When COVID-19 spurred a nationwide lockdown in India in 2020, a grave need for localised social support emerged. Giving, both private and public, flowed to NGOs working towards combating pandemic-induced challenges such as loss of livelihood for vulnerable communities, food banks, and health and medical support.
In any such social effort, programme expenses attract the big cheques — especially when they come from corporate social responsibility (CSR) initiatives in India. For example, an NGO working on education outcomes might receive funding for books, other online resources, teacher training, curriculum design, etc. But NGOs have other expenses too. In order to achieve long-term and sustained impact, they need to pay for administrative and support expenses not specifically tied to programmes— for instance, rent, electricity, technology and human resource costs. These organisational development and indirect costs, combined with programme expenses, make up an NGOs’ true costs. And underfunding an NGO’s true costs reduces the efficacy and impact of the very programmes that funders support.
Editorial | Killing the licence: On NGOs and funding
To understand how funders and NGOs perceive an NGO’s true costs, and what it takes to build a financially resilient social sector, we surveyed and interviewed over 500 NGOs, funders and intermediary organisations across India as part of our multi-year Pay-What-It-Takes-India initiative.
The funder archetypes
Based on a recent survey of nearly 80 diverse social sector funders, we discovered three distinct funder archetypes — programme proponents, adaptive funders, and organisation builders. The three archetypes represent different beliefs in terms of how philanthropy becomes impact. And those beliefs manifest in different practices around funding indirect costs and organisational development. Programme proponents value programme outcomes above all. Adaptive funders are not rigid and support indirect costs and organisational development, if the NGO makes a case. Organisation builders see value in investing in stronger organisations in addition to programmes.
CSR funders, who now represent a fifth of all private giving in India, principally fall under programme proponents. They mostly contribute little or no money to organisational development and limit what they pay for indirect costs to a fixed rate often below 5%. Our 2020 primary research showed that NGOs’ indirect costs range from 5% to 55%, depending on their mission and operating model, much as a corporate’s sales and administration costs vary significantly by industry and product.
These practices are partly a consequence of CSR funders’ focus on regulatory compliance — amendments to the CSR law in 2021 include substantial financial penalties for non-compliance. Roughly 90% of the CSR funders are relatively small, unlisted companies — and companies that spend less than ₹50 lakh annually on CSR are not required by law to have a CSR committee. They generally leave decision-making and action plans to company boards, who may have little to no experience working with NGOs or on social impact. Hence, their priorities tend to sway towards risk avoidance, compliance, and cost minimisation. Several larger companies have added CSR to the responsibilities of their HR or administration or communications head, rather than hiring professional leads, experienced in the social sector.
Further, not every company is aware of all the facets of the CSR rules they are complying with. For instance, the 5% cap on administrative overhead costs is applicable only to a business’ internal CSR operation cost, not to the grantee’s administrative costs, as is widely perceived. Many CSRs make errors on safety with the unintended consequence of leaving an NGO with unpaid bills or worse still, drawing on its scarce core funding from other donors to pay for these essential costs.
How might this change? For one thing, companies can pool their resources with other mission-aligned CSR or social sector stakeholders, increasing their collective impact potential, and also hire or tap into professionals with experience working with NGOs. Since 2020, the number of philanthropic collaboratives, such as the Migrants Resilience Collaborative that supports migrant workers or Revive Alliance that finances semi- and unskilled workers, have more than doubled.
Learn from peer organisations
In addition, CSR funders would learn from peers who view organisational development and indirect costs differently. For example, ASK Foundation, the CSR arm of ASK Group, is working to enable better livelihoods for rural communities. Until four years ago, the ASK gave annual programme grants to NGOs, limited indirect cost coverage to between 5% and 10%, and did not provide organisational development expenses. Then, it shifted to a multi-year grant making approach and started providing up to 20% support for indirect costs. The shift in practice came after the CSR team presented benchmarks of the higher rates paid by peer CSR organisations and the beneficial effects of a stronger NGO partner on its programme outcomes. These peer examples and impact stories were instrumental in ASK getting board approval for changing its NGO funding policy.
The pandemic also exposed how vulnerable NGOs are to financial stress. Our research revealed that 54% of NGOs had less than three months in reserve funds in September 2020. This number stood at 38% before the pandemic. Without adequate reserves, NGOs cannot pay salaries or bills when faced with an unexpected funding shortfall.
The CSR programmes cannot currently contribute to NGO reserves/corpus by law. However, by covering indirect costs and organisational development, they still help to relieve financial pressure and make organisations more resilient. What’s more, corporates have considerable accounting and finance capabilities that they can offer to NGOs, in addition to their funding. NGOs don’t have clear financial reporting standards and many lack the internal capabilities to undertake a true-cost analysis. A corporate that has developed a relationship of mutual trust with an NGO could offer volunteer financial analysis services to help the NGO calculate true costs and communicate with other funders, and build financial resilience. For example, Edelweiss has a structured employee engagement programme where senior and mid-level professionals voluntarily offer cashflow and financial management, MIS, digitisation and other support pro-bono to NGOs.
Not many CSR funders think this way right now, but CSR practices are maturing. As our research has shown, more CSR decision-makers are shifting their focus from compliance with CSR laws to the social impact they are making. CSR funders are following several themes to make this transition, such as hiring professionals, coming together in collaboratives, and defining and publishing their impact metrics to hold themselves accountable. The idea is to move beyond signing cheques to recognising that, ultimately, what’s good for Indian society is also good for business.
Pritha Venkatachalam is Partner and Co-Head, Asia and Africa, and Kanika Gupta is Senior Associate Consultant, Bridgespan Group.
