Q&A: How a new toolkit is helping nonprofits budget for risk

Every NGO faces roadblocks at one point or another. But SOIL, an organization working to address the sanitation problem in Haiti, was literally prevented from getting from point A to point B. Burning piles of debris blocked the road to its composting waste treatment site in Port-au-Prince. They contacted Open Road Alliance, which directs grants to nonprofits and social good companies that run into barriers that could potentially shut down their operations. The private philanthropic initiative provided SOIL with $100,000 to allow the nonprofit aid organization to build a new composting facility on private land adjacent to the land the Haitian government had informally provided within the city’s solid waste dump. With this support, SOIL could scale up its two sanitation businesses and expand its services in the capital. While Maya Winkelstein, executive director of Open Road Alliance, said she is proud of stories like this one, she tells most organizations she meets that she hopes she never has to get those kinds of calls from them. That is why the organization — together with partners including the Rockefeller Foundation, Goldman Sachs, and the Bill & Melinda Gates Foundation — created a toolkit for grantees and grantors to think through risk assessment. She spoke with Devex about how NGOs can better mitigate and manage risk, so that when the unexpected occurs, they are not out of money to address the problem and in a place where their only option may be Open Road Alliance. The conversation below has been edited for length and clarity. You’ve made 100 grants over the past five years, through one time infusions of cash, recoverable grants and the unexpected fund. Can you talk about how your approach has evolved? What can our readers learn from that evolution? On the investment side, we know this discreet, flexible, strategic, leveraged funding is useful for roadblocks, but we recognized that on the other side of the roadblock is opportunity. There are organizations that come to us in the middle of implementing a project, and they will say, “The good news is it’s going well, and the bad news is it’s going so well, the government just came to me and wants me to expand it threefold within 90 days or else they’ll walk away forever.” Financing in our sector is so slow. There is hardly any opportunity for an organization to seize a moment like that. We realize that opportunities and roadblocks are two sides of the same coin. A lot of time when organizations run into problems, they just need more money now. They can’t wait the three, six, nine, or 12 months it typically takes to get money in our sector from other investors. Either the request for the proposal process takes too long, or funders say the grant cycle is not there, but problems don’t wait for grant cycles. In those situations where it’s really just a matter of cash flow, we could give them a grant, but what they really need is a loan. We launched recoverable grants when we learned the bigger challenge these organizations face is cash flow, and not necessarily lightning striking that requires an equity type of infusion of cash. Finally, what we realized over time is this is a larger systemic issue. Even if we scaled up our own grantmaking to $100 million a year, we wouldn’t be solving the problem. We’d be putting Bandaids on a deeper problem. If we really want to address this issue, in addition to the curative side of helping projects once they are in trouble, we need to look at the prevention side and ask: How do we keep them from coming to our doors in the first place? That’s where the risk management toolkit comes in, it seems. You also mentioned that you’re in the process of quantitatively analyzing your portfolio of investments to be able to point to trends the sector can learn from. As you expand your work in this area, what is your message for donors and implementers alike? I want donors to recognize that risk is a shared responsibility. If you’re truly investing your money for impact, your job doesn’t end when you write the check. That’s in large part when your work begins, particularly if you’re doing restricted funding. You need to realize that and step up versus putting the burden on nonprofits. There are practical steps we can take, and need to take, and first and foremost it is about making it part of conversation. 76 percent of funders do not ask at any point in application process what could go wrong. While all projects are subject to unpredictability, we can’t mitigate or reduce risks if we don’t know what risks exist. For grantees, it’s a bit of a mirror image. Donors can’t help with problems they don’t know exist. The party in this partnership that has the best information about what is a risk and what isn’t a risk is the grantee. Funders should set aside contingency budgets, and nonprofits also have a responsibility to build that cash reserve. Another conversation gaining momentum in the sector, of which risk is an integral part even if it’s not named as such, is around overhead and unrestricted funding. At the end of the day, we do need financial resources to implement projects, and a project that is underfunded to begin with or is operating on a razor’s edge has less of a buffer to deal with the unexpected. And that applies both to organizations as a whole and nonprofits that are running on very tight margins. It also applies to the unrestricted versus restricted grantmaking debate. One of the arguments that we have heard from nonprofits and funders is if you really believe in lowering your risk as a funder, give unrestricted grants, because then you’re actually giving nonprofits the ability to be flexible and to absorb unpredictability. A lot of funders enter into restricted grant agreements thinking they’re limiting their risk because they’re afraid of risk or fraud or that the nonprofit will spend the money on something they shouldn’t. But the reality is it actually ends up undercutting the ability of the project to perform, more often than not. This message of the importance of budgeting for risk seems particularly timely for organizations that have relied on funding from the United States government. Many of them face lot of uncertainty in the new administration and are closely watching what is next for the U.S. Agency for International Development. If the toolkit is meant to keep organizations from coming to your doors in the first place, what are some other options they have? One of our mottos from early on is the world is unpredictable. While I think that is certainly an axiom that has always applied, nothing has really hammered that point home for many of us here in the U.S. as much as the past eight months of America’s political process. Our work is not focused on politics, or any particular issue area that may or may not be affected, but it certainly has not missed us that unpredictability is at the forefront of our minds today. What this time shows is that the only certainty is uncertainty. Knowing that, the real challenge and opportunity is if we know uncertainty is here to stay, that unpredictability is here to stay, the question really becomes what do you do about that? Our toolkit shows that there are things we can do about it. We are the last resort. We often meet a lot of our grantees well before they actually need us. I say, “While I’m so happy to meet you, and you’re doing amazing work, I hope I never have to hear from you again,” and I mean that in a very sincere way. When I hand them my business card, I say “Here’s my card, please keep it handy, this is like your State Farm card. You never want to have to use it but you want to know it’s there and how it works.” There is almost an insurance model to what we do. Another option for organizations is to go back to their existing donors to make sure they have a process in place to help. We do get nonprofits that come to us and we ask, “Have you talked to your donors?” and they say, “No, we haven’t talked at all.” Why? The first answer they give us is, “We’re afraid.” And that is not a relationship grantees or donors want in an ideal world. Nonprofits can also have cash reserves or other unrestricted reserves and emergency funds internally that they have cultivated for this purpose, for the same reason you and I try to make sure we have three months worth of income in our savings account at all times, because you never know. And there are a few other ways to try and raise money quickly, such as crowdfunding. Or if you have a wide base of individual donors, you can do mailing or email blast saying, “Hey can you help us?” But none of these are a guarantee. Read more international development news online, and subscribe to The Development Newswire to receive the latest from the world’s leading donors and decision-makers — emailed to you free every business day.