Transformed support functions reap big rewards for NGOs

By Megha S, Sanjana J, Tarun M and Smita Shah, Genpact Social Impact Fellows On 12 January 2021
Transformed support functions reap big rewards for NGOs

Support functions are ancillary or noncore activities – like HR, learning and development, finance and accounting, and IT – that an organization carries out in order to facilitate its main programs and functions. The output of support functions are not themselves intended directly for the beneficiaries, but they’re essential for successful and effective completion of a process, program, or project.


Organizations with excellent support functions have proved to outperform their peers, ensuring the maximization of donor/beneficiary returns and organization continuity and providing a great and challenging workplace for employees in the long run. Support functions enable the core activities or valueadding processes, and as the organizational backbone, play a vital role in the organization’s performance. However, most organizations neglect support functions while focusing on their core programs and processes. And this can have a significantly negative impact on the funding NGOs obtain from donors.


The Bridgespan Group examined the financial records of 20 well-known, high-performing international nonprofits of varied sizes (from annual budgets of $2 million–$650 million) to determine their actual indirect cost – meaning those not attributed to a specific program or service. It found that indirect costs fell into four general categories: administrative expenses, network and field, physical assets, and knowledge management. Bridgespan discovered that NGOs’ indirect costs made up between 21% and 89% of direct costs. The median indirect cost rate was 40%, nearly three times the standard 15% overhead rate. However, funding practices widely used by governments, foundations, and corporations, including Center for Scientific Review (CSR) grant makers, undermine the development of successful nonprofits. Funders typically support programs, but they scrimp on ‘overhead’.


The terms “overhead” or “support function cost” or “indirect costs” lack a standard definition. To showcase lower overhead expenses in fund utilization, most support function expenses are classified as program expenses.


In India, the CSR Rules of the Companies Act, 2013, Section 135, caps permitted capacity building/administrative expenses at 5% of annual CSR spend – an impossibly low threshold when you consider the financial, human resources, and information technology systems required to run an effective nonprofit. Many governments and multilateral grant-making organizations also have similar caps. The Foreign Contribution (Regulation) Act, 2010, stipulates that administrative expenses in excess of 50% of contributions received must be spent only with prior permission of the Ministry of Home Affairs. 


This persistent underfunding of overhead fuels a vicious cycle in which funders have unrealistic expectations about how much it costs to run a nonprofit, and NGOs feel pressure to conform to these unrealistic expectations and respond to this pressure in two ways: they spend too little on overhead, and they under-report their expenditures on tax forms and in fundraising. This underspending and underreporting in turn perpetuate funders’ unrealistic expectations.


Over time, funders expect grantees to do more and more with less and less – a cycle that slowly starves nonprofits. They are plagued by multiple weaknesses/limitations that are disguised as a lack of or poorly structured support systems, undermining their ability to accomplish largescale projects. These challenges are often magnified as the size and reach of NGOs grow. Directly or indirectly, poorly managed support functions lead to a crisis of accountability and transparency, which in turn blemishes the non-profit’s credibility.


Efficiently managed support systems can significantly contribute not only by helping deal with the challenges that limit their effectiveness through refined organisational skills, but also in making the NGOs transparent, accountable, and credible to public opinion.


Tag : NGOs Transformation

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