Giving Compass' Take:

• Stanford Social Innovation Review discusses risk management in philanthropy, specifically how to start developing the policies and practices that are necessary for impact.

• The first step is identifying the risks we need to manage (financial, reputational or otherwise). Then, it's time to assess: Do we have enough resources in place to build contingency tools?

• Here's more on why nonprofit leaders need to embrace risk.

There is a system failure in philanthropic practice that is diluting impact and costing funders potentially billions of dollars. The glitch? The absence of common risk-management practices as an integral part of the grantmaking process.

In its Summer 2016 issue, Stanford Social Innovation Review published an article by Open Road Alliance that highlighted this generally overlooked aspect of grantmaking, noting that there is little or no explicit and systematic preparation by donors for contingencies that might damage a project’s success.

In 2015, Open Road conducted a survey, the results of which made plain the extent of the cross-sector avoidance of discussions about risk. Out of 200 randomly selected donors surveyed, 76 percent reported that they did not ask potential grantees about possible risks to the project during the application process. Grantees reported that 87 percent of the applications they filled out did not ask for risk assessments. Why is this of such critical significance? Here’s why: Both funders and grantees surveyed estimated that one in every five grant-funded projects would encounter unexpected obstacles that derailed success.

What’s more, even though funders acknowledged that 20 percent of their projects would likely be negatively affected by unexpected events, only 17 percent of those funders reported that they set aside funds for such contingencies. In short, although funders and nonprofits agree that 20 percent of our potential social impact is at risk, as a sector, most do nothing about it.

Read the full article about embracing philanthropy's risky business by Laurie Michaels and Judith Rodin at Stanford Social Innovation Review.