September 28, 2022

Click here to listen to a related episode on our podcast, No More Mini-Grants for Well-Being. 

It is not that difficult to make a common-sense case to funders that it is in their foundation’s own self-interest to invest in grantee staff and the organizational systems that support that staff (AKA “overhead”).

But once the theoretical case is made, the question becomes: What exactly should funders do differently? At this point in the conversation, funders often ask if there is a “best practice” percentage of their restricted program and project grants that should be allocated for investing in talent capacity – is it 5%? Is it 10%? More?

If there was a simple percentage, presumably they could take it and run with it. Offering a formula would be a lot easier than keeping things customized and complex. Yet I always resisted the temptation because I felt that funders should respond to real need and customize their interventions accordingly.

However, I’m pleased to propose a formula that I think will satisfy funders and nonprofits alike. And it’s as simple as 1-2-3:

  1. First: Identify your current overhead percentage formula. Example: up until now, you’ve allowed 20% “overhead” costs and 80% “program” costs in your grants.
  2. Second: Flip the formula on its head. Now you offer 80% for the cost of grantee  leadership growth, staff development, and operational excellence. Plus you offer 20% for the cost of zoom accounts, muffins, marketing, and handouts for events and programs. That new formula reads like an actual nonprofit budget.
  3. Third: Encourage grantees to use your funds to significantly invest in the well-being, support-systems, and development of staff. Make it widely known that you care about the effectiveness, equity, and endurance of grantees by sharing your new funding formula on your website, in your grant guidelines, and in any grant budget templates.

The overly-generous amount grantees used to pretend they spend on program expenses? No more. Now you and your grantees can spend that on growing a healthy (i.e. less burned-out and more stable), highly-skilled, productive team supported by smooth operations (like good H.R. policies and services) that make their vision and mission sing! And that unrealistic sliver of money you used to allow grantees to use for supporting their staff? Now you spend that sliver on the more realistic, relatively modest cost of programs.

Using your foundation’s capacity for flexibility, long-term thinking, and experimentation, you are now able to meet the needs of your grantees. You have made huge strides in addressing a systemic, chronic problem faced by your grantees and the social sector – what The Bridgespan Group famously dubbed the nonprofit starvation cycle. You quickly helped your grantees to become more equitable, more effective, and more enduring.

(You may be asking: Why not just stop doing restricted program/project grants, and offer general operating support? First of all, this modest proposal assumes that, for better or worse, many funders will continue to opt out of offering general operating grants. Additionally, as Linda Wood, one of the most respected innovators of leadership-focused grantmaking, has argued, offering restricting dollars specifically to support staff and operational excellence is a good in and of itself, and that this is not achieved through general support.)

When considering this modest proposal, some readers of this blog may seek data to show that Flipping the Funding Formula could do all these things. To satisfy this need, I’m pleased to share three pieces of vital recent research from across the sector.

Research from The Bridgespan Group in 2016 found that the most sought-after and yet simultaneously hardest to get type of leadership-focused funding is “overhead funding for talent management capacity”.

The Chronicle of Philanthropy recently featured a 2022 scholarly study of decades-worth of data from 22,000 arts nonprofits, and found that the most successful organizations spent significantly more (like a full third of their budget) on staffing and operations than most foundation grants allow.

And over the last several years, fiscal consultants at BDO FMA and equity consultants at BCT Partners have conducted research to help a coalition of funders adjust their overhead rates. Rodney Christopher, one of the lead consultants on the team with experience as a funder and expertise in nonprofit finances, reported on the Center for Effective Philanthropy blog:

“When [we] conducted research for the MacArthur Foundation, we found that the average indirect cost rate (as reported on IRS Form 990s) of the financially healthiest quartile of more than 130,000 nonprofits is 29 percent. And so, on January 1, 2020, MacArthur increased their allowable indirect cost rate on project grants from 15 percent to 29 percent. Additionally, based on research about the median reported indirect cost rate of the Robert Wood Johnson Foundation’s grantees, on July 1, 2020 RWJF increased its allowable indirect cost rate on project grants from 12 percent to 20 percent.”

These (and perhaps some of the other participating funders) doubled the overhead rates they allow in their grants. This was a remarkable success, and an excellent example  of how meaningful data should inform foundation practices. These funders’ previous overhead rates had likely been established on a more subjective basis (as this study from California shows is the norm across most of institutional philanthropy). And the funders seem to have acknowledged that their previous rates were far below what was actually needed by grantees, and that grants structured in this way might actually harm grantees as they seek to help them.

The foundations, with this data in hand, significantly increased their overhead rates. Based on their public statements, they did so in a thoughtful fashion. But they did so in a relatively cautious fashion – they increased the rates to the minimum they now saw as necessary – the average actual “overhead” rates displayed by the most healthy of their grantees.

That is the current boundary reached by the philanthropic community. Now imagine what it would look like if these and other well-intentioned funders boldly decide to Flip the Funding Formula altogether, going from “overhead rates” of 20 percent to “leadership excellence rates” of 80 percent. 

Once funders establish their Flipped Funding Formulas, nonprofit leaders and workers in the social movements they support will no longer operate in a system that dismisses their labor as “overhead”. Instead, they will be treated respectfully as the bedrock of organizational effectiveness. As has been shown in the for-profit business sector and in research on burnout in the caring professions, that will make an enormous difference to morale, productivity, performance, impact, and retention rates. This in turn will enable leaders to build stronger organizations in the short-term, more sustainable institutions in the long-term, and to improve their mission and programmatic outputs and outcomes. It will also likely increase trust, respect, and collaboration between grantees and grantors.

Program expenses, while still very important, will be treated with appropriate respect on a scale that is more realistic.

The layers of traumas that have been piled on nonprofit professionals in recent years – from the Great Recession to the Great Resignation – have made investments in grantee staff an existential issue. The Flipped Funding Formula would empower and incentivize grantees to invest in their staff in a manner that is urgently, desperately, and clearly needed. 

So if you’re looking to help grantees emerge from the upheaval of the pandemic – if you’re looking to invest in grantee leadership, to engage in more trust-based grantmaking, to advance racial equity, and to become a more flexible funder – while still maintaining a reasonable amount of accountability with your grants – then please accept this modest proposal to Flip your Funding Formula.

You’ll be happy you did. And so will the nonprofits you support and the people they serve.

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