Investing in Capacity Building: The Overhead Pledge

Folks in the business of community building know the story when it comes to outside funders. They fund projects, not organizations.  This policy has meant that many local organizations are starved for funds. They can raise money for specific projects, but can’t invest in their people or in building up their organizations.  In practice, this means that community building organizations operate with insufficient funds to pay people, to build organizations, and to do the job right.  Organizations scale up to deliver new projects, and close when program funding ceases.  There are many reasons why these practices are short-sighted, but the most important relates to capacity building.  Starved for funds, grantees can’t invest in retaining talent, training people, developing new skills, and maintaining an experience base about what works in the field.  We constantly claim that leadership matters in economic development, yet we often fail to invest in the building blocks for effective leadership.  Capacity building–and community building–take money!

I’m now feeling a bit optimistic that this tired funding model is starting to change.  Last month, a group of major foundations, including household names like Ford and MacArthur, signed an “overhead pledge,” i.e. a commitment to do more to help their grantees pay basic business costs, such as rent, overhead, technology and other operating expenses.  This move is long overdue, and the market is ready.  A recent study by the major foundations found that 42% of grantees had less than three months cash on hand.  Thus, it’s not surprising that non-profits may close if faced with lost grants or other shocks.

The overhead pledge is an important first step, and we’ll need to see what happens next. Foundations are now looking at new approaches, such as more flexible funding tools and investment funds for organizational growth and development.  These moves are a critical recognition that community building requires new and good ideas, but it requires capable local leaders and organizations too.  Let’s hope that other foundations and other funders embrace this message as well.