Note: "cost recovery" is now being referred to as "cost transparency". DFID is keen to understand the true cost of delivering projects and ensuring transparency across their portfolio.
Non-profit organisations need to invest in the same infrastructure and overheads as for-profit organisations if they are to succeed. But in reality they often struggle to meet all of the costs associated with delivering and supporting programmes through donor funding alone.
The starvation cycle
During the results analysis of a five-year study into US NGO cost recovery, conducted by Ann Goggins Gregory and Don Howard of The Bridgespan Group, a worrying trend began to emerge. Extensive research revealed that NGOs and donors become trapped in what the researchers termed as the "non-profit starvation cycle".
It’s a chicken and egg situation: a culture of unrealistic donor expectations is fed by reporting from NGOs around the ratios of direct versus indirect programme costs. The starvation cycle is found to be damaging NGOs' ability to sustain themselves in the longer term.
In response, InsideNGO launched a campaign to tackle the issue head-on, which has gained significant momentum in the US. In 2014, Bond and Mango established a similar cost recovery campaign in the UK in order to:
- help NGOs better understand their costs, and their cost transparency, in comparison with others;
- benchmark costs by proposing a standardised method for cost allocation, to allow for enhanced transparency and simplicity;
- provide an evidence base for donor advocacy on better funding policy in this area, to support our messages that overhead ratios cannot be used as a proxy for effectiveness.
Breaking the cycle
We believe that UK and European NGOs are facing the same challenges, and we recognise the need for an evidence base to reveal the extent of the issue and provide a catalyst for change.
The first cohort of survey participants have had tailored feedback and advice in their personalised reports, which will help them become more efficient and effective. The overarching analysis was presented at an event in mid-2015, which showed trends across the sector.
If you work for a NGO, consider taking part in our cost benchmarking survey, run in partnership with Mango. There's more information and details of how to sign on the Mango website.
Find out more
Take a look at the information and articles on the InsideNGO website. We also recommend watching this Ted Talk by Dan Pallotta, founder of the Charity Defense Council, that explores the topic brilliantly.