The marketplace of human needs is broken. And we all pay.

Human needs are just that. The things that we need to be human. Adequate food. Housing and Shelter. Healthcare. Education and employment. Security, financial and otherwise. But the marketplace of human needs is broken. And we all pay. We pay when the homeless struggle to find housing. We pay when the unemployed can’t improve their skills and find new jobs. We pay when families struggle to get access to childcare. We pay when people in need are trapped in a maze of services without the proper tools to navigate it. So we pay in time, treasure, effort and hope. And those costs take a stressed system and apply ever more stress to it. 

The sector is composed of nearly 1.8 million organizations that employ 12.5 million workers and generate $3.7 trillion in annual revenue, according to Candid. Nonprofits in this country contributed $1.5 trillion to the economy in the 4th quarter of 2022, employ 10% of the country’s workforce, and account for 5.7% of the U.S.’s total GDP. They are now 5.6% of total US Gross Domestic Profit. Just the “Human Needs” sector of nonprofits is around 4% of the overall US GDP.

San Francisco is giving $1.4 billion to more than 600 nonprofits this year to help tackle some of its biggest crises, from housing and homelessness to helping people find jobs. But a new report released Tuesday by city officials suggests quite a few organizations getting city funding were not complying with the terms set out in their contracts…”

https://sfstandard.com/2022/12/20/san-francisco-nonprofits-contracts-money-city-controller/

As a hypothetical, let’s consider Maria Sanchez. She’s a single mother with a couple of boys. She’s been working as a housekeeper but recently lost her job. Now she’s trapped in a Catch-22 where she has to maintain her income and find help simultaneously. She’s stepping into the maze and she’s effectively on her own. Even with a sympathetic social worker, each area where she might need support is separated from one another. Every service she applies for is a separate application, usually filled out by hand. Every agency she engages with is a separate set of data and services multiplying the chances of error. And she has to identify, assess and reach out to every service provider or agency without any idea of what works for her or what she will qualify for.

The marketplace that Maria Sanchez is trying to navigate isn’t truly a single, integrated entity. It’s a host of smaller efforts with overlapping areas of interest that are effectively siloed away from each other and focused on solving their problems. As an example, consider San Francisco. A new report and interactive map produced by the nonprofit Crankstart Foundation lays out a web of no fewer than 232 service providers funded by nine city agencies, representing billions of public dollars allocated to the crisis in recent years.

And every market and market participant are using different tools supported by different levels of technical expertise. So coordination might mean a stack of paper applications stapled together in one file folder. The lack of appropriate tools result in a system that’s wildly inefficient at best and broken at worst. That inefficiency creates friction and opacity. Reporting and regulatory requirements create yet more pressure. Municipalities and foundations pour money into those markets but are unable to see what’s working. More than $1 trillion are lost annually, driven by administrative costs, wasteful spending and a focus on crisis management over preventative care. Siloed markets can’t coordinate so more complex issues become nearly impossible to address which leads to frustration, despair and burnout among both staff and customers. And Maria is just one of thousands seeking help. 

“These services often overlap, resulting in a fragmented system where people may need to navigate as many as 15 to 30 service providers just to get the help they need,” the report says. “It would be one thing if all this effort and money led to long-term solutions. But they haven’t.”

The friction inherent in such a situation creates perverse incentives where goals and activities end up not addressing core issues. A nonprofit might become so committed to performance metrics like numbers served that the actual quality of delivered services diminishes. Service providers don’t have the data to prove their worth so executives are measured by fundraising, not outcomes. They throw fancy parties for their funders or even commit apparent fraud rather than keeping focus on their mission. An organization is so heavily dependent on grants that it might focus on short-term outcomes to satisfy funders, rather than working on long-term, sustainable solutions. Or there is more focus on securing new grants and honoring requirements as it veers away from its core missions just to meet them. 

In 2022, The Standard reported in October that Lisa Pratt, a top Department of Public Health official, also collected an unauthorized $123,000 salary working 20 hours a week for Baker Places on top of her city salary. Pratt has since resigned from the nonprofit position, and the city has launched an investigation into her dual employment. They also released an audit that found United Council of Human Services (UCHS) had a pattern of financial mismanagement while receiving $28 million in city and federal grants. It referred the organization to the FBI and the District Attorney’s Office for criminal investigations.

Funding entities like municipalities or foundations are tasked with solving big problems and are under significant political pressure to do so. They create big dollar initiatives that might do the job but no one can really tell the value of the programs or effectively manage resources. Without positive news, efforts get abandoned before they can prove their worth or find their feet. Customers struggle to get the assistance they need, so they overstate their needs or just give up and end up requiring even more help. In communities where several nonprofits might address the same or similar issues, they compete for limited resources leading to less collaboration and redundant services as they prioritize survival over collective impact. Nonprofits are also under constant pressure to lower their administrative costs and maximize their services. Perversely this leads to situations where underinvestment in support functions undermines the effectiveness they aspire to. 

In August 2022, the City Controller’s office released an audit that found city departments operated in silos when monitoring nonprofits, creating redundancies and allowing organizations to escape notice when falling short of their objectives.

Essentially, this market is particularly vulnerable to administrative burdens and costs in part because it lacks the tools to act efficiently. Those costs range from those that customers encounter when they try to find information about public services, actually follow the rules and requirements, and experience the stresses, loss of autonomy, or stigma that come from such encounters. A significant portion of the spending, particularly in healthcare and social services, is absorbed by administrative costs, inefficiencies, and overhead. In healthcare alone, administrative costs are estimated to be around 20-25% of total spending​(CMS.gov). 

Every time customers engage with the system they encounter these frictions. When the friction is high, then so are the financial and other costs. Those burdens reinforce inequalities, and amplify consequences. However, friction in a marketplace creates incentives for innovation. And when looked at in its totality, this is a very large market. Some estimates put it at nearly $4T. 

Solving the problems of this marketplace in a way that is equitable and profitable is possible. Similar solutions and tools have been available at the enterprise level for years but never applied here. The correct tools allow the customer to center their needs while delivering the dynamic feedback that drives optimization. They should support the full range of transactions including peer-to-peer (P2P), business-to-consumer (B2C), business-to-business (B2B), government-to-business (G2B), and government-to-business-to-consumer (G2B2C) that’s required. When fully integrated, the administrative burden for all parties becomes significantly less. Reporting and regulation become nominal costs and outcomes become the standard by which programs are judged. Nearly 60% of resources lost to inefficiency can be recovered and devoted to actual services. 

Imagine a market supported with not just adequate but excellent tools. Siloed markets effectively become a single unit from the funders perspective. Customers, service providers, municipalities and foundations can connect in dialogue. A platform where customers can self identify their needs and receive meaningful recommendations based on their situation and funders can coordinate the activity of a variety of service providers to address tough challenges affecting their communities. That’s what the appropriate set of tools provides. It’s all within our grasp. It only requires that we lift our gaze and step out of the maze and onto the path.