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Nonprofit and Voluntary Sector Quarterly

How Nonprofit Leaders Evaluate Funding Sources: An Exploratory Study of Nonprofit Leaders

Kevin P. Kearns, David Bell, Bobbi Deem and Lydia McShane Nonprofit and Voluntary Sector Quarterly 2014 43: 121 originally published online 10 September 2012 DOI: 10.1177/0899764012458038

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458038 NVS 43110.1177/0899764012458038Nonpr ofit and Voluntary Sector QuarterlyKearns et al. Article

458038 NVS43110.1177/0899764012458038Nonpr ofit and Voluntary Sector QuarterlyKearns et al.

Article

How Nonprofit Leaders Evaluate Funding Sources:

An Exploratory Study of Nonprofit Leaders

Nonprofit and Voluntary Sector Quarterly 2014,Vol. 43(1) 121–143 © The Author(s) 2012 Reprints and permissions:

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DOI: 10.1177/0899764012458038 nvsq.sagepub.com Kevin P. Kearns 1 , David Bell 1 , 2 , Bobbi Deem

Kevin P. Kearns 1 , David Bell 1,2 , Bobbi Deem 1 , and Lydia McShane 1

Abstract Intensive interviews were conducted with CEOs and board chairs (n = 18) to explore the criteria they use to compare and contrast funding sources common to nonprofit organizations. The interview protocol used in the study is distinctive for: (1) the amount of data it generates from relatively few interviews, and (2) its power in eliciting the underlying values and assumptions of interviewees rather than imposing the researcher’s frame of reference as is the case with traditional forced-choice questionnaires and interview protocols.The nonprofit leaders who were interviewed in this exploratory study seem to employ a strategic perspective in their evaluation of funding sources, asserting to the researchers that they use evaluative criteria such as the extent to which the funding source can catalyze other resources, the alignment of the funding source with the mission of the organization, and the sustainability of the funding source over time.

Keywords nonprofit funding sources, nonprofit leaders, nonprofit organizations, repertory grid technique

Introduction

Nonprofit organizations rely to a greater or lesser extent on multiple sources of funding including private giving, government grants and contracts, special events, membership

1 University of Pittsburgh, Pittsburgh, PA, USA

2 Savannah State University, Savannah, GA, USA

Corresponding Author:

Kevin P. Kearns, Johnson Institute for Responsible Leadership, Graduate School of Public and International Affairs, University of Pittsburgh, 230 S. Bouquet Street, 3218 Posvar Hall, Pittsburgh, PA 15260, USA. Email: kkearns@pitt.edu

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dues, earned income, and other sources. A nonprofit’s funding portfolio is designed and managed by the leadership of that organization, especially the chief executive officer (CEO) and the board of directors (Axelrod, 2005, p. 136; Herman & Renz, 2000). In today’s turbulent economic environment, nonprofit leaders are keeping a close eye on their various funding sources and, in some cases, they are taking steps to adjust their portfolios to changing circumstances and anticipated economic conditions. How can we identify the evaluative criteria used by nonprofit leaders to compare and contrast various funding sources? Relatedly, how can we uncover the values and assumptions that nonprofit leaders employ, explicitly or implicitly, as they ponder the funding choices for their organization? These are important questions for which the existing literature provides only partial insight.

Research Objectives and Limitations

This exploratory study has two primary purposes. First, we endeavor to take initial steps toward uncovering the evaluative criteria used by nonprofit leaders as they com- pare and contrast various funding sources that are frequently used by nonprofit orga- nizations. In this regard, we acknowledge that our sampling parameters do not permit us to propose generalizations of our findings beyond the discrete group of Pittsburgh- based nonprofit leaders interviewed in this study. However, our review of prior research on this topic leads us to conclude that existing theoretical frameworks that have previously been applied to this problem can benefit from additional basic and exploratory research, especially as it pertains to uncovering evaluative criteria of deci- sion makers. To our knowledge, this is the first study of its kind to actually attempt to draw out of nonprofit leaders their decision-making criteria rather than impose assumptions and constraints that are implicitly reflected in the researcher’s own theo- retical framework. Second, we wish to demonstrate the application of an innovative interview protocol— the Repertory Grid Technique (RGT)—to a research problem that has both practical and theoretical signficance in the nonprofit sector. The RGT, as we discuss in greater detail later, was designed by cognitive psychologist George Kelly (1955) to avoid the impo- sition of the researcher’s frame of reference on respondents. The technique allows respondents to engage in a free and unrestrained process of exploring their own values and beliefs as they relate to various types of stimuli presented to them (in this case nonprofit funding sources). The purpose is to uncover not only the constructs that respondents use to compare and contrast these various funding sources, but to allow researchers to subsequently explore the relationships among those constructs—to pro- duce a cognitive map of the respondent’s perceptions of the stimili. For example, the RGT allows us to explore whether two or more constructs used by a given respondent, or by groups of respondents, are closely associated. Relatedly, the RGT is helpful in determining whether individuals or groups of nonprofit leaders display central tendan- cies in the way they compare and contrast different funding sources. In other words, do some evaluative criteria play a more dominant role than others?

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Another practical application is exploring the extent to which nonprofit CEOs and board chairs essentially speak the same language with respect to alternative funding sources. In this study we are not focused on differences (or similarities) between the CEO and the board chair within a given organization, but rather in the differences (or similarities) between the group of CEOs and the group of board chairs who partici- pated in the study. While it is interesting to examine the respective frames of reference toward funding sources within any given leadership team, we informed our partici- pants at the outset that it was not our intent to do so. In any event, such comparisons with a small number of participants would be merely anecdotal and would contribute nothing of value to the primary purposes of the study. Our belief is that even an exploratory study has both theoretical and practical sig- nificance. From a theoretical perspective, this project shows that it is possible to extend existing research on nonprofit funding portfolios by looking beneath organizational characteristics, such as mission and size, or aggregate financial statistics that have been extensively examined by others. This exploratory study shows how to probe inside the thought processes of nonprofit leaders to explore how they “think” about funding options. From a practical perspective, the list of evaluative criteria produced by this study (Table 3) may help nonprofit leaders communicate with each other, and perhaps with external change agents, regarding the important strategic issue of how to finance the organization (Molinari, Hendryx, & Goodstein, 1997). In other words, seeing how even a small number of other nonprofit leaders compare and contrast funding sources may stimulate useful dialogue between CEOs and their boards regarding their own funding choices and the decision criteria they use to design and manage their portfo- lios. CEOs and the members of the board may, for example, find that they employ different assumptions about various funding sources. Exploring these differences rather than ignoring them may significantly enhance their dialogue (e.g., Mitroff & Emshoff, 1979; Toulmin, 1958). Effective communication among members of the leadership team is especially important with respect to strategic decisions about how to finance the organization’s mission. The reader will quickly note, however, that this study has obvious limitations. First, as we have stated earlier, this is an exploratory study. As such our objective is neither to test hypotheses nor to make generalizations beyond the discrete group of nonprofit leaders interviewed for this study. Rather, our purpose is to show how an innovative interview protocol can uncover underlying assumptions and beliefs about resource management and strategy in nonprofit organizations. With respect to the empirical findings reported here our purpose is to generate a set of propositions that might sub- sequently be tested in a larger study, perhaps using traditional data gathering methods such as surveys with a larger sample of respondents from which generalizations can be made. Certainly, no such generalizations can be made from this study. A second limitation of the study, also related to its exploratory nature, is that some of the findings presented here may be influenced by the Pittsburgh nonprofit commu- nity where the data were collected. Pittsburgh has a large and vibrant charitable sector,

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including many corporate and private foundations and several colleges and universi- ties that are actively engaged as thought leaders on issues affecting nonprofit manage- ment and strategy. It is plausible that some of the evaluative criteria expressed by nonprofit leaders in this study are influenced by unique features of the Pittsburgh nonprofit sector. For example, the emphasis that some of our respondents placed on the “sustainability” of the funding source might be influenced by several local chari- table foundations that have emphasized sustainable programs in their grant making. However, we believe that this study generated a sufficiently large and diverse set of evaluative criteria to increase our confidence that the findings are not completely idio- syncratic to the Pittsburgh context. Regional variations in perceptions of nonprofit funding sources can only be uncovered with a cross-sectional study, for which the study presented here provides a starting point. Third, this study makes no attempt to correlate the leaders’ attitudes and beliefs with the funding portfolios actually in place at their organizations. With a small sam- ple of respondents such correlations would be nearly meaningless. Moreover, the peo- ple interviewed in this study do not have complete control over their funding portfolios, so correlating their perceptions with the actual funding portfolio that is in place in the organization would be spurious at best. Rather, the intent here is simply to show how researchers might uncover the evaluative constructs used by nonprofit leaders in order to learn how they think about what is arguably the most pressing management problem facing any nonprofit—how to finance its mission.

Literature Review

Several theories have been proposed to explain the funding portfolios of nonprofit organizations. One body of thinking suggests that nonprofits design funding portfolios that allow them to maximize certain objectives such as nonfinancial return on invest- ment while minimizing other factors such as risk or uncertainty (Hansmann, 1980, 1987; Markowitz, 1952; Weisbrod, 1974, 1977, 1988). For example, Kingma (1993) tested a model of economic rationality in which nonprofit managers consciously build portfolios that they believe will minimize variability (uncertainty) in expected fund- ing. Jegers (1997) added the concepts of risk and return to Kingma’s theoretical model. These studies provide very valuable insights derived from aggregated data on funding portfolios and with reasonable inferences about what motives and objectives lay beneath those data. The present study attempts to take the next step by actually interviewing nonprofit leaders to attempt to uncover the evaluative criteria that they use to compare and contrast different funding sources. This exploratory study can add some additional insight regarding what motives might lay beneath the portfolios stud- ied by others. Another theory suggests that nonprofits sometimes cultivate one or just a few reli- able funding sources in order to achieve continuity of programs and funding (Gronbjerg, 1992). Relatedly, it has been suggested that over time a certain few funding sources dominate an organization’s portfolio because they have a “crowd out” effect on other

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funding streams (Kingma, 1995). There has been debate, for example, on whether government funding crowds out certain types of charitable givingsuch as private donations due to decreased fundraising efficiency—or crowds in giving through a leveraging effect (Andreoni & Payne, 2011; Brooks, 2002; Smith, 2007; Song & Yi, 2011). Others have speculated that resource dependence theory pushes nonprofit lead- ers toward selected funding streams, potentially leading to goal displacement and mis- sion drift (Froelich, 1999). Institution theory (DiMaggio & Powell, 1983) provides yet another compelling proposition, suggesting that structural isomorphism produces a kind of gravitational pull toward certain funding sources among organizations with similar missions and values (Kearns, Park, & Yankoski, 2005). Yet another body of literature proposes that nonprofits try to diversify their funding sources as much as possible in order to enhance community “buy-in” from multiple stakeholders, thereby increasing the perceived legitimacy of the organization (Bielefeld, 1992; Galaskiewicz, 1990; Galaskiewicz & Bielefeld, 1998). Diversification of funding streams may also enhance the overall stability of the revenue portfolio (Carroll & Stater, 2009; Greenlee, 2002; Tuckman & Chang, 1991). And, finally, there is compelling empirical evidence suggesting that funding port- folios are related to a host of contingencies including the nonprofit’s mission, the benefits it provides to particular constituencies, and its investment in fundraising infrastructure (Chang & Tuckman, 1994; Young, 2006; Young, Wilsker, & Grinsfelder,

2010).

In summary, prior research has suggested that nonprofit leaders pursue the follow- ing objectives when designing or modifying their funding portfolios:

Minimizing risk

Maximizing return on effort

Enhancing organizational legitimacy and community buy-in

Aligning funding sources with industry trends

Seeking stability and continuity of programs

Seeking long-term partnerships with investors

Mission advancement

Aligning funding sources with internal management capacity

All of these evaluative constructs are intuitively appealing and add greatly to our understanding of plausible motives underlying the funding strategies pursued by non- profit organizations. The present study benefits from, and also tries to extend, prior research by actually interviewing nonprofit decision makers in order to reveal what discriminating criteria they use to compare and contrast different funding streams. Much of the research cited earlier examined income statements and aggregated finan- cial records, such as data included on the IRS Form 990. Researchers then make quite reasonable inferences about what factors shape the revenue portfolios in different types of nonprofits. But, to our knowledge, prior research on this subject has not actu- ally attempted to surface and explore the evaluative criteria used by nonprofit leaders

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to compare and contrast different funding sources. This study takes a first and very modest step toward closing that gap in our knowledge by describing how a select group of nonprofit leaders think about funding sources. Why should we be interested in what nonprofit CEOs and board chairs think about funding sources? After all, no single person in a nonprofit organization has complete control over what funding sources are in the portfolio. Mission, size, and historical legacies have significant impacts on the financing of any given nonprofit organization and these factors are, in some cases, impervious to the efforts of any individual person, regardless of their power, to change the mix of funding at a given point in time. Nonetheless, nonprofit leaders do have some impact on funding portfolios. For example, Kearns (2006) presented two case studies of organizations in which the lead- ers consciously adjusted their respective funding streams to realign them with per- ceived strategic opportunities and threats. Especially in today’s economic and political climate, nonprofit CEOs and governing boards are scrambling to devise funding strat- egies they hope will carry them through the economic crisis and beyond and, in some cases, they are reexamining their funding streams in light of new economic and politi- cal realities (Lusk, Sheridan, & Welsh, 2009). Moreover, in some localities, foundations and consultants are working closely with nonprofit leaders to boost their capacity to make thoughtful and strategic funding choices. From a practical perspective, it would be helpful for these change agents to know something about how their clients actually construe the choices available to them so that they can be atuned to the decision-making context in which they are working.

Method

Because this study is concerned with how nonprofit executives perceive funding options, the researchers applied a methodology that elicits the evaluative constructs used by the subjects to assess their funding options without imposing the researchers’ own assumptions or implicit theories of choice. Traditional forced-choice question- naires, and even some open-ended interview protocols, essentially impose the researcher’s implied theory of choice by giving subjects a limited range of possible responses that are reflective of the hypotheses that the researcher is attempting to test. In this project, we utilize a data gathering method that gives respondents the freedom to generate their own constructs in their own language.

The Repertory Grid Technique

We developed an interview protocol that is derived from the RGT. The RGT was devised by George Kelly (1955) to do individual and family therapy, and subse- quently has been used to study perception and decision making in many different contexts including adoption of innovations (Kearns, 1992), assessment of manage- ment competencies (Hayes, Rose-Quirie, & Allinson, 2000), evaluation of team

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performance (Senior & Swailes, 2004), perceptions of organizational colleagues (Kearns, 1995), and many other management applications (Easterby-Smith, Thorpe, & Holman, 1996; Fransella, 2003). The RGT is based on Kelly’s theory of personal construct psychology, which posits that all of us construe and interpret phenomena and objects in the world around us in terms of a highly personalized system of constructs (hypotheses) that may be deeply embedded in our assumptions and values, perhaps below the level of our conscious- ness. Even when deeply embedded, however, the constructs can be elicited from respondents by asking them to make comparisons of the objects of interest, which in this application are funding sources commonly used by nonprofit organizations. The RGT interview protocol used in this study proceeded as follows:

Based on a review of the literature and on our familiarity with nonprofit management, we identified nine sources of funding common to the types of nonprofit organizations in the study: (1) charitable giving by individuals, (2) corporate philanthropy, (3) foundation philanthropy, (4) special events, (5) fee for service, (6) government grants and contracts, (7) United Way or other feder- ated giving, (8) commercial ventures or social enterprise, and (9) member- ship income. Funds derived from debt instruments, such as loans or letters of credit, were not included in the study as debt is considered a liability for the organization. We then printed brief descriptions of each of these funding sources on nine separate 3 × 5 cards.

The respondent was first asked to review all nine cards containing the fund- ing descriptions to ensure that they were familiar with the funding sources. All of the respondents affirmed that they were quite familiar with the funding sources, even if their organization did not draw upon all of them.

The respondent was then presented with three randomly selected cards con- taining descriptions of three different sources of funding. The following ques- tion was posed by the interviewer: “I’d like you to look at the three sources of income described on these cards and imagine that you are making the decision about whether they should be included among the income sources

With that in mind, is there a quality or characteristic

that two of these income sources have in common that makes those two dif- ferent from the third?” We told the respondents that the characteristic could be positive, negative, or neutral.

In response to this question, the respondent articulated a construct, gener- ally embedded in a sentence. For example, the respondent might say, “These two funding sources are alike because they both have very stringent reporting requirements whereas the third funding source has no reporting requirements.” In this example, “stringent reporting requirements” would be the operative con- struct and would be recorded by the interviewer on a blank 3 × 5 card to be used later in the protocol. The respondent was immediately shown the card with the transcribed construct and asked if it accurately reflected their assessment. 1

for your organization

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The process continued through successive sets of three randomly selected cards containing funding descriptions until it became apparent, in the inter- viewer’s judgment, that the respondent was having difficulty articulating a new (nonredundant) construct to compare and contrast the three funding sources. 2

In the next phase of the protocol, the respondent was presented with the cards containing the elicited constructs and was asked whether the constructs recorded on the cards were, in fact, criteria that the respondent would use to make decisions about funding sources for their organization. In every instance, the respondent affirmed that the constructs recorded during the interview were indeed criteria that they would use to make decisions about funding sources for his or her organization. In only a few instances did the respondent ask to add another criterion to those already elicited.

Next, the respondent was asked to rank the constructs in terms of their impor- tance when making funding choices.

Finally, the respondent was presented with each evaluative construct indi- vidually and asked to rank the nine funding sources on the extent to which each one, in the respondent’s judgment, possesses the construct. In the exam- ple above, the respondent would be asked to rank the funding sources on the extent to which they are perceived by the respondent to have “stringent reporting requirements.”

Sampling

Since the primary purposes of this study are to demonstrate the use of this research methodology and to elicit the constructs used by nonprofit leaders to compare and contrast funding options, the researchers decided that the number of respondents should be just large enough to ensure that we captured the full range of constructs used by our subjects. In other words, we decided to conduct additional interviews in a rolling sample until the cumulative frequency curve of new or unique constructs generated by each additional interview became essentially flat whereupon additional interviews would have yielded diminishing returns. In prior research with the RGT, it has been noted that substantial redundancies occur with respect to the constructs elic- ited from respondents after 15 to 20 interviews (Kearns, 1992, 1995). Recognizing from the outset that we would likely interview a relatively small num- ber of respondents, the authors deemed it appropriate to draw a “typical" sample of nonprofits based on organizational size and mission (Patton, 1990, p. 173). Using data supplied by the National Center for Charitable Statistics, we first identified all organi- zations within the City of Pittsburgh with budgets under US$10 million in the follow- ing mission categories: arts, human services, health, education, public and societal benefit, mental health, housing and shelter, youth development, civil rights, and com- munity improvement. Organizations in this size range and with these missions com- prise the vast majority of nonprofit organizations in the United States. We are not

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suggesting that this is a nationally representative sample, only that the organizations selected are typical in terms of mission and size. From this set, 31 organizations were randomly selected to serve as the potential interview pool for the study. 3 From this pool, we approached the organizations one by one and solicited the participation of both the CEO and the chair of the board of directors. We sought a mix of CEOs and board chairs in the study, but we did not reject an organization if only one or the other agreed to participate. As interviews were conducted, we worked our way down the list in the interview pool, conducting additional interviews until we determined that the cumulative frequency distribution of new and unique constructs generated by each successive interview was essentially flat. This was accomplished by keeping a running tally of constructs and continuously coding them. When, in the judgment of the researchers, we reached a point of significantly diminishing return in the generation of new constructs, we concluded the search for new respondents. In the end, we inter- viewed ten CEOs and eight board chairs. The organizational characteristics are as follows:

Three arts organizations including one professional society/association, one general arts and culture, and one historical organization

Two educational organizations including one elementary/secondary school and one educational service organization

One public health entity

Two human service organizations

Four community improvement and capacity building organizations

One organization had a budget under US$100,000, two had budgets between US$100,000 and US$300,000, two between US$300,000 and US$1,000,000, three between US$1,000,000 and US$1,500,000, and four between US$1,500,000 and US$5,000,000. Two of the organizations were founded less than 10 years ago, three are between 10 and 20 years old, and six are between 20 and 40 years old. One orga- nization was established 120 years ago.

A Sample RGT Grid to Illustrate the Analytic Methods

Each of the 18 RGT interviews resulted in a unique N × 9 matrix generated by the respondent. The vertical axis of each RGT matrix is composed of the N constructs elicited from the respondent when they were asked to compare the randomly selected triplets of funding sources. The horizontal axis is composed of the nine funding sources. The horizontal rows represent the respondent’s rankings of the funding sources on the extent to which they possess or exemplify each construct (in the judg- ment of the respondent). Table 1 is an example of a repertory grid that was produced from one of our interviews. Each matrix can be subjected to various types of qualitative and quantitative analy- sis using IdioGrid software (Grice, 2008).

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Membership

income

the construct

8

8

8

2

3

1

Commercial

ventures

giving it embodies

4

4

5

5

5

5

Way

federated

or other

Rank of each funding source on the extent to which the respondent believes

United

7

8

2

6

2

2

for Government

and

contracts

grants

7

9

5

1

1

1

Funding sources

service

4

6

5

3

3

3

Fees

Special

events

6

9

9

5

3

1

philanthropy

Foundation

2

8

6

9

6

3

Table 1. Sample Results of One RGT Interview (Actual Respondent).

philanthropy

Corporate

7

7

7

4

8

1

Charitable

individuals

giving by

7

4

2

9

9

3

of in the overall

the

respondent

to

1 (tie)

6 3 (tie)

1 (tie)

3 (tie)

importance

5

construct

Rank

the costs) required

(goods or

One-shot renewable funding, not

generated

via

source is

comparison

Unrestricted funding

funds

something rendered)

respondent

sustainable

for

reporting

obtained

requirements

of effort

in exchange

(application

funding

Constructs

obtain

services

RGT

process

easily

Money

the

Heavy

Lots

The

to

the

by

130

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Frequency distributions: The RGT allows us to track the number of con- structs articulated by each respondent. In the case illustrated in Table 1, the respondent articulated six constructs used to compare and contrast the fund- ing sources. In this and other applications of the RGT cited earlier, researchers have found that some people have a very large and diverse set of constructs that they use in any given choice situation while others use a relatively small number of constructs.

Importance of constructs: The RGT protocol asks respondents to rank the constructs in terms of importance to the choices they make about funding sources. As indicated in Table 1, the respondent stated that two constructs, long-term commitment and unrestricted funding, were tied for being the most important criteria when deciding what funding sources to pursue for the organization.

Construct correlations: Each respondent’s grid can be analyzed to reveal the extent to which two or more constructs produce highly correlated (positive or negative) rankings of funding sources (correlations of the rows). This can measure how closely constructs are related in the frame of reference of the respondent by producing similar rankings of funding streams. For example, the respondent whose grid is reported in Table 1 perceives a strongly nega- tive correlation between the constructs unrestricted funding and lots of effort required to obtain the funding (r = −.97). Thus, in this respondent’s frame of reference, funding sources that require a lot of effort to obtain tend NOT to be unrestricted. It is not our purpose to judge the correctness of the respondent’s perceptions, but rather to simply uncover and reveal them.

Funding correlations: The grid for each respondent can reveal the extent to which two or more sources of funding are similarly ranked by the respondent on all constructs. This is a measure of the extent to which funding sources are clustered together in the mind of the respondent. For example, the respondent whose preferences are reported in Table 1 perceives a positive Spearman rank order correlation between charitable giving by individuals and membership income (r = .95). In other words, these two funding sources were ranked by this respondent in very similar ways on the extent to which they possessed all of the six constructs generated during the interview.

Principal components analysis (PCA): PCA is similar to factor analysis in that it reveals the evaluative constructs that explain most of the variance in each respondent’s matrix. Thus, PCA provides a glimpse into the domi- nant factors within each respondent’s frame of reference or paradigm. For the nonprofit executive whose responses are reported in Table 1, PCA reveals that two principal components explain 87% of the variance in the matrix. These two principal components are the restrictions placed on the funding and the amount of effort required to secure and manage the funding. Thus, PCA suggests that the frame of reference of this particular respondent is dominated by concern for restrictions and organizational effort. This

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essentially is validation of the respondent’s ranking of the constructs when asked which ones were most important when making decisions about what funding sources to pursue.

We present the example earlier simply to illustrate that each of the grids generated from the RGT interviews contains a very rich set of data with which to describe the cognitive map of each respondent. Thus, RGT data that is obtained from each indi- vidual respondent can be deeply analyzed and possibly compared with data from other respondents. For example, the cognitive map of the CEO could be compared with that of the board chair to detect similarities or differences in their perceptions of funding sources. In this particular project, however, we are not interested in comparing cogni- tive maps of individuals. Rather, as stated earlier, we are primarily interested in how the RGT can be used to reveal the evaluative constructs used by nonprofit leaders to compare and contrast alternative funding sources.

Findings Construct Dictionary

An important product of this study is the construct dictionary representing the com- plete set of criteria used by the 18 respondents to compare and contrast different sources of funding. The interviews generated 159 constructs from 18 respondents. The median number of constructs generated per interview was 9.5 with a range of 5 to 13 constructs. Both CEOs and board chairs had identical median values (9.5) and comparable ranges (5 to 11 for CEOs and 5 to 13 for board chairs). As expected, two or more respondents often used different words to convey the same essential idea. For example, one respondent might say that two funding sources are alike in that they are both “unrestricted.” Another respondent might say that two funding sources “can be used for any purpose we want.” The research team maintained a cumulative frequency distribution of what we judged to be nonredundant constructs generated by all of the respondents, without dif- ferentiating between board chairs and CEOs. 4 According to our coding, the 159 con- structs generated by the RGT interviews can be collapsed into 24 distinct categories or clusters. We observed the expected flattening of the cumulative frequency distribution of nonredundant constructs after the 11th interview. As Table 2 indicates, fewer and fewer nonredundant constructs were generated by each successive interview, suggest- ing that we reached the practical limit of evaluative criteria used by nonprofit leaders to compare and contrast different funding sources. The nine largest categories of constructs are presented and described in Table 3. While not mentioned as frequently as the constructs in Table 3, following are some additional evaluative criteria used by some of the leaders interviewed in this study:

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Table 2. Cumulative Construct Generation.

Interview

Constructs generated

Unique or nonredundant constructs generated

1

7

6

2

8

3

3

10

5

4

8

1

5

6

0

6

5

0

7

11

1

8

10

1

9

10

1

10

5

0

11

10

3

12

13

0

13

9

1

14

5

0

15

9

1

16

13

0

17

10

1

18

10

0

Total

159

24

Networking: The extent to which the funding source requires networking with other individuals or organizations (mentioned six times)

Donor return on investment: Extent to which the donor or source of the funding is looking for a nonfinancial return on investment (mentioned five times)

Donor pass-through: The extent to which the donor of the funds actually controls the distribution of those funds or is merely a conduit for others (men- tioned five times)

Autonomy/control of destiny: The extent to which the funding source con- tributes to, or subtracts, from the autonomy and independence of the organi- zation (mentioned three times)

Seed money/venture capital: The extent to which the money is intended as seed funding for a larger project or as venture capital (mentioned three times)

Scale of impact: The potential impact of the funding stream in terms of its size relative to other sources (mentioned two times)

Maintenance cost: Extent to which the funding carries on-going costs of maintenance (mentioned two times)

Competition/saturation: Extent to which there is high competition for the funding (mentioned two times)

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(continued)

Elicited 18 times Accounts for 11% of all constructs elicited from respondents Accounts for 10.2% of all constructs elicited from CEOs and 12.3% of all constructs elicited from board chairs Elicited 18 times Accounts for 11% of all constructs elicited from respondents Accounts for 10.2% of all constructs elicited from CEOs and 12.3% of all constructs elicited from board chairs Elicited 17 times Accounts for 10.4% of all constructs elicited from respondents Accounts for 6.1% of all constructs elicited from CEOs and 16.9% of all constructs elicited from board chairs Elicited 15 times Accounts for 9.2% of all constructs elicited from respondents Accounts for 10.2% of constructs elicited from CEOs and 7.7% of constructs elicited from board chairs Elicited 14 times Accounts for 8.5% of all constructs elicited from respondents Accounts for 9.2% of constructs elicited from CEOs and 6.2% of constructs elicited from board chairs

Elicited 22 times Accounts for 13.5% of all constructs elicited from respondents Accounts for 13.2% of all constructs elicited from CEOs and 13.8% of all constructs elicited from board chairs

Frequency

Table 3. Construct Categories Used by Nonprofit Leaders to Compare and Contrast Funding Sources.

Extent to which the funding is dependent upon a match of missions between two or more organizations, especially a match with the donor organization Extent to which the funding stream is dependent upon an emotional appeal or personal connection versus institutional mission-oriented connection

Extent to which the funding source opens

the door to other funding sources or other valued commodities including community support, partnerships, public relations, legitimacy, volunteerism The extent to which the funding is obtained in exchange for a good or service rendered in the community

Extent to which the funding source is sustainable over time based not only on the reliability of the source, but also the internal expertise of the organization Extent to which the funding source is aligned (or not aligned) with the organization’s mission

Description

Sustainability, and match with organization’s funding generating expertise Mission alignment

Exchange of goods and services

(personal connection)

Emotional connection

Compatible missions

Construct category

(institutional

connection)

Catalyst

5.
6.

3.
4.

1.
2.

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Elicited 11 times Accounts for 6.7% of all constructs elicited from respondents Accounts for 7.1% of constructs elicited from CEOs and 6.1% of constructs elicited from board chairs Elicited 10 times Accounts for 6.1% of all constructs elicited from respondents Accounts for 7.1% of constructs elicited from CEOs and 4.6% of constructs elicited from board chairs Elicited 8 times Accounts for 5.0% of all constructs elicited from respondents Accounts for 3.1% of constructs elicited from CEOs and 7.7% of constructs elicited from board chairs

Frequency

Extent to which the source of the funding requires a report of its usage

Extent to which obtaining the funding requires extensive organizational effort

Extent to which the funding stream is restricted to certain uses

relative to the return it provides

Description

Reporting requirements and accountability

Restricted/unrestricted

vestment

Table 3. (continued)

Construct category

Return on in7.

9.

8.

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Risk: Extent to which the funding carries risk of loss (mentioned one time)

Internal synergy: Extent to which the organization’s efforts to obtain the funding actually help achieve synergy among various parts of the organiza- tion (mentioned one time)

Several interesting observations can be made based on an examination of Table 3. First, it is intriguing that the category with the single largest number of elicited con- structs is catalyst. This suggests that the leaders in our study think strategically about the positive spin-offs that certain types of funding can produce by generating not only other types of funding, but also other valued resources like visibility in the community or partnerships. This notion that some funding sources act as catalysts to obtain other valued resources has been implicitly addressed in prior research through constructs like buy-in and legitimacy (Gronbjerg, 1993). Second, the findings suggest that nonprofit leaders in this study are highly cogni- zant of the importance of matching funding streams with mission alignment. In fact, if we combine categories 4 to 6 in Table 3 (all of which involve some aspect of mission alignment and accomplishment), it is evident that mission-related constructs are most frequently mentioned by our respondents, accounting for 46 individual constructs, or 28% of the total number of constructs generated in the 18 RGT interviews. We find it particularly interesting that board chairs seem to be mindful of pathologies such as mission drift in the quest for funding. Stewardship of the mission is arguably the prin- cipal duty of nonprofit trustees (Axelrod, 2005) and the findings reported here suggest that they take this responsibility very seriously. Third, the results presented in Table 3 suggest that the leaders in this study are cog- nizant of the commercial aspects of the nonprofit activities, as indicated by their awareness that various types of funding are derived from the exchange of valued goods and services with consumers (see Category 2). Again, board chairs seem to be just as knowledgeable of these exchange relationships as the CEOs, a finding that indicates their awareness of the essential business model of the organizations they serve. We see the same level of awareness by board chairs of the need for account- ability and outcome measures associated with some sources of funding, again suggest- ing that board chairs have knowledge of the consequences and long-term compliance costs associated with some types of funding. Thus, our overall assessment of the findings reported in Table 3 is:

The catalyzing effect is a desired attribute in nonprofit funding streams;

Mission advancement and adherence to the mission are important considerations;

Leaders also focus on the exchange relationships associated with certain funding.

Construct Ranking

Counting the frequency of constructs elicited through RGT interviews, as we have done in Table 3, is one way to assess their importance to our respondents. We also

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asked each respondent to rank the constructs they generated in their RGT interview in terms of their importance when making decisions about what funding sources to pur- sue for their organization. When examining the constructs ranked either first, second, or third in terms of their importance as reported by respondents, we found that constructs broadly related to mis- sion relevance or alignment are mentioned most frequently by our respondents. Our results suggest that nonprofit leaders not only use mission-alignment to compare and contrast different funding sources, but they rank mission alignment as either first, sec- ond, or third most important when making funding choices for their organizations. Beyond mission alignment, other constructs reported as highly important by CEOs concern the amount of effort needed to generate the funding and the toll that effort takes on organizational capacity. Board chairs, however, seem to be slightly more concerned with the sustainability of funding, the size of the revenue, and nonfinancial return on investment. While these differences appear to be subtle, they make sense intuitively. We would expect CEOs to have more intimate knowledge of the organizational and personal effort (time, energy, expertise) that must be invested to secure various sources of funding and the extent to which those efforts tax the capacity of the organization to do other things on a day-to- day basis. Board chairs, however, can be expected to be less concerned with the orga- nizational effort necessary for revenue generation. Instead, they seem to focus on the outcomes produced by the revenue source such as its relative stability, sustainability, and nonfinancial return on investment.

Discussion: Implications for Theory and Practice

This exploratory study lends some support to the theoretical propositions of other scholars who have suggested that various types of evaluative criteria come into play when nonprofit leaders assess alternative funding streams for their organizations. For example, this study provides support for the propositions by Chang and Tuckman (1994) that mission is an important driving force in the funding choices of nonprofit leaders. Also, this study provides some evidence that nonprofit leaders are concerned with nonfinancial return on investment (Jegers, 1997), sustainability (Kingma, 1993), leverage (Bielefeld, 1992; Galaskiewicz & Bielefeld, 1998), and exchange relation- ships (Young, 2006; Young, Wilsker, & Grinsfelder, 2010). Time and again, both CEOs and board chairs interviewed in this study expounded on the relationship of various funding sources to the accomplishment of their mission. Many of the respondents in this study worry that some types of funding will lead them astray from their mission or will diminish their organization’s distinctiveness in the eyes of the community. They reported to us that they value funding sources that are sustainable and that can be used to obtain other resources in the community, including volunteers and partnerships with other organizations. Another interpretation of our findings is that the leaders in this study report that they use evaluative criteria that reinforce their role as stewards of the missions of the organizations they serve, a duty that we believe demands the highest level of integrity,

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and even courage, in the face of increasingly dire economic conditions and a political climate that is threatening to many nonprofit organizations. In such circumstances, the temptation for a “quick fix” to financial threats and challenges is very real. Moreover, with the emergence of social entrepreneurship models over the past ten years, some observers have worried that nonprofits are in danger of losing their distinctive charac- ter and are looking more and more like businesses. Certainly our exploratory study cannot refute these claims, but we have presented evidence to support the counter- claim that nonprofit leaders at least assert that they value funding sources that allow them to stay true to their missions. Also, this study adds significantly to prior research by suggesting that nonprofit CEOs and board chairs have comparable frames of reference toward funding choices. CEOs seem to be slightly more concerned with the effort needed to generate various sources of funding, while board chairs are a bit more concerned with sustainability and nonfinancial return on investment. On the whole, however, the findings reported here suggest that these two important groups of organizational leaders essentially speak the same language and bring a comparable set of assumptions to the critically important task of designing and managing the finances of the organizations they serve. The CEO and the board chairs are influential people in making decisions regarding nonprofit finance strategies and, if our findings are accurate, they seem to be in fundamental agreement on the types of criteria that are important to the decision. We hope that the results reported here, while only exploratory, will be helpful to leaders of nonprofits as they engage in strategic planning exercises. For example, the criteria generated by this study might be incorporated into decision support models such as the Analytic Hierarchy Process (Saaty, 1980; Saaty & Kearns, 1985), allowing decision makers to debate the assumptions they are making with respect to alternative revenue streams. Similarly, consultants and capacity-building organizations may use this study to engage their nonprofit clients in deeper and more meaningful discussions regarding financial planning, informed by a shared understanding of desired outcomes and the assumptions underlying the alternative paths to those outcomes. Clearly, more research on this topic is needed if we wish to test these findings with a larger representative sample of nonprofits. The findings reported here can inform and strengthen such research efforts. For example, the construct dictionary, presented in Table 3, could be used to design a traditional survey questionnaire administered to a large cross-section of nonprofit leaders. The advantage of such a questionnaire is that its content would be grounded in the frames of reference of nonprofit leaders, not imposed by researchers. Also, drawing on the methods of experimental economics, laboratory experiments could be conducted with nonprofit leaders placing them in situ- ations where they actually had to choose certain funding sources over others and explor- ing the underlying reasons for those choices. Finally, field research could be conducted in nonprofit organizations that actually are forming (or reforming) their funding portfo- lios to test the impact of constructs and evaluative criteria generated here. Among the theoretical and practical questions that could be explored further are as following:

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Do leaders from different subsectors (e.g., arts vs. human services) have dif- ferent perceptions of what types of funding fit with their mission and what types do not?

What types of funding are perceived by leaders in various subsectors to be most sustainable and why?

What types of internal management capacity is required to obtain and sustain the various types of funding? Do leaders feel that they are in need of capacity building assistance to sustain certain types of funding?

Do members of nonprofit governing boards have an adequate level of financial literacy with respect to funding sources and strategies? Do they understand the criteria used by CEOs and other paid staff when evaluating funding options?

What difficulties do nonprofit leaders encounter when they try to alter the profile of their funding portfolio? What forces motivate them to attempt such alterations?

There are many other meaningful research questions that can be pursued in a large cross-section study based on the exploratory results reported here. Moreover, the RGT could be replicated in other cities and regions to test the robustness of the findings reported here and the validity of the technique itself. Our effort here has been to:

stimulate interest in the cognitive frameworks used by nonprofit decision makers, illustrate the use of this research methodology to explore those frameworks, and put forth some testable theoretical propositions for future research.

Acknowledgment

The authors are grateful to the reviewers for their extensive and careful reading of this manu- script and to their colleagues William Dunn, Sera Linardi, and Annemie Maertens for helpful comments on an early draft.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors received no financial support for the research, authorship, and/or publication of this article.

Notes

1. It should be noted that sometimes the respondent talked at length about the attributes of the three funding sources presented to him/her. Because the RGT interview protocol involves continuous, real-time coding of responses, the interviewer must listen carefully to select and transcribe the operative construct mentioned by the respondent. We believe that it is quite important for the interviewer to immediately confirm with the respondent that the brief transcription of the construct elicited from him/her accurately reflects his/her think-

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ing. It is also important for the interviewer to record as many constructs as the respondent actually mentions. For example, the respondent might say, “These two funding sources have stringent reporting requirements. The third funding source gives us unrestricted funding.” In this circumstance, the respondent has actually mentioned two constructs— “reporting requirements” and “no restrictions on use.”

2. Obviously, the interviewer must exercise judgment when deciding that the subject is beginning to have difficulty in generating additional constructs. The random triplets were selected in advance of the interview using a random number generator. Each respondent had a unique ordering of the cards containing the descriptions of the funding sources. Thus, no two respondents reviewed the same ordered sets. The researchers adopted this strategy to help ensure that there would be a maximum probability of generating new constructs over the course of all interviews since one of the purposes of the project was to map the full range of constructs used by respondents to compare and contrast funding sources.

3. Obviously, in a study of this nature, in which there is no effort to test hypotheses, random selection of participants was not intended to enhance statistical significance or generaliz- ability of findings. Rather, our intention was simply to ensure that we did not inadvertently bias our findings by selecting respondents known to us.

4. The principal investigator (the first author) personally conducted all of the interviews and, therefore, did the initial coding of constructs into categories. The entire research team then reviewed the codes and, where there were differences of opinion or ambiguities, the tape recordings of the interviews were reviewed to arrive at consensus.

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Author Biographies

Kevin Kearns, PhD, is professor of public and nonprofit management in the Graduate School of Public and International Affairs, University of Pittsburgh, PA, USA, and director of the Johnson Institute for Responsible Leadership, a program promoting ethical leadership in public and nonprofit institutions.

David Bell, PhD, is assistant professor of public administration, political science, and public affairs at Savannah State University. He earned his doctoral degree from the Graduate School of Public and International Affairs, University of Pittsburgh, PA, USA, where he was the K. Leroy Irvis Fellow.

Bobbi Deem is in an executive in retail management. At the time of this research she was a student in the Graduate School of Public and International Affairs. She has her Master’s degree

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in public administration, public, and nonprofit management from the Graduate School of Public and International Affairs, University of Pittsburgh, PA, USA, and her BA from the University of Pittsburgh in history of art and architecture.

Lydia McShane is the administrator of the Johnson Institute for Responsible Leadership in the Graduate School of Public and International Affairs, University of Pittsburgh, PA, USA. She has worked as a private school educator and nonprofit administrator for many years and also worked as the managing editor for a nonprofit educational association.

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