Is there a one-size-fits-all solution for foundations conducting due diligence on prospective grantees?

Is there a one-size-fits-all solution for foundations conducting due diligence on prospective grantees? Are there standard techniques or formats that one could borrow and apply? To a certain extent, yes. But it’s also true to say that due diligence is an art because the paint brush lies ultimately in your own hands – what you focus on and how you perform it makes the process unique to who you are as a foundation. This is what we realised after looking back at how our process at the IKEA Foundation has evolved over the years.

When the IKEA Foundation started grantmaking back in 2010, there was no due diligence process, or organisational assessment as we call it. Neither was there much need; the first projects were inherited from IKEA’s social initiatives with large organisations like Save the Children, UNICEF and renowned universities. We signed agreements, requested the partners’ bank information and transferred the funds.

Soon after, as our CEO set out to scout new partners, especially innovative and entrepreneurial ones, we introduced a simple process. We requested copies of registrations and charters to verify the organisation’s legal and tax status and objectives. We studied audited financial statements for solvency and income prospects, particularly for organisations with less diversified income streams which could mean that they may become highly dependent.

In the past few years, our Foundation’s profile increased. We professionalised, increasingly received funding requests, and as a result had to make choices. Three incidents shaped our current approach.

The first was the implementation of our grant-management system. Not only did it drive us to consolidate the individual practices into a standard workflow with assigned task owner and approver (risk owner), but the technology also provided opportunities for collaboration. Having grantees complete a self-assessment questionnaire greatly freed up our staff’s capacities.

The second was the reaffirmation of our Foundation’s values[i], which inspired us to examine how aligned our partners are with our own values. Learning about an organisation’s culture and values became an integral part of our assessment.

The third influence came from learnings – failures – that taught us to pay attention to an organisation’s strategic direction and operational growth.

Our due diligence approach today aims to be holistic, covering both hard and soft facts from legal and regulatory authentication to financial health checks to understanding an organisation’s governance, culture, values and ability to grow. Rather than passing judgement, we see it very much as the beginning of a long-term dialogue with our partners, from which we learn where they stand today where they are going tomorrow, and how we can help them on that path.

When one looks at our practice, the elements are not that different than those of others: questionnaire, checklist, desk research, field visits, references, risk registrations and follow-ups.  What it doesn’t tell you is how decisions are made.

Long before the due diligence begins, our programme staff conduct informal screening. With an invitation-only policy, the programme managers scout the players whom they think would be best suited to working on certain concepts. They have already learned a lot about a prospective partner before inviting it to apply, and have often already visited its headquarters or field offices.

Does that make it difficult for our finance staff to veto the partner at a later stage? The answer is no for several reasons. One, the project controllers who perform organisational assessment work closely with their programme counterparts in the portfolio teams. There is generally a high degree of alignment on the choice of partners. Two, by promoting values, our programme managers are well equipped to act as the first line of defence and rule out those cultural mismatches. Finally, our due diligence, though performed on the partner, is always interpreted in the context of a programme’s chance to succeed. This analysis puts the identified risks into contexts and perspectives.  We discuss these risks with our partners and agree on mitigation measures, such as setting capacity building budget, reporting requirements or special contractual terms.

All these factors reduce the need to reject a partner after inviting them for application, unless we identify some deal-breakers during the assessment. For example, we have zero tolerance towards corruption and reputation damage to the brand. Other than that, we are a high risk-taking funder when it comes to programme investments, particularly for proof-of-concept types of grants.

Knowing how much risk your foundation is willing to take is essential. Take an organisation’s income, for example. Undiversified income may be a deal-breaker for some, a warning sign for others, but an opportunity to invest for another. After all, where you position the pointer on the risk-o-meter takes you through all decision-making. Having a formal organisational-risk framework also aligns staff and prevents decisions being skewed by individuals’ risk appetites and subjective opinions. This framework is something we are still working towards.

Going forward, we still have a lot to improve in our own process. We want to further streamline it. At the moment, each assessment can take anywhere between three months to a year (when the informal screening takes somewhat longer) to complete, but some situations will require us to act more agilely. We want to test a tiered approach, something we’ve learned from the OAK Foundation. That approach would allow us to efficiently distribute internal staff resources in proportion to risks that matter. We do not want to be too self-absorbed and forget the larger goal: to help our partners to help many people. If our grantees have to pass one due diligence after another, spending tremendous time and manpower answering similar questions and submitting the same documents, maybe we need to take the lead and be a less demanding donor. So we want to look into alliance initiatives, such as information sharing, shared formats, equivalency/transfer programmes or third-party accreditation. “Glorious future, a lot remains to be done,” as our founder likes to say. This journey will never stop evolving.

[i] Our values are: Togetherness, Cost-consciousness, Lead by example, Simplicity, Give and take responsibility, Different with a meaning, Renew and improve, and Caring for people and planet.