Tuesday, August 21, 2007

What information do markets need to work?

Did you know that about 6% of non-profits in the US attract four-fifths of the resources?

This might be fine if there were not so much at stake. There is a growing appreciation of the role that philanthropy can and must play in addressing the challenges we face - be it education at the local level or carbon emissions at the global level. And Americans are putting their money where their mouth is: last year they gave away almost $300 billion to philanthropic initiatives.

So it really matters where all this money goes. The problem is, as Paul Brest puts it in his most recent Hewlett Foundation President's Letter, most donors "simply lack the necessary data to support informed decision making." This means that the philanthropy marketplace does not function well, and resources don't get allocated to their highest-impact uses.

It also means that big organizations can get bigger based on their marketing and branding rather than on their results. And the little guys, regardless of how good they are, usually have trouble attracting the attention of donors. The sad fact is that seven out of the top ten largest NGOs in 1990 either maintained or grew their size relative to the rest of the sector during the following decade.

As Mari and I write in a forthcoming book chapter:
Well-functioning markets, on the other hand, demonstrate significant entry and exit from the market, as organizations with innovative ideas enter to compete, and companies that have lost their edge go out of business. To illustrate, from 1990 to 1999, only three of the top ten companies (ranked by market capitalization) at the beginning of the decade remained in the top ten list by the end of the decade. All of those three companies had lost market share. The other seven companies in the top ten in 1999 had not been on the list at the beginning of the decade.
In his letter, Paul Brest describes some of the organizations (including GlobalGiving and several other excellent ones) that are working to provide donors with the information they need to make better decisions. As Paul says, "diverse philanthropic investments do not have a single common measure [of return]." To that, I would add that diverse "donors" do not share the same measure of returns. As a result, no single set of data or information can or should inform - or motivate - all philanthropic decisions.

The question is how to provide a mosaic of data suitable for different philanthropic investments and donors. It is clear that there will be no single solution to this - it really will have to be different strokes for different folks. But there are common elements that should be applicable to many organizations and many donors, and Paul discusses some of these in his letter, which is highly recommended reading.