Four Practices for every NGO in 2022

Recent research focusing on India’s nongovernmental organizations (NGOs) is upending conventional funding wisdom. By and large, funders prefer to bolster programmes and restrict most of their contributions from being used on non-programme-related expenses.

It turns out, however, that this chronic underfunding of indirect costs has long undermined the social impact that funders strive for. Indirect costs are essential for administrative or support functions, capacity building, and building reserves for financial stress. If NGOs are to grow and sustain their impact and survive unforeseen shocks, unrestricted funding is vital.

A new study from The Bridgespan Group describes the array of challenges that NGOs—particularly those in rural and non-metro areas or led by members of the Dalit, Bahujan, or Adivasi communities—face in building their strength and resiliency. To tackle these barriers, here are four path-changing practices for funders and NGOs that can help them deliver greater social impact.

1. Develop Multiyear Funder-NGO Partnerships

Funders often view grants merely as short-term, transactional arrangements. They see no need to get to know a grantee’s true costs. By contrast, multiyear partnerships nurture trust built on mutual understanding of the NGOs’ needs and actions. “Once trust is established, we leave the actual expenditure to grantees. Our focus is on [the] actual achievement of shared goals,” said one funder.

A commitment to longer-term collaborations allows both funders and NGOs to focus on all the elements required to deliver greater impact.

2. Close the Indirect-Cost Funding Gap

Contrary to some stakeholders’ beliefs, indirect costs are not “a waste of money.” Rather, they encompass expenditures essential to the success of an organisation, such as salaries for administrative staff and leadership, fundraising expenses, and rent and electricity.

NGOs can make adequate funding possible by clearly communicating and engaging funders in conversations about their indirect-cost needs. Funders can also respond by not assuming low, fixed indirect-cost rates.

Cost transparency and open communication on cost structures and efficiencies would also enhance mutual trust. As that trust grows, funders can further invest in unrestricted grants that enable NGO leaders to put money into critical non-programmatic uses.

3. Invest in Organizational Development

For NGOs to grow, they must prioritize and invest in organizational development, such as strategic planning, leadership development, and technology infrastructure. NGOs typically pay for organizational development out of unrestricted funds, but such funding remains relatively hard to come by.

Funders can begin by providing training to their own grant staff and program officers to understand the importance of investing in grantees’ organizational development. Additionally, funders can communicate to grantees that they understand the importance of building strong organizations and are willing to provide needed financial and non-financial support.

4. Build Financial Reserves

The COVID-19 pandemic has highlighted not only the role that NGOs play in serving low-income and marginalized communities, but also the need for organizations to have cash reserves in the event of an abrupt drop in funding. 63% of NGO respondents to our survey saw their funding decrease during the pandemic, and for many, this decrease in grants coincided with a sharp increase in demand for services.

When possible, funders can encourage their grantees to set aside operating surpluses to build reserves. Also, NGOs should help funders understand the importance of generating a surplus and raising reserve funds to build financial resilience. When NGOs think longer term about fundraising, their strategies might also include seeking multiple funders and articulating the connections between financial health and the ability to grow their impact.

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