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How Philanthropy Is Changing the Culture on Full Cost Funding

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Breaking the nonprofit starvation cycle is not easy, but exciting progress keeps happening. To keep that momentum going, a great deal of culture change is needed. It is an entrenched mindset that has existed for a long time, one that asks nonprofit organizations to eke by with little to no administrative expenses; in response, nonprofit organizations are accustomed to scaling back, making do with as little as possible, while their capacity and potential for innovation dies on the vine.

But change is happening. Donors Forum convened more than 30 foundation CEOs in May to talk about some significant changes:

In the public sector, after significant advocacy from national groups like the National Council of Nonprofits, the federal Office of Management and Budget has issued guidance stating that at least ten percent of federal dollars awarded to nonprofit grantees should pay for their indirect costs. This gives government funders a chance to pay the real costs needed to generate outstanding, sustainable outcomes. Additionally, leading websites such as Charity Navigator and GuideStar are moving away from using overhead costs as a measure of organizational efficiency. Instead, they are developing ways to measure the outcomes organizations produce.

These are only some of the changes needed. Private philanthropy is starting to make some shifts, as well, to support full costs with their grants. I've been heartened to see progress in this area too, as foundations travel their own paths to making these changes.

Let's look at three private foundations that have made this shift recently. We'll call them Alpha Foundation, Beta Foundation, and Delta Foundation. Each has made a change recently to increase their support of real costs, but each arrived at that decision through a different process.

For Alpha Foundation, the roots of the realization came from the CEO's experience in the private sector, which is more skilled at using accounting techniques such as capital depreciation to plan for needed improvements and equipment. Their nonprofit grantees needed that same sort of planning and budgeting know-how, but it wasn't happening. While the Alpha Foundation had no restrictive "overhead" funding policies, most of the budgets they were presented had little or no overhead included. The Foundation recognized that, because of the culture that had built up around overhead funding in the philanthropic field, nonprofits were unlikely to initiate a conversation about overhead costs. Alpha Foundation empowered their program officers to inquire about and encourage applicants to make sure full costs of programs were included in proposal budgets. The foundation worked with its grantees to help them see the importance of funding programs at a level that could support sustainable organizations.

Beta Foundation took a different path. The key for Beta Foundation was their work in evaluating their grants and identifying which kinds of organizations achieved good outcomes over the years. By looking at their grantmaking outcomes, Beta Foundation made the connection between the importance of having strong organizations (not just strong programs) and the need to build the capacity of organizations they supported -- in order to develop the outcomes they wanted to see. Their move toward supporting costs came organically; over time, they saw that such support was necessary to fulfill their mission better. As a result, Beta Foundation deliberately eliminated any mention of "overhead" in their application and reporting requirements and trained program staff to raise this issue with grantees.

Delta Foundation's change came about because of a change in leadership. Such times present a great opportunity to reflect not only on what the foundation funds but how it funds. They also listened to their grantees and other stakeholders extensively and learned how vital greater flexibility to allocate grant dollars could help an organization become a stronger, more dynamic part of the communities Delta Foundation supported. As a result of this reflexive listening, Delta Foundation changed its policy, eliminating the restrictions they had previously placed on grantees limiting how their grant dollars were to be allocated. The response to this change has been incredibly positive, showing how crucial this kind of support is to nonprofit organizations.

With the movement to support full costs growing, this is an exciting time for the philanthropic and nonprofit communities. Together, we have an opportunity to change how we (both grantmakers and charitable nonprofits) operate, and to create better partnerships and stronger organizations that can bring real outcomes and impact to communities for years to come.

What are we doing as an organization that represents both the grantmaker and the nonprofit in this dialogue? Donors Forum has created a statement to share with its members about our commitment to advocate for full costs funding in both the public and private sectors. We will also commit to the education and training of both funders and nonprofits about the importance of full costs funding to achieve successful outcomes.

Effective nonprofit enterprises are functionally integrated entities, and supporting the full costs of program outcomes requires support of all aspects of the organization.