Managing risk: Community and social investment and development

19th January 2016

Managing risk: Community and social investment and development

19th January 2016
Black chess pieces

Managing risk: Community and social investment and development

Spending money is easy. Spending limited resources effectively and efficiently is extraordinarily difficult. Doing so in ways that please everyone is impossible as long as demand for money exceeds supply. 

Grantmakers are subject to a range of contradictory demands. For example, they are expected:

  • To innovate – but not to risk failure.
  • To make sure that funding decisions are sound and to make investments with the minimum bureaucracy, speedily, with easy access for small local groups, and at minimum cost.
  • To avoid duplicating funding or to only fund already well-supported causes – and to fund causes that command widespread support from the general public.

The above expectations give rise to two major challenges:

  • How to design grantmaking processes in ways that provide a basis for sound and fair decisions, minimise risks of failure and fraud and, at the same time, retain the grantmakers’ commitment to other principles such as innovation, openness, transparency, accountability and accessibility to small and marginalised groups with little or no track record.
  • How to increase public, political and media understanding of what grantmaking can and cannot achieve, its inherent riskiness and the dilemmas and trade-offs involved.

Meeting these challenges is the basis for a more informed debate regarding efficient and effective grantmaking, and appropriate performance measures for different types of grantmakers – and grants – with different goals.

The purpose of grantmaking organisations is to spend money in pursuit of their objectives which they attempt to fulfil by working through independent intermediaries. This is an inherently risky process for a number of reasons.

  • Grantmakers cannot typically inspect the quality of the finished product before the decision to purchase/fund.
  • Grantmakers do not have specialised market or development knowledge. The idea that grantmakers may obtain all the knowledge they need via the demands or applications of intermediaries overlooks the fact that grant applicants come to beg and not to buy. In many cases, grant applicants do not perfectly reflect the needs of end users, i.e. beneficiaries.
  • Grantmakers work through often hundreds or thousands of grantees/intermediaries with whom they have typically had little previous contact and of whom they have little direct knowledge.
  • Grantmakers typically set out to fund new and untried services and thus suffer from the “liability of newness”.
  • Grantmakers need “unbiased” knowledge of intermediaries who have an interest in presenting only that information which they choose to present and which is most supportive of their application.
  • In seeking knowledge of intermediaries and their proposals, in pursuit of the goal of making best use of their resources in achieving their missions, grantmakers are hindered by the lack of any established body of knowledge about the factors associated with “success” (what works).
  • Grantmakers depend on intermediaries over whom they typically have little if any direct oversight or control other than via the terms of the grant. At the same time, despite or perhaps because of their financial independence, the aim of grant recipients is often to maintain maximum autonomy and flexibility, keeping the strings attached to the grant as loose as possible.
  • And grantmakers are expected to overcome these risks with low costs, bureaucracy and overheads.

Grantmakers can attempt to reduce some of the potential risks inherent to grantmaking, but in doing so they are likely to reduce some of the advantages and benefits of grantmaking.

Grantmaking organisations derive their power not so much from their resources per se but from their resource independence. Unlike statutory organisations, grantmaking organisations are not constrained by considerations of government or public approval.

Until very recently, grantmakers/donors made grants with little consideration of efficiency and effectiveness, requiring very little accountability from intermediaries. Although this approach had a number of disadvantages, it also enabled grantmakers to:

  • Fund groups and causes that do not command voter or popular support.
  • Experiment and innovate without fear of failure.
  • Give grants unrelated to performance measurement considerations/criteria.
  • Adopt a hands-off approach to the way in which intermediaries work.
  • Spread grants widely and often thinly.
  • Determine the size and duration of the grant according to the rules and needs of the donor (e.g. formal and informal guidelines concerning maximum size and length of grant) rather than what might be required to achieve an outcome.
  • Support a wide range of new, small organisations that would be unlikely to comply with requirements for, say, receipt of public money.
  • Give grants with minimum bureaucracy both prior to and after grantmaking.
  • Keep overhead costs to a minimum.

These characteristics provided the basis of how donors saw their roles and the expectations others had of them. Grantmakers and others saw the “good donor” as one that took risks, did not interfere in intermediaries’ management, and kept bureaucracy and overheads to a minimum.

Dealing with risk

Funders adopt different approaches to handling risk, some proactive and some reactive.

Types of risk

All funders face a variety of different types of risk in making grants. These include:

  • Person risk – backing the individual maverick innovator.
  • Personnel risk – putting staff/volunteers in danger.
  • Organisation risk – poor management by the intermediary, threatening efficiency and effectiveness.
  • Political risk – challenging the established order; getting too close to lobbying; risk of media disapproval.
  • Environmental risk – factors in the external environment that might cause the project to fail.
  • Means-end/innovation risk – lack of proven/any theory of the relationship between means and ends.
  • Procedural risk – failing to follow agreed or expected procedures in grantmaking.
  • Funding risk – too small grants, and/or for too short a time to be effective, or grants too big for the organisation to handle.
  • Reputational risk – grants that for any of the reasons above threaten the grantmaker’s reputation.

The significance of each type of risk will vary between different grantmakers depending on a number of factors, including their legal/organisational status, values, goals, organisational culture, and their approach to grantmaking.

Goals, values and organisational cultures

Goals and values will have a profound effect on what is considered to carry negative rather than positive risk. For example, some grantmakers may value their reputation for accessibility and low bureaucracy; others may value their reputation for taking political risks, challenging the established order.

Organisational culture more generally will also have an effect on perceptions of positive and negative risk. In many ways, risk-taking is built into the culture of grantmakers in that they may describe themselves as “risk-takers”.  But it is often unclear what types of risk they see themselves as taking.

Between organisations, and within any one organisation, staff and trustees may have very different cultures of risk in terms of both what type and what level of risk they are prepared to take. They may all agree that they are risk-takers but mean very different things by this. Starting with the list above it may be useful for staff and trustees to identify what they mean by “risk-taking” and then consider the level of risk they consider appropriate in each type.

Grantmakers also need to consider how their views on risk-taking fit with other organisational values. For example, is it possible to be a learning organisation without taking risks? Is it possible to be innovative without taking risks? Is it possible to be accessible without taking risks? Are there some organisational goals and values that discourage risk-taking? How does emphasis on achieving pre-specified outcomes, targets, performance measurement and accountability fit with different types of risk-taking?

Skills and other resources

The grantmaker’s skills and other resources will also affect what types of risk it assumes, e.g. does the organisation have the time, resources, knowledge, networks, and tolerance of overhead costs to effectively manage a large programme of small grants?

Identifying risks and tolerance

Each type of risk and ways of dealing with it carries different potential for harm and benefit.

Thus the organisation’s first step in dealing with risk is to identify:

  • What risks it is taking and of what type.
  • What risks it is prepared to take and of what type.
  • Which risks it can reduce without losing other benefits or increasing other harms.

The types of risk the grantmaker is most vulnerable to, which it cares most about and which it can tolerate will vary between grantmakers. Responding to all risks as though they have the same probability, level of impact and involve the same potential for harm and benefit is a recipe for a system paralysed by its own procedures.

Conclusion: Making choices

The discussion above has suggested that:

  • Grantmaking is by its very nature a risky business.
  • Risk is ever-present and has the potential for benefit as well as harm.
  • Risks take different forms and their nature depends on where you stand and what your goals are.
  • Dealing with one type of risk may reduce other benefits and increase other harms.

Grantmaking is a matter of making choices between goals and ways of reaching those goals, between values and principles and between the expectations of different stakeholders. Depending on their type, grantmakers to a greater or lesser degree face a range of strategic, operational and relationship choices.

Strategic choices include:

  • Focusing on the alleviation of symptoms vs. understanding their causes.
  • Focusing on short-term “quick wins” vs. longer-term change.
  • Maintaining independence of government vs. working with government to achieve lasting change and greater leverage, or subsidising state activities.
  • Allowing donor control where this is not compatible with responding to greatest need and/or making the most effective use of money.
  • Remaining true to the funder’s formal and informal intentions vs. responding to change and innovation.
  • Balancing professionalisation of giving with space for “out-of-the-box” thinking.
  • Balancing responsible stewardship of funds with real risk-taking and innovation.
  • Maximising income vs. remaining true to principles and mission.
  • Maximising income for grantmaking vs. spending on infrastructure and organisational capacity to increase effectiveness.

Operational choices include:

  • Balancing the pressure to make grants quickly with the time needed to ensure well-planned applications, sound selection processes and effective grants.
  • Funding those with reputation and proven track record vs. funding the new and the untried.
  • Funding those known to the grantmaker vs. equal chances for all applicants.
  • Regular monitoring of grant recipients vs. allowing flexibility of grant recipients to respond to changing circumstances.
  • Funding only those with the capacity for sustainability vs. taking chances on change.
  • Responding to open applications vs. proactively choosing priorities.
  • Responding to demands and needs vs. staying close to priorities set and principles chosen.
  • Giving a small number of large grants for maximum impact vs. a larger number of small grants for maximum spread.
  • Giving longer-term grants (tying up resources) vs. retaining flexibility via shorter term grants funding core costs vs. funding project costs with an obvious time limit.

The important point is that all grantmaking is a matter of making choices and trade-offs. You cannot have it all ways, and each way carries both positive and negative risks.

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