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20 July 2013

Charities- the New Normal

Tag(s): Sustainability, Philanthropy
Last year I wrote a blog entitled The New Normal (24th March, 2012 tag Politics & Economics). This was based on a speech by Andrew Sentance, former external member of the Monetary Policy Committee of the Bank of England and now Senior Economic Adviser at PwC.  It seems the phrase has stuck because I recently participated in a seminar organised by PwC on Charities – Managing in a Downturn  and the presenters, Liz Hazell, Head of PwC Charities, and Ian Oakley Smith, a specialist in charity turnaround, described ‘the new normal’ as it relates to charities. It seems that between a third and half of the money that charities receive from government, whether central or local, is being cut as part of the austerity measures. To date the proportions are still quite small but within a few years they will be very big indeed.

Some charities see this as an opportunity because they believe they can provide services better than local authorities. However, during this period of adjustment to ‘the new normal’ uncertainty is debilitating for social purpose organisations. Decisions can be pending for seemingly interminable periods and letters go unanswered.

The Charity Finance Group and the Institute of Fundraising together with PwC have combined to research current practice among charities. 8,000 charities were approached of which 427 took part. 50% of these had responded to the crisis by reducing wages and salaries though not necessarily headcount. Where they had reduced headcount they had increased their usage of secondees and interns. Fundraising has become even more competitive and emphasis is placed on the retention of regular donors, particularly those where a legacy is expected.

The market for charities remains extremely crowded and in need of consolidation. Estimates vary but there are around 170,000 charities with annual income of £36.7 billion and net assets of £90.2 billion. If we define civil society more widely to include not only general charities but also universities, housing associations, cooperatives, faith groups and sports clubs they together receive annual income of £170.4 billion and hold net assets of £228.4 billion. These civil society organisations employ 2 million people, some 7% of the UK workforce and, of course, also depend on millions of volunteers. Nearly 20 million help a charity once a year of which nearly 13 million help at least once per month.

So what is the impact of spending cuts? If the planned spending cuts are passed on proportionately, the voluntary sector will lose around £1.2 billion per year by 2015/6, and £3.3 billion in total. At the same time 67% of the charities surveyed have experienced increased demand for their services while 72% expect further increases, no doubt in response to the long term depression since the banking and fiscal crisis of 2008. While demand for services increases and resources are cut back, 93% of charities surveyed say the fundraising climate has worsened and 89% expect it to get worse still.

How, then, are charities responding to this bleak concatenation of circumstances? 85% are exploring new fundraising options while 63% plan to draw on their reserves. 69% had collaborated with others while 55% had increased trading and other enterprise. 21% said they had merged or were considering it to which I cynically enquired whether this means 1% had merged while 20% say they are considering it. This prompted a discussion in which one distinguished business leader, chairman of three FTSE 250 companies, said he had been involved as a trustee of two charities which had considered a merger. One had gone ahead smoothly whereas the other had been frustrated by the egos of the two CEOs and the two sets of trustees who put their own interests ahead of the beneficiaries. There was a feeling that the Charity Commission could take a lead in encouraging consolidation but most were doubtful that it had the appetite for this. I suggested that funding bodies like the Arts Council were better placed to stimulate this but there are undoubted hurdles. In the private sector there is a whole industry associated with Mergers and Acquisitions where merchant banks, lawyers, accountants and public relations consultants all earn huge fees if deals are done and so seek to encourage this. The charities could not afford their fees but may have difficult legal issues to resolve in terms of merging two sets of articles as to their charitable remit.

PwC recommended a number of winning strategies as to what charities should be doing now. They should understand their market place. They should understand the impact and that of others in the same space. They should explore collaboration if not merger. They should demonstrate clear financial leadership. Above all they should be strategic in all they did. All these require time, expertise and resource and should not be underestimated. To this the participants added that they needed to make sure they had the right people in key positions. This all seems like ‘motherhood and apple pie’ but that is the point about charities. While the profit motive is absent in the delivery of programmes and the management of resources, it is no different from business and so business people with the right motivation can help charities enormously.

Business people will usually offer their help as trustees though personally I prefer to work with the CEO as a mentor where I feel I can make the maximum impact. So what should Trustees be doing in this situation? First let’s consider the role of a Trustee. He or she should act as a critical friend to the management just as a school governor is a critical friend to the staff. But they should ensure the right people are in post. They should protect the assets of the charity. They should set the strategy by which the goals of the charity are achieved and then monitor performance against that. And if the charity is incorporated then the trustees have all the obligations of company directors.

In fulfilling these obligations there are key behaviours we should expect to see. These include honesty and openness and a conviction to put beneficiaries at the heart of decisions. They should refuse to compromise over standards and should not tolerate inefficiency. They should both challenge and support the management. They need to persevere and be decisive. And they should demonstrate a willingness to listen and take advice.

The Charity Commission view on the question of governance is that the issues raised are more relevant than ever. In their guidance It’s Your Decision published recently they explain the key principles of decision making that the courts and the Commission expect trustees to apply when they are making significant or strategic decisions about their charity.[i]  Trustees need to be very mindful of the issues raised, particularly setting aside irrelevant personal views. They must always act in the best interests of beneficiaries and if necessary take independent advice. The advisory community are not known for the low cost of this advice but they will usually discount their rates for charities and in any case the cost of not taking this advice may often be much higher. In some cases the continuation of the charity may be at stake. 

If the trends of increased demand and reduced income continue it is inevitable that charities will face existential issues. In seeking to respond to such challenges a sense of time is critical to maintaining options. These need to be considered in parallel, not in series. Thus the Trustees might explore diversifying income, streamlining operations, focusing on core objectives, collaborating with others, then merger before finally committing to closure. Milestones need to be set for each of these and Trustees need to be prepared to roll up their sleeves and help with some or all of these options.

So Trustees should now be approaching the question of strategy with an open mind. They need to understand the true cost and impact of the charity’s activities. They should research the market for potential partners and benchmark against other charities. These two activities can at times be combined. They should make the best use of independent and/or professional advice. One participant also made a plea that Trustees need to be aware of pension liabilities.

Even after all this is said it seems to me that some more fundamental changes are likely in the voluntary sector. The Olympics demonstrated that with the right appeal and organisation the British are still very willing to volunteer their efforts. There is an increasing appetite for social enterprise and social investment. There is a case for industrial ‘back office’ support even if the front facing imagery of a charity is preserved. We can expect to see substantial private sector collaboration. Despite the difficulties there has to be some considerable consolidation of the sector. Funders are likely to apply performance terms to their donations. Overall we can expect significant changes in the voluntary sector.

Sources: Managing in the ‘new normal’ – adapting to uncertainty PwC 2013
Charity News: Lessons to be learnt: learning from the mistakes of others PwC 2012

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