CSOs' Organizational Health as Important as Programming
A report by Humentum based on research commissioned by a collaborative of private foundations called Funders for Real Cost, Real Change, shows that when CSOs don’t receive adequate funding for their overhead costs, it negatively affects their effectiveness and financial sustainability.
Based on a survey of 81 CSOs in ten countries across Africa, Asia, Latin America and Europe, as well as support documents and data, the findings show funders’ restricted grants don’t fully cover CSOs’ overhead costs. As such, CSOs subsidize their overhead with funds intended for other purposes. This propagates a cycle in which they don’t reveal their actual costs and a budgetary ‘race to the bottom’ which undermines funder-CSO relations. The research shows intermediaries like UN agencies, the European Commission and INGOs provided the least coverage, perhaps due to their restrictions or because they themselves are underfunded.
Reserves and unrestricted funds are a CSO's safety net and the source of a CSO’s investment for scaling. Thus, funding programmatic impact over organizational resilience makes CSOs vulnerable to financial shocks and funding gaps. The report also states that while small amounts of unrestricted funding (combined with cost coverage) help grantees and don’t increase the cost of funders’ portfolios much, even these small amounts were necessary, but not sufficient, to ensure a CSO’s financial health.
The report recommends funders: commit to covering a full, fair share of overhead costs associated with their grants; directly fund CSO financial management, cost recovery and fundraising capabilities; provide unrestricted funding; and systematically collect anonymized data on grantees' adequate cost coverage to drive funder accountability and adequate overhead. The CSOs surveyed also suggested similar changes, but with the onus on funders (given the unequal power dynamic), such as longer-term partnerships with significant general operating support and unrestricted reserves, and better coverage of project administration, including start-up, closure and salary costs.
CiSoRise aims to help address part of the solution through online transparency of overhead costs, and change the perception that low overhead proves relative efficiency.