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Strategic Giving - Why and how Foundations should move from project funding to unrestricted funding.

In a recent, global survey I had the pleasure to coordinate,[1] over 4,000 non-profits were asked a simple question: if you could change one thing about your donors’ behavior, what would you change? 82% of them said that donors should shift from project funding to unrestricted funding.

“82% of non-profits say donors should shift from project funding to unrestricted funding.”

Non-profits sent a clear message. Donors can’t ignore it, and some are actually taking action and shifting towards a different way of giving.[2] However, most Foundations /philanthropists I know are still struggling to understand (1) the difference between project funding and unrestricted funding (or as I will call it, ‘strategic funding’). They also struggle to understand (2) why and (3) how to make this shift. Let me address these points.

1. What is the different between project funding and unrestricted (or ‘strategic’) funding?

The vast majority of funding provided by Foundations and philanthropists is project funding. This means that funding is directed to a specific project. Most of the time, the donor chooses the project from the existing projects of the non-profit they wish to support, and oftentimes, projects are created ad hoc to meet the ‘needs’ of the donor.

Project funding is appealing to most donors because it gives a (false) sense of ‘control and attribution’. Control, because the donor feels that he/she ‘knows where the money is going’; attribution, because it allows the donor to clearly connect their donation to a specific outcome and claim credit for that outcome (ex. building a school).

Unrestricted (or ‘strategic’) funding is – simply put – funding that doesn’t have any strings attached. The recipient can decide to use it in the way that he/she considers most useful (provided of course that this is done in accordance with the mission of the organization and existing laws and regulations).

2. Why is it necessary to move from project funding to strategic funding?

Strategic funding is, in most cases,[3] a more impactful way to give. The decision to support an organization as a whole – and thus not earmarking a donation for a specific project – carries significant advantages for both the donor and the grantee and, most importantly, the beneficiaries who the donors and grantees intend to serve. 

For the grantee, the advantages are enormous. Strategic, unrestricted funds can be used in a more flexible, effective way. First, they can be used for operational expenses, which donors don’t typically want to cover, but which are key to the development of any effective non-profit (think of the importance of investing in M&E, HR, and technology). Second, unrestricted resources can be allocated where the needs are greatest or more urgent: anybody who has experience in managing non-profits knows that beneficiaries’ needs and circumstances can change, which means that money often needs to be re-allocated from one project budget to another, or to projects that may not seem ‘attractive’ but that are necessary and impactful. In a nutshell, unrestricted funding is precious for non-profits, it allows them to grow and to address more effectively the needs of their beneficiaries.

For the donor, the advantages of providing unrestricted grants are also significant. Giving unrestricted funding fundamentally means two things: having more impact (for the reasons described above) and running more efficient, simpler operations. This second aspect is key: when you give unrestricted grants, what you fund is an organization, not a specific project. This allows the donor to adopt selection, grant-making and monitoring systems that can be much more standardized (same process and criteria applied to all applicants), effective and less time-consuming for both the applicants/grantees and the donor (see section 3 below).

"Unrestricted doesn’t mean unaccountable."

What is important to highlight is that ‘unrestricted’ doesn’t mean ‘unaccountable’. When you give an unrestricted grant, your due diligence and monitoring cover the whole of the organization, not just a project. This means you have a much more complete picture and strategic understanding of where your money is going. The common notion that if you fund a project you know exactly how your money is used is a myth: with very rare exceptions, donations to a non-profit go into a single bank account, where they are combined with the donations of many other donors. So, the idea that a specific donation is directly linked to a specific outcome is often false, supported by reports that try to track project funding in ways that is ‘artificial’ and very cumbersome for the non-profit.

3. How to move from project funding to strategic funding?

Moving from project funding to strategic funding is a world of change in terms of approach, but it definitely isn’t rocket science from a technical point of view. It simply requires a few changes in the 4 key processes every donor implements: selection, grant-making, monitoring and reporting. Let me go through them quickly:

Selection. Shifting to strategic grants means that the unit of analysis of due diligence is no longer a project, but the organization as a whole. This means that calls for proposals and applications need to be structured to gather key information on the organization (not just a project). This can be done easily by adopting a simple yet comprehensive list of selection criteria that cover key aspects of an organization’s impact, operations and governance. 

Grant-making. Unrestricted funding should be supported by grant-making agreements that emphasize the freedom that the grantee has for determining their best use of the resources. At the same time, such agreements clearly stipulate that the grantee is subject to rigorous monitoring (‘unrestricted’ is not synonymous with ‘unaccountable’) and that the grantee may be asked to document how it decided to use the resources. The amount of the donor contribution is determined based on the strategic needs of the organization rather than of a specific project, which further supports a strategic, trusted relationship between donor and grantee.

“Moving from project funding to strategic funding is a world of change in terms of approach, but it definitely isn’t rocket science from a technical point of view.”

Monitoring. Here is one of the key advantages of strategic grants: monitoring can be done using the exact same criteria used for selection and due diligence. The result of the initial due diligence basically becomes baseline data. Monitoring will then check that the same level of guarantees and performance that the organization could offer at the time of selection is still present over time. Monitoring strategic grants offers a significantly better experience for both the donor and the grantee, one that is conducive to more lasting, trusted partnerships.[4]

Reporting and Communications. Many Foundations (especially corporate Foundations) cite the need to ‘communicate results that can be attributed to our donation’ as a key obstacle in moving towards strategic grants. This is of course understandable, but fairly simple changes in the narrative used to communicate impact can address this challenge and actually make communication more compelling.

Using an example is the easiest way to explain this. Under the ‘old’ project funding paradigm, a Foundation would claim to have fully funded the building of a specific school. Under strategic funding, a Foundation can claim to have played a key role in supporting the building of many schools. It should be noted that a donation can be earmarked geographically, which can make communication more focused/linked to as specific territory, if necessary. There are many examples of how strategic grants allow a donor to communicate in a way that is actually more ‘mature’, that is less focused on attribution and more focused on the notion of contributing strategically and responsibly to wider impact.

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In a nutshell, philanthropy is growing fast – in virtually every country – and it has the potential to become a significant force of change and development. Such potential can only be realized if donors keep improving not only in terms of how much they give, but also how they give. This is what the move towards strategic grants is all about.

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You can follow me on Twitter: @Nico_Crost

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https://www.impact46.co

[1] Survey was conducted by Epic during the years 2015-2018 as a by-product of its global selection process. A summary of the results can be found in the ‘Epic Outlook’ publications at epic.foundation.

[2] Some of the pioneers in terms of adopting unrestricted grants include Mulago Foundation (USA), Stars (UK), Epic (France), Manan Trust and Tondo Foundation (HK)

[3] I would concede that in some cases it does make sense to grant project funding. This particularly when grantees are difficult to monitor as a whole because of their size or geographic dispersion. Or when the projects they carry out are too disparate in nature.

[4] For more on this specific point, see my OpEd “Goodbye Monitoring and Evaluation (M&E), Hello Monitoring and Collaboration (M&C)” (2017).

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