Creative Destruction, Oversimplification, and Assessing Philanthropy

Here comes another piece that oversimplifies the nonprofit sector and sees improving it as a matter of simply importing the “dynamics” of for-profits.  This one, by Harvard Business School’s Robert S. Kaplan and Allen S. Grossman, is yet another in a long list of examples of this kind of thinking, which I have written about over the past two years (including here, here, and here).

Kaplan and Grossman open with a lament that the nonprofit sector lacks the “cycle of creative destruction famously described by the economist Joseph Schumpeter.”

Right!  That’s precisely the point.

Nonprofits take on issues that other actors in our society cannot or will not — the challenges markets haven’t solved. If market forces could solve everything, we would not need a nonprofit sector.

As Bill and Melinda Gates point out frequently (including on this recent 60 Minutes segment), if we left if to the markets to decide what diseases to do research on, we would pay attention only to the diseases affecting those with an ability to pay (even more so than we already do). Kaplan and Grossman seem not to understand — or perhaps choose not to acknowledge — that the ability to operate outside of traditional market dynamics is at the root of why the nonprofit sector matters!

The Gates Foundation’s work on Global Health, predicated on the simple belief that every life has equal value, is designed to bring resources to bear to help eradicate diseases that disproportionately affect the poorest people on earth. It’s a great example of why philanthropy matters: the Gates Foundation is addressing market failures. 

Kaplan and Grossman’s piece, which appears in the October issue of Harvard Business Review and is titled The Emerging Capital Markets for Nonprofits, surprised me for its lack of nuance or demonstrated understanding of the role, accomplishments, or history of the nonprofit sector. The sector is rich with examples of innovation that never would have been funded by for-profits, because of the lack of an obvious near-term return. Many of these innovations have fundamentally changed our society for the better — often in ways that also redound to the benefit of business. The examples run the gamut (as I have noted in previous posts) from cures to diseases to the Internet — which was developed based largely on work conducted at nonprofit, endowed universities.

Kaplan and Grossman are absolutely right to call for a greater emphasis on performance assessment, and to note that there remains a need for a stronger intermediary infrastructure (although there has been progress on this front in the last decade), but they are wrong to make it about adopting for-profit approaches. They cite important examples of funders pushing to understand their impact, from the Edna McConnell Clark Foundation to New Profit to the Gates Foundation. But they do a disservice to readers when they write that the Gates Foundation “dedicates an entire department to assessing the performance of its grants” as if this is a new concept.

Are they unaware of the efforts of many other large foundations to assess performance, perhaps most notably the Robert Wood Johnson Foundation, which has done so with a dedicated team of evaluators for decades?

Are they unaware of the emphasis on measurement during institutional philanthropy’s earliest days? Bill Schambra, of the Hudson Institute, has pointed out that the “mania to measure” goes back to the “first days” of the Rockefeller Foundation. Schambra, of course, sees the focus on measurement as a negative. I, like Kaplan and Grossman, would like to see more — and more thoughtful — assessment of performance in philanthropy.

But that won’t happen unless we root the discussion in facts and in an appreciation for the complexity of the challenge.

By failing to really educate readers about the role of nonprofits and about the genuine complexity of measurement in a sector with no universal measure — no analog to profit — I worry that the authors actually undermine the effort to get foundations, nonprofits, and individual donors to focus more energy on assessing results.

Disclosure: The Bill & Melinda Gates Foundation, Edna McConnell Clark Foundation, and Robert Wood Johnson Foundation provide grant support to CEP. All three, as well as New Profit, have also used CEP’s assessment tools.

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