The presidents of the Ford, Hewlett, MacArthur, Open Society, and Packard foundations have agreed to experiment with new practices to alleviate the chronic underfunding of their grantees. 

Led by presidents of the Ford, Hewlett, MacArthur, Open Society, and Packard Foundations, the two-year project has resulted in an agreement between the foundations to experiment with new practices to address the chronic underfunding of their grantees, as well as a call for other funders to join them in addressing this sector-wide problem. A new report from The Bridgespan Group reports on the findings of the collaborative effort of these foundations.

‘Indirect costs include essential capabilities that drive impact, such as executive leadership, information technology, strategic planning, and knowledge management. When you underfund these indirect costs, you limit a nonprofit’s ability to do its best work,’ commented Jeri Eckhart-Queenan, a partner at Bridgespan and co-author of the report.

Added Michael Etzel, a partner at Bridgespan and co-author of the report, ‘In fact, a couple of years ago, Bridgespan examined the financial health of nearly 300 grantees that account for a third of the combined spending of the top 15 US foundations. Unfortunately, what we found was that more than half suffer from frequent or chronic budget deficits; 40 per cent have fewer than three months of reserves in the bank to cushion financial shortfalls; and, 30 of the 300 organizations showed no reserves—making them technically insolvent. That is what makes the Foundations’ current efforts so critical.

After establishing a shared understanding of how project grants are resulting in insufficient funding for nonprofits’ indirect costs, the five foundations have created five guiding principles to change their grantmaking policies and practices:

• Do what is right, and do no harm;
• Pay a fair share of indirect costs;
• Act with consistency and fairness;
• Stimulate honest and constructive conversations between funders and grantees; and
• Promote efficient and effective allocation of resources.

Julia Silverman, a manager at Bridgespan’s Boston office and co-author of the study, said, ‘While of immediate value to their institutions, the principles can also help other foundation leaders in addressing grantee underfunding and set the stage for embarking on a search for potential solutions.’

With guiding principles in place, the foundations appointed a steering committee composed of senior-level representatives from each foundation. This committee collaborated with leading nonprofit finance advisers (BDO, CostTree, FMA, Humentum, KPMG, and the Nonprofit Finance Fund) and social sector intermediaries (GuideStar, Independent Sector, and Northern California Grantmakers) to create a menu of six grantmaking approaches, ranging from flexible enterprise-level grants to project grants that offer sufficient coverage for both direct and indirect expenses.

Queenan added, ‘Through the five foundations’ collaboration and research, a consensus emerged that the solution for insufficient cost recovery must be adaptable to accommodate more than one way for funders and nonprofits to proceed, and it must provide some degree of standardization to increase transparency and facilitate scale.’

‘We wouldn’t be here today without the leadership and commitment of many individuals and organizations – including those mentioned above- who have dedicated themselves over a long period to interrogating the problem and developing solutions at scale. We are grateful to many for their colleagueship, which continues as we speak,’ said Etzel.

Read the full report here: http://www.bridgespan.org/ending-the-nonprofitstarvation-cycle