further note that this leanness is shaped by policies and long-held beliefs. Traditional funding models allocate money to specific projects, constraining how funds are spent. In addition, this funding must often be renewed annually. In principle, linking funding to service delivery for clients makes sense, but it leaves little money to build organizational capabilities. Razor-thin margins diminish organizational flexibility, capacity and resilience - manifesting as burnout. As well it limits the capacity to re-imagine service delivery or to receive training on new approaches, and creates an absence of succession planning. In other words:  

  • Funding cycles are too short. More often than not, funding is administered on an annual basis (or shorter) rather than multi-year horizons. This means organizations don’t have certainty for strategic planning, are unable to offer long-term staff positions, and can spend more time hunting for the next funding source than tending to their mission. 
  • Funding prioritizes program delivery over operations. Understandably, funders and donors want to know their investments directly benefit community. But as a result, funding is often aligned with the delivery of a specific project, program or service with very little room for meeting operational needs. Too often “extra” expenses like administrative supports, professional development, and operational costs for things like Internet connections, rent and utilities, technology, etc. are excluded. Not surprisingly, staff often play multiple roles, and administrative functions like basic systems and operational management take a back seat to front line delivery. This leads organizations to miss out on strategic opportunities.  
  • Funding comes with reporting strings. There is an incredible degree of accountability placed on the sector in the form of reporting requirements. Typically to do their work, organizations are putting together piecemeal funding opportunities through a mix of grants, donations and other sources. Each source often requires a different approach to evaluation and reporting - but there’s limited resources to support the time needed to do this work, let alone to apply for funding in the first place.  
  • Funder priorities drive mission drift. Sector funders and donors want to see resolutions to issues facing communities. But the dark side of that good intention can be a hunt to identify “silver bullet" solutions and the attraction toward shiny promises of the next new thing. Given the power held by funders to design application criteria and the need of organizations to find resources to keep going, too often funding processes coerce a move away from the organizational mandate. By focusing on the idea of the hour, valuable time is spent on funder priorities versus community ones, and the core work of the organization can be neglected. 

While these issues are longstanding, COVID-19 has shone a light on cracks in the sector – especially for those groups providing front-line social services to communities. During the pandemic, some of these groups received increased funding to do their work. While welcomed, it is still a short-term solution and, in some cases, amplified the need for operational supports as more staff were hired and more clients were served.  

 

Beginning the Unraveling Process 

We believe these challenges can be addressed through teamwork and true partnerships. The pandemic stimulated funders and nonprofits to rethink traditional models and to implement changes. Two key opportunities for collaboration have emerged:  

A Coordinated Approach to Supporting the Sector: 

Addressing the complexities of new ways of working with the sector could start with a designated home in government. Nationally, groups such as Imagine Canada, the Ontario Nonprofit Network and the Advisory Committee on the Charitable Sector (among others) are advocating for a home in government for the sector. Provincially, vehicles for centralizing data collection and analysis, and policy-making that affects the sector should be considered for comprehensive and coordinated policy development across departments. Creating a home for the nonprofit sector in government will facilitate a horizontal approach to policy alignment, funding, workforce planning, improved service delivery, new approaches to governance, and opportunities for innovation.  

Stable, Predictable Funding and Streamlined Reporting: 

The study Funding Matters: The Impact of Canada’s New Funding Regime on Nonprofit and Voluntary Organizations highlights an increasingly piecemeal funding regime for nonprofits. The report was written in 2003, but 20 years later the identified issues still ring true: 

  • Funders have increasingly adopted a targeted approach to funding. 
  • Funding models are project-based, with a marked shift away from a core funding model and a reluctance to fund administrative costs that cannot be directly tied to a project or program.  
  • Funding is provided for shorter periods of time and is increasingly unpredictable. 
  • Reporting requirements have increased.  
  • Funders are increasingly requiring organizations to make joint submissions with other project partners and to demonstrate that they have secured funding from other sources – either financial or in-kind contributions – before extending their support. 

We propose that a new relationship between funders and nonprofits take place in a climate of “radical trust.” The notion that organizations need the freedom of funding flexibility to allow for discretionary decisions, based on the needs presented by community.   

The opportunity exists to develop a funding model which recognizes that there are core costs for organizations that are contracted year over year to deliver services on behalf of government and to develop a reporting framework which addresses the “accountability crush” of multiple and duplicative reporting requirements.   

Development of a stable, predictable funding and reporting model will allow organizations to focus on the people they serve and the communities they are enriching.   

What if we worked collaboratively to address the feelings of over-whelm, burn-out and stress in this important sector by developing a home in government to work collaboratively to develop a funding and reporting model that allowed organizations to focus on the people they serve and the communities they are enriching? 

The goodwill is there, and the time is right.  

We want to hear from you!

Please consider taking a few minutes to share your ideas for sector transformation and recovery! 

2 thoughts on “Unraveling an Unsustainable Funding Model”

  1. Thanks for shining a light on this important issue, Annika and Sandra. A couple comments:

    Early in your article, you frame things around the three pillars that make up society: government, the economy, and the community impact sector. If we define “economy” has how society meets its needs, I would say that there are actually five key sectors in the economy: public, private, community, household/peer-to-peer, and the Commons. I think that conflating private companies with “the economy” overstates the importance of private companies (as important as they are), and leads to very unbalanced, lop-sided policy decisions. In 2020, the NY Times published an article (https://nyti.ms/3qqiw8q) that the unpaid work of women…”is staggering: $10.9 trillion, according to an analysis by Oxfam. It exceeds the combined revenue of the 50 largest companies on last year’s Fortune Global 500 list, including Walmart, Apple and Amazon.” Imagine Canada estimates that the community sector accounts for 8.1% of Canada’s GDP, more than the retail trade industry and close to the value of the mining, oil and gas extraction industry.

    * * *

    I would say that government and other funders have got their funding models half right: they say they want to fund program outcomes and social impact (the results they want), but then they require nonprofits to report ad nauseam on *how* they create those outcomes and impose arbitrary restrictions on how they can spend their money to do so. If nonprofits were to forcefully and with evidence present the value of the social outcomes they create, I would think (the good ones at least) would be able to show an SROI of more than 3x (300% in ROI terms). It would strengthen the further assertion that, if you’re paying for outcomes, then nonprofits should be held accountable to report on the achievement of those outcomes, not on how they make those outcomes or the money they spend. (When the Government of NS does a paving contract with Dexter Construction, I’m pretty sure that Dexter doesn’t have to report on or limit how much they spent on overhead.) This position has been advocated for by Jason Saul (see his book, “The End of Fundraising”) in the US and Shawn Loney here in Canada (see “The Beautiful Bailout”) for some time.

    * * *

    I really like your assertion that there should be a home for the community sector in government. My time working on social enterprise development policy has highlighted the need for a champion on the inside who can connect the dots for key decision makers in the various departments. One of the challenges of doing this is that investments made by one department (say, Health and Wellness) will produce benefits for another department (say, Department of Seniors). So a key task for a community sector champion would be to show how those investments and benefits flow – not a small task!

    * * *

    Thanks again for raising this critical issue. It’s something that we’ll need to sort out soon, so that nonprofits can prepare to respond to the challenges that will be driven by the ongoing climate crisis – climate refugees being just one.

    All the best,
    Andy

  2. I agree with Andy. Adding two additional points.

    1. There is no market for solutions.

    2. Government values what it buys. They do not value what they fund.

    Not-for profits need to professionalize what we have to offer by identifying the market problems we are providing a solution to, what products and services we are engaging to solve those problems, and what the outcome value is. Reframing the conversation will produce a significant paradigm shift as Government, investors, and donors will view their engagement with service providers as “purchasing a solution.”

    I encourage you to take a look at this satirical video capturing how the government/procurement structure views applications from business versus the non-profit sector. Encompass Co-op (Shaun Loney | Lucas Stewart) and New Perceptions (Dave Berge) captured the experience perfectly. Broke: The Business of System Change https://youtu.be/uojUD6ugNN4

    We also need to change how we are valuing work-based training programs, and our countries untapped labour force.

    We don’t need new tools, or for new organizations to be stood up. We need to celebrate, recognize and engage existing tools available from thousands of organizations who have been providing the solution for decades, and in some cases centuries.

    Also, non-profits, especially social enterprises, are not-eligible for 95% of programs and services for business development/expansion, nor are they eligible for 97% of investment funding through Community Foundations.

    Moving forward:

    Eliminate “funding” terminology. Imagine the impact to the GDP and Government budgets if all solution-finders stopped doing what they are doing. We are not a strain on, or a deficit to, the economy. We are an asset.

Comments are closed.