Social Investors: focus on impact, not overheads

South African corporates and social investors should look beyond the conventional wisdom around what it costs to run a non-profit organisation (NPO) when looking to develop their CSI budgets for 2021, and instead focus on the impact these entities can have in their communities.

Keri-Leigh Paschal, executive trustee at social impact initiative Nation Builder, says there’s a perception in the industry that the standard operating costs for any NPO should be no higher than 20-30%, which makes social investors think that anything higher than that is a sign of inefficiency or poor stewardship. Nothing could be further from the truth.

“Fact is, an NPO’s operational costs can vary from 10% to as high as 90%, depending on the type of service rendered. This assumption around a 20% overhead is restricting many NPOs’ ability to run their organisations in a manner that will have the greatest impact,” says Paschal.

Instead of expecting NPOs to run on the ‘leanest’ possible profiles and focusing on the financials in isolation, Paschal suggests that corporates and social investors first look at the type of intervention the NPO is running. Services that involve a lot of staff costs, like psycho-social services, will naturally be resource-heavy, for example. Other organisations are resource-light, and most of their spend will go directly to the programme.

Brendan Smith, the Chief Operating Officer of Valcare (a Nation Builder Community partner) says many NPOs are uniquely specialised to perform very difficult and challenging work, and their staff are often highly qualified and skilled – and should be recognised as such. “NPOs should be seen as professional service providers and partners by social investors, and treated and remunerated as professionals, instead of having to make do or do without,” he said.

Charlene Lackay, Group CSI Manager at another Nation Builder Community partner, the Momentum Metropolitan Foundation, likes to use the analogy of a courier service for development work. To get specific outcomes delivered, you need a reliable, licenced vehicle that is serviced regularly; has qualified drivers; and needs to be refuelled. Your route needs to be well-planned, and you might need to adjust if you encounter traffic or accidents on the way. And you haven’t even talked about the actual goods that you need to deliver yet.

“So how come we don’t think about the social impact work and the need for overheads in this way? There are essentials that need to be in place for good work to happen. In the past year, we’ve seen that organisations who invested in their capacity, their infrastructure, their people and their financial sustainability were much better equipped to deal with the crisis,” she said.

Paschal says it is natural that social investors want to make sure that an implementer organisation is a good steward, and has good financial practices in place. “But we shouldn’t take a blanket approach to overhead costs, but rather focus on the impact that the NPO has. If you have 90% overhead costs, but the impact is through the roof, you are ultimately achieving your social investment objectives,” she says.

Part of the challenge for social investors is that there’s no clear outline for how to measure impact in the NPO space, coupled with a lack of consistent reporting across the industry. Over the last two years, more than 95 social investors and NPOs in the Nation Builder community collaborated to establish a guideline for social impact measurement reporting. The guideline, which will be released in March 2021, will help provide standardised reporting across the social impact sector.

To help break the cycle, Paschal is advocating for social investors to:

  • Support NPOs holistically – which includes assisting towards operating expenses and programme-specific funds, where possible. This gives NPOs autonomy to allocate funds more dynamically to meet their needs and ensure greatest impact, especially in our current uncertain time that requires agility.
  • If you are financially partnering on specific programmes – commit to including a greater share of overhead costs in your partnership.
  • Have open and honest discussions about overheads, and encourage the development of a standard definition of the term. This can help shift the focus to the real target of any social investment: outcomes.

NPOs can contribute by:

  • Centering their strategy discussions around outcomes and the investments needed to achieve them, rather than costs.
  • Demonstrating the business case for overhead investments, and getting investor buy-in.
  • Offering social investors better ways to measure performance, so that audited financials don’t become the only form of accountability.

“In a time when there are fewer resources and more demand for support than ever, there’s a real sense of urgency to standardise the way in which the sector reports and measures impact. We must be able to compare programmes to determine which approaches are having the greatest impact. That’s why we want to help organisations report in a similar manner, that allows both NPO and social investor to query or explain decisions, successes and anomalies to stakeholders,” says Paschal.

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