Is Fundraising Ready for Behavioral Economics?

In its April issue, The Chronicle of Philanthropy heralded the arrival of behavioral economics with the cover tease, “Science Unblocks the Secrets of Giving.” In a sidebar, Professor John List who is chairman of the economics department at the University of Chicago explains that he’s bringing the science of behavioral economics to fundraising. Whether fundraising brings itself to the science of behavioral economics is another matter entirely.

The first mention of behavioral economics in my library is in the fun and fascinating Predictably Irrational[1]  published in 2008 and written by Dan Ariely who is – aha! – the James B. Duke Professor of Psychology and Behavioral Sciences at Duke University.

I found much in Ariely’s book that piqued my interest with respect to the applicability of behavioral sciences to fundraising, although I don’t recall even one of the dozens of intriguing experiments he describes as having anything to do with fundraising.

For example, Ariely describes experiments and their findings that would cause one to reconsider the use of premiums and many benefits in fundraising and how to set out ask strings in solicitations. He also has much to say about how people plan their finances which, if not directly relevant to fundraising, is getting closer.

Then there’s The Moment of Clarity[2] published in 2014 and containing this useful definition of behavioral economics: “A field within economics that includes social and psychological factors in models of economic decision making, with particular focus on the differences between rational and irrational decisions.”

The two books are quite different, yet complementary. They differ on perspective. Predictably Irrational thinks tactically, which is where the rubber of behavioral economics meets the road of marketing, sales, and fundraising. The Moment of Clarity, while not devoid of tactical ideas, takes a strategic perspective. It tells four illuminating stories about the marketers of LEGO kits, Coloplast colostomy bags, Intel chips, and Adidas footwear. But it’s really about how the influences of behavioral economics affected company management by introducing them to moments of clarity.

Not only could I see those stories as metaphors of the situations of major nonprofit sectors or organizations, I could see how this perspective on behavioral economics would work much more effectively at ensuring its ultimate applications to fundraising.

The Chronicle article accepts the difficulty most nonprofit organizations – specifically fundraising decision makers – will have with behavioral economics. The nonprofit sector is in a heart-of-darkness jungle of tactical tangles. There isn’t the time, resources or C-level support within fundraising to make the seismic changes outlined in The Moment of Clarity.

Nonprofit fundraising will only get harder if it doesn’t take full advantage of behavioral economics. But it’s already harder than it needs to be in most places. It operates without the invested support of C-level management (let alone the board!) and careful integration of financial, program, marketing, and funding strategies.

[1] Ariely, Dan, Predictably Irrational, Harper Perennial, HarperCollins Publishers, New York, 2010

[2] Madsbjerg, Christian and Rasmussen, Mikkel B., The Moment of Clarity, Harvard Business Review Press, Boston, 2014

Paradigm Shifting

Diarists and the photographer Frank Hurley who accompanied Ernest Shackleton on HMS Endurance in his attempt to cross Antarctica from sea to sea in 1914-15 recorded graphically the loss of the ship to the forces of advancing, expanding winter ice. As if the ice understood the metaphor it would bequeath, it first took the ship’s rudder, then caused a flooding leak preoccupying the crew, and finally, as Shackleton himself observed, twisted Endurance out of shape before causing her to sink.

For many CEOs of nonprofit organizations, being in the nonprofit sector since the Great Recession and in this new age of confounding media technologies feels like piloting the Endurance through advancing and expanding floes of Antarctic ice. Like the Endurance, a great many vessels on nonprofit missions are getting caught in ice and it is flowing in the wrong direction, taking them away from their goals and objectives by limiting their financial resources. Exacerbated but not caused by the Great Recession, it’s an environment characterized by ever-advancing competition for stagnating sources of funding.

We are reminded of a common but powerful statement of management advice: If we don’t change direction, we’ll wind up where we are headed. The situation calls for changing business models. For most, tweaking is out of the question and innovation is demanded.

The nonprofit sector hardly ever benefits from the disruptive influence that capital markets bring to bear on innovation in the commercial sector. Missions anchor the businesses of nonprofit organizations. They rarely change; changing them is rarely justified.  Business model innovation must come from within, and change must contend with the powerful current of mission and the course it sets for organizations’ resource development and management strategies.

Where program initiatives are monetized, there is a functional connection made between the nature and performance of mission and the financial stability and capacity of organizations. The most prominent examples are medical services and higher education. Yet even in these situations, capital is rarely transformative let alone disruptive.

In any case, most nonprofit organizations cannot, and some choose not to, monetize the programs that manifest their missions. And while higher education and health services account for lions’ shares of nonprofit assets and operating income, they do not account for proportionate shares of the nonprofit sector’s organizations.  For the majority of nonprofit organizations, business models have to do with commerce outside the castle’s moat, providing sustenance for those within. The tension between doing good and doing well financially quite often affects flammable friction within and public controversy without.

The most likely sources of funding substantial enough to be disruptive are private foundations. But while private foundations have the freedom to be entrepreneurial, they seldom exercise that freedom. They most always provide funding to organizations because of what those organizations are already committed to do and not because they have the capacity or wherewithal to do something else.

How, under these circumstances, does one bring about change to business models? Not easily. In his book, Change by Design, Tim Brown writes, “More good ideas die because they fail to navigate the treacherous waters of the organization where they originate than because the market rejects them.” He was writing about private enterprise, but his point holds true especially for nonprofit enterprise.

When gears grind in paradigm shifts at nonprofit organizations and progress stalls, the immediate cause is almost always isolation or segregation of program and financial strategies, and contributing cause is ignorance of what really makes organizations financially viable. What’s required are leadership that engenders management staff commitment to learning, collaborative senior management planning, and full partner ownership of the new model.

None of these requirements fits nonprofit organization norms. Nonprofit organizations are normally led by CEOs who are primarily qualified by their mission and program credentials. Just as it took a couple hundred years to understand that teachers – good teachers – were not necessarily qualified to manage the business of public education, it has taken much longer than the private nonprofit sector could afford to understand well enough the need for management-qualified CEOs or COOs to codify credentials in position descriptions or budget for the additional professional skills.

At the management level beneath the CEO, siloing of financial management, program management, fundraising, marketing and marketing communications is the norm. This doesn’t happen because senior managers in nonprofit organizations are characteristically isolationist people. It happens, first, because mission and program are preeminent and self-justifying; second, because the management of program expense and of funding are normally profoundly different from one another; and, third because senior managers are not normally trained or knowledgeable about their colleagues’ realms of work.

People – especially nonprofit organization board members who should know better – are often heard to say nonprofit organizations should operate like businesses. But the fact is operating nonprofit businesses is much more challenging and difficult. This isn’t to say that good management of profitable enterprise is easy; rather it is to say that managing to the bottom line is far simpler than managing to both (often elusive) mission objectives and to efficient and effective funding. Nonprofit organizations, even those with fungible programs like health services and higher education, have really two businesses to model and manage.

And the business of funding, even in those apparently simple cases, is made complex by the diversity of sources available to the nonprofit: individuals, corporations, private foundations, public foundations (such as community funds), public agencies, and even legislatures. The organization whose management doesn’t understand the range and variety of skills required to pursue all these sources will not fare well.

Of all funding sources available to nonprofit organizations – and not all sources are available to all organizations – the most complex and difficult to manage is individual support. One reason is because of the wide range of knowledge, skills, and experience required to work effectively across the spectrum of donor relationships, from first-ever gift to capital campaign participation or estate commitment. Another reason is that what we might call the retail part of fundraising – all that fundraising conducted through media of direct or mass communication – has become technically complex, economically confusing, and as cacophonous as a flea market in a concrete warehouse. And third, individual fundraising is hard to manage and complex because the marketplace of individual donors is itself quite complicated.

Right now, in all three respects, the complexity of individual fundraising seems to be running amok. And while nonprofit executives don’t usually perceive of fundraising as something worthy of such grand terminology as fundraising business model the approach necessary to affect change needed is worthy of the term. It means that what’s required is a collaboration among those chiefly responsible for the four realms that we believe comprise the well balanced nonprofit enterprise: program, finance, financial resource development, and organizational competency.

That’s were change starts or it never gets started. That’s how organizations stay on course despite what the environment throws at them.

The Phenomenology of Fundraising

In the earthquake zone that is the West’s coast, engineers pay special attention to the bottom floors and foundations of structures. Things have been done to those foundations and bottom floors over the years out of necessities valued higher than the necessity of preventing earthquake havoc.

In the San Francisco Bay Area, for example, the more readily available composites for bricks and ready means of transporting them (in barges across the Bay) engendered their wide use – especially after the 1917 earthquake – in foundations incapable of withstanding any ground movement. Strictly limited space, especially in San Francisco, Oakland, and Berkeley, made conventional the practice of having garages and wide open retail spaces as the first floors of apartment or commercial buildings, first floors into which floors above would be sure to collapse in the first seconds of the inevitable Big One.

What’s foundational to structure is fundamental to enterprise; and often we find that until a crisis occurs enterprises live on and expand for reasons and in ways that disconnect them from the fundamentals on which they were founded.

In commercial enterprise the most serious of those disconnections occurs between companies and their customers. The new book, The Moment of Clarity, by Christian Madsbjerg and Mikkel B. Rasmussen (Harvard Business Review Press) offers a variety of case studies in which companies discovered they’d lost their market moorings and started to drift. More valuably, the book introduces us to the methods through which each of them achieved their moments of clarity.

The Moment of Clarity is worth its weight in gold, unless you are an executive with a nonprofit organization who has anything to do with fundraising. In that case, it’s worth its weight in platinum.

My aim is to tempt you to read it.

In the nonprofit realm, disconnections can certainly occur between organizations serving people and the people they serve. But the more serious and common disconnections occur between organizations and those supporting them financially; and among those sources the most common and serious disconnections occur with individual donors. This happens principally because most donors are connected only through the mechanics of media and because for too many in nonprofit management, that’s good enough.

Madsbjerg and Rasmussen are founding partners of ReD Associates. Their work has transformed business strategies at companies like Intel, Adidas, LEGO, Coloplast and Samsung. The essence of their work is the disciplined application of human sciences to the solution of problems of disconnection between companies and their customers.

The human sciences – anthropology, psychology, ethnology, philosophy, and sociology – and their applications in art and literature deal with how people experience the world as opposed to what they experience, which is the realms of natural and social sciences.  Statistics of social and natural sciences can tell us with precision what people may do under the influences of their world experiences, like making a contribution, but our measures of response and sizes of gifts are not measures of the donor experience.

Does this matter? For as long the nonprofit sector in this country was a sellers’ market and organizations weren’t experiencing the acute pressure of buyers’ market competition, this distinction didn’t matter nearly as much. Ironically, organizations in the sellers’ market were far more inclined to state, as simply as possible, their cases for support in ways that engaged donors in those cases.

But we have now been in a buyers’ market for a long time, long enough to have also witnessed the ebb tide of one and the inflow of another generation of donors distinctly different from one another. And the buyers’ market has affected less attention rather than more to donor case engagement, and more attention to fundraising tactics and techniques.

The Moment of Clarity introduces many new or at least esoteric terms, all of them worth understanding and incorporating into one’s thinking about how to run companies and organizations more successfully. Two are central to the text. One is sensemaking. This is the authors’ term for the process of employing human sciences to solve complex problems of disconnection that are hard to conceptualize and articulate. They describe the skills and characteristics of sensemaker leaders in this way:

  1. Care deeply about the products and services they make or provide and the meaning that these offerings create for people
  2. Have a strong perspective on their business, one that stretches beyond the current horizon and the current company (or organization) boundaries
  3. Are good at connecting different worlds inside the company (or organization)

The second term central to the text is phenomenology, the study of how people experience life and the world.

The lessons for fundraising management from The Moment of Clarity, in brief, are that organizations don’t just need to re-brand themselves or re-create their marketing and fundraising strategies to raise more money. They need to understand the phenomenology of giving, or giving as a life experience.

Building codes inspired by events like the Bay Area earthquake of 1989 no longer allow brick foundations or open first floor plans without adequate cross bracing and what’s called shear-walling. The lesson learned is that an earthquake is not a disaster; the disaster is the result of not being prepared. The phenomenology of structural engineering is not in understanding earthquakes but in understanding the earthquake experiences of buildings.