The Nonprofit Starvation Cycle
Ann Goggins Gregory and Don Howard have written an important article entitled "The Nonprofit Starvation Cycle", originally published in the Stanford Social Innovation Review. They describe a vicious cycle that causes nonprofits to significantly under-invest in the infrastructure they need for long-term success: unrealistic funder expectations, pressure on nonprofits to conform with these expectations, and unrealistic reporting.
I'd encourage anyone interested in the health of the nonprofit sector read the article here; then pop back over if you'd like to hear my further comments on the article (which hadn't been posted over there yet as of this writing).
I find the article conveys important messages for funders and nonprofits. I would take some small issue with a few of the introductory comments though. "It is not news that most nonprofits do not spend enough on overhead..." Sounds like a study did highlight, but I think the general perception out there is nonprofits do spend too much on overhead, or at least many do. But then you certainly hit the point spot on when you say the problem is funders and nonprofits alike perpetuate this problem by focusing on costs not outcomes.
I see a few additional ways this plays out: 1) individual donors, especially those with limited understanding of the sector, tend to focus on "% of budget on fundraising" as the only number they are interested in; 2) fixation on finding "cost per x" ratios, which don't differentiate between say 100 kids playing in an unstructured after school program vs. 10 receiving well-structure, one-one tutoring.
The other part I take a bit of issue with is the idea that a lot of this problem is because nonprofits are "choosing" to not spend enough on infrastructure. I think for the most part we are put in the situation because there aren't enough unrestricted revenue streams and/or grants don't provide for enough overhead. Good point though that nonprofits play into this in the reporting process.Overall, I agree with the message, especially that focusing on outcomes not costs is key to addressing this. And a related point would be more grants supporting an overall organization and its outcomes and less on program-specific, which incentivizes creating new programs that further stretch under-funded infrastructure.