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

People, infrastructure, and support staff, and 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 who now supports philanthropic families to navigate their giving journey, 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 encouraged philanthropists to firstly complete due diligence on the for-purpose organisation they have in mind. 

Then consider the overall outcome of their granting and community impact rather than judge a project budget by whether granted funds will be allocated to direct program or indirect costs (often referred to as overheads).

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

Evidence collected via the 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 Australia.

The report, 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 of funding they receive for them.
• Caps on indirect costs leads to lower capability and effectiveness.
• 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, in contrast to the average ask in funding agreements of just 10 to 20%. 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 COVID-19 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.

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 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. 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. You can read an SVA summary of the report here.