Weathering The Storm – How Will The Third Sector Cope During Economic Downturn?

The succession of negative stories in the press about higher inflation, concerns over the housing market, and the possibility of the UK entering a recession has dented public, private and governmental confidence in the near future. Chief executives are rightly asking how might this affect their own third sector organisations. Here we explore the possible implications of the economic downturn on three major funding sources and what the sector can do to mitigate against those risks.

Less resilient and innovative organisations will find it more difficult to withstand the economic downturn. For the third sector to minimise organisational losses a professional approach will be key. Innovative approaches recognise that incomes may decline but that it is still possible to retain and unearth untapped revenue making opportunities. To improve long-term viability it is necessary that third sector organisations understand the environment in which their funders are operating and map the likely effects on any economic changes, so that revenue making strategies can be recalibrated to maximise opportunities and weather the expected economic storm. This should enable third sector organisations to remain intact and flourish when more optimistic periods return.

Public Service Funding

The Government’s concerns over future economic growth and long-term investment decisions may have implications for organisation who rely heavily on government funding.

During economic slowdowns or recessions an increasing proportion of taxation gets apportioned to social services, as money has to be spent on people with reduced incomes rather than investment projects. This may favour third sector organisations working with certain Government departments such as the DWP, funding organisations to retrain and find employment for the long-term unemployed. However, this is likely to be at the expense of other third sector areas, as funding gets directed towards relieving increasing levels of poverty.

In addition to economic changes shifting government spending, a significant proportion of the Government’s investment programme is being attributed to recent grands projets such as the Olympics, Crossrail, ID cards, nuclear power stations and Trident. In such a climate many third sector organisations not in the focus of more pressing government strategy will struggle during the fight for fewer contracts.

The continued efforts to develop more sophisticated relationships with government funders and commissioners, and the continuing professionalism of the sector may help to overcome these risks. Communicating the added value that we can provide through running public services will be key. Investment projects will become increasingly scrutinised by commissioners keen to keep an eye on the bottom line, to emphasise value for money to taxpayers but three year contracts; emphasising the positive outcomes of third sector projects; and highlighting effective accountability when should enable third sector organisations to increase competitiveness relative to rival providers.

Private Organisation Funding

Private companies have differing reasons for donating money to the third sector, whether based on CSR values, the need to publicly demonstrate giving, or the accounting benefits of charitable contributions. It is important to remember that private companies’ motivations are to maximise profit, which is especially likely during periods of economic uncertainty or decline.

In many cases the charitable arms of organisations are one of the first things to be pared down during economic downturn. While CEOs may lose their jobs for reducing their company’s dividend return it is unlikely that heads will roll if their charitable giving were to be affected in similar ways. One recent example is the plight of Northern Rock, a stalwart of charitable giving who had to reduce its donations from 5% of its profits to just £7m annually following its collapse. Only after nationalisation was it able to increase its funding to a still relatively low £11m.

It is likely that the levels of donations given during more optimistic business cycles will not match future funding as a result of the economic uncertainty ahead. However, it is not necessary to panic, as most companies should still be able to afford to donate. Innovative approaches that reinforce relationships with third sector organisations and their private benefactors are likely to see strengthened funding over time. For example, Execution Ltd, an institutional stockbroking firm has an annual charity trading day, which donates all gross commissioning raised that day to charity. This helps to emphasise to all staff members the positive differences deeds and giving can provide, rather than a 1% footnote that gets ignored on companies’ CSR reports.

Individual Funding

Third sector organisations are already suffering from reduced individual funding, with NCVO and CAF suggesting a 3% decline in the population giving to charity in 2006/7 on previous years. The combination of inflation and a slowdown in the economy is likely to hit individuals’ confidence in being able to handle their financial priorities, further affecting the volume and total amount of contributions.

It is important for organisations to examine the economic and social makeup of individuals who currently donate to them and how differing economic scenarios may affect them. Currently the OTS suggests that there exist large increases in the average donation from individuals above the £20,000 earnings threshold and again those earning more than £50,000 annually. This is reflected in the strong correlation between levels of income and the amount donated to charities and the third sector, which is highlighted by this year’s Sunday Times Rich List Giving Index showing the 1,000 richest people in its paper’s survey nearly doubling donations to £2.38bn.

Differing consumption profiles between income groups are likely to be the key to understanding how third sector organisations’ donations will be affected. Low income groups are likely to be affected the most significantly, as they are highly vulnerable to the effects of higher food, fuel and mortgage prices. The OTS highlights that the most common barrier to spending was not having enough money to spare, with 58% of non-givers and 75% of those who decreased their donations mentioning this as a reason.

There have been some whispers by economists that rather than fears of stagflation, whereby both unemployment and inflation increase simultaneously that that the economy could be heading for biflation, whereby the processes of inflation and deflation occur simultaneously. If it were to happen then paradoxically, while low income users would end up suffering from high prices of basic goods, the declining costs of luxury goods, such as televisions and cars may increase the purchasing power of the most affluent in society.

It will still be difficult to encourage the wealthiest to maintain or increase their contributions and coax donations from individuals whose annual bonus have shrunk from £1m a year to £200,000. However, it is possible and likely to be one of the most effective strategies for organisations in the short-term, despite it appearing an uphill battle. For example, Vanni Treves, a senior fundraiser of NSPCC likes to highlight how rich Britons donate relatively little compared to in the US, despite both countries exhibiting wide income gaps. Research by the Institute of Fundraising reinforces this notion, suggesting that the key to successful fundraising lies in nurturing loyal high income supporters, citing a growth by activity of 77% in star performers.

NCVO and CAF have suggested that charities would benefit from appealing to other charities’ donors rather than to the population as a whole, especially given the current shrinking of the pool of donors, to increase the donations of those willing and able to pay. Also, trends worth examining for organisations looking at approaches to maximise revenue include the number of religious donators increasing by 8% over the previous year, bucking the decline in donors; and the high incidence of married women donators giving to charity (62%) compared to single men (44%).

The oncoming economic situation will prove difficult for the third sector, as financial setbacks and instability may result in tough decisions for its leaders. However, a practical and level-headed approach to economic challenges can be used as an example of the increasing maturity of the third sector. It is imperative that organisations brace themselves for challenges, increase innovation and improve links with existing funders so that when the short-term difficulties pass the third sector will stand on an improved footing relative to both the public and private sectors, and fully take advantage of better times when they arrive.

This article was written by Jonathan McHugh in June 2008

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