During 2001 we consulted with leaders in the Canadian nonprofit sector to identify innovative charitable organizations that could potentially meet our investment criteria. We talked to some 40 nonprofit organizations in the Toronto area, and conducted half-day strategy sessions with 10. SCP had hoped to find two or more organizations that met the criteria where SCP could invest both financial and intellectual capital, using its own resources and those of its strategic partners.

What we discovered was that our investment approach, as originally conceived, was not likely to be workable, given the strategic barriers that affect most existing Canadian nonprofit organizations, arising from heavy dependence on government funding. Our research indicated that, for several reasons, government funding and an increasing amount of foundation funding comes with very restrictive conditions on how that funding is to be used. While these conditions were originally intended to ensure that funds were used efficiently and properly, the net effect is that several social service organizations are forced to act in seemingly counter-productive ways in order to maintain funding sources.

Some observations from our survey process:

• There is plenty of talent and commitment in the Canadian nonprofit sector. We met great, capable, committed people everywhere who despite not having the same kinds of financial rewards as the private sector kept persisting at their mission in the face of often very frustrating circumstances. The people and organizations were generally able to do a lot with a little.
• Individuals in this sector are capable of doing a lot with a little because they have to. Virtually all the organizations we reviewed had relatively weak balance sheets and low reserves. They were in perpetual scramble mode just to make ends meet.
• As a result of weak balance sheets a disproportionate amount of a charitable organization’s time and energy is devoted to fundraising. We saw the social mission often had to take a back seat. Even when they were successful at raising funds, it was still difficult for them to accomplish their social mission, for the following reasons:
• There is little funding of organizational capacity. There seemed to be reasonable levels of funding available for specific programs or services. But capacity building was almost frowned upon as if it were an administrative expense contrary to the rules of good governance. So most operating charities had a myriad of separate programs funded by different donors, all of which had to be tracked and accounted for separately. Capacity-building funding, to integrate programs into a coherent strategy, was viewed as “wasteful”.
• Further, there’s no funding for long-term outcome measurements. Not one of the organizations we worked with could tell us much about their users or target populations two years after “graduation” from one of their programs. No funders saw this as a useful application of their grants. This lack of knowledge about long term outcomes means that: i) the charitable organizations really do not know if they are solving root cause issues or if the populations they serve slip back once the formal help is completed; and ii) there is no way to prove that they are more effective than other organizations attempting to address the same issue. Lack of support for long term outcome measurement prevents the establishment of a link between performance and funding, which means the good organizations don’t necessarily get more funding and the poor ones don’t necessarily get left behind. Success is measured only anecdotally and virtually all small and medium sized charities limp along.
• Heavy dependency on government funding is also a problem. This reflects the choice of most Canadians to be part of a socially progressive democracy, with a bigger social safety net but also higher tax rates than the US. It means, though, that we place a disproportionate reliance on government to be the principal funder of the social services sector. But government funding, by its nature, is typically short term (rarely more than a year at a time), slowed by bureaucratic decision making processes and is often subject to politicized agendas – not ideal for organizations trying to orient their operations to long-term goals.
• Most non-government financing in the sector comes through a “donor lens”. Most funding from other sources such as endowments and wealthy individuals tends to have conditions attached, that are more about meeting donor wishes than end user needs. These don’t always match.
• As a consequence – the Canadian nonprofit sector has been forced to develop a core competency in tailoring programs to suit donor desires as opposed to focusing on unmet user needs. Frankly many charitable organizations have become better at meeting donors’ needs than the needs of the populations they are trying to serve. They will willingly accept funds and tailor programs to donor’s requirements even if they only loosely fit the organization’s social mission. Sometimes it’s the only way to make payroll.

It was, and is, our belief that this condition cannot be easily remedied by the funding model that we had initially hoped to employ, and that a different model is required to create real change in certain parts of the sector.