Grant Makers Shouldn’t Play With Matches

Making a matching grant seems like the easiest way for a foundation to get the most “leverage” from its giving. By requiring other donors to follow its lead and support a charity, the foundation ends up generating two, three, or even four times as much as it gives away.

Every foundation that matches the grant feels like it has multiplied its own gift too. What’s more, foundation officials can feel that they are having a significant influence on the non-profit world.

But, as their mothers probably told them, you shouldn’t play with matches.

The leverage, or added value, of a matching grant is often only illusory. Matching grants do not change the allocation budgets of other foundations. Consequently, they do not increase the total amount of money that foundations give or that charities receive — they just redirect some of the dollars from one project to another. Matching grants are a zero-sum game.

At best, other foundations will choose the matching project over another. As a trustee of a family foundation, however, I have found that grant makers look mostly to the merits of a project or organization in deciding where to give their money. The support of other foundations may serve as a credential, but whether or not that support is in the form of a matching grant carries little weight.

If matching grants don’t influence other grant makers, then perhaps they motivate the charity’s fund raisers by focusing their energy on raising money before the match expires. All the fund raisers I know are pretty motivated already. Having to meet a matching-grant deadline might put a particular project at the forefront of their efforts, but that again is a zero-sum game — merely redirecting the fund-raising effort from other projects.

Of course, if the matching-grant project is a better use of funds than the alternatives from which the money has been taken away, then the match has done some good. But if the project really is better, it should receive funds on its merits alone — and fund raisers should be making it their top priority anyway.

Matching grants also contribute to the grantees’ financial stability by requiring them to build a broad base of support. But trying to steer other foundations’ grants has surprisingly little effect on the non-profit world overall.

Foundations gave out approximately $20-billion in grants last year, of which only about 4 per cent were matching grants. That $800-million worth of matching grants sounds like a lot of money — until you realize that total revenues to the non-profit world were more than $650-billion. Matching grants represent about one-tenth of 1 per cent of non-profit revenues. Attempting to influence the non-profit world through matching grants is a lot like trying to steer a battleship with a canoe paddle.

And there is another problem as well. The average foundation grant represents less than 1 per cent of a foundation’s annual giving — in other words, it’s pretty small. To undertake any sizable project, therefore, grantees are usually forced to put considerable time and resources into raising funds from many sources instead of concentrating on delivering services or providing social benefits.

Foundations thereby make it harder for charities to accomplish their missions. Often, grantees could proceed more quickly and efficiently if they were able to focus on immediate implementation, rather than on obtaining the “match” for their funds.

Should grant makers give up on the idea of making matching grants? No. But they should not be lulled into thinking that real leverage comes so easily. If grant makers want to create impact that is many times the amount of dollars they provide, they might consider changing the way they give: that is, to provide funds for improving their grantees operating performance.

If, for example, a $100,000 grant can improve by 5 per cent the operating efficiency of a grantee with a $10-million annual budget, then that grant has produced $500,000 in impact — a “leverage factor” of 4 to 1. If the improvement remains in place for five years, then the impact rises to $2.5-million — a leverage factor of 24 to 1. And there is no reason why such improvements should not remain in place indefinitely.

Improving a charity’s performance — unlike offering it a matching grant — is not a zero-sum game. Instead of merely shifting foundation dollars from one project to another, increasing organizational effectiveness means that grantees are able to deliver more or better services for the same amount of money. Other charities can adopt those new practices, too, and the influence will extend far beyond the small slice of the non-profit world that foundations support.

Indeed, with advances in technology and non-profit management, there is no limit to the degree to which organizations can improve their performance over time — or the degree of extra value such grants can create.

In 1997, roughly $150-million — or less than 1 per cent of foundation grants — went to technical assistance or “capacity building.” In the for-profit world, it is common for such expenditures to return savings of five or ten times their cost, so the impact of those grants may have been substantial.

Thinking big though, if foundations were to devote half of their grants, or $10-billion per year, to organizational effectiveness, and that massive infusion of funds returned only three times its cost — a mere 5-per-cent improvement in the performance of the non-profit world — then the benefits produced would be worth $30-billion a year, or $150-billion over five years.

Now, that is real leverage.

Mark R. Kramer is managing partner of the newly formed Center for Effective Philanthropy, in Boston, and the former chairperson of the Jewish Funders Network. He is a regular contributor to these pages. His e-mail address is kramercap@aol.com.