Iona Joy

Back in March, NPC surveyed 750 top UK charities to uncover their experiences of public sector commissioning. This week, we’ve published our findings, in partnership with Zurich, in the report When the going gets tough. Unsurprisingly, it depicts a sector facing much greater risk. 90% of charities say they face more risk now than they did a year ago. This risk is coming from three areas: new types of contract, new ways of working, and cuts to government spending.

Charities are uneasy but not totally negative about the new types of contract coming into play – including payment by results, personal budgets and spot contracts. These impact on finances and can lead to problems with cashflow, and charities are split on whether they will be good for those they help – only 50% think payment-by-results contracts will lead to better results for beneficiaries. The main issue seems to be having the reserves and skills needed to participate in such contracts in the first place.

The new ways of commissioning services – with long supply chains headed up by a lead provider who subcontracts to others – are causing disquiet. The publicity around poor referrals in the work programme, which have caused charities such as St Mungo’s to flounce off, is a case in point. Interestingly, our survey found charities are fine being subcontracted by other charities – 80% have a good relationship with charity lead providers, compared to 41% with private organisations. They have more confidence in the bidding process if other charities are conducting it. At the same time, 80% of charities subcontracting work say they are confident they have the right skills and capacity to manage the process. However, this presupposes that the tendering process is sufficiently fair to charities to allow them to participate – 51% are not confident that government commissioners run bidding processes in a way fair to them.

Encouragingly, 67% think working in consortia has a positive impact on their ability to deliver, so there is a role for charities clubbing together to play in this market. Partnership requires time and effort, and complementary skills and knowledge. As one of our case studies, Open Age, said: ‘Unless you’ve got very different skills, what is the point of creating more meetings and bureaucracy to agree work that could just as easily be done independently?’ But when this collaboration works, it works well, and allows smaller organisations to take part in bigger contracts.

The government cuts are harsh, with a third of our respondents reporting a loss of government income, especially from local authority funding. This has had a dire effect on reserves: 60% have used or plan to use reserves to make up shortfalls in income, and we worry this may send charities over the cliff. They are finding ways of overcoming drops in income: developing volunteer programmes or working more collaboratively. But they need more access to capital to plug reserves – and this is where funders come in.

Charities need core funding while they adapt to new ways of working. For instance, cash to maintain sufficient senior staff to put together and manage consortia to bid for contracts, or hire extra expertise to manage contracts and sub-contractors if they decide to bid as a lead provider. Charities expanding their offer to beneficiaries with personal budgets will need new admin systems and enhanced IT. In both cases there will be a period of investment where the revenue doesn’t immediately come in, and so the funding needs to bridge this. Funding for programmes like volunteer development costs money, but could work well.

If pursuing a payment-by-results contract, working capital will be needed. The contracts will be paid in arrears rather than upfront, and the charity may not have reserves to fund staff salaries during this period. Social investment might be the answer here, but investors may need to share the risk with the charity if the outcomes specified in the contract aren’t met sufficiently to trigger a payment. Lack of experience and expertise in setting outcomes targets – on both the commissioner and charity side – means that these contracts carry considerable risk of being structured in a way that doesn’t work.

For the less technically minded funders, topping up charities’ reserves would be a very valuable contribution to the problem. But first be sure you believe in the charity’s strategy and be prepared for some charities to go to the wall. This is not an environment where success is guaranteed for anyone.

Iona Joy is head of funder effectiveness at New Philanthropy Capital and co-author of the report When the going gets tough