5 Reasons Why Austerity Is Hurting Your Philanthropy – Strategic Investments for Sustainable Impact

Many philanthropists believe that cutting back on their charitable efforts is a sign of good stewardship, but cutting back in the wrong places can significantly reduce your impact. In this post, we explore five common reasons why frugality in philanthropy does more harm than good, and why strategic investments are essential to achieving sustainable change.

1. No investment in technology

The CEO of a foundation responsible for managing over $200 million in assets didn’t allow his employees to take company laptops on business trips. His reasoning? To avoid the $1,700 cost of replacing a lost or broken laptop. As a result, employees couldn’t be productive while traveling. They couldn’t prepare grant recommendations, research funding opportunities, or even respond to emails efficiently. This lack of investment in essential technology resulted in lower productivity and wasted valuable time – which was far more costly than the price of a laptop.

The lesson here? Without the right tools, even well-meaning philanthropists can experience delays in their progress and impact.

Investing in technology for nonprofits is critical to ensuring your teams and grantees can work effectively. When organizations lack up-to-date tools and systems, they struggle to accomplish their missions.

2. Short-term subsidies hinder long-term impact

Another example comes from the perspective of a nonprofit grant recipient. A nonprofit applied for a three-year grant to advance an innovative approach to drug treatment through policy advocacy. However, the donor only approved one year of funding, severely limiting the nonprofit’s ability to plan for the long term. Political engagement requires sustained efforts over a long period of time – research, raising public awareness, organizing communities, and influencing policy makers.

Due to limited resources, the nonprofit was unable to hire top talent. The CEO’s ideal candidate wasn’t willing to give up a secure position for a one-year stint, so the CEO hired someone with less experience who ultimately wasn’t as effective.

The lesson here? Short-term thinking leads to short-term results, and without a commitment to long-term support of nonprofits, it is nearly impossible to achieve lasting change.

This is a perfect example of why effective grantmaking requires an abundance mentality and multi-year investments to create real, systemic change.

3. Underfunding of non-profit organisations’ overhead costs

One of the most common ways philanthropists cut costs is by refusing to fund nonprofits’ overhead costs. Many funders believe that all of their money should go directly to programs, leaving little for necessary infrastructure, staff development, or evaluations. This approach is short-sighted. Nonprofits cannot thrive without investing in their own infrastructure.

For example, one donor insisted that grant funds should not be used to cover staff costs. While she was willing to fund programs, she refused to cover the salaries of the staff who run those programs. How can nonprofits provide effective services without adequately compensating the people who make those services possible? The answer is simple: They can’t.

The lesson here? If you don’t cover essential overhead costs, you risk disadvantaging the very organizations you want to help. To ensure sustainability, nonprofit funding must also include operational support.

To support nonprofit capacity building, funders must rethink the false dichotomy between program spending and overhead costs, both of which are essential to nonprofits working effectively and creating sustainable impact.

4. Do not seek advice from strategic consultants

Another common pitfall in philanthropy is the reluctance to seek outside expertise. strategic consultantsMany philanthropists believe they should manage every aspect of their giving themselves or rely solely on internal resources. While this may seem like a way to save money, it often leads to costly missteps and missed opportunities, especially when making complex decisions like establishing a new foundation, developing a strategic philanthropy plan, or managing foundation succession planning.

For example, a family foundation decided to cease operations but did so without a clear plan. Without the guidance of an experienced advisor, the foundation struggled to balance current grantmaking with future commitments and was unsure how to involve the next generation in the process. As a result, the transition was marked by confusion and it missed opportunities to maximize its ultimate impact. A strategic advisor could have helped it develop a thoughtful plan that was consistent with its long-term vision while ensuring a smooth transition.

The lesson here? Strategic advisors bring valuable expertise that can help you make important decisions, avoid costly mistakes, and ensure your philanthropy aligns with your long-term goals. Investing in the right advice can increase your impact and put you on the path to success.

5. Neglecting capacity building of non-profit organisations

Philanthropists often focus only on funding direct services, forgetting that nonprofits must also invest in their own capacity building efforts to deliver those services effectively. Capacity building includes upgrading technology, improving financial management systems, conducting evaluations, and developing leadership skills. Without investment in these critical areas, even the best-designed programs will struggle to grow and achieve sustainable impact.

For example, a nonprofit dedicated to addressing food insecurity developed an innovative program that delivered fresh food to families in need. However, because it lacked the resources to invest in better technology and operational systems, it was unable to scale its operations. Delivery schedules were chaotic and food often ran out, leaving some families without adequate supplies. The innovative nonprofit had a vision and a plan, but without investing in its internal capacity, it could not expand its reach or operate efficiently.

The lesson here? Investing in capacity building is critical to helping nonprofits achieve their missions effectively and sustainably. By supporting infrastructure and leadership development, you help your grantees scale their work and maximize their impact.

Frugality may seem like a responsible approach to philanthropy, but cutting corners in critical areas can have negative long-term consequences. From underfunding overhead to avoiding investments in technology and talent, these five common pitfalls hinder your ability to create lasting change. To make a meaningful impact, philanthropists must be willing to invest in the right places, even if it means higher spending in the short term. The next time you’re faced with the decision to cut back, ask yourself: Are you cutting back on the wrong things?