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

Visit http://nortonspeel.wordpress.com/category/society/ for more infromation on the third sector

Music News Bulletin - 17/06/08

Where did all the money go? It's in the Black Box...: As revenues from music become increasingly diversified, it's becoming more and more difficult for artists to keep track of what they're owed May 20 2008
"An astute business sense and creativity doesn't always bless the same person. Matter of fact, judging from the many examples, in books like Hit Men, of artists getting royally screwed, musicians have a tendency to take their eye off the ball when it comes to the business side of the music business. Hey, who'd want to spend a day sifting through royalty statements and contracts when it can be spent making music?

Well, I decided to educate myself by attending an event thrown by MusicTank, where the future of record deals was being discussed. On the panel was Adrian Bullock, an auditor of royalties (don't fall asleep; this is going to get interesting), who kept referring to Black Box. No, he wasn't talking about the nineties house act of Ride On Time fame, nor about airplanes - though the artist managers on the panel seemed to be looking for Black Box like a rescue team after a crash." [Guardian]

Amazon cuts Coldplay album prices to bring in the crowds June 17, 2008
"If you are going up against a giant, it helps if you too are a giant. And scrappy.That appears to be Amazon.com's strategy as its MP3 store takes on Apple's iTunes in digital music.Today, the British alternative rock group Coldplay (pictured above), is releasing its new album, "Viva la Vida or Death and All His Friends." Amazon is using the occasion to wave in more customers with some huge discounts.

Amazon said it would begin selling digital versions of past Coldplay albums for bargain-basement prices. As part of a weekly promotion called Daily Deal, the Coldplay album "X&Y" is today available for $1.99. On Wednesday, "A Rush of Blood to the Head" can be yours for $1.99. Both albums are currently $7.99 on iTunes. "Parachutes" is next up on Thursday for $1.99. On Friday, the "Brothers and Sisters" EP will cost you only 99 cents." [LATimes]

How can CEOs drive accountability and outcome measurement in their charities without losing sight of organisations caring supporting function?

The third sector’s role is changing as a result of moving from working predominantly in niche areas to greater involvement in core activities of public services. However, the third sector has tended to lag behind the public and private sectors in improving accountability and transparency. Given the number and range of stakeholders that third sector organisations work with, including some of the most vulnerable in society it is imperative to for organisations to build strategies that demonstrate effective governance, rather than just relying on the sector’s positive motives. Increasingly performance management systems are being used to help organisations balance the differing requirements of funders, staff, and service users, and strengthen organisations’ functions.

Developing effective monitoring to improve leadership and public perceptions

The third sector’s goals are more intangible and their ability to evaluate success less clear cut than the private sector, which focuses on profitability; or the public sector, where accountability comes through elected politicians. These differences in intension and preferred measurements have often caused problems, as funding agreements have usually been focused on inputs (where money went) and outputs (what the charity did), rather than outcomes (what difference was made).

Currently, the monitoring system of third sector organisations are largely controlled by funders, often stipulating reporting which offers minimal benefit to the third sector. Consequentially organisations spend too much time and resources focusing on providing less appropriate information. This reduces funders’ ability to fully understand the fund’s benefits, as they may receive reports that don’t fully reflect how much of an impact their money is making to communities.

However, more considered and proactive outcome measurements would reassure funders, and focus organisations minds on the provision of services. If third sector organisations were better able to highlight their societal benefits through effective performance measurement systems, whilst showing financial prudence then they would be more attractive to funders, and increase their role on the delivery of public services.

Learning to communicate more effectively with funders

New Philanthropy Capital (NPC) highlights a reciprocal problem between funders and the third sector, with funders being mistrustful of the third sector’s financial competence, and recipients being too nervous to question the funders volume or choice of reporting. However, through examining the optimum level of measurement, and having the confidence to explain the benefits of differing approaches it is possible to build trust with funders, provide them information that highlights the positive outcomes from their investment, and reduce administrative waste.

When funders ask for detailed reports they want to ensure that their money is not being wasted. However, often too little feedback is given, leaving charities unaware of how their reports are being used, or even at all. This can be demoralising, time consuming and inhibits future improvements to the monitoring system.

This is exacerbated by the timidity of some organisations in the face of funders, as they are reluctant to question or challenge their demands for fear of alienating funders. This weakens relationships and threatens trust, as charities may be hesitant to report problems or speak clearly.

NPC’s ‘Turning the Tables’ pilot study encouraged charities to be more proactive through producing their own standard report and then offering it to all of their funders. They suggested creating three types of reports:

• A core report, containing information relevant to the whole organisation.
• Project reports, containing detailed project specific information.
• Individual reports, tailored to the needs of particular funders.

This method helped re-examine the reporting structure through taking a holistic approach; improving organisations’ relationships with funders, through increasing empathy; and lowering administrative costs through reduced duplication and targeted monitoring.

Ensuring that staff members and service users are involved in the monitoring process

Engaging with staff is a useful way of encouraging innovation and ingenuity to create solutions. Given the fact that staff members are the front line of service it is necessary to seek their input to create an optimum balance between improving the needs of service users and funders’ needs for accountability and financial competence. Ensuring support for change and ascertaining whether the organisation currently has the training and capacity to handle any governance reforms is critical.

Similarly the involvement of service users in the governance of organisations and in defining outcomes is one of the factors which helps to distinguish the third sector as having a user-centred perspective, as opposed to the organisation-centred perspective so often seen in the public sector. Focusing public services on the user is one of the most fundamental challenges facing organisations who delivery and commission public services and is a key strength for the third sector.

Far from compromising the support which third sector organisations provide, a greater emphasis on outcomes and performance measurement will mean that organisations focus on delivering the services which really matter, and that funders are aware of the real impact which they are making.

This article was written by Jonathan McHugh in June 2008

EU Public Affairs Monitor - 04/06/08

YouTomb: A YouTube takedown May 20, 2008
"Some enterprising MIT students are raging against the machine. In this case, they are targeting YouTube, the video-sharing website run by Internet giant Google.

The students' website, YouTomb, documents which videos are removed from YouTube for alleged copyright violations or other reasons, so they don't disappear unnoticed. You can't watch the videos on the site, but you can find out what happened to them." [LATimes]

The (knife) fight over Internet radio royalties continues June 4, 2008
"Joe Kennedy, chief executive of Pandora, carries a weapon in his battle over Internet radio royalty rates that he says could kill his popular online music site: a Stiletto.

Not the old-fashioned, sharpened-steel knife popular with mobsters and dancing street gangs in "West Side Story." This is the high-tech Stiletto 100 Portable Satellite Radio from Sirius. Kennedy brandishes it when he meets with members of Congress to highlight what he calls the inequity of the royalty rates.

The Stiletto has two antennas. One picks up Sirius' satellite signal and the other connects via Wi-Fi. But songs played over those connections pay different performance royalty rates." [LATimes]

Adam Smith Notes

For Smith although people were self interested and calculating he felt that people were still motivated to sympathise and help others. He considered that mutual sympathy is pleasurable, as we are led to see ourselves as others see us and that we take account of others when deciding on a course of action. Famously Smith explained how despite not being greatly disturbed by the deaths of one hundred million in China following an earthquake, as we have little emotional connection with them we would still be prepared to lose a finger in order to save them. This is because the ‘impartial spectator’ inside us forces us to appear worthy in our own eyes. This notion extends to how we conform to the rules of society.

Smith’s most quoted passage by laissez faire economists is his reasoning that the butcher, brewer and baker only exist in those professions to serve their own needs rather than others. This is an important piece and is useful in reemphasising the intension of business, the return of profit. However, this viewpoint is too narrow, as it is followed by Smith stressing that “civilised society [man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarcely sufficient to gain the friendship of a few persons.”

Because mutual sympathy is itself pleasurable, it “enlivens joy by presenting another source of satisfaction; and it alleviates grief. It enlivens job by presenting another source of satisfaction; and it alleviates grief by insinuating inot the heart almost the only agreeable sensation which it is at that time capable of receiving.” Adam Smith

This omittance of Smith’s moralising is a hollowing of the laissez faire belief, as it fails to recognise the benefits of mutual support and leaves the ideology free to abuse by people keen to justify selfishness. It is perhaps this abandoning of Smith’s moralistic dimension by his successors that Skidenski describes the invisible hand as paralysed.

Similarly, although Smith recognised and accepted that the market system would go through periods of growth and decline, he held sympathies towards bankruptcy, unlike today’s practitioners who consider it an acceptable method of rooting out the weak.

Rosenburg found that it would be unthinkable for a moral philosopher like Adam Smith to abandon the ideas contained in the Theory of Moral Sentiments in 1759 when he published the Wealth of Nations in 1776 without making it explicitly clear.

Smith was searching for an institutional framework which would eliminate zero sum gains, ways in which wealth may be pursued without contributing to the welfare of society. Therefore, Smith’s vision was not the open free for all that contemporary economists may suggest but as Rosenburg puts it “a careful balancing of incentive, of provision of opportunity to enlarge ones income against the opportunities for abuse.”

Smith highlighted that self interest can be pursued in a number off undesirable ways as self interest will only serve the public interest when the right institutional arrangements create the right psychic tension to direct such self interest The direction of effort is as important as its intensity.

“Society…cannot subsist among those who are at times ready to hurt and injure one another.” Adam Smith

The attainment and possession of wealth are regarded by Smith as almost universally corrupting. For once such wealth has been acquired, man naturally gives vent to his desire for ease, “the indulgence an variety of the rich” is fully as important a force in Smith’s system as is the desire for riches itself.

“The high rate of profit seems every where to destroy that parsimony which in other circumstances is natural to the character of the merchant. When profits are high, that sober virtue seems superfluous, and an expensive luxury to suit better the affluence of his situation.” Adam Smith

A central, unifying theme in Smith’s Wealth of Nations is his critique of human institutions on the basis of whether or not they are so contrived as to frustrate mans baser impulses (“natural insolvence”) and antisocial prodivities and to make possible the pursuit of self interest only in a socially beneficial fashion. Hence his criticism of mercantilism, which strengthened merchants to better themselves without contributing to the nation’s economic welfare.

These notes were collected in June 2008

US Public Affairs - 30/05/09

Lessig on the orphan works bill

"Prof. Lessig has an OP-ED in the NYT today about the orphan works bill rolling now in Congress. Among the important points mentioned there, here are my three favorites: (1) to the extent that foreign authors are substantially deprived of copyright protection as a result of the new rule, the amendment will probably violate U.S. international obligations, and it would take the E.U. exactly two seconds to file a WTO complaint. (2) It makes no sense to put so much weight on the issue of “diligent effort” if rightholders are not required to register works, as in the case of patents, for instance. (3) It would be somewhat unfair to apply the rule retroactively to works by authors who relied on full, automatic copyright protection upon creation/fixation." [CyberLaw]

EU Commission: Internal Market - 30/05/08

EU Internal Market Chief: Counterfeiting and Piracy Need Industry-Led Solutions
"The European Commission wants practical, pragmatic suggestions for fighting the “modern-day highway robbery” known as piracy and counterfeiting, Internal Market Commissioner Charlie McCreevy said at a 13 May commission-sponsored high level conference on the issues.

McCreevy stressed that more regulation is not the answer, and that solutions lie with public-private cooperation. He called on industry to lead the battle against fakes, and on internet service providers (ISPs) to solve the problem of illegal downloads. But he also outlined planned expansion of anti-counterfeiting and anti-piracy efforts within the Commission." [IPWatch]

European Commission Proposes Forum On Future Of Copying Levies
"The European Commission has recommended that a forum involving creative artists and the consumer industry should be established to determine the future of private copying levies.

Twenty-one of the European Union’s 27 countries impose oft-criticised surcharges on equipment - ranging from blank cassettes to MP3 players and mobile phones - that may be used for recording or copying images or sound. While such levies are officially designed to compensate musicians or authors for the use of their work, they have attracted much criticism for allegedly being imposed in an arbitrary manner and for hampering cross-border trade within the EU." [IPWatch]

EU Public Affairs Monitor - 30/05/08

"Three Strikes and You're Out" Policy Strikes Out April 21, 2008
"The new baseball season is in full swing, yet in recent months the phrase "three strikes and you’re out" has taken on an entirely different meaning on the Internet. My new technology law column (Toronto Star version, homepage version) reports on how, prodded by content lobby groups, a handful of governments have moved toward requiring Internet service providers to terminate subscribers if they engage in file sharing activities on three occasions. The policy - occasionally referred to as "graduated response" - received support last fall from French President Nicolas Sarkozy, who pressured the private sector to negotiate an agreement to implement the three strikes system. The policy soon attracted global attention as the United Kingdom, Japan, and Australia all announced that they were contemplating a similar approach.

In recent weeks, however, it would appear that governments are beginning to have sober second thoughts. After a Swedish judge recommended adopting the three strikes policy, that country's Ministers of Justice and Culture wrote a public opinion piece setting out their forthcoming policy that explicitly excluded the three strikes model." [MichaelGeist]

German Court Says ISPs Can't ID File-Swappers March 20, 2008
"A German court has ruled that the identities of ISP subscribers should not be disclosed as part of potential file-sharing copyright investigations, finding that such measures can only be used for "heavy" crimes like terrorism, murder or child pornography, TorrentFreak reports. The Federal Constitutional Court's (FCC) ruling will stand for six months, after which time it could be made final.

Earlier this week, Italy's government agency that deals with privacy issues made a similar finding, ruling that companies like Logistep that harvest IP addresses from file-swappers for use in copyright investigations are breaking the law." [DWMMedia]

German Court Decision Hands Big Win to File-Sharers March 20, 2008
"The Federal Constitutional Court in Germany has ruled that the identities of file-sharers must remain private and can no longer be revealed to media companies who accuse them of copyright infringement. In future, only those accused of ‘heavy’ crimes such as murder, child pornography or kidnapping will be revealed.

Germany has some of the toughest copyright laws and it’s thought that as many as 200,000 German file-sharers have had their identities revealed to entertainment and media companies, so that they may be threatened with legal action." [TorrentFreak]

EU Commission: Information and Society 05/09/08

Cut red tape to attract venture capital to cutting edge high-tech research, Commission tells Parliament and Council (04/09/2008)
The Commission today called on the Parliament and Council to support a new drive to cut red tape and allow greater flexibility to make European high-tech research more effective. It was responding to the 'Aho report', the most comprehensive evaluation of EU ICT research yet, looking beyond the management of research to evaluate its impact on innovation. The report highlighted that EU research could be of greater benefit for European competitiveness by involving and supporting high growth companies and providing better links between research and venture capital. The Commission, which has launched several initiatives to involve leading companies in research (IP/08/910, IP/08/824, IP/08/785), is committed to making the information and communications technology (ICT) research it supports more effective in terms of delivering business opportunities. It is also launching a public consultation that will feed into proposals to this end in early 2009. [Europa]

Opening soon: a digital library for Europe 11/08/08
Europe's cultural diversity in books, music, paintings, photographs, and films open to all citizens at the click of a mouse via one portal – this dream of a European Digital Library could become reality this autumn. However, further efforts by the EU Member States are needed, said the Commission today in a new Communication on making available digital versions of works from cultural institutions all over Europe. Digitisation of cultural works can give Europeans access to material from museums, libraries and archives abroad without having to travel or turn hundreds of pages to find a piece of information. Europe's libraries alone contain more than 2.5 billion books, but only about 1% of archival material is available in digital form. The Commission therefore called on Member States to do more to make digitised works available online for Europeans to browse them digitally, for study, work or leisure. The Commission itself will provide some € 120 million in 2009-2010 for improving online access to Europe's cultural heritage. [Europa]

Supporting social tourism 21/08/08
The Tourism Unit of the European Commission’s Enterprise and Industry DG is promoting the exchange of good practice on social tourism through a series of conferences and workshops, launched in 2006, as part of the Commission’s drive to promote tourism in the context of the Lisbon strategy. The most recent, in Brussels in April 2008, was on the topic ‘Facilitating the growth of the youth and senior citizen tourism markets’. In addition to various actions supported by the Commission, good practices in tourism by local authorities and private sector from several parts of Europe were also reviewed. [Europa]

EU Commission Enterprise and Industry Monitor - 05/09/08

The Best Idea for Red Tape Reduction Award
The Best Idea for Red Tape Reduction Award aims at identifying innovative suggestions for reducing unnecessary bureaucracy stemming from European law. Cutting red tape will allow companies to spend more time on their core activities and free up resources for research, innovation and growth. The purpose of the competition is to generate ideas for the European Commission to consider as part of its Action Programme for Reducing Administrative Burdens. [Europa]