The changing role of CSR in NGO funding

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Beyond signing cheques, companies are recognizing that what’s good for society is good for business

Beyond signing cheques, companies are recognizing that what’s good for society is good for business

When COVID-19 triggered a nationwide lockdown in India in 2020, a dire need for localized social support arose. Donations, both private and public, went to NGOs working to address pandemic-induced challenges such as loss of livelihoods for vulnerable communities, food banks, and health and medical support.

In any such social effort, program expenses attract the big checks, especially when they come from corporate social responsibility (CSR) initiatives in India. For example, an NGO working on education outcomes may receive funding for books, other online resources, teacher training, curriculum design, etc. But NGOs also have other expenses. In order to achieve sustainable, long-term impact, they must pay for administrative and support expenses not specifically related to programs – for example, rent, electricity, technology, and human resource costs. These organizational development and indirect costs, combined with program expenses, are the true costs of an NGO. And underfunding an NGO’s real costs reduces the effectiveness and impact of the very programs donors support.

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To understand how donors and NGOs perceive the true costs of an NGO and what it takes to build a financially resilient social sector, we surveyed and interviewed over 500 NGOs, donors and intermediary organizations across India as part of our multi-year Pay-What-It -Takes-India Initiative.

Funder archetypes

Based on a recent survey of nearly 80 diverse funders in the social sector, we discovered three distinct funder archetypes – program promoters, adaptive funders, and organization builders. The three archetypes represent different beliefs about how philanthropy becomes impact. And these beliefs manifest themselves in different practices regarding the financing of indirect costs and organizational development. The promoters of the program value above all the results of the program. Adaptive funders are flexible and support indirect costs and organizational development, if the NGO justifies it. Organization builders see the value of investing in stronger organizations in addition to programs.

CSR funders, who now account for a fifth of all private giving in India, report primarily to program sponsors. They typically contribute little or no money to organizational development and limit what they pay for indirect costs to a flat rate often less than 5%. Our 2020 primary research showed that NGO overhead costs range from 5% to 55%, depending on their mission and operating model, just as a company’s selling and administrative costs vary widely by industry. and the product.

These practices are partly a consequence of CSR funders’ emphasis on regulatory compliance – changes to the CSR Act in 2021 include substantial financial penalties for non-compliance. Around 90% of CSR funders are relatively small, unlisted companies – and companies that spend less than ₹50 lakh per year on CSR are not required by law to have a CSR committee. They typically leave decision-making and action plans to corporate boards, which may have little or no experience working with NGOs or dealing with social impact. Therefore, their priorities tend to shift towards risk avoidance, compliance and cost minimization. Several large companies have added CSR to the responsibilities of their human resources, administration or communications manager, rather than hiring experienced social sector professionals.

In addition, not all companies know all the facets of the CSR rules with which they comply. For example, the 5% cap on administrative overhead only applies to a company’s internal CSR operating costs, not the recipient’s administrative costs, as is widely perceived. Many CSRs make mistakes when it comes to security, with the unintended consequence of leaving an NGO with unpaid bills or, even worse, dipping into its limited core funding from other donors to pay for these essential costs.

How could this change? On the one hand, companies can pool their resources with other CSR or social sector actors aligned with their mission, thus increasing their potential for collective impact, and also hire or call on professionals with experience working with NGOs. Since 2020, the number of philanthropic collaborations, such as Migrants Resilience Collaborative which supports migrant workers or Revive Alliance which funds semi-skilled and unskilled workers, has more than doubled.

Learn from peer organizations

Additionally, CSR funders would learn from their peers who view organizational development and indirect costs differently. For example, the ASK Foundation, the CSR arm of the ASK Group, works to improve the livelihoods of rural communities. Until four years ago, ASK provided annual program grants to NGOs, limited indirect cost coverage to between 5% and 10%, and did not cover organizational development expenses. Then it moved to a multi-year grantmaking approach and started providing up to 20% support for indirect costs. The change in practice came after the CSR team presented references on the higher rates paid by CSR peer organizations and the beneficial effects of a stronger NGO partner on their program results. These peer examples and stories of impact helped ASK gain board approval to change its NGO funding policy.

The pandemic has also revealed how vulnerable NGOs are to financial strains. Our research revealed that 54% of NGOs had less than three months of contingency funds in September 2020. This number was 38% before the pandemic. Without adequate reserves, NGOs cannot pay salaries or bills when faced with an unexpected lack of funding.

CSR programs cannot currently contribute to NGO reserves/corpora by law. However, by covering indirect costs and organizational development, they still help relieve financial pressure and make organizations more resilient. In addition, companies have considerable accounting and financial capacities that they can offer to NGOs, in addition to their financing. NGOs do not have clear financial reporting standards and many lack the internal capacity to undertake true cost analysis. A company that has developed a relationship of mutual trust with an NGO could offer pro bono 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 program where senior and mid-level professionals voluntarily offer cash and finance management, MIS, digitization and other forms of support to NGOs. free support.

Few CSR funders think that way right now, but CSR practices are maturing. As our research has shown, more and more CSR decision makers are shifting their focus from compliance with CSR laws to the social impact they have. CSR funders are following several themes to make this transition, such as hiring professionals, coming together in collaborations, and defining and publishing their impact metrics to hold themselves accountable. The idea is to go beyond signing checks to recognize that ultimately what is 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.

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