There is much to like in the op-ed calling for more humanism in charity that Peter Buffet wrote for The New York Times this summer. In particular, his widely discussed plea for philanthropy to increase its focus on systemic change is an important reminder for the sector to keep an eye out for high-risk, high-reward opportunities that promise long-term change.
As Phil Buchanan of the Center for Effective Philanthropy points out in his response to Buffet’s essay, market solutions are not always effective precisely because many social problems are the result of market failures.
In the course of his argument, Buffett revisits the evergreen debate about efforts to quantify impact and opportunities in philanthropy. He hears people ask “What’s the ROI?” (return on investment) and takes it as evidence that lazy thinking is leading philanthropic decision-makers astray. And it would be problematic if decision-makers asked only that question and took the answer literally.
But in our experience, leaders facing tough decisions about what worthy causes to support don’t just ask, “What’s the ROI?” They consider five essential questions along the way – and use ROI estimates to document their answers. These questions are:
- What are our underlying assumptions? Foundation and nonprofit staff usually are experienced strategists with expert knowledge and finely tuned intuition about their topics. Even so, documenting assumptions – such as what criteria factor into decisions – helps ensure transparency in difficult conversations, both internally and with grantees or funders. The discipline of completing and documenting good estimates of the social return on investment helps make the underlying assumptions more clear.
- What are our values and how will they inform our decisions? Some philanthropists prefer to avoid crowded fields, believing that the absence of other grantmakers will provide more opportunities for impact. Others prefer to fund tried-and-true solutions and avoid the risks of costly and unsuccessful experiments. An ROI estimate that considers risk and contribution alongside benefit and cost can be used to document the funder’s beliefs about relative risks and contributions as well as to produce a topline estimate. This analysis can be crucial in shaping a portfolio in line with the values and priorities of decision-makers.
- What’s the broader context? One of the first ideas taught in Behavioral Economics 101 is the peak-end rule. It explains that our memories of and feelings about an experience are most affected by (1) the strongest sensation, and (2) the last sensation, rather than a holistic view of the experience. Similarly, when speaking with knowledgeable people in the course of designing and executing a strategy, it is easy to be swayed by (1) the loudest or most confident voices, and (2) the people with whom one has spoken most recently. Taking the time to document and synthesize the contributions of experts through ROI estimates helps prevent this bias by placing new information in a clear framework on an equal footing with all other data.
- How are our grantmaking opportunities related? The simplest analytical approaches often treat investment opportunities as independent options, and in many cases this makes sense. But in other cases, investments share underlying risks and can affect one another. This is especially true when a program’s grants are all targeted at a specific goal – like increased access to reproductive health services. As decision-makers consider independent estimates of ROI, they also should look at how those opportunities are related to ensure they don’t inadvertently put all of their eggs in one basket. (An in-depth treatment of how portfolio analysis can improve philanthropic strategy can be found here.)
- How will we update our beliefs over time? We recently worked with a large foundation looking to improve its monitoring and evaluation (M&E) practice. One of the main issues the foundation identified is the need to build M&E into its strategies’ initial design, so that evaluators do not have to reconstruct the thinking behind decisions. ROI estimates can document the beliefs and rationales that inform decisions over time. This clarity, in turn, allows grantmakers to change course in a thoughtful way, based on what beliefs have proved more or less true in practice.
Of course, ROI has limitations: estimates are usually rough, and we agree with critics of similar analyses that decision-makers should consider numerous other factors, such as the degree of uncertainty. But using ROI as a framework also provides a simple, efficient, and transparent means for thinking systematically that foundations and nonprofits can use on a day-to-day basis.