Starting a movement to Pay What it Takes

When I was growing up, one of my favourite Mancunian bands was New Order. In 1983 the band released a 12-inch single called Blue Monday (which will tell you how old I am). The cover art was intricate and amazing – cut to look like a floppy disk, featuring a brightly coloured strip encoded with a secret message. The song and the cover were hailed as innovative, and it rose up the charts, holding its place there for years. By all these measures, Blue Monday sounds like a phenomenal success. But the story goes that the single cost more to manufacture than it could be sold for. So, when I bought my copy, it cost the record company money.

When I accepted my first CEO job back in the early 2000s, I did not expect to be facing a Blue Monday situation. By so many measures, this not-for-profit organisation was performing exceptionally well. An independent evaluation confirmed that the work we were doing (focusing predominantly on Aboriginal communities) was having a positive impact and doing what people wanted it to do. But as I got busy with the board and team to bring in more funding and deliver more projects, I realised that the more we delivered on, the more the organisation was losing money.

I made a rookie CEO mistake of not interrogating the finances before I accepted the job. When I did look closely, we discovered that projects were not costed properly. The price did not include overheads. Recognising this, we sought to address it immediately with funders. But at the time it wasn’t a conversation anyone wanted to have. No one was willing to pay indirect costs. So, for the organisation that meant that for each dollar we brought in, we had to find a way to fill the gap between that dollar and what it actually cost.

The organisation worked at the pointy end of change on politically sensitive issues. Communities trusted the brand grown over 25 years. Because the work was demonstrably effective, we were always attracting new projects and new funders. So, for some time I was able to operate under the misapprehension that we were doing well. One year we'd even made a small surplus.

But when I really examined it, I found that over ten years the organisation’s reserves had been slowly but surely eked away.

With the support of the board, I began to look at three key things that could help: raising income, the operational model, and the revenue model. 

Raising income

Through project funding, we had increased the organisation’s income by 100 per cent. But we still needed to broaden its income streams. Even though our work was deemed to be charitable, and we were a not-for-profit, the DGR status of the organisation meant that a lot of charitable giving was not open to us. A simple technical fix would have been to change the status. But, to cut a long story short, we pursued this until the point we received legal guidance that we would not be successful in our bid, and we would have to be active in parliament to apply for special dispensation for ‘DGL 1’. At the time, with a Liberal government in place, it was made clear that wouldn't be happening.

Operational model

We could see the social enterprise model was taking off in the UK and Europe. Although the concept was relatively new in Australia, we recognised that essentially, we were a social enterprise. If we could grow a proportion of our work to be commercial, that could help fund our charitable work. It could be a way to bring in income that was not wholly reliant on winning funding or government contracts, or tied. To do that we would need to really understand our indirect costs, reprice everything and test them in the market.

Revenue model

All of our funding was tied to projects. Many times, we applied for funding to cover the cost of our overheads, but we were never successful in that. In the end, we focused on the social enterprise model––applying commercial rates and looking at what investment would be required to support the charitable work, and how long it would take us to turn a profit. Once we'd done the modelling, we determined it would take two and a half years. The problem was there wasn't two and a half years left in reserves. So, we went to all our existing funders and allies and said we need this amount of money over two years to get us over the line. We also looked at getting a loan but again the social enterprise model was not really understood, so people were not interested in loaning either at a commercial or concessionary rate. 

Finally, the board made the decision that the best thing for the organisation was to go into hibernation and release its assets into the community. Over 18 months, with my 2IC, we finished the projects we were funded to do and worked to make sure staff were supported as best as possible. We tried to raise awareness in the sector about what was happening, being really honest and open about the challenges we faced. 

I’m still thinking about this experience but from the other side of the fence now. One of the hats I wear in this sector is CEO of the Siddle Family Foundation, a new family foundation in Australia. I’m keenly aware of the challenges for-purpose organisations face every day.

All funders and for-purpose organisations want to maximise their positive impact, and ensure funds are effectively deployed in service of positive change. But, too often, funding practices force for-purpose organisations to underinvest in their core operational and infrastructure needs. Many people across philanthropy, government, the public and the media expect overheads to be minimised, or not to pay for them at all. Yet they are essential to running a functioning, effective organisation. Over time this underinvestment has the effect of limiting impact and creating financial vulnerability.

The Pay What it Takes (PWIT) movement is a collection of funding and for-purpose organisation leaders, working to recognise that investment is a crucial part of a thriving for-purpose sector that is able to deliver the greatest impact. The PWIT movement comprises of individuals, philanthropic funders and for-purpose organisations committed to understanding what it actually takes to create impact and paying for it. To ensure that for-purpose partners have access to the resources, connections and support required to create impact now, and over the long term.

Overwhelmingly, the work that for-purpose organisations do in this country is intricate and amazing. It is innovative and it is hard to do. As Executive Chair of the Pay What It Takes Coalition here in Australia, I can report that we are in agreement that if, as funders, they do not cover indirect costs, they are perpetuating a starvation cycle. And it isn’t good for them as funders, because it increases the risk that their funding will not have the impact they want it to have. But, you may be already thinking, all this is easy to say but not easy to do.

Under the Pay What It Takes banner we’ve been working to ignite conversations about how to ensure that funding to for-purpose organisations really gives them a solid base from which they can contribute to change, and how can we can plug some of those gaps that exist because of the way that funding is distributed, and the way organisations are reviewed and judged.

On the funders side we’ve published reports investigating the scope of the issue for Australia, hosted webinars and most recently shared the challenges and learnings of leaders across the sector working to implement the Pay What It Takes principles. We’ve also launched Reframe Overheads to provide guidance to for-purpose organisations to bring these principles into conversations with their boards and funders. And we are just getting started.

If both funders and organisations can work to do this together, we have the best chance of avoiding more Blue Monday situations. The work so far has been a starting point, inviting a shift in mindset for the sector. But we  hope to create a community of practice, share our experience, learning and tools, all with the goal of creating sustainable for-purpose organisations that are able to consistently deliver high impact work and benefit communities across the country.