So why is a £100m transition fund needed?

The news today (24/10/10) includes widespread coverage of Dame Suzi Leather citing the potential £5bn loss faced by the voluntary sector after the spending review. We’ll come back to that figure in a future blog (and in the meantime, see this), but it’s also worth noting that the government has responded by highlighting the £100m transition fund it announced in the SR. So it seems a good time to me post an article Dave Kane and I recently wrote for Charity Finance that I think explains why resilience and transition are such important issues at the moment…

That the world of voluntary and community organisations (VCOs) is characterised by uncertainty will be of no surprise to anyone. Even the biggest and best public and private sector organisations have struggled to deal with the economic and political shockwaves of the last three years. Yet, I’ve read – and been disappointed by – a number of blog posts that recently have complained that VCOs should have seen the no-longer-impending cuts in public spending coming. It’s not for nothing that Lester Salamon refers to nonprofits as the ‘resilient sector’ . So, the intrepid Dave Kane and I thought we would investigate.

For what it’s worth, many of the VCOs that we talk to and work with have been anticipating public spending cuts in their planning (though to what extent it remains unclear). NCVO’s Foresight programme  has been flagging this as a red light for some time, whilst infrastructure bodies across the country have pulled together to help frontline organisations manage the changes needed so far. Nevertheless, knowing that a perfect storm is coming in from the south doesn’t imply that organisations are sufficiently resilient to weather that storm. This begs the question: what are the sources of resilience? And how resilient are VCOs, and in particular, how resilient are those VCOs that are delivering services (often, though not always, supported by the state) to the most vulnerable in society?

Photo: Resilient, by sierraromeo See

What do we mean by resilience?
Resilience means different things to different people: it’s a contested term . We like this definition from Wikipedia, which is taken from the field of computer networking: resilience is the ability to provide and maintain an acceptable level of service in the face of faults and challenges to normal operation.  For writers such as Noah Raford, it might not even be the optimal status for an organisation as it implies returning back to the form before the period of stress. Raford prefers the concept of organisational agility, or the ability to bend in the face of stress, but then reconfigure oneself to withstand that pressure: Like resilience, agility is also related to as flexibility, but more so in the sense of change or transformation. Either way, one Gates Foundation blogger recently argued that resilience is an underrated quality in nonprofits.

What might organisational resilience mean in practical terms? Academic research on nonprofits would suggest that resilience is more than just about money, but is instead a complex set of characteristics and behaviours, such as good governance . In an excellent recent briefing for Philanthropy Northwest on how to cultivate resilience, tactics included an ability to improvise, behaving collaboratively and ensuring that organisational resources can be quickly rerouted to where they are most needed. One characteristic that caught my eye was the need for redundancy and overlapping capacity: while most organisations are unlikely to have staff twiddling their thumbs in the anticipation of a new need arising, some organisations do hold reserves in anticipation of periods of stress. Bearing in mind the preceding discussion, to what extent might reserves be an indicator of the sector’s resilience?

Recession – Reserves = Resilience?
It’s a well known fact within the sector that any resilience strategy based on building free reserves is a difficult, long-term project for most organisations. It’s a strategy that in the past has not been helped by funders of many stripes: trusts and foundations have often been underwhelmed at best by organisations with substantive reserves, whilst contracts for delivering public services have not enabled organisations to build significant surpluses. The massive public service delivery-led expansion of the last decade has led to a bigger, though not a more resilient sector if reserve levels are any indication (chart 1).

Estimating levels of free reserves is not without problems, particularly when our source data are charity accounts. As such, these estimates are a guide to levels of reserves. They tally well with research on free reserves published by the Charity Commission. Nevertheless, a number of characteristics emerge that have important implications for our understanding of the sector’s resilience. The first has already been noted: that despite a near-continuous expansion over the last decade, reserve levels have remained static as a proportion of expenditures. Second, the headline level of free reserves, £46 billion in 2007/8, which is more usefully expressed as the number of months’ equivalent expenditure, is pulled significantly upwards by the inclusion of grantmaking trusts and foundations. When these are removed – leaving just ‘operating’ charities – reserves are equivalent to an average of 8.5 months’ expenditure rather than 17 months. The median free reserves level for operating charities is 2 month’s worth of expenditure. Our analysis indicates that one third of operating charities do not hold any free reserves.

A third characteristic is the uneven distribution of reserves. The easiest way to demonstrate this is using sub-sectors (chart 2). The sector’s average of 17 months’ expenditure in reserve is clearly influenced by the significant unrestricted assets held by research bodies (most of which are grant-makers) who hold 74.7 months of expenditure in reserves and grant-making foundations who hold 44.3 months. Conversely, employment and training organisations typically hold only 4.5 months of expenditure in reserves, umbrella bodies hold 4.1 months expenditure and playgroups and nurseries less than 2 months. Looking specifically at VCOs in receipt of statutory income, whether through grants or contracts for delivering services, we believe the median level of reserves is 1 month, with the mean level at 4 months. It could be argued that this doesn’t matter to public service commissioners – after all, we estimate that VCOs deliver the equivalent of 2% of public services by total value. But these services are delivered to individuals and communities that statutory bodies find it most difficult to reach. The resilience of VCOs are therefore of some significance to the most vulnerable in our society.

So what?
There is an argument to suggest that this might not matter: after all, VCOs have just come through the worst recession in the post-war period. Employment in the sector is rising, by 6.5% from 2009 to 2010. But as one recent report from UCLA in the US noted , these may just be indicators that organisations are over-extending themselves as they struggle to meet increased demand. Another argument that is frequently put forward is lifted straight from the private sector: if organisations are not resilient and ultimately fail, this simply leads to a more efficient allocation of scarce resources. But as a paper for Harvard Business Review  reminded us, in a public sphere where mergers are difficult to transact and failures leave constituents ‘underserved’, resilience is a problem that is not limited to the staff and trustees of the organisation at risk. Reserves may well just be one characteristic of a resilient organisation, but the significant, rapid changes in public funding that are emerging will test just how important a characteristic they are.

Karl Wilding & David Kane
NCVO Research