The role of philanthropy in the face of the Third Sector crisis

If we tried to observe the last two years, we could probably try to refute the “black swan theory” according to which unexpected events, with devastating impacts on the economy and society, occur with extreme rarity. Who would have imagined, in the first place, the emergence of the COVID19 pandemic, which for over two years has tragically introduced a radical discontinuity in sociality and value creation models. And who could have foreseen the outbreak of war in Ukraine, with the humanitarian crisis, the increase in the cost of energy and, consequently, the resumption of inflationary dynamics, with a vigor such as has not occurred for at least two decades in the economies advanced. The sudden slowdown in GDP is there to show that we are preparing to face a new and unexpected challenge, with global scenarios that even prefigure the use of nuclear weapons. Black swans – rara avis in terris, nigroque simillima cycno wrote Juvenal – not only are they not so rare, but they can arrive a short distance from each other.

In this picture of growing complexity, what will be the impact on social needs and civil society organizations? We can probably assume that the inflationary push will affect the cost of living, exacerbating the condition of fragility of low-income households, already exposed to the risk of poverty. In a context like the Italian one, deeply marked by a long cycle of low economic growth and insufficient redistribution policies, the crisis will have dramatic effects. Therefore, as the social demand grows, we should hope for a solid response from the organizations of the Third Sector. Yet many of these, already fatigued by the contraction in public spending, have made a difficult desert crossing during the pandemic. We think, in this sense, of the organizations that manage reception facilities, family homes, RSA, RSD; the growth in the cost of energy will have inevitable effects on the models of financial sustainability and, therefore, on the ability to intervene effectively on the articulation of needs or even on international cooperation organizations that are facing a huge increase in travel costs. By proposing a simplification, the search for sustainability will be able to influence organizational strategies along three possible lines.

  • The first is certainly the shortest (and most painful) way: to reduce the costs of the organization’s structure, starting from the staff, which often, in reality labor intensive, represents the largest item of expenditure and is often already overloaded and underpaid.
  • A second guideline moves towards revenue diversification, repositioning the organization on new areas of need potentially capable of generating revenues. This aspect could be a challenge to innovation but also a risk to the continuity of the organizations mission and to the consistency of the value proposition.
  • The third, more interesting in our opinion, is that of mergers or the sharing of services and structures between organizations that share values ​​and vision. Complex step that requires courageous leadership and resources to invest in the process.

Compared to this picture, what could be the role of philanthropy in mitigating the combined effects of the two black swans?

The stakes are very high, territories that risk seeing the precious safeguards of social inclusion disappear, established thanks to the decades-long presence of Third Sector organizations. To safeguard the gigantic heritage of knowledge and civil passion of Third Sector organizations, we need an enterprising philanthropy. No one is better able than the actors of philanthropy, who work alongside Third Sector organizations in the territories, to understand the magnitude of the challenge. The extraordinary nature of the context requires an equally extraordinary capacity for innovation. By touching some levers, we think it is possible to create the conditions for securing the fabric of civic participation that risks being taken away by the crisis.

In particular, a measure can, in our opinion, determine an immediate positive impact on the management aspects of organizations: increase the percentage share of resources that do not have to be accounted for, often attributed to the indirect costs item. If we look outside Italy, the debate on the remuneration of indirect costs – which include structure costs, design, compliance, safety, risk and contingency management – began way back in 1986 (Indirect Costs – A Guide for Foundations and Nonprofit Organizations, Rand Corporation) but came alive in 2009 thanks to a Research of the consultancy firm Bridgespan. So we started talking about starvation cyclethe so-called cycle of hunger that forces non-profit organizations to continuously present new projects to try to cover the costs of the structure.

In 2019, five American foundations – Ford, Hewlett, MacArthur, Open Society and Packard Foundations – began working together to solve the problem and created the consortium Funding for Real Changea space that collects proposals and practices from the main international players. Although, in the United States, foundations cover 15% of structural costs, a much higher percentage than the average for Italian philanthropy, according to Collected data, the actual average costs facing organizations are 40%. Ford Foundation it therefore decided to bring structure cost coverage to 25% because “organisations’ expenses, from electricity bills to technical support, have a weight especially if funds are received for projects and not for general operational support of the organisation. This is where indirect costs come into play that allow organizations to operate sustainably by covering the operational fees needed to achieve project goals.”

If traditional institutional philanthropy is moving in this direction, the example of an outsider, a black swan like MacKenzie Scott, is even more relevant. Writer and philanthropist and in honor of the news for her divorce with Jeff Bezos, MacKenzie Scott donated $14.4 billion to hundreds of organizations, even very small ones. After careful selection work and due diligence, the funds were given without any constraints, with the utmost confidence in the organization and in its ability to know how to use them “to buy chairs or recruit new staff or simply stop working on the weekend and rest.”

The role of philanthropy in the face of the Third Sector crisis