Effective Grant Making at Oak Foundation Guidelines PDF

_____________________________________________________________________________________________ Internal Guideline Effective grant-making Latest update: 1 September 2023 Core support and true cost coverage Introduction This document is a guide to support Oak staff to use core and project funding in...

_____________________________________________________________________________________________ Internal Guideline Effective grant-making Latest update: 1 September 2023 Core support and true cost coverage Introduction This document is a guide to support Oak staff to use core and project funding in the most effective way. Part I focuses on core support: definitions, advantages, and challenges, and when and how to provide core support. Part II focuses on project support, more specifically on how to make sure that we cover the true cost of the projects we fund. Oak Foundation / Effective grant-making guidelines Not-for-profit organisations notoriously suffer from underinvestment in their administrative functions: IT, HR management, communications, financial processes and systems, fundraising capacity, safeguarding, premises, infrastructure, equipment, general support, management, to name the main categories. This results in a ‘starvation cycle’ (definition on page 3 and illustration in Annex 2). One way of addressing the ‘starvation cycle’ is to promote and make use of core funding. Where core funding is not deemed appropriate, it is essential to ensure that project funding covers ‘true costs’: not only the direct costs of projects but also a fair portion of administration, or indirect costs. 1. Introduction At Oak, we use two main types of funding: core and project support. Core support is unrestricted funding for an organisation, while project grants cover a clearly defined set of activities and related budget. Next to these two main terminologies, we also use the following designations:  Unrestricted programme grants: These are grants are treated in a similar way to core support grants, except that they will cover the costs of a specific work programme within an organisation. This is typically a large organisation with many programmes where Oak is interested to fund only a part of the overall work.  Organisational strengthening grants: These are usually given in the form of project grants and are funds to support an organisation in building its capacity.  Core+ grants: This is a hybrid grant made up of core and project support (a core support grant to which a specific objective with defined outcomes is added). We recognise that both core and project support are important elements of Oak’s grant-making. Core support is a way to provide flexibility to organisations to use the resources in the way they believe will make the most impact. Core support strengthens organisations, as it gives them the ability to use resources where they are most needed. Project support allows Oak to provide direct funding to specific projects we believe will move the needle on issues we are focused on improving. Due to the systemic nature of the issues which Oak tackles, there is a recognition that core, flexible, and multi-year funding will grow to respond to Oak’s programme strategies, which are focused on building stronger organisations and embracing a system change approach. Many foundations have also significantly increased their core support in response to the call for more flexible funding during the Covid-19 pandemic. At Oak, core support is increasing, from 22% in 2013 to 42% on 2021 to 37% in 2022, and the intention is to continue this upward trend in the coming years. 2 Oak Foundation / Effective grant-making guidelines Along with increased core support, there has been growing momentum in the sector to ensure funders are covering the full cost of carrying out the work when providing project support. During 2020 - 2021, 12 foundations, including Oak, have joined forces in the Funders for Real Cost, Real Change collaborative to ensure adequate cost coverage when providing project support. The aim of the collaborative is to support the development of robust organisations that do not languish in a starvation cycle1. Starting with 2022, Ariadne and EDGE are managing the work under the Funding for real Change project. The goal of this guidance is to ensure that programme staff are aware of the issues of true cost coverage and to ensure they can make this support available to grantee partners when relevant. It is our aspiration to practice effective grant making and thus2:  support our partners to become more sustainable through predictable, longer-term funding with a significant component of core support;  assure better cost coverage of all administration costs associated with projects, including start-up and closure costs, and salary costs; and  contribute to stronger organisations that invest in themselves and their employees, while also addressing the unequal power dynamic inherent in the funding relationship. 2. Core support 2.1 Definition Core support refers to unrestricted funding in support of a grantee partner’s mission (and is to be distinguished from specific projects or programme grants). It can also be described as “general operating support” (GOS), “unmarked contributions”, “unrestricted support”, or “general purpose support”. In the interests of clarity and consistency, we recommend that we use “core support” as the standard term used across the foundation, and it refers to unrestricted, unconditional, and flexible funding for the partner to use as they see fit (e.g., to cover organisational development costs, administrative costs, programmatic work, or a combination of all these). Center for Effective Philanthropy has defined core support as `funding that is not restricted to use for a particular programme or expense... non-profit leadership may use these funds at their discretion to further their mission`. 2.2 A case for core support Core support fosters more resilient organisations by helping partners to:  respond to programmatic and institutional emergencies; 1 1 The term ‘starvation cycle’ was developed by the Bridgespan group over a number of years of work on cost coverage described here: https://www.philanthropy.com/paid-content/the-bridgespan-group. The non-profit starvation cycle has been defined as “a debilitating trend of under-investment in organisational infrastructure that is fed by potentially misleading financial reporting and donor expectations of increasingly low overhead expenses.”. See an illustration of the ‘starvation cycle’ in Annex 2. 2 Humentum research, March 2022. 3 Oak Foundation / Effective grant-making guidelines  invest in topic areas where there is a general lack of funding;  cover gaps in funding, including funding exits;  invest in core operations (unlike the project-by-project funding which is preferred by some donors);  diversify funding by using the core support to attract other funders, to match other funding and to feel empowered to have conversations and negotiate with other donors; and  build reserves. Core support helps improve effectiveness and impact by:  allowing investments in core organisational areas such as leadership, fundraising, strategy & MEL, financial management, IT systems, communications, and staff development;  allowing organisations to scale and develop;  investing in systems change work, collaborative efforts, and evolving approaches to create lasting change, because most systems change approaches need the flexibility given by core funding as well as long-term funding support to achieve their goals;  allowing to invest in the eco-system/field building. Core funding fits well with our core values and demonstrates that we approach our grantee partners from a place of equity, humility, and transparency. This includes providing multiyear core funding, simplifying and streamlining processes, soliciting and acting on feedback, being transparent and responsive, and offering support beyond the grant. 2.3 Risks of core support grants It is important for programmes to be aware of the following risks associated with core support to avoid any issues:  Core grants can encourage complacency and stagnation – with the same interventions repeated year after year.  It can be difficult to exit from a core support relationship as it is unclear what the end of the funding relationship should look like.  It can lead to donor dependency, discourage initiative, and allow fundamental problems to remain unaddressed.  It is difficult to maintain accountability – being able to control and monitor how funds have been used and whether outputs have been achieved.  It is hard to measure precisely what are the aggregated results of core grants in terms of impact. (Some suggestions to address this can be found under point 7.)  It is difficult to attribute outcomes (rather than contribute to outcomes). 2.4 When to award core support grants Besides good strategy alignment between funder and partner, Oak can award core support in the following circumstances (this list is not exhaustive or prescriptive):  A small/start-up organisation for a pilot or learning purposes, as an injection of capital to meet all contingencies in its incubation period, or to allow the organisation to grow. When the organisation is small (3-5 people), project funding is almost meaningless.  An anchor/strategic partner of the programme. There should be substantial mission alignment between Oak and the grantee partner, a strong record of success in prior grants, and continued confidence in leadership and vision.  A long-term partner of Oak where there is trust already built in the organisation and the leadership. 4 Oak Foundation / Effective grant-making guidelines  An organisation that is over-reliant on disparate funding streams and requires some ballast to institutional finances. The organisation could be experiencing temporary difficulty in its life cycle, but Oak has decided to lend assistance in a period of transition.  An organisation that is too small to qualify for a project grant but is of enough size and programmatic value to absorb a regular grant (this is especially pertinent to organisations in the Global South).  An organisation undertaking an especially controversial or politically sensitive project in which we are interested. Core support can be used to deflect specific or explicit association to the controversial nature of the work. Notes:  Occasionally, the negotiations leading to a grant include an articulation of donor preferences (e.g., the need to improve financial reporting or communication functions). These preferences can be folded into the grant but fall short of conditions or prescriptions. As elements which have been mutually understood, they constitute “negotiated core support”.  In general, core support should not be used for building endowments or capital campaigns. 2.5 Readiness to receive a core support grant Each programme will have their own criteria to decide if a partner is `ready` to receive core support. Here are some helpful characteristics that seem to be highly correlated with successful outcomes of core support grants (according to TCC Group core capacities).  Ability to articulate a clear vision. Given the open-ended nature of core funding, it is critical that organisations have a strong vision of where they are going, both programmatically and institutionally.  Established organisational credibility. Some potential signs of credibility include leadership being included at decision-making tables for the issue; the ability to convene broad groups of people; and a history of success in the advocacy arena.  An engaged board of directors. While engagement can look different in various organisations (e.g., active fundraisers, strong policy agenda setting, broad networking), having a board that is interested in the success of the organisation and willing to think critically for the organisation is evidence of readiness. A good relationship between the board and the executive director is often a good sign of effective leadership, both on the part of the board and the executive. See Oak`s Governance assessment tool for assessing board effectiveness.  Adaptive capacities such as strong data about the operating environment or ability to measure progress against a strategic plan. This is especially important in assessing the leadership readiness.  Strong financial management. Because of the reduced oversight associated with having general funds, a solid financial management system helps assure that the funds will be used in a transparent and productive way.  Enough staff to cover core programmes and clarity in staff roles. It is important that individuals have clear roles and can function effectively within those roles (i.e., no micro-management). Low staff turnover can sometimes be an indicator of core staff readiness.  Commitment to an issue. A not-for-profit that is focused and strategic in its work and does not actively “follow the money” is likely to be ready to use core support to prioritise its key issue areas.  Open and honest learning culture. An open and honest environment that fosters a healthy “learning culture” is an important cultural aspect, as it is a strong indicator that staff is committed to working together and not in competition with one another. 5 Oak Foundation / Effective grant-making guidelines 2.6 Management of a core support grant Due diligence The invitation to apply for core support should be at the discretion of programme staff. Consistent with current practice, due diligence procedures will apply depending on the financial risk of the organisation. Please refer to the due diligence guidance in the Grant-making and Operating handbook. Specific instructions for organisations on how to apply for core support can be found here: Application Guidelines Discussing objectives during application and grant recommendation stages It can be difficult to identify, isolate, and assess the impact of a core support grant considering all of the organisation’s work. A helpful starting point is at the application or grant recommendation stage; as part of the application process, programme officers and partners need to discuss and agree on the objectives and expected outcomes of the grant. These should be high level, but also specific and not too vague. This will help measure progress during the grant implementation. During the application process, programme officers should also discuss how the organisation will track progress. There is a dedicated section in the application form to capture these plans. It is important that the plans discussed are correctly resourced. This might require a dedicated budget line. Progress reports Grantee partners should report the total project cost in the core support line in GMS – see grant-making manual for additional information. 2.7 Outcomes of core support At Oak, we track impact in two ways: a) As part of the end of grant report, programme officers complete an impact rating that summarises the outcomes that each individual grant has produced or contributed to during the grant. This is done in the GMS, and it is an internal requirement for all grants in all programmes. Guidance for this rating is available here. b) Those programmes that are tracking progress against outcomes in their strategies in Amp Impact also rate progress against those outcomes on an annual basis, at the progress report stage. This allows programmes to capture the contributions that individual grants are making to the outcomes in their strategies. c) Additional items in core support reporting can look at: a. Reliance: has the financial reliance on Oak improved? b. Strategic focus: What extent did the core funding enable a better strategic focus of the organisation? Typical outcomes of core support grants Here is a list of typical outcomes of core support grants that can serve as an inspiration. At organisational level:  Increased ability to leverage funding  Increased funding  Improved programme quality and effectiveness  Increased reputation/visibility/credibility 6 Oak Foundation / Effective grant-making guidelines  Increased influence in the field, including playing a field leadership role  Improved organisational culture  Increased motivation/wellbeing/performance of staff  Strengthened organisational resilience and preparedness  Increased agility and flexibility to adapt to changes in context At field level:  Better ability to align on macro change goals (e.g., system change, policy change,  collective impact, etc.)  Strengthened field networks and field cohesion  Enhanced field influence  Better system outcomes At programmatic level:  Any programmatic outcomes that describe changes in systems or in people that are closely related to the organisation’s core mission, as captured in the GRF (e.g., power building for social movements, improved access to secure housing, increased knowledge of what works for children with learning differences, etc 3. Project funding – ensuring the coverage of true costs 3.1 Definition A project grant, or project funding, is a grant which has a predetermined purpose defined by the receiving organisation in discussion with the funder. The organisation is held to a predetermined line-item budget and must achieve the objectives of the grant by the end of the funding period. The overall purpose of the ‘project funding’ section of this guidance is to give Oak staff an overview of tools that enable the funding of the true costs of projects, and to provide information to help disseminate information on the importance of covering true costs. Overall, the aims are to:  promote a common understanding within Oak on the issues related to the funding of partners’ indirect costs;  ensure that, where funding is made through projects, Oak funds a fair share of the indirect costs incurred by grantee partners to run such projects;  raise Oak staff’s awareness on existing tools to ensure full and fair cost coverage; and  share information which will help Oak staff promote the funding of true costs by co-funders and the donor community. 7 Oak Foundation / Effective grant-making guidelines 3.2 The case for project funding There are many situations when core funding or unrestricted programme funding may not be appropriate. In such cases, project funding can be the way forward. Examples include:  Focus: project funding may be required by grantee partners to support their focus on particular objectives  Co-funders: some co-funders may not be ready to support core funding, but may be ready to take part in a project co-funded by Oak  Lack of full strategic alignment: in cases when there is not complete strategic alignment, project funding may enable funding of the portion of the grantee partner’s strategy that overlaps with Oak’s;  Recent relationship: core funding requires a significant degree of trust and understanding with the grantee partner; in some cases, project funding as an initial step will enable to build such understanding and trust  Innovation: project funding may encourage a grantee partner to innovate in a given area, usually carrying a level of risk that they would not want to undertake on the basis of their core activities.  Very large organisations/BINGOs with many project areas, where Oak only funds a percentage/area of the work. 3.3 Risks of project funding It is important for programmes to be aware of the following risks associated with project funding to avoid any issues:  Strategy: project funding has a risk of being donor-led, and therefore not fully aligning with the partner’s strategy. This, in turn, may divert some of the partners’ resources to activities that are not core to their mission  Co-funders: some co-funders may not be ready to support the full costs of projects, resulting in projects drawing on the partner’s core resources and feeding the ‘starvation cycle’. 3.4 Project funding and true cost coverage Cost types and terminology Fig. 1 overview of cost types Source: Funders for Real Cost Real change, Indirect Cost Rate Guide, 2022. Developed by BDO 8 Oak Foundation / Effective grant-making guidelines The basic principle is that two main categories of costs are incurred to implement projects:  Direct Costs: costs which are directly incurred for a given project. Direct costs are obvious, in that they are easy to identify and link to projects: if the project did not exist, they would not exist.  Indirect Costs: all costs incurred to support projects (i.e., costs necessary to administer and manage the organisation as a whole). When donors provide project support, it is important to ensure a portion of the grant goes to cover these costs. Indirect costs can be seen as more nebulous as they are less clearly attributable to projects: after all, if the project did not exist, the organisation would still need IT infrastructure, a senior management team, staff policies, audits, etc. Without these, though, the project would not be able to run. There is no standard terminology in the not-for-profit and donor communities: indirect costs, overhead, administration costs, administrative costs, infrastructure costs, management costs, core costs, etc. are all terms that are employed across the board and can have slightly different meanings for different people. Nor is there agreement about the categorisation of given costs as direct or indirect. Behind a simple definition, complex cases can arise, and experts have been known to strongly disagree about whether a given cost belongs to one or another category. The principle, though, remains unchanged: both direct and indirect costs (or equivalent terminology) are necessary for projects to be implemented and require adequate funding. True cost funding means ensuring that a fair share of indirect costs is attributed to projects by the donor. Cost recovery is the mechanism whereby costs are attributed to projects by the partner organisation. Oak’s commitment to true cost Oak is committed to ensuring it covers true costs (i.e., a full and fair share of the indirect costs associated with projects). This is one of the main recommendations from the research3 commissioned by the ‘Funders for Real Cost, Real Change’ collaborative. Other recommendations include communicating policies to grantee partners to ensure that they know what they are entitled to ask for, and funding partners to strengthen their financial management, cost recovery, fundraising, and data collection on cost coverage. At Oak, true cost funding in practice means that:  Oak encourages grantee partners to include a fair share of indirect costs in project budgets;  Oak has a flexible rate for indirect costs; and  Oak is committed to funding capacity building to support grantee partners’ development of their cost recovery policies. Encouraging partners to include a fair share of administration costs in project budgets There is an outdated belief that “low” indirect costs means more money is going toward carrying out the programmatic work of an organisation. This has led many donors to favour low overhead rates. However, we have seen this leads to the “starvation cycle”, whereby an organisation does not fully cover the cost of doing their work and becomes financially weaker as a result. Oak staff should encourage partners to ask 3 “Breaking the starvation cycle”, Humentum, March 2022 – see link 9 Oak Foundation / Effective grant-making guidelines for the real share of indirect cost contributions. Oak and other funders also have a significant role to play in promoting the idea of fully covering the cost of not-for-profits’ work. Flexible indirect cost rates The indirect cost rate can vary significantly between different partners, and over time for a given partner. Many factors influence the rate: geography, project type, project portfolio, fundraising strategy, organisational maturity, governance model, etc. In accordance with the principles of true cost funding, Oak has no set benchmark for the indirect cost rate; except in the case of universities where we apply a cap of 15%. (Project funding through universities involves complex hosting structures, reducing the relevance of the indirect cost rate.) This does not mean that the indirect cost rate should not be discussed with partners: on the contrary, all budget reviews should include a conversation and comments on the indirect cost rate. Many grantee partners have good cost recovery systems in place and can articulate the basis for their rate. Should the discussion become technical, programme staff can secure the support of Finance Officers. Building partners’ capacity to seek full coverage of their indirect costs In some cases, grantee partners may not be in a position to articulate their cost recovery practices. Or their indirect costs may be under-funded by other donors. In such circumstances, they may need additional support to develop their policy and practices. Oak’s grant may also be an opportunity to increase partners’ ability to request enhanced cost coverage from other funders. Therefore, a key message is that Oak is ready to fund capacity building in the areas of cost recovery and true cost coverage. Do you need further assistance? If you have any questions about the guidelines or if you require further help in regard to the subject, please contact Adriana Craciun or the Finance Team. 10 Oak Foundation / Effective grant-making guidelines Annexes ANNEX 1 – DECISION MAKING TREE When to propose a core or a project grant? The following decision tree guides programme officers in identifying the most suitable grant type for each partner. It also shows when to include organizational strengthening (OS) grants. Do you want to support Do you want to fund a specific project partner’s mission at large? of the partner/organisation? Check against Is the partner ready to Does the organisation have the basic readiness Receive core support? capacity to deliver the project? Do you want to support a Programme/area of work? Do you want to invest in strengthening capacities? Is the organisation at a good level Do you want to invest in of maturity to receive core support. strengthening capacities? 1. 2. 3. 4. 5. 6. CORE CORE SUPPORT UNRESTRICTED PROJECT PROJECT GRANT OS DON’T SUPPORT + OS PROGRAMME GRANT +OS GRANT SUPPORT OBJECTIVE SUPPORT OBJECTIVE The foundation of core and project support is represented by the strong alignment between Oak and partner missions. Contingent on strong alignment of strategies and satisfactory due diligence, core support can be awarded on its own (1), to support the implementation of the strategy of the partner. When the partner has specific organisational strengthening (OS) needs:  core support can be accompanied by organizational strengthening (OS) support (2). These are hybrid grants, or Core+, where the OS is added within the core grant, as an additional objective.  Organisational strengthening support OS can be given as an independent, project type-grant (6) (through the organizational development pooled fund or as a small grant). If the partner has a wider mission than Oak`s scope, we provide unrestricted programme support (3). This is the case when the organisation is large, and Oak is aligned only with a part/programme of the organisation`s strategy. If there is no strategy alignment between Oak and the partner, Oak can still select to fund a specific project (4) which will advance the goals of the foundation. In case the organisation needs specific organisational strengthening support to implement the grant, this will be added as a specific, additional objective to the project grant (5) or will be given as an independent, project-type grant (6). 11 Oak Foundation / Effective grant-making guidelines ANNEX 2 – ILLUSTRATION OF THE STARVATION CYCLE The figures below illustrates the ‘starvation cycle’, which is at the root of and feeds under-investment in organisational infrastructure. It is an extract from scientific research carried out on the cycle in 2014. Find the research linked here https://www.researchgate.net/profile/Jesse- Lecy/publication/247778048_Anatomy_of_the_Nonprofit_Starvation_Cycle_An_Analysis_of_Falling_Ove rhead_Ratios_in_the_Nonprofit_Sector/links/00463533c77a48cfb1000000/Anatomy-of-the-Nonprofit- Starvation-Cycle-An-Analysis-of-Falling-Overhead-Ratios-in-the-Nonprofit- Sector.pdf?origin=publication_detail 12 Oak Foundation / Effective grant-making guidelines ANNEX 3 – AN OVERVIEW OF THE TECHNICALITIES OF COST RECOVERY The objective of the present guidance is not to set out the detail of various cost recovery methodologies. Should Programme Officers have any questions or be unclear when looking at an organisation or a project budget, their finance team point of contact is available to provide support. For information, the sections below provide an outline of points to be considered. The key to covering the true cost of projects is to ensure that budgets cover both direct and indirect costs. Although the principle is simple, implementation can give rise to different approaches. Oak is flexible as to which methods grantee partners use. The below gives a simple overview of some of the technicalities, further detailed guidance exists – see for example BDO’s 2022 indirect cost rate guide4. Covering direct costs:  in many cases, it is simple to identify these costs: staff whose time is fully devoted to the project, consultants contracted to support delivery of a particular activity, travel undertaken to deliver on a specific objective, etc.  in some other cases, cost allocations are required to ensure adequate budgeting. This is the case for shared costs: e.g. staff whose time is split between projects, requiring a mechanism such as timesheets to ensure adequate allocation; facilities such as premises and utilities, which need to be allocated in accordance with a tracking system or allocation key (e.g. square meterage). Shared costs should be allocated across relevant activities based on a reasonable estimate of the utilisation of the resources by each activity. Allocation bases for shared costs should be:  Reasonable  Consistently applied  Supported by accurate and current data  Appropriate to the particular cost being distributed  An accurate measure of the benefits provided to each activity  it is worth noting that direct costs may be administrative in nature: e.g. costs of recruiting staff for a given project, costs of maintaining financial records for project reporting, costs of ensuring legal or donor compliance, etc. Covering indirect costs:  indirect costs are the costs that are not tracked as direct costs or unrestricted fundraising costs;  the allocation key is the indirect cost rate, defined as follows: percentage indirect costs over direct and unrestricted fundraising costs5. 4 https://insights.bdo.com/rs/116-EDP-270/images/Indirect_Cost%20Guidelines_2022_Final_2-11-2022.pdf 5 The costs of raising unrestricted funds are neither programme nor administration costs, hence their inclusion in the denominator of this calculation 13