Question: What does any broker, 401k advisor, or wealth management professional want to know from clients before they invest? Answer: Their risk profile. Some investments are riskier than others, and successful financial advisors need to know in advance how comfortable the client is with risk.
But what about our philanthropic dollars, the grants given to others to create social impact? These funds are also investments with ROI measured in social impact rather than dollars. The world of philanthropy is a $358 billion industry with thousands of projects happening simultaneously. Yet currently, philanthropists invest without knowing their risk profile or what to do if a project encounters an unforeseeable problem. As discussed in part I of this 2-part series, philanthropy doesn’t account for the unexpected.
From independent research, we know that 76% of funders do not ask potential grantees what could go wrong in the course of the project. Only 17% set aside funds for emergencies or other unexpected events, which their grantees might encounter. And yet, funders also report that 1 of 5 projects runs into an unforeseen disruption that threatens its successful completion.
Much like traditional investments, all philanthropic outcomes are affected by known and unknown risk factors, and no matter how much due diligence is conducted, there is no guarantee that any intervention will produce the impact expected. More important, most of the variables that could derail such a project lie outside of our grantee’s control. For example, a student’s responsibilities outside of school or problems within their own household can prevent even the best after-school program from being effective. The same problems apply on a macro scale as well, ranging from weather conditions to infrastructure to currency fluctuation to changes in government regulation.
Whether it’s micro or macro, some deviation is inherent. And not having a Plan B in place to manage disruption is a recipe for diminished returns.
At Open Road Alliance, we are in the business of the dealing with the unexpected. All our money is designated to provide contingency funds when some unanticipated disruption happens. We advocate for grantmakers and nonprofits to take a proactive approach to risk management at the earliest stages of the project, and we recommend some basic steps to assess and mitigate risk involved in each project:
The first step to risk management is, of course, to identify potential risks that could derail a project. Generally, this process involves direct conversations with the nonprofit. There are many ways to ensure that you and your grantee discuss risk:
- Include a question in your application about what could go wrong, and ask the nonprofit what they would need to fix it.
- Require your program officers to get on the phone and ask nonprofits about potential risks. Many nonprofits may be more comfortable talking “off the record” rather than putting it on paper.
- Share tools like the SWOT, PESTLE, and others to help nonprofits conduct their own risk assessments.
- Once you identify potential risks, use a risk matrix to map different risk scenarios.
- Assessing risk balances two considerations:
- The probability that a particular event will occur.
- The severity of harm resulting if such an event does occur.
Mitigation & Contingency Planning
Acknowledging that risk exists is not the same as being able to prevent disruptions. Depending on the type of risk identified, the nonprofit, in collaboration with the funder, needs to determine whether a mitigation plan can be developed. Perhaps there’s additional training or resources that can be provided up front to reduce the probability of certain disruptive events from coming to pass or having a catastrophic effect if they do occur.
Yet most events that derail well-vetted projects are not foreseen. This is why contingency planning is such a crucial piece of the risk management process.
Creating effective contingency plans requires advance planning and decision-making both internally and between partners. Some contingency planning techniques to consider include:
- Funder sets aside a percentage of project budget for contingencies.
- Nonprofit factors in a percentage of its budget for contingencies in original project plan, justifying this amount within the larger budget narrative.
- Pre-identify areas of flexibility or vulnerability within timelines, project scope, or budget allocations.
- Pre-identify additional resources (financial, personnel, partners, training) that can be applied as needed.
- Pre-establish channels of communication and decision-making protocols in the event of contingency risks.
- Adjust expectations and be aware of preexisting risks.
Breaking these steps down makes risk more digestible for both donors and nonprofits, leading to more open and honest conversations between the two. Both funders and nonprofits want to see their projects and investments succeed. We are united by a common desire to create impact, solve problems, and leave this world a better place than we found it. But the altruism and generosity that motivates our work as philanthropists is not enough to effect change without planning for a harsher reality.
Laurie Michaels is the founder of Open Road Alliance, where she works with her team to make charitable and recoverable grants to nonprofits in need of contingency funds. Prior to founding Open Road Alliance in 2012, Dr. Michaels maintained a practice in clinical psychology.
Maya Winkelstein is executive director of Open Road Alliance, where she is responsible for the organization’s overall investment strategy, which includes finding new ways to deploy capital to achieve maximum social impact. For more updates from Maya and Open Road Alliance, follow Open Road on Twitter!