Round table debate: scenario planning in challenging times

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To hear a short podcast of sound bites from the event, listen to the August 2010 Unity Trust Bank round table podcast.

Introduction

After 15 years of unprecedented growth, the voluntary sector now faces potentially devastating cuts. But is it all bad news? Is the sector sharing the doom and gloom being spread by the media, and what plans should forward-thinking organisations be making to best manage in a worst-case scenario?

The summer 2010 Unity Trust Bank round table debate brought together experts from across the sectors; from non profit organisations as diverse as Girlguiding UK and The Mission to Seafarers, to financial services provider UBS and third sector specialists, Baker Tilly Corporate Finance.

We've grouped the main arguments raised during the event into four areas:

• Are you having a lovely recession?
• Scenario planning and reserves
• Generating your own income: hidden assets and income streams
• CSR: easing a corporate's conscience

Are you having a lovely recession?

Professor of Voluntary Sector Management, Paul Palmer of Cass Business School, chaired the meeting, and began by challenging the delegates. Does anybody disagree with the assumption that there are hard times ahead? Does anyone feel the sector will carry on as before?

The loyalty of your donors

Simon Evans of Girlguiding UK met the challenge: “It depends on the donor base you’ve got,” he said. “Some charities maintain their donors in times of austerity; it depends how loyal they are to the cause. I’m a trustee of a charity doing youth work, and they’ve had the best time they’ve ever had this year.”

Indeed, as Professor Palmer pointed out, there is evidence to suggest that sometimes donors give more in times of recession than they do in times of plenty.

Profiting from recession

Michael Chuter, Head of Finance and Enterprise at the Foyer Foundation, joined in: “We can’t just assume that the recession hits everyone the same,” he said. He recalled recently meeting Lord Digby Jones (the former industry minister and business leader), who told him that he was enjoying the lowest rate of inflation in at least the last 15 years, had the lowest rate of mortgage interest since he took out a mortgage, his disposable income has therefore never been higher and he said that personally, he was having a lovely recession!

Michael pointed out that those who are not directly affected by the recession are actually doing very well. “Those organisations who get a lot of their money from personal and individual organisations should see this as an opportunity, because there are people out there who have more money than they were probably expecting, and certainly (more) than they have had historically, when mortgage rates were at 17 per cent,” he said.

New investors in the third sector

Jim Clifford from Baker Tilly Corporate finance offered his expertise from the advisor’s perspective to the mix, explaining that they are observing two very distinct changes in the marketplace.

Firstly, income yields on capital are very low and that seems to be causing a divergence in the behaviour of clients. Whilst those reliant on income are concerned about increasing tax rates, those who are capital rich are seeing very low rates of interest on their capital, and that’s affecting where they decide to place their money.

The other factor driving a change in attitude, he explains, is a greater awareness of social issues and a greater awareness of need. Whether this has come about through improved reporting of the sector, or debates about Big Society, there does seem to be a better understanding of where the need lies.

And the result? Investors are beginning to see both social gain and income gain through placing their capital in the third sector. “We’re seeing a number of cases where private individuals are investing in the sector at rates that are very favourable to charity sector projects,” Jim explained. “It’s not necessarily straight donor behaviour, but it’s often investment focus mixed with donor type products.“

Scenario planning and reserves

Scenario planning: looking to history

As Michael Chuter quite rightly pointed out, this is not the first time a government has come into office wielding the cutting axe. Has anyone looked back to 1982, he wondered?

Simon Evans said the Scouts had done this and found that during this recession, the numbers of those volunteering had increased markedly, presumably due to unemployment. This perhaps bodes well for Cameron’s Big Society dream.

Overcautious with reserves?

Michael has been doing his homework on reserves. He found that the NSPCC had 86 per cent of their income in reserve for the following year’s expenses, Barnardo's had around 64 per cent, and Marks and Spencers had 9 per cent.

“What is it about Barnardo's that makes them think they operate in a more risky environment than the high street?” he asks. “Or what is it about Marks and Spencer's risk appetite that makes them say: 'We can afford to run for another month if we’re lucky – but not to worry, because we have confidence in our ability to flog enough nighties in the intervening month to keep us going in the following month!'”

In his opinion, the very worst thing the sector could do now is “talk itself into a slough of despond.” He makes the point that we now have a government that wants to cut the public sector and substitute it with the voluntary sector. “There are going to be huge chunks of government money that are coming our sector’s way. There’s a real danger that if you batten down the hatches too tightly, you’re going to miss out on some huge opportunities.”

Trusts and foundations or trading?

The Archway Project's John Milton was worried about not knowing where the cuts are going to fall and how this impacts on planning reserves. “We’re not going to be told about funding for the next financial year until December,” he says, “How do you plan what’s going to go on if you’ve only got three months?” His scenario planning involves moving away from government funding and more towards trusts and foundations.

“When they came to us saying they weren’t sure about next year’s funding, I told them I wasn’t sure if I wanted it because they weren’t paying us enough for what we do! By taking our services elsewhere, we cut out all the labour-intensive statistics reports, which I’m certain they never read!” They have also built flexibility into their HR plan, by employing more hourly sessional staff, so they can cut back hours if required.

But whilst John is leading The Archway Project towards trusts and foundations, Martin Craddock of St. Luke's Parochial Trust, says he fears for charities relying on them. “They (trusts and foundations) will, of course, have built up reserves,” he said. “I was the finance director of a very large foundation and we had over a million pounds in reserves, but it’s going to be gone very quickly.” He went on, “At St.Luke's we are not relying on foundations at all - they’re not sustainable. The business world is for us.”

He has taken St. Luke’s Parochial Trust through “enormous change” in order to diversify income streams to make them more sustainable. He didn’t want to scale back services, because they serve some of the most vulnerable members of the community (the elderly), so the only way they could see of increasing sustainability was to grow. “We decided we just had to trade ourselves out of this deficit,” he said, “by widening our remit away from just older people, to serve the whole community.”

Looking for returns?

Paul Mitchell of financial services provider UBS AG, warned that we now live in a changed world as far as investments go. “The message to charities that have investment portfolios, really is - don’t rely on the returns you’ve had previously.” Whereas before they would have suggested organisations expect 8 or 9 per cent total return over economic cycles, now it’s more like 5 or 6 per cent. “If we stay in a low-inflation environment, it’s not too serious,” he advised, “and we probably will for the next two years, but the jury’s out on what will happen from there.”

In his experience, trusts and foundations prefer to give money on a sustainable basis over longer periods of time, so if charities are looking to these organisations for immediate one-off bailouts they are unlikely to get them. Nor are they likely to get them from anywhere by the sounds of it. “Certainly from my recent conversations, there’s a reasonable proportion of (investors) who have got their heads in the sand.”

“Essentially, it’s going to be harder going forward for fund managers to get returns for you,” he said. “The best option is to diversify in order to better control volatility and protect the downside.”

Sharing back office

Michael Chuter thinks sharing back office facilities is a huge opportunity for the charity sector, and one that the private sector have been taking advantage of for years.

He drew on his past experience working for the Burtons group, which consists of Topshop, Dorothy Perkins, Champion Sports and various others. The group has a single computer centre, one delivery service, and share many other back office operations. “It would be daft to have their own,” Michael said, “and yet so many charities think they have to do everything themselves.”

The shy, polite charity sector: when to approach an ailing charity

“People talk about mergers, but really there is no such thing, there are only takeovers,” said Professor Paul Palmer.

This prompted John to put a question to the table. He described a nearby organisation, where the recently resigned manager has not been replaced, they have reserves of less than a month and 79 per cent government funding. “I can see the writing’s on the wall for them. I’m monitoring the situation, but what do I do about it? When do I suggest to them 'look, you’re going bust. How about us helping you out?' Who approaches who and when?” 

“This situation is happening everywhere,” said Jim Clifford of Baker Tilly Corporate Finance. “There is this tendency to be very polite, because we are the charity sector and we’re not rude to each other. We tend to stand back and not broach the subject; but I think it is your duty as a charity to support continued service to the beneficiaries.”

He insisted that charities that are able to should approach failing organisations in their field with either an acquisition bid or an offer to manage the organisation through this period. What’s more, he advised that organisations should be doing this sooner rather than later, long before the government money ceases, and long before the banks decide they’ve had enough.

“Express your concern for their beneficiaries,” he said. “Outline how you might be able to help, give them a couple of alternative courses of action, then ask if you can talk.” In his experience this opens the door because you are “coming at the problem from the same side of the table.”

Generating your own income: hidden assets and income streams

Hidden income streams

Jim also encouraged charities to start looking at hidden income streams; activities that organisations have been doing for nothing, services they have been providing for free, supposedly under the guise of charitable purpose. He said that actually there is often a potential income stream there because you are inferring gain on an organisation who are then gaining financially.

Michael Chuter agreed wholeheartedly. “When I first joined the sector, I was just astonished at how much information charities give you for free - downloads from websites, for example. The private sector wouldn’t dream of giving them away!” He went on, “We’re quite bad at thinking commercially; it’s a dirty word, because we’re all so nice!”

Michael went on to describe a situation where an organisation he works with successfully found a hidden income stream. They work with disadvantaged ethnic groups within London and they have started providing a paid-for service to the Metropolitan Police since discovering that many of their young police officers were hitting the beat with little or no understanding of street language or youth behaviour. “For example, they were misinterpreting approaches as threatening when they were quite the opposite,” Michael explained. “Our organisation now trains the officers in street culture.”

Hidden assets: the best kind of charity shop

Jim also identified the potential for charities to find hidden assets in the culling of the quangos. “There are some 35 organisations whose attics are about to be tipped onto the street,” he said. “There might be intellectual property, publications, knowhow or brands,” he said. “These things could all be made use of by voluntary organisations.”

He likened it to “the best kind of charity shop”. Again, drawing comparisons with the private sector, he said, “It’s the start of what the commercial world would recognise as a shopping list of acquisitions.” 

CSR: easing a corporate’s conscience

Michael Chuter then brought up CSR (Corporate Social Responsibility), saying that whilst we might assume that companies would cut back on CSR during a recession, in fact he thinks the reverse is true. “Barclays aren’t sponsoring the cycle super-highway because they think cycling’s a good idea - they are sponsoring it because they know they’ve got a crap reputation and they want to do something that’s public and looks vaguely good!”

He went on: “When times are hard, corporates are more embarassed about their profits; somehow, becoming profitable is a dirty word. Charities should be going to them and saying, "we can ease your conscience!"

“There is an HR element as well,” added Jim. “They have made staff redundant and they are desperately keen to keep the remaining staff, who are arguably the best at a time when they can’t necessarily give pay increases. They want to appear cuddly and concerned and feeling, at a time when to some, they may have appeared unfeeling.”

He described a good example of the creative embracing of CSR. One third sector organisation who desperately needed their driveway retarmacing to allow for wheelchair access, costed the job commercially, then approached a company and asked if they would consider doing it as a CSR exercise, if nothing else, to keep their machines operating during a time of slow business. As a result, they got the job done at a fraction of the cost!

In conclusion

There were clearly mixed emotions around the table, with some seeing every opportunity in the recession and relishing the opportunity to cull the fat, whilst others were clearly concerned about the times ahead.

But the suggestions that arose...

• to look for hidden income streams, such as services currently being provided for free

• shopping around for valuable assets in the charity shop of culled quangos
• seizing the opportunity to encourage investment from capital-rich individuals, at a time when putting money into the third sector is starting to look like an attractive proposition
• capitalising on CSR opportunities by selling your PR value to corporates
• and making the most of those lucky individuals who, like Lord Digby, are having ‘a lovely recession!’ 
  

…are hopefully cause for a degree of optimism.

Useful links

• Delegates at this round table came from the following organisations: Baker Tilly Corporate Finance (this link takes you straight to their social impact page), The Foyer Federation, Girl Guiding UK, The Mission to Seafarers, The Archway Project, St Luke's Parochial Trust, UBS and NCVO.

Have your say

Do you have any thoughts on what was said at the round table debate? Why not start a discussion with others on the Fundraising forum, or in The Cafe?