How to Overhaul Grantmaking in India

Village meetings facilitated by Adhikar Sakhies of Ibtada in Alwar, supported by EdelGive Foundation. (Photo courtesy of Ibtada)

Grantmaking practices in India too often undercut the very goal that motivates funders’ generosity: impact that improves the lives of individuals and communities. Most funders equate impact with programs, which is where they concentrate their grantmaking. Many show little interest in fully funding essential nonprogram expenses out of concern that such costs detract from their program-focused impact goals.

In fact, the opposite is true. Nonprogram expenses cover essential administrative or support functions across programs, organization development expenses such as strategic planning and leadership training, and reserve funds. Indeed, NGOs with reserves weathered the COVID-19 pandemic far better than those with little or no financial cushion when their funding slowed or disappeared.

The problem, as recently described in a report by The Bridgespan Group, is that the failure to fund these expenses stunts impact by leaving NGOs without the organizational or financial strength to grow or sustain impact, rendering the sector perpetually subscale. Our research—drawing on a survey of 388 NGOs broadly representative of the sector in India, as well as a separate financial analysis of 40 leading and relatively well-funded NGOs—mirrors similar studies in the United States. Indirect costs in India averaged 19 percent of total NGO costs, but 68 percent of grants that the 40 NGOs received over the past three years allocated less than 10 percent for indirect costs.

 

Only 18 percent of the 388 survey respondents said they invest adequately in organizational development, while 38 percent reported fewer than three months of reserves, an indicator of serious financial stress. That was prior to the COVID-19 pandemic. Just eight months into the pandemic, 54 percent reported fewer than three months of reserves. Despite their financial stress, NGOs across India rallied to support the nation’s response to the pandemic.

The stresses of underfunding are felt inequitably. Seventy percent of NGOs led by members of the Dalit, Bahujan, or Adivasi (DBA) communities—who have historically faced systemic socioeconomic discrimination—have reported no operating surplus at all in the past three years, compared to 45 percent for non-DBA-led NGOs. Non-metro and rural NGOs were similarly under-resourced compared with NGOs based in eight major cities.

The research findings paint a picture of a sector stymied by what one NGO leader called “systemic deprivation.”

Start With Relationship Building

At the Dasra Philanthropy Week virtual conference in March, Amit Chandra (founder of the A.T.E. Chandra Foundation (ATECF) and managing director of Bain Private Equity in Mumbai) and Vidya Shah (founder and executive chairperson of the EdelGive Foundation) described a different approach to grantmaking. They made the case for more trust between funders and NGOs as the starting point for understanding and adequately funding nonprogram costs.

Funders and NGOs too often make the mistake of bypassing relationship building in the rush to get a project funded. “Whenever things have gone wrong, and we have reflected back on why that has happened, we have realized we were in a hurry and there was some misalignment which happened in that upfront period,” Chandra explained. “Relationship building is actually a very critical part of this entire journey. It requires alignment of vision on both sides, sharing of plans, making sure that objectives really match. So getting that upfront alignment done, in my mind, is actually very important.”

Once that initial alignment has been established, funders and grantees need to commit to “very clear, crisp communication, which should be transparent.” While good news flows freely, Chandra advises that transparency requires sharing bad news as well: “Funders should not hear bad news from external sources. It is important for people to share what's going wrong, not just what’s going right.”

Clear communication becomes easier when funders visit grantees onsite. “If you make the effort to spend time in the field, you get a realistic sense of what the challenges are for the development partner,” said Chandra. “Trust building is a two-way effort.”

Shah advises that it is important to view grantmaking as co-creation with grantees. “The language we use is around how we grow together,” she said. While funders expect candor from grantees, they also have to give respect, she added. “It’s so important to be respectful as a funder of what the NGO founder is telling you.” Co-creation also requires funders and NGO leaders to show vulnerability in sharing information “with honesty and transparency.”

Build Indirect Costs in the Budget

EdelGive Foundation made indirect-cost budgeting a priority several years ago after realizing that its grantees failed to include important expenditures, which led to frequent requests for line-item adjustments to cover unbudgeted expenses. But NGOs are not the sole source of this problem, Shah acknowledged. “To be honest, even funders need to learn about indirect cost budgeting,” she said. What was happening across the sector is not the NGOs’ fault because that is how funders deal with them. Funders say just give me a budget. Then the funder adds some 5 percent or 10 percent for nonprogram, operational costs, and the NGO gets a grant. Later, all this nonsense starts about line-item adjustments.”

Today, EdelGive works with grantees to clarify a strategic plan, identify what it will cost to implement the plan on a yearly basis, and give the grantee freedom to work within a “true-cost” budget. “The whole idea behind doing that was to spur thinking about budgeting,” said Shah. “It should be a serious exercise. You are not budgeting for the funder, you are budgeting for the organization.”

Chandra agrees that both funders and NGOs lack adequate understanding of indirect costs, a view consistent with Bridgespan research in the United States, described in “Time to Reboot Grantmaking.” “NGOs do not fully know how to budget for it, and the donor community does not have an appreciation for it,” he noted. “I think both communities need to appreciate the importance of indirect costs in achieving desired impact.”

ATECF made budgeting for indirect costs a priority from the beginning. “We specifically had a mission to fund indirect costs because we believe that it was the highest return,” explained Chandra. “We wanted to prove that by funding this cost, you could actually create disproportionate social returns.” He is confident that this research will lend support to this view. “You will start seeing evidence emerge that this is the right thing to do, that doing it generates great returns.”

Make the Case for Organization Development

Organization development is a concept that did not come naturally to India’s funders or NGOs. In EdelGive’s early years just over a decade ago, “there was huge resistance in the NGO sector to any guidance on growth and scale,” recalled Shah. Many funders also resisted, telling her: “‘You do not understand sevabhav.’ Sevabhav is not about growth and scale, it is about serving. So there was this weird situation where funders clearly did not pay attention to capacity building and NGOs themselves had this big hesitation about what capacity would do to their (service) values.”

EdelGive broke through the resistance barrier by offering grantees a package deal: “If you want to work with EdelGive, you get funding, and you get advice on capacity building,” said Shah. The organization adapted a venture-capital approach to shoring up weaknesses in investees’ governance, strategy, and management. “We borrowed that approach and said, if there are areas where we jointly agree you need help, we will find the resources to do so.”

Experience soon revealed four areas where nearly all of the capacity-building assistance was required: strategy and financial planning, human resources (hiring, training, and performance appraisals), systems processes and technology, and fundraising and financial sustainability. Surprisingly, a lot of NGOs do not look at fundraising as a core activity, said Shah. When she asserts that it is almost as important as programs, “a lot of NGOs look at me as if I am stark raving mad,” she added. “But you cannot survive if you do not have the funding. You need capable people because fundraising is an art.”

For his part, Chandra views organization development as a necessary component of funding indirect costs. “We realized that our limited resources could have the biggest impact by investing in the capacity of organizations,” he said. “That’s where we began our (philanthropic) journey almost a decade ago, and it has not disappointed us at all. I can tell you without doubt that funders who have invested in capacity have seen the investment pay for itself many times over.”

Quality Education Support Trust’s (QUEST’s) 14-year growth journey is a case in point. During its first decade, QUEST deployed volunteers to develop educational enrichment programs for children in tribal and rural schools across districts in Maharashtra. Over that time, it succeeded in reaching an estimated 47,000 children. “We had good impact right from the beginning,” Nilesh Nimkar, a QUEST director and trustee, told the Dasra session participants. As a result, requests for scaling its program work exceeded QUEST’s ability to keep up. “We had a lot of demand, but we were not able to say yes to those requests,” Nimkar continued. QUEST remained relatively small because it had no money to invest in organizational capacity building, nor did its leaders have the experience or access to training to develop a growth strategy.

That began to change three years ago when ATECF and Y.M. Deosthalee, former chair of L&T Finance, took stock of QUEST’s expansion challenges and partnered with the organization to pay for a range of nonprogram costs. “Until we had our hands held by the experts for a certain amount of time, we could not describe our organizational needs or our true operational costs because we had never done costing in that way,” Nimkar explained. Investments in nonprogram costs turbocharged QUEST’s growth. Today it reaches 214,000 children, a four-fold increase in just three years.

As evidence from QUEST and others mounts that capacity building leads to greater impact, Chandra urges others to follow. “This is a journey I would encourage all NGOs and donors to start sooner than later,” he said. “It’s not an easy journey. It’s a bumpy journey. It’s a tough journey. But once you begin, you make organizations better and stronger in so many ways.”

Ending Systemic Deprivation

Changing deeply engrained funding practices that have left so many NGOs unable to fulfill their impact potential will take time. This is a complex, systemic issue, and all stakeholders need to work together to solve it. But funders hold the purse strings, which puts responsibility for leadership in their court. For most, that means building awareness of the chronic underfunding problem, followed by changing funding mindsets and practices.

ATECF and EdelGive are among a small number of funders aiming to model these practices. They joined with three other foundations and Bridgespan in 2020 to lead a multiyear Pay-What-It-Takes India initiative committed to building stronger, more financially resilient NGOs. The Children’s Investment Fund Foundation (CIFF), the Ford Foundation, and Omidyar Network India round out the funder participants.

Chronic NGO underfunding is a problem for which a solution already exists. It is time for funders to reflect on and refine their approach to grantmaking.

Read more stories by Pritha Venkatachalam, Donald Yeh & Shashank Rastogi.