The NGO-donor (dis)equilibrium: why and how we must address it

Nicola Crosta
Feb 10, 2016 · 5 min read

By Nicola Crosta– Executive Vice President, Epic Foundation[1]

Earlier this year the world lost a great economist. John Nash was truly “A Brilliant Mind” as the biographical movie about his life was aptly titled. How many mathematicians do you know that have won a Noble Prize in Economic Sciences and been played by Russell Crowe in a Hollywood movie about their lives? Nash was awarded the Nobel Prize for his work in game theory and in particular for discovering the eponymous ‘Nash equilibrium’, a situation where two parties have found strategies that none has the incentive to change unilaterally: once this equilibrium is found nobody basically makes a move.

I believe this is exactly the situation that the majority of donors and NGOs find themselves in today. Currently, both donors and NGOs are all too often trapped into an “equilibrium” that is highly dysfunctional and, unfortunately, severely hinders the impact both groups could be achieving.

Let me explain why this is a serious problem for the non-profit industry and what we can do about it.

On the one hand, we have donors whose primary role is to provide financial resources and technical assistance to NGOs. Most Donors commit to provide these resources with a genuine intention of generating positive social impact. Simultaneously however, most of well-intentioned Donors lack the time, resources and skills necessary to judge whether the organizations they are supporting can actually deliver any positive impact at all. Given these practical constraints most donors tend to rely on self-reported information from NGOs that is almost always positive, and is also almost never checked by the donors or external parties. Feedback on impact is therefore a “good news machine”, telling donors what they want to hear and ensuring NGOs, regardless of the impact they achieve, continue receiving funding.

On the other hand, NGOs find themselves in a situation whereby for the reasons discussed above there is a strong incentive to keep providing donors with only the ‘good news’ they expect. Many NGOs do collect and process a lot of information internally that reveals what actually works and what doesn’t. Yet, often their reports to donors do not discuss these findings and tend to focus on providing good news and data that shows to the donor their money has made a significant impact. Sometimes this kind of communication involves simply focusing on what is positive and underplaying failures. Many times it also involves manipulating or even fabricating data that doesn’t actually exist. This is especially problematic given a lack of external evaluations of NGOs, which are often deemed too expensive for the NGOs or Donors to meaningfully implement.

Since most donors and NGOs tend to behave this way, this practice has become the standard in the industry. A sort of ‘Nash Equilibrium’, in which a constant flow of good news from NGOs supports the ‘feel good effect’ of individual donors: I give back, I have an impact, I feel good. Also, good news addresses the priority of most institutional donors (whether government or corporate), which is often not to achieve positive impact, but to be able to communicate positive impact. Once more, what most want to hear are positive stories and results from NGOs, not an accurate account that would include a fair amount of ‘bad news’ and failures.

A donor that makes the first move — think of a large fortune 500 corporate donor — in the direction of having a deeper understanding of its impact would inevitably face situations in which impact hasn’t occurred — ‘bad news’ — and the company could end up being considered as a ‘bad donor’ compared to others that keep reporting only great results. How many managers of CSR departments would be keen to take that risk? Similarly, an NGO that decides to break the silence and communicate more openly about the difficulties it faces and about its failures, could pay a high price. Think for instance of how it could get ‘downgraded’ by some platforms that rate/rank NGOs and would end up being written off by most donors.

The result of all this is an industry that is — by and large — stuck in a highly dysfunctional equilibrium. Today, in the social sector we have something akin to a ‘don’t ask, don’t tell’ situation: donors don’t really ask what their impact truly is, and NGOs don’t really have an incentive to communicate it.

This must change.

This system damages organizations — both donors and NGOs — that are actually doing a good job, and offers the perfect playing field for those who aren’t. In a context dominated by unverified performance results from NGOs and unchecked communication by corporations and other donors, philanthropic money to NGOs and recognition to donors ends up being done irrespective of impact. Moreover, in the longer term the suboptimal equilibrium I describe represents a strategic risk for the whole non-profit sector as people will simply end up losing faith in such a system and its capacity to deliver positive impact. I believe this is a real risk that needs to be addressed, especially in countries in which we see the advent of a new generation of philanthropists that are more data-driven, more informed and more demanding.

So, how do we un-lock this donor-NGO dysfunctional equilibrium?

The good news is that there are ways to address this situation, to ‘un-lock’ the dysfunctional equilibrium described above and replace it with a more truth-seeking and effective relation between donors and NGOs. During the past few years of my professional life — particularly the last one — I have observed and experimented with tools that do just that. More specifically, I have investigated how advanced tools for selecting and monitoring NGOs can allow for a robust understanding of NGOs’ performance both before a donor decides to support it (selection tools) and after a grantor-grantee relationship has been established (monitoring tools). These tools are becoming more and more common in the fields of venture philanthropy and impact investment, and they are bringing about a level of transparency and professionalism that had been largely lacking in the industry. The most promising of these tools are — as I wrote in a recent piece[2] — those that are not designed to support a ‘top-down’ control of donors on NGOs, but rather a climate of trust and collaboration that can be incredibly beneficial to both donors and NGOs.

The tools I described above are now widely available and they are getting better and better. Best of all, thanks to technology it seems these tools will get both cheaper and more accurate. So, going forward, there will be no excuse for not using them.

I believe this is where a revolution in the non-profit sector can start: the most thoughtful donors and impactful NGOs can increasingly strengthen their relationship with the use of more sophisticated tools and a more open dialogue about impact. The other NGOs or donors will then have to follow, or be revealed for purposely deciding to remain in the world of ‘unchecked philanthropy’.

You can follow me on Twitter: @Nico_Crost

[1] Views are my own.

[2] Please see my previous Op-Ed on this topic: https://goo.gl/FLNW3i

Nicola Crosta

Written by

Executive Vice-President of EPIC Foundation. Former Head of Policy at United Nations, kitesurfer, proud father of 3 boys

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