With Millions at Stake, Some Foundations Slash Consulting Budgets

Each year, the Bill & Melinda Gates Foundation awards around $4 billion in grants to protect the vulnerable from disease, educate young students, and empower women around the globe. It has also funneled upwards of $60 million a year to experts who tell the world’s biggest private grant maker how to do it all better.

But last year, in an effort to more firmly steer its own course, the foundation slashed its budget for those consultants by 50 percent.

“We believe we are making better use of our in-house intellectual capacity,” explains Jim Bromley, the grant maker’s chief financial officer, in an email. “We want to make sure the talented experts among our existing staff are really leading the work they know best.”

Gates is not alone. Between 2013 and 2015 the Gordon and Betty Moore Foundation reduced overall spending on consultants by more than a quarter. The Blue Shield of California Foundation has also made changes — instead of relying on outsiders, the grant maker increased its headcount by 25 percent and began to look within to design strategy.

Grant makers say the move to shed consultants fosters institutional memory and deepens their expertise on subjects like international development and hunger. It also comes as pressure mounts on nonprofits to reduce how much they spend on administration and costs that aren’t directly related to charitable work.

Many foundations find consultants useful because they can offer advice in areas where organizations lack expertise. But others are critical of spending cash that could be steered directly to grantees on advice instead.

“Consultants play an important role,” says Jan Masaoka, CEO of the California Association of Nonprofits. “But over the last 20 years, the amount of money that has gone into the consultant-industrial complex has become egregious.”

Money Well-Spent?

Foundations have long used consultants to provide expertise on staffing, develop investment game plans, and string together up-to-date computer systems. Over the past decade, as grant makers tried to develop more detailed blueprints for how to generate social change, they have leaned more heavily on consultants to develop strategies and design programs. Foundations also use consultants to generate publicity. For instance, in 2013, the Rockefeller Foundation paid Teneo Strategy Consulting, a firm with close ties to Bill and Hillary Clinton, $7.4 million for public-relations work.

A 2015 survey by the Foundation Center found that more than 80 percent of large foundations — those that make more than $50 million in grants annually — had hired a consultant in the previous two years. More than half used consultants at least 11 times during that period, and more than one-third hired outside help to chart new strategies and design programs.

Kris Putnam-Walkerly heads the Putnam Consulting Group, which counts the Annie E. Casey, California Wellness, and Cleveland foundations among its clients. She says some problems foundations tackle are simply too large for small staffs to handle. Hiring a consultant can also help them get an unvarnished view of how their money is being put to work, she says, because grant recipients are more likely to open up to an outsider than they are to a donor who is footing the bill.

“Grantees are fearful that if they say something negative they’ll lose their funding,” Ms. Putnam-Walkerly says. “Having a third party come in and ask those questions alleviates some of those concerns.”

But as foundations expect grantees to be prudent with the money they spend, nonprofits should demand no less of grant makers, counters Ms. Masaoka, who before joining the California Association of Nonprofits was the longtime executive director of nonprofit consulting group CompassPoint. Too often, she says, foundations pour money into contracts with consultants without being held accountable for whether that money was well-spent.

Aaron Dorfman, executive director of the National Committee for Responsive Philanthropy, says that at some foundations, reliance on consultants puts too many hands on the tiller.

“In general, foundations tend to overthink things,” he says. “That money could be going out the door in grants.”

Consultant Role-Play

Among those reconsidering their approach is the Moore Foundation. It reduced spending on consultants by more than 25 percent, to $5 million, between 2013 and 2015. More than $500,000 of the cuts came by dropping consultants who advised Harvey Fineberg, the foundation’s president, on how to develop strategy.

A pitfall of using consultants is that after they develop a plan of action, “all that learning and expertise stays outside the organization,” says Dr. Fineberg, an M.D. who became the Moore fund’s leader last year. But outside strategists can provide valuable services, he says. Moore primarily contracts with consultants to get independent evaluations of its work and to develop plans in new areas where staff members lack knowledge.

Two big recent projects, a $90 million effort to promote sustainable food supplies and a $100 million program to conserve rainforests in South America, reflect the foundation’s different uses of consultants.

The food venture aims to use market incentives to press businesses to adopt sustainable methods of agriculture and fishing — areas where there were gaps in Moore’s expertise. To fill those holes, the foundation relied heavily on outside help, Dr. Fineberg says.

The rainforest project used outside help differently. Consultants assessed areas where the foundation could improve its approach, but the effort was driven by in-house experts who had been working on conservation in the Amazon region for years.

Savings Build Staff

For the Blue Shield of California Foundation, reducing the consulting budget is a step toward developing internal expertise. For years, the foundation maintained a lean staff and looked to outside help in order to save money, according to Brenda Solórzano, its chief program director. But the charges added up.

In 2012, the foundation’s top five contractors were all consultants, and they were paid a total of $2.1 million. By 2014, the most recent year for which records are available, it had made significant cuts. The foundation’s top five contractors were still consultants, but they received $1.5 million, equivalent to 4.7 percent of the $31.6 million in grants the organization made that year.

Ms. Solórzano declined to say how much the foundation has reduced its entire consulting budget, but she said the savings have been enough to hire six full-time employees.

The change coincided with an effort by the foundation to be less of a grant maker and more of a “change maker,” says Ms. Solórzano. Staff members are expected to be “thought leaders” who focus on developing strategic relationships with others in the field. The new hires — Ms. Solórzano describes them as the “engines” behind the grant-making process — buttress that work by poring through grantee reports and reviewing grant applications.

The effort, she hopes, will increase the foundation’s stature as a source of health-care expertise and help staffers find and seize opportunities for future projects, something that couldn’t be done when the heavy lifting was done by consultants.

“They’re not inside and don’t know what’s going on,” Ms. Solórzano says. “Their approach is a little more transactional.”

Accountability Lacking

In 2014, when the Marin Community Foundation was rethinking its strategic plan, it tasked Sandra Nathan, then its vice president of programs, with looking at the value brought by each consultant the grant maker used. What she saw troubled her. Too many hired experts, in her opinion, had stayed under contract too long. The time and money spent on them would, in many cases, be put to better use developing talent in-house.

“Foundations have to be truly vigilant in the use of consultants,” says Ms. Nathan, who is now executive director of the AIDS Emergency Fund. “Once you invest the resources internally, you have all that knowledge and expertise embedded in the organization.”

While she worries about excessive dependence on consultants, Ms. Nathan says they are essential at times. For instance, she said FSG, a consulting group Marin hired to help develop its new strategy, was effective because it was intimately familiar with the antipoverty and educational work the community fund engaged in locally. Plus, the consultancy had insight into how those issues were being addressed at a national level.

But, she adds, consultants often aren’t held accountable when things go wrong. FSG is a leading proponent of “collective impact,” a strategy that has gained traction among grant makers in the last decade. In collective-impact efforts, many local organizations work together on a specific cause and use data to track progress. In Ms. Nathan’s view, the idea hasn’t lived up to its hype. But FSG gets paid for helping foundations develop a collective-impact strategy, whether or not the strategy succeeds.

“Clearly, FSG made out like bandits,” she says. “They’ve made a ton of money leading that field.”

An Outside Voice

Mark Kramer, managing director of FSG, defends both collective impact and consultants’ role in forging it. The model isn’t a “magic formula,” he says, but he can tick off a list of accomplishments FSG’s work has helped produce. For instance, collective-impact interventions reduced emergency-room admissions for children with asthma in Dallas and led to a decline in opioid overdoses in Staten Island, he says.

If a consultant’s advice regularly produced failure, it wouldn’t stay in business long, Mr. Kramer says.

“It is true that consultants get paid whether or not the strategies they recommend prove successful, just as grantees get paid whether or not their programs achieve the desired social impact,” he says. “In both cases, however, the long-term success of the enterprise depends on earning a reputation for consistently delivering good results over time.”

Often, Mr. Kramer says, foundation staff feel strongly about the approaches they’ve taken even if a broader, more objective view might suggest better alternatives. Consultants can provide an outside voice that can “separate the program from the program officer,” he says.

A consultant can assess what a foundation’s strengths are, provide insight into national trends, help run meetings with other organizations that do similar work, and collect data and evaluate how well a grant maker is doing, he adds.

“We can’t determine which issue is most important,” Mr. Kramer says. “But we can help a foundation figure out which issue is the one they’re likely to have the most impact on.”

Pulling ‘a Lot of Levers’

To be sure, the foundation consultant is at no risk for extinction.

Even with its reduced budget, the Gates Foundation still spends tens of millions of dollars on outside help. Foundations aren’t required to report all of their consulting expenses to the Internal Revenue Service, but they do annually list their five highest-paid independent contractors that received more than $100,000 in a given year. Three of Gates’s top five contractors in 2014 provided strategy-development or program-planning services. The foundation paid Boston Consulting Group, McKinsey & Company, and PricewaterhouseCoopers more than $20 million each that year. The foundation also paid 766 contractors more than $50,000 each — a minimum total of $38.3 million — for professional services, although it is unclear how many of those provided strategic consulting.

Gates’s IRS filings for 2015 are not yet available. Mr. Bromley, the foundation’s finance chief, declined to provide consulting expenses for last year. But he said Gates cut its entire consulting budget by 50 percent, and that some program areas reduced their consulting expenditures more than others.

When asked about staff reaction to the consulting cuts, a Gates spokesperson said in an email that “a change of this complexity and magnitude would be challenging for any organization, but leaders and employees are committed to driving the most impact possible in our work.”

The plan is to “stay at the new, lower baseline of consultant use,” the spokesperson said.

Consultants are useful to foundations that want to “pull a lot of levers” at the same time to solve a problem rather than simply handing out grants, says Wendy Woods, a senior partner at the Boston Consulting Group. She points to the firm’s work in K-12 education. Boston Consulting serves as a hub for discussions among education officials, nonprofits, businesses, parents, and teachers as it works to develop and evaluate new school curricula and education policy.

“Most foundations aren’t staffed to execute that,” Ms. Woods says. “A consulting firm can be your best change agent.”

It remains to be seen whether the count of foundations cutting consultant budgets will grow. What is clear is that those looking to add themselves to the list now have a number of recent case studies to borrow from. For her part, Ms. Masaoka acknowledges that consultants will always have a place in developing grant makers’ strategies. So she offers up a rule of thumb: If foundations feel good about divulging to grantees what they are spending on consultants, they are probably within bounds. If they don’t, they may be overspending.