Q&A: How aid CFOs plan for the unpredictable

PORTLAND, Oregon — Chief financial officers at development and humanitarian organizations face a challenging prospect: How do you create a responsible financial plan when your mission is responding to unpredictable crises? CFOs in the humanitarian and development sector often work on behalf of government and institutional donors with varying compliance demands, funding levels that rise and fall, and strict requirements about what their money can — and can’t — be used for. On top of that, CFOs must strike a balance between spending on individual programs and investing in the internal systems and capabilities that can help build more innovative, effective organizations. Devex spoke to Beth deHamel, chief financial officer at Mercy Corps, about some of the biggest challenges facing the people responsible for financial planning, stewardship, and accountability at humanitarian and development organizations. Here is the interview, edited for length and clarity. As a chief financial officer, what does a relatively flat United States global development budget mean for you? How are you adapting to the downward pressure we're seeing on foreign assistance spending? We are concerned about [U.S. government] funding, and for many years — I've been here five years, but even prior to that — Mercy Corps has been thinking about diversification of funding. Let's start with our traditional sources. About 85 percent of our funding globally is from institutional funding — so direct government: U.S. government, the [United Kingdom], European; and I'd include in that multilateral funding [from the United Nations]. Then about 15 percent is from private donors — corporates and foundations. Looking at those traditional sources, we have been focused on diversifying away from U.S. government, not with the hope that our U.S. government portion goes down, but that as a percentage we grow from other sources. And we have been successful in doing that over the last four or five years with the growth of the European office. European funding has been growing, which is a plus on diversification, and [the U.K. Department for International Development] is a good donor to work with. They're very thoughtful, innovative. However, the overhead that they allow us to recover is significantly less than what we receive from U.S. donors. So that creates a different type of issue for those of us managing finances. With the U.S. government, we have a formula by which we show our actual cost. The European donors tend to have a flat rate, which is about half of what the U.S. government rate is, and sometimes they exclude things from it. And yet it's no less challenging to provide all of the reporting they're asking for — which is understandable, it's public money, and there's accountability for that. But that's a challenge for us and for the sector. “From my perspective, that declining percentage of our total revenue that is unrestricted or indirect cost recovery from the institutional donors is a challenge, because the flipside is that the cost of compliance is getting higher.” --— Beth deHamel, chief financial officer at Mercy Corps Some of our colleagues at smaller organizations will say, “we're not taking European money.” We would never say that, because we value those partnerships and where they're working. If you're a country director, your portfolio is U.S. government, DFID, European, private — and those all come together to help meet the strategy. But from my perspective, that declining percentage of our total revenue that is unrestricted or indirect cost recovery from the institutional donors is a challenge, because the flipside is that the cost of compliance is getting higher. And again, there are good reasons for that. [We spend a lot of] time and effort on anticorruption policies and procedures, making sure everyone in the organization understands we have zero tolerance for corruption. We have zero tolerance for sexual misconduct. Overhead is everything — it's hiring; it's HR policies; it's a legal staff; it's compliance. All the new funding or programmatic modalities, including more cash and vouchers, which are great and efficient, have overhead with them as well. To do a cash program is very efficient and it's dignified for the beneficiaries, but if you don't do it right, you're going to have a lot of other problems. Are you able to have the kind of nuanced conversation with donors? Can you say, “look you're asking us to do more on the compliance side, we can't do it with the overhead you allow?” We do, and it is more or less successful depending on the donor. Sometimes it's easier to have the conversation with a private donor, and some of them have actually revised their policies as a result of conversations with us as a sector. It's not just us at Mercy Corps doing it. But some European donors are pretty much [set in saying], “this is what we pay.” And the U.N. — “this is our rate and that's it.” And they are funding us in places of great need. It's very hard strategically, or for our fundamental mission, to say no to that. But it's a conversation. You know when CFOs get together, we all talk about this. Does that really happen? All the development CFOs get together and talk? It's great. Mercy Corps is actually hosting it this year. It is a very do-it-yourself group. We're just now talking to all of them about what topics we want to have. We do our own presentations. There's nobody from the outside, no vendors, no press. It's a small group. You bring two people — the CFO and whoever he or she wants to bring. And it's great. It's like a cone of silence. We talk about a lot of stuff. It's two and a half days. On the issue of compliance and requirements on things like anticorruption — we've seen some of the high-profile incidents that have pushed those conversations, like money in Syria going to extremist groups. Are those issues still creating backlash for people in your position? Is that something that you're dealing with on a day-to-day basis, or is that just the background context of this compliance regime? It's both. We've been focused on this for a really long time … Our general counsel, our treasurer came from the private sector. I've been in banking for many years, and I'm on the board of our microfinance banks where the money laundering and terrorism takes a tremendous effort. There's been a very high awareness of that here and through policy, practice we've been focusing on it before the incidents in Syria — and the environment is getting harder as things like you mentioned happen and as the banking world gets tighter and tighter. For a commercial bank, we're a small customer — we as a sector — for most of the banks. They don't want to do anything that's going to impair their ability to operate — [such as] by sending money to Syria or Yemen — without a long checklist. So yes, we do continue to focus on that, and our treasury department is talking with banks a lot. I think the awareness and concern in Europe is maybe lagging behind what the U.S. Treasury is leading. But it is a very real concern, and the needs are bigger. The need to operate and get to be in Yemen, Somalia, Syria — five or six years ago that would have been a smaller part of our sector's focus. So how does that tension resolve itself? [It takes] a lot of time. We generally get the issues resolved. We figure out a way to get the money there legally, but it just takes more time, and again more overhead. And sometimes we don't. Hawalas are the informal money traders that have been in the Middle East for centuries, and it's really the only way to get money in some places. We spend time vetting them and making sure our donors know. Before, we did all of our vetting and [the donors] sort of accepted it. Now they're more involved in it with us, which is appropriate, but it's just more time. To operate in a lot of the places you need to have cash. And banks don't have any humanitarian mandate. “It's really incumbent on our sector working with Treasury and the regulators to try to make it reasonable and minimize the risk for the financial sector to work with us.” --— They don't. They're responsible to their shareholders, and getting in trouble with the [Office of Foreign Assets Control] laws of the U.S. Treasury is an existential threat to a bank. So they have no incentive to do that, and I understand why. It's really incumbent on our sector working with Treasury and the regulators to try to make it reasonable and minimize the risk for the financial sector to work with us. And do you think that the way those risks versus needs are currently being weighed and conceived is reasonable at the moment, or is there an overemphasis on risk aversion, considering what you're trying to do in some of these places? I understand government concern with taxpayer dollars — or foundation dollars — going to terrorists. That's the worst outcome for everyone, starting with our beneficiaries, because that would pull back all these efforts. It's worse than bad PR for everyone. It would have all the public funders pulling back. But how do we thread the needle to do that? The focus on it is right. I think in the last year or so, largely led by General Counsel and supported by Treasury, there has been more of an effort to find that. I think the U.S. government and others are understanding that conundrum, and they're the same ones funding the humanitarian assistance. But I don't think it's ever going to be easy, because the growth of the dark economy is there. We all do compliance checking. There are global databases. We just upgraded the system we're working with so every country gets run through this global check. You get a lot of false positives and generally we didn't ever have a match. But one match is a fundamental threat to us. There's a lot of time, effort, and money all running in the background for all of us to do that kind of thing. But none of them are perfect. Stepping back a little bit, I'm interested in how you do budgetary planning. The things that you are responding to are incredibly unpredictable. You've got crises ongoing that you're responding to now, but who knows what the next one is going to be. Do you keep money in reserve in case something pops up? We have reserves, and we always have a pool of money available when an emergency comes out. We work with fundraising, but we fund the initial assessment. In a case like an earthquake or a natural disaster, where there's a defined event, we send somebody out to see what value we can add. And then we see what private funding is coming in, who else is there, who we can partner with. But the bigger question of how we plan year to year is really hard. We're not a company making a product where we can look at global trends and say, “oh, it's going up 2 percent.” So year to year, we budget very granularly. It comes up from the country — what grants are you working on now? Which ones are in the pipeline? Which ones do you think are highly likely? Medium probability? Low probability? Low probability we assume nothing, no revenue. Medium, 25 to 50 percent. It's kind of a formula, which, miraculously, has worked. At any given country level, we'd be hugely off, but aggregated, it's worked pretty well year to year. The “out-year” planning is much harder. It's big-level scenario planning. So taking where we are right now, what happens if the U.S. government is flat and Europe grows? And we never assume an emergency. We never assume there's going to be an earthquake in Nepal, or whatever. When that happens, as I said, we're prepared for the immediate funding, and then often a natural disaster emergency has funding from the public and from other donors coming in to support it. But in our revenue in our out year, and our staffing, we don't assume that. We haven't had a big one for a while. It's just not appropriate planning. But the scenario planning for the out-years is really looking at broad trends. What's happening with the U.S. government? What's happening with DFID? And then, what's happening in the private [sector] because the unrestricted funding that comes from private sector is really important for us. That funds a lot of the overhead and all these costs that we're talking about. And it also funds the really exciting and innovative new things that we're doing. So that's the type of scenario planning — three to five years. People say well, let's do 10 years. We can do 10 years, but we're on pretty shaky ground. You're talking about two presidential elections. Right, and it is also based on where we are in year three and five. So, different than you would probably see in the corporate world. And am I understanding correctly that when you're thinking of those out-year plans, what you're thinking about is funding trends among donors, not crisis trends in developing countries? Right. And then, what we look at for managing the business here — if we are a $500 million organization, only about 10-12 percent of that revenue is unrestricted or indirect cost recovery. And that is what funds all of us here. That's the administrative overhead. So that funds my department, the HR department, the legal department, all of those central support functions. People who aren't on projects. Who aren't directly billed to projects, right. And so that's not much discretionary funding — and it also funds the really interesting innovative things we do, some of which are partially funded by donors. But our Social Ventures fund — how do we think about pay by results? Innovative financing techniques — how do we get something new off the ground? New initiatives and investments in technology. We're putting in a new procurement system, and we're working on a new global HR system, and a system to collect, maintain, and help us really evaluate data on the impact of our programs. Those things which will ultimately lower our costs, make us more efficient, make us better — those have got to be funded out of indirect cost recovery. So that's $50-$55 million every year, and of that you have to have a finance department, legal department, HR. So, what we can actually think about to invest in new ideas in both internal efficiencies and things that will make us externally better and innovative and have more impact, all that comes out of that. There's both the global trending and then, what our staffing looks like, and where do we want to invest? What do we want to do? Do you feel really strapped in that particular area? If you had more money, is there a lot more you could be doing? Could we use more unrestricted money? It's the silver chalice of every fundraising department and every CFO.