The emerging role of CSR in funding NGOs

When COVID-19 led to a nationwide lockdown in India in 2020, a serious need for local social support emerged. Giving to NGOs, both private and public, that are working towards combating challenges induced by the pandemic, such as loss of livelihoods to vulnerable communities, food banks and health and medical aid.

In any such social endeavour, there are major constraints on program spending – 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 there are other expenses from NGOs. To achieve long-term and sustained impact, they need to pay administrative and support expenses that are not specifically tied to programs—for example, rent, electricity, technology, and human resource costs. These organizational development and indirect costs, together with program expenses, make up the real cost of an NGO. And reducing an NGO’s actual cost reduces the efficacy and impact of the programs that funders support.

editorial | Killing the license: on NGOs and funding

To better understand how funders and NGOs understand the real costs of an NGO, and what it takes to build a financially resilient social sector, we have conducted a campaign across India as part of our multi-year Pay-What-It Surveyed and interviewed over 500 NGOs, funders and intermediary organizations. -Tech-India initiative.

funder archetypes

Based on a recent survey of nearly 80 diverse social sector funders, we discovered three distinct funder archetypes – program proponents, adaptive funders and organization builders. The three archetypes represent different beliefs in terms of how philanthropy makes an impact. And those beliefs are manifested in various practices around indirect costs and the financing of organizational development. Supporters of the program attach paramount importance to the results of the programme. Adaptive funds are not rigid and cover indirect costs and support organizational development, if the NGO makes the case. Organization builders see value in investing in strong organizations in addition to programs.

CSR funders, who now represent one-fifth of all private donations in India, primarily come from program supporters. They pay little or no money for most organizational development and limit what they pay for indirect costs to a fixed rate that is often less than 5%. Our 2020 primary research showed that NGOs’ indirect costs range from 5% to 55% depending on their mission and operating model, as much as a corporate’s sales and administration costs vary significantly by industry and product.

These practices are partly a result of CSR funders’ focus on regulatory compliance – amendments to the CSR law in 2021 to include substantial financial penalties for non-compliance. Roughly 90% of CSR funders are relatively small, unlisted companies – and there is no need for a CSR committee for companies that spend less than Rs 50 lakh annually on CSR. They usually leave decision-making and action plans to company boards, who may have little or no experience working on NGOs or social impact. Therefore, their priorities lean towards risk aversion, compliance and cost minimization. Many large companies have added CSR to their HR or administration or communications chief’s responsibilities instead of hiring experienced professional leadership in the social sector.

Also, not every company is aware of all the aspects of CSR rules that they are following. For example, the 5% limit on administrative overhead costs applies only to the business’s internal CSR operating costs, not the grantee’s administrative costs, as is widely believed. Many CSRs make errors on security with the unintended consequence of leaving the NGO with unpaid bills or, worse, draw on its scarce core funding from other donors to pay these necessary costs.

How can this change? For one thing, companies can combine their resources with other mission-aligned CSR or social sector stakeholders, increasing their collective impact potential, and also employ professionals with experience working with NGOs. Can be held on or tapped. Since 2020, the number of philanthropic partners, such as the Migrants Resilience Collaborative which supports migrant workers or the Revive Alliance which finances semi and unskilled workers, has more than doubled.

learn from peer organizations

In addition, CSR funders will learn from peers who view organizational development and indirect costs differently. For example, ASK Foundation, the CSR arm of the ASK Group, is working to enable better livelihoods for rural communities. Until four years ago, ASK made annual program grants to NGOs, limited indirect cost coverage to between 5% and 10%, and did not provide organizational development expenses. Then, it shifted to a multi-year grant-giving approach and began providing support of up to 20% for indirect costs. The change in practice came after the CSR team presented a benchmark of higher rates paid by peer CSR organizations and the beneficial effects of a strong NGO partner on its program outcomes. These parallel examples and stories of influence were instrumental in getting ASK to get board approval to change its NGO funding policy.

The pandemic also exposed how vulnerable NGOs are to financial stress. Our research showed that 54% of NGOs had reserves for less than three months in September 2020. The number was 38% before the pandemic. Without adequate reserves, NGOs cannot pay salaries or bills when faced with unforeseen funding shortfalls.

CSR programs currently cannot by law contribute to the NGO reserve/corpus. However, by covering indirect costs and organizational development, they still help relieve financial pressure and make organizations more resilient. In addition, corporates have adequate accounting and finance capabilities that they can provide to NGOs in addition to their funding. NGOs do not have clear financial reporting standards and many lack in-house capabilities to conduct actual cost analysis. A corporate that has developed a relationship of mutual trust with an NGO can provide volunteer financial analysis services to help the NGO calculate actual 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 provide cash flow and financial management, MIS, digitization and other support to NGOs.

Not many CSR funders think so right now, but CSR practices are maturing. As our research has shown, more CSR decision makers are focusing their attention on the social impact they are making by complying with CSR laws. CSR fundraisers are following a range of disciplines to drive this transformation, such as hiring professionals, coming together in collaboration, and defining and publishing their impact metrics to hold themselves accountable. The idea is to go beyond just signing the check to acknowledge that ultimately, what is good for Indian society is also good for business.

Pritha Venkatachalam is Partner and Co-Head, Asia & Africa, and Kanika Gupta is Senior Associate Consultant, Bridgespan Group.