The Robin Hood Rules for Smart Giving

Michael Weinstein, Ralph Bradburd

• Publisher: Columbia University Press
• Year: 2013
• ISBN:
  9780231535243
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

The Robin Hood Foundation is a charitable organization focused on alleviating poverty in New York City. Michael M. Weinstein is the foundation's senior vice president. In that role he developed its metrics-based approach, called "relentless monetization," to ensure that the money the foundation receives and grants is used most effectively. Ralph M. Bradburd has served as long-time consultant to Robin Hood on matters of metrics.

In this book Weinstein and Bradburd show how to implement the Robin Hood approach and explain how any nonprofit organizations or philanthropic donor can use it to achieve the greatest benefit from every philanthropic dollar. Drawing on their extensive knowledge, the authors devote specific chapters to the difficulties most frequently encountered by donors trying to measure the benefits of their initiatives.. This book provides straightforward, targeted advice for funding "smart" nonprofit programs.

1

Overview of Relentless Monetization

You’re a philanthropist whose mission is to fight poverty. You’re choosing between two different ways to allocate your charity. One option would have you donate $10 million to teach carpentry to female high school dropouts. A second option would have you donate $10 million to middle schools that serve disadvantaged children to expand their onsite psychological services. Which option do you choose?

This thought experiment triggers two questions. How can you, as a philanthropist, make the right choice? And what exactly does “right” mean in this context?

This book lays out a concise framework for answering these questions, a framework by which to make smart philanthropic decisions. By philanthropic decisions, we mean decisions driven by a mission other than the maximization of personal profit. By smart, we mean achieving philanthropic goals to the maximum extent possible with whatever money is available. We call our framework Relentless Monetization (RM). It methodically applies the workhorse of modern economics, benefit/cost analysis, to the task of making effective philanthropic choices.

For many readers, “relentless” and “monetization” carry negative connotations. So why do we focus on them? Why do we argue that putting the two terms together makes for smart philanthropy? By monetization, we refer to assigning dollar values to philanthropic outcomes. And relentless means making these assignments even when the benefits associated with those outcomes are hard to measure and the evidentiary basis for assigning dollar values to specific outcomes is slim. RM uses these monetized values, however uncertain, to guide philanthropists toward their best, smartest options. RM, we argue, provides a reliable, transparent answer to the kind of question we posed in our opening thought experiment: Given my mission of fighting poverty, should I fund carpentry training for unemployed women or psychological counseling for middle school students?

To whom is this book directed? RM is all about analyzing philanthropic choices. As such, it informs the decisions of any actors who make such choices: donors, nonprofit organizations, government officials, legislators, policy experts, or anyone else facing philanthropic tradeoffs. In a world of finite resources, philanthropists cannot fund every activity that does good, not even every activity that does a lot of good. They must make choices. The idea behind this book is that philanthropists cannot settle for choosing programs merely because they generate important benefits. They must hold out for funding only those programs that do the most good per dollar of costs. Otherwise money is wasted, which is an unforgivable mistake given yawning social needs. The analysis would be largely the same no matter which actors would be in mind. Much of our discussion in this book is directed at “funders,” but that’s simply a mannerism. The discussion could just as easily be directed at the leaders of nonprofit organizations or any other philanthropic actors.

This book makes the case that, as a matter of theory, RM applies to philanthropic endeavors of all stripes. We could have posed the initial thought experiment from the point of view of environmentalists: Should they spend money to save oysters in the Chesapeake Bay or polar bears in the Arctic? Or we could have posed the thought experiment from the point of view of human rights activists: Should they focus their time and money on countering the trend in Latin America of electing authoritarians to political office, or on steering courts in the United States away from sentencing juvenile offenders to prison?

However widely the RM framework applies to philanthropic decision making in theory, the question arises of how widely applicable will the RM framework be in practice. Can it guide real-time philanthropic decisions in smart directions? To address this question, this book tracks the actual practices of the Robin Hood Foundation, a nonprofit that makes grants of about $120 million a year to community-based organizations in New York City to alleviate poverty. One of the authors developed RM there as Robin Hood’s chief program officer over the past decade.

It is on the basis of the examples set forth in this book that we claim that RM not only works in theory, but also in practice (at least for the purpose of guiding efforts to fight urban poverty). That said, the book by necessity leaves open the question of how well the framework will transfer to other philanthropic realms. For example, will environmentalists and human rights activists find the framework equally powerful? That question can be answered only as philanthropies of different stripes experiment with RM. We hope this book will stimulate philanthropic actors to adopt RM’s principles in pursuit of their own missions. From such implementation, we’ll learn exactly how generally applicable RM will prove to be.

Here’s a quick note on terminology. We use the term “nonprofits” to refer to either (1): community-based organizations (soup kitchens) that provide direct services (emergency food) to targeted individuals to achieve a philanthropic goal (alleviate hunger); or to (2) the funders of such community-based organizations. Context dictates which meaning we have in mind.

Seven Steps That Define Relentless Monetization

Recall the central questions posed by the previous thought experiment: Should a poverty fighting funder spend money on job training or middle school instruction? There is no obvious answer to questions like this, although RM provides a road map for proper scrutiny.

A basic problem that plagues philanthropic decisions is that there is no natural yardstick by which to measure, and therefore compare, different philanthropic outcomes. Said another way, there is no one natural way by which to compare, for the purpose of fighting poverty, the value of providing job training to a would-be carpenter to the value of providing better middle school instruction. Nor, similarly, is there one natural way to compare the value of saving oysters in the Chesapeake Bay to the value of saving polar bears in the Arctic. RM makes such comparisons possible and explicit.

Contrast philanthropy actors to garden variety for-profit actors. For-profit actors do share one natural yardstick: profit. To paraphrase Michael Boskin, chairman of President George H. W. Bush’s Council of Economic Advisors, capitalists don’t care whether they earn a dollar’s worth of profit by selling potato chips or computer chips. Profit is profit. Success is measured the same way regardless of which product is sold. No novel yardstick is needed to compare the success of a potato chip factory with that of a computer chip factory. The central premise of this book is that RM offers philanthropic actors a common measuring rod by which to measure success of philanthropic outcomes, the analog to the role that profit plays in measuring success of for-profit activities.

We’ll now briefly set out the seven steps that define RM. To make the exposition easy to swallow, we follow a concrete example through the seven-step process: Our example is that of a nonprofit whose mission is to fight poverty, making grants to educational programs that serve disadvantaged children. Each step is explained in depth in subsequent chapters.

Step 1: Adopt a mission statement.

Here, the mission is fighting poverty.

Step 2: Translate the mission statement into well-defined goals.

Here, translate the mission to “fight poverty” into the goal of improving the living standards of poor individuals by raising income and improving health.

Steps 1 and 2 define what the nonprofit deems important. The next steps determine how well individual activities (or “interventions”) accomplish what the nonprofit deems important. Steps 3 through 6 sketch the process by which the nonprofit places a dollar value on single interventions.

Step 3: Identify a specific intervention to analyze.

The philanthropic intervention we envision throughout this book is a grant made by a funder to a nonprofit. Let’s focus here on a grant to a middle school to expand onsite psychological services for currently enrolled students and create a college counseling service for recent graduates of the middle school who have since enrolled in high school or college.

Step 4: Identify each and every mission-relevant outcome (MRO) that follows from the intervention. (Grants can generate one or more MROs.)

Each MRO must satisfy two conditions. Condition 1: The outcome must be caused by the intervention identified in Step 2 (in the sense that if the intervention were removed, the outcome would disappear). Condition 2: The outcome must be tied to the mission according to Steps 1 and 2.

The hypothetical grant anticipates two mission-related outcomes. Does each of them satisfy the two conditions? In this case, the answer is yes.

Outcome 1: Boost high school graduation rates.

Condition 1: Onsite psychological services increase the probability that students graduate from high school. Condition 2: Over their careers graduates earn more than do demographically similar students who drop out of high school.

Outcome 2: College persistence.

Condition 1: Counseling helps college students handle problems that otherwise cause them to drop out. Condition 2: Every extra year of college enrollment increases future earnings on average.

Step 5: Monetize—that is to say, assign a dollar value—to each outcome identified in Step 4.

This step is the hallmark of RM, the key to bringing transparent discipline to the task of making philanthropic choices and the direct and indirect focus of the vast majority of subsequent chapters.

Recall that Step 2 says to focus on earnings and health.

Outcome 1: Boost high school graduation. Research shows that high school graduates earn about $6,500 more a year than do equivalent students who drop out—a boost worth about $100,000 if taken as an upfront lump sum payment. Research also shows that graduates live an average of 1.8 more years (in excellent health) than do equivalent students who drop out. For reasons we’ll explore in chapter 3, we assign a lump sum value of $50,000 to each additional year that graduates live in good health. Thus, the health benefit can be taken to be about $90,000 per graduate ($90,000 = 1.8 × $50,000). The monetized value of Outcome 1 equals $190,000 ($100,000 + $90,000) per graduate. The total monetized value of Outcome 1 equals $190,000 multiplied by the number of students who graduate only because of the funder’s intervention.

The point to notice is that the benefit of increasing earnings and the benefit of improving health, the objects of grant making as set out in Step 2, do not compare in any natural way. Earnings are measured in dollars. Health is measured in terms of mortality and morbidity. RM handles the problem by assigning dollar values to each benefit. Monetizing the value of dissimilar philanthropic benefits and outcomes lies at the core of RM.

Outcome 2: College persistence. The college office created under the grant works with the graduates of the middle school once they’re enrolled in college so they stay enrolled and complete their course of studies. The research literature tells us that every extra year that students spend in college raises their future earnings by about $40,000 on average. The monetized value of Outcome 2 then equals about $40,000 for every student who spends an additional year in college because of the efforts of the college office.

Step 6: Estimate the benefit/cost ratio of the intervention.

In Step 5, we monetized the impact of an individual outcome. In Step 6, we monetize the impact an entire intervention (often a grant). Grants can (and often do) generate multiple outcomes.

In this case, a grant to the middle school generates two poverty-relevant outcomes. It boosts the percentage of students who graduate high school and it boosts the percentage of students who complete at least one year of college. The monetized value of the grant equals the sum of the monetized values of the distinct outcomes (correcting for double counting if possible, which is a subject discussed in chapter 3).

The monetized value of the grant constitutes the numerator of the grant’s benefit/cost ratio. The cost of the intervention—in general, the size of the grant—constitutes the denominator. The ratio captures the overall impact of the grant per dollar of cost, a philanthropic analog to the financial rate of return on a for-profit investment.

Assume the funder makes a grant to the middle school of $290,000. Assume that the grant boosts the number of students who eventually graduate high school by 10 students. By asserting that the grant boosts the number of high school graduates by 10 we mean that 10 more students will graduate high school than would have graduated had the grant to the middle school not been made. (These italicized words brings to the fore the issue of counterfactual information—a topic discussed at length in chapter 4.) Finally, assume that the college service helps 25 graduates of the middle school stay enrolled in college for a year rather than suspending their college studies.

For Outcome 1: Putting all these numbers together, we estimate that for each student who graduates high school because of the grant rather than drop out, poverty fighting benefits rise by $190,000 ($100,000 earnings benefit + $90,000 health benefit). If the increase in the number of students who graduate is 10, which is the assumed impact of the grant, then the grant generates a total poverty fighting benefit of $1.9 million (10 students × $190,000 benefit/student).

For Outcome 2: Monetized value = (25 more students complete a year of college) × $40,000 higher lifetime earnings per extra year of college = $1,000,000.

Total monetized value of grant (both outcomes accounted for) = $1.9 million + $1.0 million = $2.9 million. The $2.9 million figure constitutes the numerator of the grant’s benefit/cost ratio. The denominator of the benefit/cost ratio is the size of the donor’s grant, or $290,000. Thus, in this hypothetical example, the estimated benefit/cost ratio is 10:1 ($2.9 million/$290,000).

How do we interpret the 10:1 estimate? The ratio says that the aggregate living standards of students at the middle school rise by $10 over their careers for each dollar the funder spends.¹

Step 7: Compare benefit/cost ratios for any one proposal against another.

For the thought experiment at the top of this chapter, the philanthropist needs to compare the impact on poverty—translation, impact on earnings and health status—of spending money on job training versus spending money on improving middle school instruction. Toward that end, compare the estimates of the benefit/cost ratios for training carpenters vs. improved teaching of middle school students. Choose the intervention that delivers the most benefits per dollar. Note that for current purposes, we are assuming that estimates of benefit/cost ratios are accurate. See the embarrassing anecdote in the last section of this chapter for doses of reality.

Thoughts About Benefit/Cost Ratios

Is the 10:1 estimate from the preceding hypothetical job training example impressively high? Disappointingly low? Answer: Neither.

First, whether 10:1 is to be treated as high or low depends first and for...

Table of contents

• Cover 
• Half title
• Title
• Copyright
• Contents 
• Preface
• 1. Overview of Relentless Monetization
• 2. Translating Mission Into Mission-Relevant Outcomes
• 3. Basics of Monetizing Outcomes
• 4. Those Pesky Counterfactuals
• 5. The Meaning of Present Discounted Values
• 6. Examples of Metrics by Outcome
• 7. Examples of Metrics by Grant: Multi-Outcome Interventions
• 8. Completing the Analytical Traverse: Small-Bore Benefit/Cost Analysis
• 9. Key Generalities: Q&A
• 10. Six Purposes
• 11. Prominent Metrics Systems
• 12. Reflections on Risk
• 13. Conclusion
• Appendix A: Counterfactual Complications: Shared Responsibility
• Appendix B: Choices Between More and Less Risky Initiatives
• Appendix C: Calculating a Program’s Expected Well-being Impact
• Notes
• Index