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Improving Grantmaking Through Portfolio Management

Much of our work for foundations is concerned with assessing the overall impact of grant programs. While many funders realize they don’t deserve all of the credit for the work their grantees do, the basic approach is generally that grantees are asked to measure the impact of funded projects. The foundation then sums up the impact that was reported by its grantees, and that becomes evidence of the foundation’s success.

In a literature review that I conducted as part of a current project, I was intrigued to learn about a radically different way of thinking about the relationship between funders and their grantees. One can argue that a funder is in fact not at all accountable for the outcomes of the work their grants support, but is solely responsible for the quality of the funding decisions that are made. The funded projects may or may not have the desired impact, but that is not a reflection of whether the foundation’s decision to fund them was fundamentally sound.

In the field of Decision Analysis, it is generally accepted that you can’t judge the quality of decisions based on their outcomes (here’s another link on the topic), and what’s more, in speculating on the outcomes of individual grants, funders may be compromising the impact of their grant portfolio as a whole.

Evaluated on its own, a grant application for a project that is likely to fail (let’s give it a 1-in-10 chance of succeeding) is unlikely to be funded, no matter how significant the impact of the project might be if it does succeed. If, however, there are ten such proposals in the pool of applications (each of them with a 10% chance of success), it is actually quite likely that one of them will pan out. So, if the expected return on one high-risk, high-impact investment is high enough to justify the cost of supporting nine other projects that might not succeed, the decision to support that pool of high-risk projects may be better than funding projects that seem like safer bets when considered individually.

In the arts, grants are usually awarded by review panels that are charged with evaluating each proposal on its own merits, but in other sectors, sophisticated methodologies have been developed to select and manage portfolios of grants that promise the best cumulative outcomes. For instance, the RAND Corporation’s PortMan method asks experts to score the risk (probability of success) and value (if successfully implemented) of each project, then uses that data to identify the set of proposals that is expected to have the highest cumulative impact.

While arts funders may not leap to adopt the RAND Corporation’s method for selecting national defense and intelligence contractors, the question of whether the decision-making that goes into selecting grant portfolios could be improved seems worth considering. If funders can indeed increase the performance of their portfolios by improving the quality of their selection processes, foundations could focus their attention on evaluating their funding decisions, rather than worrying about (and asking grantees to report on) the outcomes of individual grants, over which funders have little control.

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