Philanthropy for the post COVID world (1/N): Why the current models are broken?

From MSMEs to Startup Ecosystem, when one wants to foster scale and innovation, the first lever that one looks at is capital - More credit, more investment and flexible terms for accessing capital. In the post pandemic world, NGOs are up against a wide range of problems that are not solvable through a business as usual approach. It needs more innovation and scale than ever before. Following the wise of words of Einstein about doing the same thing, there is clearly a need to rethink capital that NGOs have access to - Not only the quantum but also the nature of capital.

In a series of posts, I want to posit two thoughts:

Firstly, Can we shift how NGOs are funded from a cost-based approach to a value-based approach?

Secondly, Is now the time to build a cadre of NGO investors who will help provide the capital and support required to scale innovative solutions?

In the first post of this series, I want to share the extent of the problem. The subsequent two parts of the series focus on answering the two questions above. Let's begin.

There are broadly four types of people who give us money to do what we want to do.

• An Investor: An investor is committed to seeing an organisation succeed. An investor encourages using her money for strategic investments that have the highest impact which markets might not immediately pay for. An investor enables market access, acts as a sounding board, influences peer network for the benefit of the organisation. She also exerts control on the direction of the organisation. An investor's success (and returns) is in seeing the organisation succeed and scale.
• A lender: A lender gives money to help an organisation with cash flow and investments in growth. While a lender has much less skin in the game, the lender is keen to see the organisation succeed and scale since it ensures payback of capital but also creates opportunities for more credit. The lender has limited control on the organisation's direction or strategy and is primarily interested in ensuring risk mitigation.
• A customer: A customer pays for the value delivered by the organisation. A customer does not care about the success or strategy of the organisation. The customer also has limited influence on how an organisation spends the money that the customer has paid as long as the value is delivered as promised.
• A parent: The parent provides money to children for specific needs that they are convinced of. The parent asks detailed questions (and proofs) on where the money is spent ("bring me the bills"). The parent (at least a generation ago) has full control on the child's agency to spend the money.

So, where does a funder - NGO partnership play out today? Most Institutional funders engage with NGOs to identify an organisation that will help them with their mandate to create impact - The mandate could be a legal one (as in the case of CSR) or an institutional one (as in the case of foundations) or borne out of one's intent. Funders assess and decide to work with NGOs based on, broadly, credibility, capability and fitment. The funder doesn't quite care about success and scalability of the NGO beyond the transactional engagement they share. So far, it seems to fit the Customer archetype perfectly well.

But immediately after, they shift to the Parent archetype: Funders ask for bills for every expenditure, salaries of every person involved. They mandate how and when money has to be spent and what the NGO can do with the money. Beyond the funders, the rest of the system also can ask the NGOs the same set of questions.

Now think of any other professional relationship comparable to this one? I doubt you will find one because there is a foundational principle that market is based on:

What you charge a customer is not based on how much it cost you to do it but the value that the other person perceives to receive from the transaction.

And what's more, There is no absolute measure for that value in the market.

From charity to social development

So why should NGOs alone work with cost-based pricing for their work? I believe that stems from what one believes NGOs do. The mental model of a donor about an NGO today is as a charity - NGOs serve as conduits of capital that is meant to directly go to the poor. As custodians of charity, NGOs should ensure that as little of the money goes towards their services. Costs borne by NGOs is seen as transmission costs, which ideally should be zero.

The NGOs of today are not conduits of capital. They are not just feeding the poor, giving away scholarships, handing money to people or distributing resources. They are broadly engaged in three types of activities -

• Service delivery: NGOs ensure delivery of essential services at the highest possible quality for the poor because it is neither viable for markets to deliver them nor feasible for governments to deliver at scale. NGOs build the infrastructure and delivery models that ensure that poor continue to receive services.
• Innovation: NGOs drive innovative models of delivering value to the poor that are both economically frugal and socially sustainable. Over the last years, many NGOs have brought the innovation mindset to solving problems for the poor.
• Building resilience: NGOs organise communities, build agency among people, amplify the voices of the disadvantaged, engage systems to ensure equity and fairness.

None of these fit into a charity model and it is impossible to deliver these effectively in a cost-based model of delivery. We need investors, lenders and value-based customers to ensure this is delivered at scale.

Our current efforts to shift the needle are making it worse

There have been many efforts towards talking about this before. Unfortunately, the current efforts are incremental improvements that reinforce the fundamental bias of the donor - NGO relationship. Donors are encouraged to invest in the organisational development of NGOs; Donors are encouraged to pay for indirect costs of NGOs; Donors are encouraged to understand the true costs of NGO operating costs. All of these reinforce the notion that donors have to know the cost structures of NGOs and create new buckets where they can give money to NGOs that are again governed by the same cost accounting model.

Why don't we flip this completely? What if we could tell donors - "You care about increasing learning outcomes for children. Here are five models of varying costs with different features, interventions and differentiators. No information of costs will be provided but data on reach, engagement and impact will be available. What are you willing to pay?"

How do we know there is impact

Which brings us to a pertinent question that the donors ask - How do we know this is creating impact. It is an extremely important question because philanthropic capital is limited and hence has to be used judiciously. However, cost-based engagements with non-profits don't increase a donor's ability to maximise impact with their funding. In most cases, they actually impede the chances of impact. If donors weren't controlling inputs, how will they ensure that their engagement with NGO partners will create impact?

• Can we build scalable systems to directly listen to communities impacted by the NGOs to see what their feedback is just like we will listen to customers for a for-profit organisation? An idea that has long been pioneered by Hewlett Foundation
• Can we build better benchmarks to understand what has been ROI of various models to see whether increased costs have resulted in increased impact across different time horizons and hold the NGOs accountable for value and not cost?
• Can we be realistic about what impact can be created by an organisation in a time frame? The burden of impact can be more for NGOs than they are for for-profit organisations. But they cannot be beyond what is humanly achievable.

The true cost of the cost-based model

I once visited a mill in Surat where I met a man who worked 20 hours a day without a shirt on his back for 150 rupees a day. The reason he put his life at risk was because his employer couldn't bargain for a better price in the market and squeezed his salary to keep the mill running. At the risk of provocation, the same is true for the social sector today. The inability of the NGOs to raise the bar on the funding they need to run the organisation well is ultimately borne by two stakeholders - One, the employees who work in the NGOs who are putting their families at risk of long-term financial sustainability without any life savings. And two, the people the NGOs serve who can be provided greater value if they NGOs had access to better capital.

To change this course is not simple - It requires building capabilities in NGOs, making regulatory changes, shifting donor mindsets and building better incentives (which I hope to cover in the next two posts). But all of that starts with recognising that the current model is broken and should not just be incrementally nudged but be revamped to suit the current reality we live in.

Do you agree?