Key Considerations for 2023
As we get closer to the end of the year's first quarter, there is still a sense of uncertainty about what 2023 will be about politically, socially and economically. It is also, for many organisations, the beginning of a new financial year and potentially a new strategic period.
So what are the current hot topics that nonprofit leaders should consider? What should they do to ensure the sustainability and impact of their organisations?
We are all well aware of the challenges facing nonprofits, from financial pressures related to a downward trend in income, inflation and increasing demand for services, to growing regulatory, compliance and public requirements. We won't spend time further describing the issues but instead highlighting what nonprofit organisations should consider in this context. We believe that nonprofit leaders should prioritise five areas:
Focus on performance - Organisations have to develop a clear understanding of where they spend their money and the impact they deliver. This understanding will help them identify improvement opportunities in their strategy and operating model.
Build resilience - They need to invest in resilience measures such as building an agile organisation and self-sufficient teams, finding and promoting adaptable leaders, and investing in talent and culture.
Protect income - They need to examine how their funding landscape is changing, identify new opportunities and leverage digital and data capabilities.
Collaborate - Collaboration, partnerships, networks and other groups are critical to enabling organisations to deliver their impact efficiently and effectively, which requires a review of core capabilities, gaps and opportunities.
Leverage data & technology - Like in any sector, technological advancements are vital to helping nonprofit organisations find new and innovative ways to achieve their mission and make their model sustainable.
UK nonprofits face increasing financial pressures due to cuts in government funding, increasing demand for their services, and uncertainty caused by Brexit. In addition, the economic downturn caused by the COVID-19 pandemic and the war in Ukraine has also led to a reduction in charitable giving. This reduction has made it difficult for some charities to maintain their services and support the communities they serve.
Focus on performance
If most nonprofit organisations have a budgeting and financial performance review process, we found that many lack a clear understanding of the link between the use of their resources and the delivery of their impact. This is often due to the following financial reasons:
A budgeting process focused on inputs rather than outcomes
A budgeting process emphasising incremental spending rather than bottom-up costing
The lack of impact-focused cost accounting and unit costing, and often an inadequate structure for cost centres
A performance management framework that does not integrate impact, financial and operational measures.
We are encouraging nonprofit organisations to increase the maturity of their financial management and embrace more advanced practices in cost allocation and financial analysis. In addition, zero-based budgeting should be considered by organisations that have a meaningful proportion of their resources with third parties.
Build resilience
Resilience is a crucial characteristic of organisations which thrive in difficulty. The starting point to build resilience is to identify potential risks and vulnerabilities they may face internally and externally. This will help inform strategies and put the right actions to mitigate these risks effectively.
Beyond a diagnostic, four capabilities should be considered by senior management:
Build an agile organisation - a shift toward faster, federated, data-informed decision-making and "good enough" outcomes can make it easier for leaders and teams to test, learn, and adjust in the wake of complex business challenges;
Build self-sufficient teams that, when held accountable and given ownership of outcomes, feel empowered to carry out strategic plans and stay close to customers, and which, through feedback loops and mechanisms, have the information they need to continually change course or innovate
Find and promote adaptable leaders who don't just react when faced with a challenge, such as - a competitor's moves or a change in team dynamics, but instead catalyse new behaviours. They develop capabilities that can help set the conditions for both a short-term response and long-term resiliency.
Invest in talent and culture - now and for the future. Organisations that focus on building resilient operations, teams, and leaders may gain a two-way talent advantage: such adaptable environments are more likely to attract top talent who will have a greater chance of success and, in turn, be more likely to perpetuate a cycle of resilience.
Protect income
Nonprofit leaders need to examine how their funding landscape is changing, identify new opportunities and leverage digital and data capabilities.
An initial step is to pinpoint levers to generate more income and other non-financial benefits for the organisation. This step requires looking broadly and creatively at the organisation's assets to identify value areas for its stakeholders within the boundaries of the organisation's mission and code of conduct. The stakeholders can include beneficiaries, volunteers, the broader public, professionals and businesses related to the organisation's activities, government, investors and other nonprofit organisations.
It is important that the areas identified are aligned with the delivery of the social impact strategy and do not create any potential reputational and other risks to the organisation.
We have seen great examples of new income generation from commercialising new inventions, setting up philanthropic funds investing in research, developing new corporate partnerships and launching new consumer services.
Beyond new income sources, nonprofits can also leverage advanced analytics (e.g. machine learning algorithms) to better understand their supporters' behaviours and develop more effective products, supporter journeys and communications.
Collaborate
Nonprofits should increasingly collaborate with other organisations, including private sector businesses. Public sector bodies and other nonprofits to achieve their goals and deliver greater impact. Typical benefits include:
Increased innovation: By working together, companies can combine their expertise and resources to develop new products, services, or technologies they may not have been able to create alone.
Access to new opportunities: Collaborating with others can give nonprofit organisations the scale and capabilities to access new audiences and geographic locations.
Improved efficiency: Organisations can streamline processes and share resources and expenses, such as research and development costs, marketing expenses, or equipment, which can help reduce costs and increase the resources dedicated to delivering their purpose.
Risk sharing: Collaboration can help organisations share risk as they work together to achieve a common goal.
Enhanced brand reputation: Collaborating with a reputable company can boost an organisation's image and reputation, as they are seen as being associated with a successful and respected partner.
Knowledge sharing: Collaboration allows organisations to share knowledge, best practices, and expertise, which can improve quality, operational performance and overall outcomes.
Within the different types of collaboration, nonprofit leaders should look at opportunities to outsource activities that are either non-core or require capabilities that the organisation cannot maintain effectively (e.g. technology and data). Unfortunately, too many voluntary organisations tend to recruit rather than buy. This has led to an increase in fixed costs, siloed working and the development of poor capabilities in areas that matter for the future of the organisation.
Leverage data and technology
The pandemic has accelerated the shift towards digital, and many charities have successfully introduced new ways of working by leveraging online tools. However, further work is often required to appropriately adapt to this new environment to continue providing services and raising funds.
Many small and medium-sized charities lack the resources and expertise to make this transition successful. As a result, we have seen countless examples of digital initiatives that have failed to deliver the expected benefits. Far from bringing the scalability and impact they were designed to, they have led to large spent, siloed working, cultural clashes and disengagement of staff and volunteers.
Despite those potential drawbacks, data and technology are critical to the success of nonprofit organisations, which need to adapt to the digital age to remain relevant and reach new audiences. This is an area where collaboration with the right partners is critical. We encourage nonprofit organisations to reflect on their data and technology activities, prioritise areas that matter the most to their success and identify the best delivery partners.