yorkshireculture

The seven key challenges for non-profit organisations

2007-09-19T05:32:00.000-07:00

John Wright
Director of Policy and Strategy
Yorkshire Culture

In this article John Wright, Yorkshire Culture’s Director of Policy and Strategy, identifies seven key challenges facing non-profit organisations in achieving sustainability. It challenges a number of assumptions commonly held by funders and support agencies. It is based on experiences of working directly with cultural non-profit organisations through the ERDF and Yorkshire Forward funded programme, ‘Modelling Sustainability for the Cultural Sector’ and a wealth of research, most notably through the US based ‘Non-Profit Finance Fund’.In business, we are told that the customer is king; in the non-profit sector it is more like Jack, Queen and King — multiple stakeholders ranging from funders, to brokers to end users. The problem is that the end user or recipient often has very little say in what is being ‘purchased’ on their behalf. To most non-profit organisations the crucial relationship is that shared with the funder or broker, not the end user. If cultural non-profit organisations are to fully exploit their enterprise potential, relationships need to be rebalanced.

Satisfying the needs of the funders

In Clara Miller’s excellent article entitled ‘The looking-glass world of nonprofit money’ (Miller, 2005), she uses the analogy of a hotel. Guests arrive at the hotel in need of a room, but unable to pay the bill. Before they can be checked in, the hotel must find a third party willing to meet the cost. Fortunately, there are a number of third parties willing to pay for the rooms. However, each funder has its own idea about what the needs of the group are such as the quality and cost of the room, whether breakfast should be included, how long they can stay and even whether all the guests are eligible for support. After many hours of discussion with the funders, the hotel is finally able to assign a room to each of its guests. Finally at this stage the hotel must begin to address the needs of its guests directly.

This scenario, devised in the US, is equally applicable in the UK and most non-profit organisations would recognise the daily challenge of satisfying a range of funders to meet the needs of target groups. The majority of cultural non-profit organisations have received funding to deliver core services to priority groups such as young people or black and minority ethnic communities.
The industry of social policy intervention has grown and been sustained on a flood of public investment over the past 15 years. Starting with the lottery capital building boom from the mid nineties, through seven rounds of the Single Regeneration Budget, ERDF, ESF, Neighbourhood Renewal, numerous learning and skills initiatives, safer communities funding, community health, crime, cohesion and older people target schemes. Every aspect of the community has been addressed in one way or another and non-profit organisations have become expert at satisfying the needs of the funders.

The shift towards identifying and meeting the needs of customers directly requires a shift in mindset, along with a whole new language and approach to business. This transition rarely develops organically without entrepreneurially focused individuals. As with many skill sets, it can be developed, supported and encouraged but requires a medium to long-term commitment. Short-term interventions are unlikely to yield lasting results in changing organisational culture. Business support programmes need to adapt and develop to encompass this challenge.
Pricing and cost

The second challenge facing non-profit organisations is around pricing and cost. The reality for the vast majority of the cultural sector is that it is largely impossible to generate a profit on core business. Even within the commercial elements of the sector, income generated through box-office does not cover the costs of production and requires commercial sponsorship. Within the non-profit sector, this deficit has traditionally been met through revenue grants, and to a lesser extent through trading activities such as retailing, catering and asset rental.

Whereas commercial business would eventually abandon unprofitable areas of commerce, non-profit organisations must remain in these areas due to their mission and charitable status. Furthermore, their revenue support and eligibility for grants from the lottery and trusts and foundations is generally predicated on operating as a charity in an environment characterized by market failure. Market failure is characterized by environments where commercial business will not operate due to the difficulty of sustaining profitability. This is often due to the fact that the targeted customer base is unwilling or unable to meet the full cost of the product or service. This is particularly acute in health and social care charities where the most vulnerable groups are often the least affluent, but is also true for much of cultural sector.

Over the last decade, revenue funding both from local authorities and central government via the Department for Culture, Media and Sport (DCMS), has become conditional on working with targeted groups. This presents two problems for the sector. Firstly, these targeted groups, such as young people, ethnic minorities and disability groups, tend to experience high levels of social exclusion and below average levels of income. This means that not only do the costs of intervention rise, but also end users are not able to meet any of this additional cost.

Secondly, it means that cultural organisations can devote insufficient focus on the needs and demands of their traditional customer base. In other words, what would be considered a disastrous approach for business remains the standard operating environment for the non-profit organisations.

The problem is that it is all but impossible to generate a profit or operating surplus. Indeed, it is commonplace for organisations to make a loss on activities, providing in effect a subsidy to the funder. The increasing emphasis on full-cost recovery is certainly welcome and will lessen the pressure on organisations but knowledge of the cost recovery principles is not the same as securing them.

Organisations need support to develop both their management information systems to assess the true cost of delivery and also in developing their negotiation skills to try to secure more sustainable outcomes, often against a backdrop of reduced funding availability and funders more that ever wanting bigger bangs for their buck.
Unwilling funders

The third challenge exists where funders are not willing or able to fund on a full-cost recovery basis. Conventional business operates on an elemental supply and demand basis with companies competing for market share from consumers who are able to make a choice of suppliers. The operating environment for non-profit organisations is more complex, as they compete to secure both income for the activity and a subsidy to meet the losses incurred.

All too often funders will have different and sometimes conflicting goals and values. This is most evident in the debate between price and value. The funder will demand a certain level of value but will not pay the full price of these demands. This leaves organisations to decide whether to seek additional subsidy, turn down the money offered or provided under-funded services to clients leading to a reduction in quality.

The most common response to the lack of operating profit, is for non-profit organisations to develop subsidy business to generate profits to subsidise core business. However, subsidy businesses from fundraising to retail incur their own costs and require investment and significant management time and expertise. The development of the subsidy businesses, often operating as social enterprises is another area requiring significant investment into business support.

Restricted income

The fourth challenge facing non-profit organisations is restricted income. Business requires cash-flow to survive and grow. Success is predicated on investment in people, equipment and systems. The role of directors and senior executives is to direct investment to bolster or secure market position. The trustees and managers of non-profits rarely have this freedom. It is the custom of most funders to restrict or ‘ring-fence’ funding to be spent on projects, often in delivering unprofitable services to targeted vulnerable groups.

For the funders, this allows them some measure of control over how funding is allocated and ensures that it goes directly to helping those most in need. However, the reality is that for nonprofits restricted income often carries high costs, which cannot easily be met from other sources.

Going back to Clara Miller’s hotel analogy, the funder decides that there are not enough hotel rooms to meet demand so decides to provide funding for more beds. However, in doing so it fails to recognize the additional costs incurred in providing hotel accommodation, such as heating, bedding and other furniture. If the non-profit organization is to accept the funding for the new beds, it needs to identify where it can raise the additional finance required to actually provide more accommodation.

A further problem of delivering restricted funding programmes is that organisations can be cash rich but have negative cash-flow. Unlike the private sector, managers operating in the non-profit environment cannot easily move funds around to meet cash-flow needs. It is therefore typical that organisations need to raise funds from several areas to meet the additional costs of delivery. Indeed when public or lottery funds go unspent it is often because non-profit organisations cannot afford to take the money, given the restrictions and the lack of funds to pay for all the necessities those restrictions rule out.
Handling surplus

The fifth challenge facing non-profit organisations is dealing with surpluses — despite everything that has been said about the difficulty of making a profit — well managed organisations will occasionally find ways to do so, particularly by reducing the cost of delivery.

Let us return to the hotel. Suppose it was discovered that a way of reducing operating costs was to make the building more energy efficient. The funders would not support it because it did not represent direct service delivery but the board decides to go ahead anyway to reduce costs and environmental impact and so decides to borrow capital on the basis that it can service the debt from the savings it makes on energy costs. In the commercial world this would be simply seen as good business, in the non-profit world it could be catastrophic.
As discussed earlier under the terms of restricted funding contracts, it is impossible to shift monies between restricted funds. Furthermore, it is often impossible to shift monies within restricted funds. Typically, budgets are agreed line by line and cost by cost and surpluses or profits must be refunded. So instead of being able to use the savings to service the debt on the investment in energy efficiency, the organisation would need to refund the under-spend on energy costs and of course the original capital investment costs are non-reimbursable — leaving the organisation to meet the costs of servicing the debt. Not all funders take such a draconian approach, but the feeling remains that surpluses are bad, signifying that organisations do not really need the money.

Investment problem

The sixth challenge is closely related to this and involves the difficulty of investing into non-profit organisations. Funders tend to ignore the standard business maxim that as the business grows, so the management costs increase. Businesses invest in infrastructure to increase efficiency as growth occurs. Non-profit organisations are rarely able to pursue the same approach, funders prepared to support investment into core costs are a very rare beast — and most not only refuse to support core but also seem to deny that these costs exist, or worse assume they can be reduced through economies of scale.

Costs of this nature might include training for staff to deliver new services, recruiting new staff, supporting managers to take on broader responsibilities, or fundraisers to meet higher targets. All these activities will increase the efficiency of the organisation and in the long term reduce costs, but in the short term, they place high cost burdens on non-profit organisations.
Most funders will not recognize these costs as they exist beyond the marginal cost of providing services. Sadly the end result of this is not that non-profit organisations will turn away the work as their dedication to the mission precludes this option, but that they continue to operate without the investment, undermining the quality of the services and ultimately leading to the organisation facing financial meltdown and the funders receiving poor value for their investment.

Overheads in service delivery

Our seventh and final challenge is related to the cost of overheads in service delivery. All too often overheads are viewed with suspicion by funders — indicating that too much money is being diverted from direct delivery. The irony is that most funders view the restriction of funding as a technique to control costs, in reality it undermines efficiency and programme quality. The inability of non-profits to invest for growth in their people, premises, marketing and managers means that eventually organisations and particularly managers burn themselves out.

Despite significant investment and all the right motives we have a system where we find it extremelydifficult to find and retain higher quality leadership in the sector, where self-sufficiency is almost impossible and sustainability very difficult in the short to medium term and where economies of scale are very difficult to achieve without sacrificing programme quality.

Alongside this, we have ambitions to increase commissioning of the third sector to deliver public services and, as we can see, more restricted funding will worsen the problem already facing the cultural sector and the third sector as a whole. Clearly there is no simple solution to this, but we must recognise the challenges and seek to address them. We must rebalance the relationships between the funders and the funded and focus on the true costs of service delivery.

Conclusion

With a constructive debate and some creative thinking, funders and support agencies can create a less dysfunctional environment for non-profit organisations to operate in, creating a more intelligent approach to funding, access to finance for social enterprise. It will allow is to work towards sustainability, support improved leadership and innovation and finally introduce some of the basic maxims of good business.

ReferenceMiller, C. (2005) The looking-glass world of nonprofit money: managing in forprofit’s shadow universe, The Non Profit Quarterly, 12(1): 48-56.

This article appeared in the Summer 2007 edition of, and was reproduced courtesy of, the Yorkshire & Humber Regional Review.

Yorkshire needs a top-flight football club...desparately

2007-07-30T07:14:00.000-07:00

Ben McKenna
Information Communications Manager, Yorkshire Culture

Ask any tourist in London where they hope to see on their trip here and they will more than likely tell you that they hope to take in some football at either Arsenal or Chelsea’s ground, maybe even Tottenham if they are being really adventurous or can’t get tickets for a quality side. Ask any tourist who has braved the trip up north to either Manchester, Liverpool or Newcastle and I’m sure the likelihood that they will take in a game will be as close to 100% as you are able to get. This affiliation with football and in reality the Premier League not only boosts the profile of the city but with close to five thousand supporters from opposition clubs virtually guaranteed to come to town every fortnight it boosts visitor spend and bed-occupancy figures, especially for us in the northern reaches of the country.

Following Sheffield United’s teary but strangely inevitable relegation on the last day of the season back in may Yorkshire is again faced with the prospect of having no teams in the top tier of the English game, the self professed - some would say hyperbolic - “Most Exciting League in the World” (Copyright BSkyB). Leeds United’s stirring Champions League runs are now a distant memory following their spectacular, combustive demise and fall through the trapdoor of the Championship, parachute payments and all. The Blades’ steady progress under Warnock has now hit a hiccup following his departure and the less said of Wednesday and my now-hometown club Bradford City the better. There’s a real sense among the region that football is becoming something that other places “do”.

I guess I’d probably get a few emails if I didn’t mention Headingley at this point, test cricket matches have taken place there this summer and have been as successful as they usually are. Cricket and similarly, but in an entirely different way geographically at least, Rugby League are where this region’s strength seems to lie. It’s fair to say that I don’t know enough about League to comment with any great, informed perspective but I do know it is still very much a “niche” at National level, even with the inclusion of French side Catalan Dragons in this and last season’s competition.

The game of cricket though is certainly not undergoing a boom, the symptoms of this slow demise are probably best seen not in the recent, farcical and overlong World Cup but in the fact that children in the West Indies now want to be Allen Iverson rather than Viv Richards.

I really hope I’ll be able to watch some premiership football the season after next, and it looks like the task of putting Yorkshire and Humber back on the map will fall to the relegated and, ominously, managed by Brian Robson, Sheffield United. They’ll be ably, in some cases anyway, assisted by Sheffield Wednesday (9th last season) Barnsley (20th), Hull City (21st) and the newly promoted Scunthorpe United fresh from winning the League One Championship.

I fear though, it’ll be a little while longer until we see a team from the region lift the top division’s trophy or take on Valencia in a Champions League Semi-Final.

How green is my strategy?

2007-07-20T04:29:00.000-07:00

Ben McKenna

Information Communications Manager, Yorkshire Culture

One of the inevitabilities of life in the public sector is the fact that, each morning when you receive your post, without fail you will be confronted by a strategy of some shape of form. My desk is littered with them and from time to time I feel like I am drowning under the weight of nicely printed paper and cleverly illustrated action plans.

Now, I’ve done my fair share of strategies in the past. Big ones, little ones, quiet ones, loud ones and sometimes even fun ones. They play a useful role in our world even if a small percentage of them exist solely for the sake of pointing to some sort of achievement, namely writing a strategy. The business of writing, designing and publishing these auspicious tomes has become an art in itself. There are great designers, either in house or at an agency level, working on a lot of these things but it’s a massive challenge to make a lot of what the cultural sector does truly engaging.

We’re lucky really, that in the cultural sector we can illustrate our work with exotic dancers (steady), taught and striving sporting figures and either sexy new buildings, fascinating old ones or sweeping landscapes. It’s a lot easier than sending out business, science and technology or regeneration pieces. Men in pinstripe suits, white coats and hard hats are never going to play well with whatever target audience you’re trying to hit.

I’m in no way as green as I should be, I recycle a bit of paper here and there but I don’t compost, wash my cans out or take regular trips to the bottle bank. The problem is though, that the culture of how the public sector as a whole communicates is still very much based around the strategy document ethos. Write it, make it look nice with some “inspirational” shots, print it and then post it. I know that 99% of these documents will be printed on at least 80% recycled stock which has come along way in the last decade but is this really enough? Especially in these Green days where party leaders cycle to work and former US Vice Presidents implore us to make a difference to the world through the medium of middle of the road pop. I’m not sure that, if we looked good and hard at the carbon footprint of each of these documents, we’d like what we saw. Or for that matter that we’d feel we are truly getting value for money.

We live in an age now where the internet gets information to you faster, cheaper, easier and more interactive. Maybe the price of the matt effect, double thick stock paper or the lushly de-bossed accompanying envelope could be better spent elsewhere on a cool viral or a site which grabs the attention and gets the message across. Direct Marketing still has its part to play and I’m not saying the standard of the design needs to be lower, just that maybe the medium for it could do with changing. It’d certainly last longer, be cheaper to deliver and wouldn’t have coffee spilt over it or get left in the office.

Skills Trains and Drum Beats.

2007-07-12T09:25:00.000-07:00

Gary Topp - Chief Executive, Yorkshire Culture
6th July 2007

Culture and sport are about creativity and energy. There is plenty of energy around at the moment concerned with the London 2012 Games and our task, as managers of the Yorkshire Committee for the 2012 Games is to involve and engage with as many partners as possible in the region to ensure that Yorkshire maximises the opportunity.

It is not every week, therefore, that ends with a partnership meeting in a carriage on Hull Trains and a mass drumming session with the regions sporting professionals. The teams at the Learning and Skills Council and Sport England really did come up trumps with these two ideas.

On Thursday a wide range of partners from the world of skills were invited on a trip to London to see the Games site first hand. The train left Hull with only a couple of us on board but at each stop Between Hull and Doncaster more people joined and we soon had a private carriage bustling with briefings and networking. This was an important beginning to the region’s 2012 skills activity and the fact that we saw the Games site up close, shared some stories and policies, and began to piece together project ideas made for a great day.

The following day, at Doncaster’s new Keep Moat stadium, the drums came out to play. At the beginning and end of a fascinating and inspirational morning with the region’s top sports development officers we were all invited to be part of a drumming workshop. We all sat in a circle, banging away to ‘I like apples, I like pears’, creating a great noise and jigging about. David Gents solo had less artistry than Steve Sawyer’s but no less passion and a goodtime was had by all.

Both sessions serve to remind us that fun and inspiration are important parts of getting the job done. Thanks to all involved.

A visit to China

2007-07-10T03:05:00.000-07:00

Gary Topp - Chief Executive, Yorkshire Culture

Gary recently visited China with a delegation from the region including Yorkshire Forward, Yorkshire Culture and the Northern Ballet.

The visit, designed to strengthen ties between the Yorkshire and Humber region and the world’s most populous country, proved to be eye opening for all involved reinforcing the links between culture and business in what is soon to be the planet’s economic powerhouse. Reflections on a week in Beijing

Towards a context. Gary Topp

China is sparking the world’s imagination. It is compelling, baffling, worrying and deeply fascinating. Western businesses are crazily negotiating and determining to open up this enormous market- it offers both the cost savings of the third world and the potential for phenomenal growth through the emerging consumerism of its 1.4 billion people. In the week that we were there Google conceded its principles and launched Google.cn and on the flight back I had a detailed conversation with a leading mobile phone company’s ethical manager. He had spent two weeks in Beijing undertaking a strict ethical audit on proposed factories. He determined that the Chinese workers would be paid 50 cents (euro) an hour and sleep in dormitories with 2 square metres of personal space – apparently this is better than current minimum legal standards in China and will pass their test. Beijing is a city of 15 million people…up to half of them migrant workers from the country’s 800 million farmers.

S class Mercedes and 7 series BMWs rub shoulders with hundreds of thousands of more humble vehicles and the laconic cruising of the cities 10 million bicycles. Workers wave flags and blow whistles at every major traffic junction in a bizarre ritual of failed traffic control. Your eyes are gritty with smog and you soon develop the Beijing cough as you negotiate the city’s 172km by 160 km scale. B&Q and Ikea have major stores and virtually everyone from rich to poor lives in an apartment. You can get a mortgage, and finally, you can actually buy an AmericanEnglish style suburban house for circa £200,000.00.

One event dominates the cities skyline advertisements – Beijing 2008 Olympics. Beijing is revealing itself to the world through the Olympics. It reminded me of Los Angeles with freeways, pollution, dominant advertisements and a brutal two speed economy. A value supply chain model ? Yorkshire – UK – EU – China – Beijing- Culture. This is a challenging value/ supply chain to unravel. What did we learn on this first trip by way of an initial set of observations? Culture, particularly high culture, is fantastically important to the new Chinese elite- it has something of the ‘Victorian’ about it. UK culture has status in China. Mr. Yu (Deputy Director General- China National Tourism Administration) constantly referred to a Chinese/ UK ‘emotional’ state or relationship. This seemed to be based on a notion, as much as anything, of British manufacturing quality (ironically he talked about his cashmere coat!) that seemed vaguely mid 1900’s in origin (think Jaguar cars and British tailoring). Business and culture are natural bedfellows in China – more so than in the UK these days. It refers back to notions of patronage, pride, intellect and social status. Yorkshire’s UK cultural offer can build business relationships – it brings values, status, pleasure and etiquette to the party. It could be a significant part of the region’s calling card. Mr Yu was clear; clear in his facts and figures and clear in his view. Chinese people will come to the UK for the culture – specifically high arts and heritage. Our package tour should be London – York – Edinburgh. Our hotels must be at least 3 stars or above. Our brand should be a cultural one. Good shopping will be the necessary icing on the cake. Beijing 2008 will be enormous. Great tracts of the city are littered with cranes as entirely new facilities are built from the ground up. The media complex alone dwarfs any current development site in Yorkshire. They will green the city, tidy it, plump it up and stage a magnificent spectacle. Mr. Luzeng Song (Deputy Director General) is clear that they will top the medal table (‘leave some medals for us’). They are hungry for sports and events business. Delighted to host new sports events – better still if they bring new equipment and brand opportunities. He suggested that we should try to introduce cricket. Perhaps, at least, we could hold an exhibition match. Yorkshire County Cricket club, Leeds Met Carnegie…..there might be something in it. (I was delighted to meet the official that had arranged President Bush’s recent mountain bike ride with the Chinese national team!) China has, and readily builds, cultural facilities on a magnificent scale.

It has state of the art theatres, enormous museums and phenomenal heritage attractions. Our visit to the Great Wall was astounding as both a punter and a professional. Great Wall – York Minister. China is secular – Yorkshire’s world class religious heritage would be a powerful and fascinating draw for a country with a troubled history of Christian relationships. It would be a fascinating and dramatic story for Chinese visitors. Again, the insistent ‘emotional’ link that Mr Yu shared with us. He wanted to talk about the ‘problem’ – the Chinese wanted to visit the UK but the beaurocracy and prejudice exhibited by the UK was stopping it dead. Our visa arrangements were punitive and, in his informed and evidenced view, based on a misunderstanding that Chinese people would have any desire to desert their homecountry for ours as illegal immigrants. His message was blunt – sort it out now or the Chinese would look elsewhere. This is not a regional issue- but we could be a region that makes our voice heard on it. For his part he accepts that currently foreign tour operators cannot set up in China- it demands a joint venture approach. It seems that deregulation has not yet hit the tourism sector. Our opportunity To integrate our emerging business / inward investment activity with a vibrant cultural exchange programme- it could be our regional competitive edge. If we do it now, as we move towards Beijing 2008, we could bring together our cultural excellence, our Olympic London 2012 support and our inward investment strategies to deliver a strong thread linking Beijing and Yorkshire – worth a shot?