Foundations worry a lot about their grantees. Which of the many struggling organizations do they help and how do they do it? Equally important, how can they identify grantees in trouble earlier? Which due diligence “rocks” should they be turning over?
Wellspring Advisors, LLC was surprised by the answer it found: consider fewer issues, not more, yet become more targeted and comprehensive in analyzing prospective and current grantees. This simpler, streamlined due diligence process increases the probability of grantee success. Equally important, staff members use their time more effectively, confident that they are focusing on the right issues.
Wellspring embarked upon a project to refine and strengthen its due diligence process with the help of KrasnePlows. The project’s impetus came when Wellspring realized that its program staff, while very bright, came from a variety of backgrounds with little or no formal due diligence training. As an institution, Wellspring felt that it needed to communicate clearly what is expected of its program staff in this important role.
Wellspring first considered “off the shelf” resources, particularly to strengthen its financial due diligence. While somewhat helpful, most presented exhaustive checklists of everything that one could possibly ask a grantee. They didn’t give realistic or useful guidance to program officers who were managing multiple grantee relationships.
Together, Wellspring and KrasnePlows developed a due diligence process that used:
- An enterprise-wide assessment of the three key factors in grantee success—program, money, and leadership;
- A short list of targeted indicators of grantee health (fewer “rocks” to turn over); and
- A three-tiered rating system—a red, yellow, and green traffic light—to distinguish among the organizations that were really struggling, those of concern, and the bulk of healthy nonprofits.
The biggest benefit for Wellspring was the shift to looking at the grantee as anenterprise. Before, the concern was getting the grantee through the due diligence process. Now, Wellspring focuses on the grantee and what it needs to be successful.
Using fewer indicators to assess an organization was also a big benefit for program officers. They felt burdened by an extensive due diligence process, yet were unsure they were looking at the “right” things. Now they focused on the risks that would affect their grantmaking decision and then on how to increase a grantee’s success.
The best example is the two indicators KrasnePlows identified to measure an organization’s financial health. From a variety of suggested indicators and ratios, they narrowed the list to six. KrasnePlows then calculated the ratios to gauge their predictive value, using publicly available data from a cross-section of Wellspring grantees. They found that just two indicators (frequent material deficits over time and the amount of cash available to cover operating expenses), when used in combination, proved to be good predictors of financial health. The rest gave no additional useful information.
KrasnePlows captured an organization’s overall financial condition in a red, yellow, and green traffic light rating system. Most grantees were a financially healthy “green.” For the relatively few yellow and red organizations, grants management staff could analyze an organization’s financial statements in greater depth to understand any weaknesses. KrasnePlows also developed follow-up questions that program officers and grants management staff could use when talking with a grantee’s leadership.
Program officers found that their due diligence workload was more manageable and focused. As one person said, “I was wasting my time analyzing all my grantees in depth. Now I can be confident in my ‘green’ organizations’ financial health based on the two indicators. I have more time to focus on those having problems. For example, the process led me to recommend an additional grant award so one of our organizations could increase its development capacity.”
Similarly, KrasnePlows drew on its and others’ experience to identify a few key indicators of leadership capability, including bench strength, a leadership succession plan in place, and board engagement. Again, there were a few simple questions to ask or documents to review to find the answers; the red/yellow/green rating system; and follow-up queries where needed. Wellspring already had a robust due diligence process for grantee programs, which it distilled into key areas for focus and rating.
Wellspring also clarified the due diligence roles and responsibilities of its leadership, program staff, and grants managers. KrasnePlows helped the Wellspring project team revisit current policies, revising them where appropriate and clarifying when, how, and who could make exceptions. One important feature of the rating system is that it defines the respective roles of the program staff and Wellspring’s management. While it doesn’t automatically stop a grant from going forward, it does require further analysis, a risk mitigation strategy, and higher-level consideration and sign-off before it proceeds.
The process drew upon the collected wisdom and knowledge of Wellspring’s program staff. The resulting candid conversations about how to identify and manage risks and maximize grantee success—and the “safe space” KrasnePlows provided for them—were extremely enriching and contributed to everyone’s understanding. The conversations are ongoing and have become an important part of Wellspring’s institutional culture.
Wellspring is already seeing the benefits—improved and more useful discussions with grantees; more thoughtful and sometimes tougher funding decisions; and awards shaped to better meet grantee needs and ensure their success. Who would have thought that such a seemingly mundane process like due diligence would yield such big rewards?