(This first appeared on the Stanford Social Innovation Review blog on November 1, 2010.)

About a year ago, Don Howard and I co-authored “The Nonprofit Starvation Cycle,” which examines how limiting overhead dramatically impairs nonprofits’ ability to achieve impact. We describe the vicious cycle that starts with funders’ unrealistic expectations about how much running a nonprofit costs and results in nonprofits’ misrepresenting costs while skimping on vital functions. The overhead issue is not “news”—indeed, leaders have been talking about it for decades—but the piece clearly struck a chord.

Over the past year, we’ve seen continued momentum on this issue. In May, the Government Accountability Office (GAO) released its report on the dynamics of indirect cost rates, calling for government grantmakers to come together to fix a system that places “stress on the nonprofit sector, diminishing its ability to continue to effectively partner with the federal government to provide services to vulnerable populations.” In a recent Urban Institute report, 68 percent of nonprofits studied say government is not paying the full cost of contracted services. As demonstrated in our article, foundations also reinforce the cycle. Research by Grantmakers for Effective Organizations (GEO) finds that 80 percent of foundations know their grants don’t cover the costs associated with grant reporting.

Yet despite the worst economy in decades, these reports are not calling for overhead to be cut. Rather, recommendations from a variety of sources seem remarkably aligned: funders should simplify and standardize grant processes, and be open to fully funding grantees’ work; nonprofits should develop a clearer understanding of the fully loaded costs associated with getting results; and nonprofits and funders alike should talk more explicitly about linking costs and outcomes (see Neuhoff’s and Searle’s “More Bang for the Buck”).

There’s the rub. “Explicit talk” between nonprofits and funders can sometimes be the rarest of commodities. Not once in Bridgespan’s own presentations of the cycle have we successfully stimulated conversation between funders and grantees. Maybe we weren’t using the right format. Or maybe when funders and nonprofits get in the same room, honest talk just takes a walk. Lack of trust, mismatched power, and a long history of not telling it like it is are enormous barriers to addressing the root causes of the starvation cycle.

In the end, it is people—not organizations—that make decisions. Decisions need to be made on the basis of mutual understanding. We can talk all we want about systematic change, but until we find a way to improve the tenor of funder/nonprofit conversations, we’ll be a long way from realizing the potential for social change.

What if there were a way to break through and have the right conversations? For example, bringing together funders from one set of geographies and nonprofits from another, or funders from one field and nonprofits from another—potentially detouring around the power dynamics. Or facilitating a multi-step process, letting the two sides practice honest conversation before getting to the really tough stuff.

As we wrote in the “The Nonprofit Starvation Cycle,” changing funders’ unrealistic expectations about overhead and getting nonprofits to understand and report their actual costs will require a coordinated, sector-wide effort. Happily, there are pockets of willing experimenters. In 2011, GEO is hoping to organize a collaborative effort across foundations, nonprofits, and intermediaries (including Bridgespan) to explore steps we can take together to break the starvation cycle. I am familiar with similar collaborative efforts underway at the state and local level in Texas, Massachusetts, and Illinois. I have a hunch that others in the field are contemplating similar approaches and would love to hear about them.

As difficult as they may be, these across-the-aisle conversations can be a powerful tool for change. Have you been part of funder-nonprofit conversations that have addressed big common challenges? What do you think might have been the secret sauce that led to honest talk?