First, do no harm?

Susan Nelson of TDC gave us a healthy dose of her thought leadership in her GIA session with Olive Mosier of the William Penn Foundation. She presented — for the first time — the findings of a new report on Philadelphia cultural institutions that comes five years after the breakthrough study, Getting Beyond Breakeven: A Review of Capitalization Needs and Challenges of Philadelphia’s Arts and Culture Organizations. The 2009 study rocked the national philanthropic boat with its analysis of ways local grantmakers offered a robust but chaotic grants marketplace and showed that more than 70% of Philadelphia organizations had high financial literacy but weren’t able to apply it successfully to their operations. The report spurred both conversation and action across the U.S. and helped inform GIA’s own National Capitalization Project.

So, no surprise when Nelson dropped successive bombshells on the packed room of grantmakers on Monday. Her five-year review shows a rapidly changing external environment in which Philadelphia cultural institutions (spurred by the funders who support them) have created an ever larger number and variety of offerings, but that paid attendance across the participating institutions has not grown at all.  Does Growth Equal Gain? is the title of the new report, and you’ll want to read it when it’s released. Bravo to the William Penn Foundation for pursuing this important work.

Part One of the report shows how organizations fared from 2007-2013; who gained and who lost. Part Two looks at philanthropic investments made toward growth, and attempts to answer questions posed by the William Penn staff about how best to guide organizations toward growth, how to know when growth is advisable, and what markers beyond growth can be used as a proxy for success.

Using CDP reports and in-person interviews with 40 organizations, the new study shows that Philadelphia organizations remain financially weak. About 70 percent fall into Nelson’s “at risk” or “vulnerable” categories of financial health, as defined by available cash. “Vulnerable” organizations have about one month’s cash on hand, while one week of cash defines “at risk.” The percentage of organizations in these categories is approximately the same as found in the earlier study.

However, the reasons for poor health are evolving. Nelson documented three trends worth further investigation.

The weak did not exit

Here’s a topic few people are willing to discuss – why don’t more of the sector’s weak organizations fold? And should they? Nelson reports no evidence of significant exits, even after the Great Recession. Possible reasons? Closure is extremely slow in the nonprofit sector; there are both process barriers (convincing everyone that it’s the right move is certainly one), and legal ones. The possibility of functioning with partial or total volunteer labor also makes closure less likely.

Large organizations gained philanthropic market share

Data show that very large organizations “swamp the system” (Nelson’s terminology) and have grown over the past 5 years in both size and number. The report shows a more crowded playing field at the top with larger organizations competing with each other, and with some Philadelphia-based major institutions rebounding with larger capitalization campaigns that are successfully drawing major philanthropic support. In total the study organizations are looking for $1.4 billion in new capitalization, a number Nelson called “typical for a city the size of Philadelphia.”

The number of paid patrons was stagnant

Data showed that increases in earned revenue beat inflation, but only because of higher ticket prices. The number of paid patrons did not keep up with population growth. “Churn” in patrons was identified as an invisible factor. Many new patrons are sampling but fewer are subscribing or they’re attending less frequently. Nelson reports that organizations understand the ways demographic and audience behavior trends are changing, and they are planning for it. However, they have insufficient change capital to test new approaches. The result is a fundamentally reactive operating mode, with organizations chasing changes in the marketplace rather than evolution based on demand. In this environment, Nelson asked us to consider whether “flat” is actually “good.”

So organizations face a conundrum. They need to maintain current audiences while shifting dollars to attract and retain new people. But they don’t have enough money to account for both needs. 90 percent of interviewees had a strategy for new audience engagement, but only 20 percent had money to fund it.

The philanthropic market plays a role in sector stability

Perhaps most sobering of all the data from a grantmaker’s perspective: Philadelphia’s foundations and major individual contributors led the way to the growth that may have in fact contributed to destabilization of some organizations in the study. During the 5-year period, foundations tipped the balance and became the area’s largest single source of contributed revenue. But their increases did not allow organizations to make consistent investments that would “move their needle” over time; foundation funding is inherently episodic. The result is that organizations grew, but not strategically.

So what?

Nelson’s analysis goes much deeper than what I’ll recount here. After all, you should read the report, and soon. But there’s a giant “so what” here for the philanthropic sector. Funding choices and program structures are based in a growth paradigm. There is an underlying assumption – a dominant logic – that foundation grants allow organizations to invest and grow and that in this growth all other problems will be solved.

But Nelson reports that the growth orientation of so much grantmaking may not only be unhelpful, not merely benign, but actually working against success.  She cites several reasons, of which two stood out for me:

1. Funders’ tastes may not align with the rest of the audience and therefore growth-in-audience assumptions are flawed. The audience is changing in its demographics, purchasing habits, and attendance patterns. Foundations may not be in tune with the times.
2. Funders invested most in the organizations that were financially weak. Nelson shows that sustainable growth is different from significant growth. Organizations cannot move into a significant expansion without first dealing with fundamental financial weaknesses. Further, it is easy to spend money but much more difficult to predict the net from any investment. Expansion is likely to cost more than its direct costs. Not only organizations — but also their grantmaking partners — fail to exercise financial discipline when making funding choices.

Nelson closed by suggesting that grantmakers take more time to think about the context of the larger ecosystem in which any given organization works, then ask, “When is it better not to invest?” She suggested that foundations think about their success measures in light of the increased competition, market saturation, and audience preferences that are characteristic of our times. Is the aim to strengthen and advance particular organizations? Is the aim a particular community vibrancy goal? Or a meta-audience goal? “Just what is your score here?” Nelson asked.

What was particularly refreshing about Nelson’s presentation? Her willingness to talk turkey. She does her homework, she has researched and thought through the details, and her messages are clear. If you need evidence that grantmaking is a complicated endeavor, reading this report will be fodder. And perhaps grantmakers need to have their own oath: First, do no harm. That’s a lot harder than it looks.