A Hidden Cost of Intermediaries in Philanthropy
In the complex landscape of philanthropy, intermediaries—organizations that manage and distribute funds on behalf of donors—play a crucial role in connecting sizable foundations with grassroots nonprofits. While their impact in streamlining and targeting donations can be significant, there's an underlying issue that deserves a closer look: the substantial portion of funding that intermediaries consume in administrative and operational fees before the money ever reaches its intended recipients.
The intent behind using intermediaries is sound. These organizations often have the expertise and networks to ensure that funds are used effectively, reaching nonprofits that are well-positioned to make a difference on the ground. They can also provide valuable administrative support and strategic guidance to nonprofits that might otherwise struggle with capacity issues. However, this service comes at a cost—literally.
Recent studies and reports have started shedding light on the fees that intermediaries charge for their services. For instance, some prominent intermediary organizations retain around 8% of the total grant funding for their administrative overhead. While 8% might seem reasonable at a glance, in the grand scheme of philanthropic giving, this can amount to a significant reduction in the actual funds that reach those in need.
To put this into perspective, consider a philanthropic donation of $100 million. An 8% fee means $8 million is used up in intermediary costs. This $8 million could otherwise fund entire programs, support additional nonprofits, or extend the reach of existing initiatives significantly. Now consider the total amount allocated by intermediaries may be as much as $2 BILLION to $3 BILLION dollars annually. That means $160 MILLION to $240 MILLION dollars is not being utilized to affect nonprofit missions.
The question then arises: is the value added by intermediaries worth the substantial cut they take?
It's crucial to understand that every dollar taken as a fee is a dollar not going towards direct aid. Nonprofits operating on thin margins may find themselves significantly constrained by reduced funding, potentially having to scale back services or operational capacities. This is particularly concerning in sectors like health, education, and social services, where the efficacy of direct aid can be starkly apparent.
Moreover, feedback from nonprofits about intermediaries has been mixed. According to a report from the Center for Effective Philanthropy, nonprofits do not universally view intermediaries as more effective or beneficial compared to direct funding sources. They note that intermediaries are often less knowledgeable about the grantees' work and less likely to provide flexible funding options like multiyear or unrestricted grants, which are vital for long-term planning and stability in nonprofit operations.
In light of these issues, it's essential for donors and the philanthropic community to critically assess the intermediary model. Transparency about fee structures and the actual impact of these costs on nonprofit effectiveness should be a priority. Donors should question whether the intermediary’s role could be streamlined or if certain services could be brought in-house to reduce overheads.
Moreover, alternative models of philanthropy, such as direct giving and smaller, more targeted donor-advised funds, should be considered. These models can reduce administrative layers and ensure more funds reach those at the front lines, maximizing the impact per dollar spent.
I am not saying intermediates are illegitimate or immoral. But, as we move forward, the philanthropic community must balance the expertise and strategic benefits that intermediaries bring against their cost to the overall efficacy of aid distribution. It’s not just about how much we give, but how much of that giving actually reaches those for whom it is intended. By critically evaluating and optimizing the role of intermediaries, we can ensure that more funds are used for the direct benefit of communities in need, rather than covering operational overheads.
