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An important discussion for funders and grantees alike

by Denise Cheng, Equity Trustees - Relationship Manager, Philanthropy

What does it take to run an efficient, effective, outcomes-driven, for-purpose organisation? 

People, infrastructure, support (or “back-office”) staff, office space. Exactly the same as for any for-profit business. 

And yet, for as long as the charity sector has been around, for-purpose organisations have existed on the smell of an oily rag.

As a former fundraiser, now supporting philanthropic families to navigate their giving in a strategic and thoughtful way, I have an appreciation for the needs of the for-purpose sector.  I know what it takes, in both direct and indirect costs, to support a community.

I have always advocated to philanthropists to firstly complete appropriate due diligence on the for-purpose organisation they have in mind. Then consider the overall outcome of their granting and whether community impact is present or expected down the track - rather than dissect a project budget with specific focus on whether granted funds will be allocated to direct program or indirect costs (often referred to as “overheads”).

In the recent past, there has been much discussion on the global philanthropy scene around the concept of the “starvation cycle” and the chronic underfunding of the sector’s indirect costs.  And now, there is a research study produced by Social Ventures Australia, Philanthropy Australia and Centre for Social Impact, to help us better understand the landscape in Australia.

Evidence collected via Centre for Social Impact’s Pulse of the For-Purpose Sector survey (see below) shows the level of costs covered by different types of funding, highlighting the widespread nature of the starvation cycle in the Australian context.

Philanthropy graph

Paying what it takes: Funding indirect costs to create long term impact provided a number of useful insights, including:

Indirect costs as a proportion of total costs is not an indicator of either the efficiency or effectiveness of a not-for-profit
A Not-for-profit’s ‘true’ indirect costs often far exceed the amount the funding they receive for them
Caps on indirect costs leads to lower capability and effectiveness, and
The drivers of indirect cost underfunding are complex and interrelated.

The report found that the average indirect costs of the organisations analysed was 33% of total costs, which is contrasted to the average ask in funding agreements of 10 to 20% of overall costs.  And a common theme was that for-purpose organisations underinvest in their core capability.
The Philanthropy Pledge 2020 was instituted at the start of the COVID19 pandemic and formalised a commitment that had started to develop in Australia – where grant-makers work with their chosen beneficiaries in a trusting environment, with full disclosure around the challenges of service delivery and full costs to deliver the work, and deliver outcomes.

At Equity Trustees, we have a commitment to strengthening the for-purpose sector which is a key objective of our Blueprint for Deepening Community Impact.  Where we have discretion around granting decisions, we seek to “unlock sector potential” and “fund for impact” particularly through organisational learning, innovation and growth.

With this report, Philanthropy Australia is commencing a body of work focussing on the concept of “pay what it takes”.  Equity Trustees has joined the community of practice which was been established and will be participating in a number of sector-wide workshops to activate the recommendations from the report.

There can be a variety of ways to “pay what it takes” – from providing full-cost project funding, untied funding, or capacity-building funding – and we look forward to collaborating with the sector to better understand how grant-makers can best support for-purpose organisations and the community.

To read more about the report, view this article from Fundraising and Philanthropy magazine.
Read SVA summary of the report.