Recent increases in the visibility and frequency of capacity-building activities in philanthropy arise from several trends. First is the considerable attention to venture philanthropy, with its counterpart in the nonprofit world – social entrepreneurism. Although not inherently linked (I don’t personally believe running nonprofits as you would a business would improve their outcomes), capacity-building in practice is supported by many donors because they view it as the “business” approach to nonprofit.
Second is the increasing commitment by foundations to evaluating funded projects and their measurable outcomes. The lack of nonprofit organizational capacity shows up in evident ways when rigorous evaluation is done.
And third, there are profound changes in the nonprofit world that both promote and demand increased strength of these institutions. They include more demands for service in the face of government cutbacks, fewer resources, privatization of services (which puts fragile nonprofits more at risk – their revenues may increase, but so does their financial risk under tightly-defined service contracts offered by public agencies), increasingly professional management, and the growth of university-based nonprofit management training programs.
Ultimately, foundation interest in capacity building comes from the desire for leverage – for increasing the impact of philanthropic resources invested in nonprofits. A recent article in Harvard Business Review by Michael Porter and Mark Kramer sets this larger context persuasively, identifying four special assets of foundations: financial resources, expertise, independence, and a long time horizon. How can these assets be leveraged? Porter and Kramer suggest four strategies that are used by most foundations today:
1 – selecting the best grantees (each of which is made stronger by capacity building)
2 – signaling other funders about how to conduct their work more effectively (promoting capacity building)
3 – improving the performance of grant recipients (capacity building)
4 – advancing the overall state of knowledge and practice (advocacy)