The E-Philanthropy Revolution Is Here to Stay

By JAMES E. AUSTIN

With technology stocks plummeting and dot-com companies disappearing by the score, it would be easy to assume a similarly dim future for e-philanthropy, which describes the use of the Internet to raise money and recruit volunteers.

But make no mistake: The e-philanthropy revolution is here to stay, and it will transform charitable giving in as profound a way as technology is changing the commercial world. Charities that have dismissed e-philanthropy as a fad, or run from it in confusion, will, sooner or later, need to become reconciled to it. If they don’t, they risk losing touch with donors and imperiling the vitality of their work.

To be sure, the financial markets have not been kind in recent months to e-philanthropy enterprises and any other venture that has technology at its core. Last month, for example, Charitableway, a company that was formed to help corporate employees and others give quickly and easily by using the Internet, announced that it is going out of business.

What’s more, several online-giving portals, including Shine and OnGiving.com, ceased operations in recent months, and several commercial online-giving sites were swallowed up by other companies.

But research by the Initiative on Social Enterprise at the Harvard Business School shows that e-philanthropy is fast approaching a critical mass that will, in coming years, bring about fundamental changes in the way charities operate.

In mid-2000, the initiative found about 180 new Web-based e-philanthropy enterprises in operation, some performing multiple functions.

Twenty-five “information-portal” groups organized and, in some cases, evaluated the vast information available online for people who are interested in nonprofit issues. Forty-five enabled online giving through searchable databases of nonprofit organizations. Ten groups sold workplace-giving software systems to corporations to allow their employees to donate through the companies’ in-house communication networks. Ten groups used the Internet to recruit volunteers. And 29 “click-to-give” sites allowed Internet users to make small donations to charity in exchange for viewing a commercial advertisement; 55 charity malls had contracts with online retailers under which a percentage of each sale went to charity; and 20 charity-auction sites helped nonprofit groups hold online auctions to raise money.

Other data point to a growing volume of fund raising over the Internet. In 1999, according to estimates by the Initiative on Social Enterprise, about 4 percent of donors contributed online, giving about $10-million. In 2000, online donors gave an estimated $250-million. The Initiative on Social Enterprise projects that by 2010 one-third of money donated will be given online.

On-the-job giving is one of the most promising arenas for online philanthropy. Employee donations currently run about $3-billion a year. But a transformation in giving methods is taking place in many corporations, shifting from manual methods of collecting money to more-efficient intra-company and Internet-based giving methods that have been shown to reduce the costs of running company giving programs by about 25 percent.

The new methods will attract more companies and higher rates of employee giving, thereby expanding on-the-job giving, according to industry estimates, to $5-billion — a 66-percent increase — over the next decade.

The irreversibility of the online-giving revolution is rooted partly in the emergence of a fast-growing e-philanthropy industry, most of which is made up of for-profit companies. In mid-2000, 78 percent of those enterprises were Web-based commercial operations.

The main reason that commercial companies have come to dominate online giving, of course, is that Internet start-ups demand huge amounts of money — money that traditionally has not been available for nonprofit e-philanthropy efforts through foundation grants. Although it is unclear how commercial investment in e-philanthropy will be affected by the recent upheavals in technology stocks, venture-capital companies thus far have invested about $150-million in the new online-giving enterprises.

The online-giving revolution also is rooted in underlying behavioral changes. Early evidence suggests that technology will make giving easier, attract more first-time donors, and stimulate bigger-than-average donations. Research on workplace-giving systems that use online technology shows that employees are spending significantly more time learning about and interacting with the nonprofit organizations to which they will donate.

Still, despite technology’s vast promise as a tool to enhance philanthropy, its benefits will depend on how vigorously nonprofit groups embrace it. Among the challenges that charities must confront:

• Developing Internet readiness. Nonprofit groups’ lack of preparedness for using the Internet is a significant barrier, according to most of the e-philanthropy enterprises that were interviewed by the Initiative on Social Enterprise. Although some nonprofit groups are quite sophisticated, most are lagging in technical and organizational capacity.

  It is imperative that charities clarify where the Internet fits into their overall strategy for fund raising, developing ties to donors, and delivering services.

  E-philanthropy is an additional resource in managers’ portfolios, and figuring out why and how to use it is essential. It is not a question of discarding old ways but rather integrating new technology to create a more powerful mix.

• Dealing with dot-com companies. Many nonprofit groups have a fundamental concern: Can you trust a dot-com?

  The answer, by and large, is yes. Commercial e-philanthropy enterprises clearly see a business opportunity but also are energized by the social purpose of their charitable work. They will succeed as businesses only if they add real value to their nonprofit partners.

  Besides overcoming suspicions of the profit motive, nonprofit groups and e-philanthropy enterprises must reconcile contrasting organizational cultures and operating styles. For example, decision making in nonprofit organizations generally does not occur at the speed typical of Internet enterprises. Likewise, nonprofit groups’ aversion to taking risks contrasts starkly with Internet companies’ risk propensity. Mutual recognition and accommodation are necessary.

• Understanding e-philanthropy strategies. Nonprofit managers need to understand the business strategies of dot-com companies to assess whether a partnership makes sense.

  For example, nonprofit groups must consider how a particular e-philanthropy enterprise generates its revenue. Most online companies get their money by charging for each consumer transaction, selling advertising space on their sites, and billing their clients and partners for maintaining Web-based software that allows for online financial dealings.

  As with any other purchased service, nonprofit groups should do some comparative shopping that assesses the relative cost, quality, and dependability of online organizations and their services, as well as compatibility with the nonprofit groups’ mission and values.

• Living with change. An inherent characteristic of the Internet world is technological and organizational change. Technological advances are occurring with increasing rapidity. Therefore, nonprofit groups should not get too comfortable with current e-philanthropy systems and arrangements, because better ones will emerge. The trick is not to be petrified into inaction by this prospect, but rather to accept fluidity and recurring adjustments as the norm.

One impetus for change is the fact that online enterprises are thin-margin businesses, and the pressure on online companies to raise their fees is mounting. Below-cost pricing is a common strategy among e-philanthropy companies to gain clients and build traffic and to compete with online- giving sites run by nonprofit groups.

The thin margins make volume crucial for profitability. In e-philanthropy, scale matters. The initial explosion of e-philanthropy firms onto the Internet scene will be followed by a consolidation in the industry. Smaller players will not necessarily be able to mobilize the capital necessary to cover the marketing costs to drive traffic or the technology investments needed to create superior and innovative online services.

Such consolidations already have been occurring. Last year, for instance, GreaterGood.com acquired the Hunger Site, a Web site at which corporate sponsors make donations to food charities when visitors click on the site’s “Donate free food” button.

Despite such inevitable shake-ups, e-philanthropy has altered the landscape of the social-capital markets, and it will continue to do so in the future. New channels for connecting donors and nonprofit groups have been created. Flows of information and funds will continue to grow geometrically. Donors will be more informed and able to deploy their philanthropic resources more intelligently. As nonprofit organizations master this new arena, the philanthropic marketplace will become more democratic and efficient.

And rather than simply providing new channels for the existing pool of philanthropic capital, the e-philanthropy enterprises hold the potential to stimulate an overall increase in giving. The revolution is here, and its evolution will significantly transform the philanthropic marketplace.

James E. Austin is chair of the Initiative on Social Enterprise and the McLean Professor of Business Administration at the Harvard Business School.