A National Imperative: Joining Forces to Strengthen Human Services in America (Jan 2018)

relatively small number of contracts. We recommend that CBOs continue and redouble efforts to develop alternative revenue sources and to diversify their funding profiles. Examples might include the creation of for-profit or surplus-creating subsidiaries or programs, which focus on providing services similar to the CBOs’ existing core program services, but to recipients or entities with greater financial capacity to pay for them. Alternative funding sources. Human services CBOs also need to make changes to ensure that they have appropriate access to capital and debt funding sources. Steps in this direction should include meeting with potential bank lenders to understand underwriting criteria in advance; making modifications to financial practices and policies as necessary/feasible to meet these criteria; and applying for back-up lines of credit, even if they are not currently needed, in anticipation of possible future needs. Human services CBOs cannot address all the causes of their financial stress on their own. Public and private funders will also need to change their practices and policies. First, and most importantly, funders need to commit to contract terms that cover the full costs of providing services and reviewing their funding models over time. Today, contracts frequently pay at levels that are below the actual costs incurred by the CBOs – either because public agency funders assume that CBOs will reach out to philanthropic funders to cover the difference, because they disagree about what an appropriate full cost level should be, or simply because the government agencies themselves are not fully funded (or some mix of all these reasons). CBOs will never be financially stable and sustainable if “cost minus” contracts are the norm. Full, reasonable costs should include all costs related to delivering services, including both direct program costs and indirect general operating costs, as well as costs related to general operations, capacity-building, and innovation. Reasonable full cost levels should be estimated and agreed, potentially with independent third parties playing a role in establishing a “standard” view of acceptable expected cost levels. For-profit vendors to government agencies expect to be fairly and completely compensated for the goods and services that they provide; CBOs should be able to expect the same. Funders also need to commit to providing CBOs with more flexible outcome-based funding that incentivizes efficiency and performance and the ability to reinvest savings in increased capacities. Today, contracts typically specify artificially created caps on what portion of contract payments can be used for indirect costs. Contracts may also specify artificial compensation caps for senior members of CBOs. These restrictions limit CBOs’ ability to manage their businesses in an optimal way. CBOs need the flexibility to invest in innovation and an infrastructure capable of supporting innovation. At times, this may require the flexibility to spend more on administrative functions or technology; at other time, it may require less. CBOs will always know their businesses best and will be best positioned to make these kinds of budget allocation decisions. In light of that, funders should provide CBOs with flexible outcome-based funding that can be allocated as necessary to support both service delivery and the CBOs’ long-term organizational health and development. Funders should also commit to contract terms and payment practices that support timely payments to CBOs. Contract terms should specify that late payments will trigger the payment of interest and/or penalties paid to CBOs, as is common in the commercial world. They should

70 |   A NATIONAL IMPERATIVE