*The Guardian | Wednesday 4 July 2012 1

A riskier role for charities?

There’s little doubt that providing public serv-ices, such as caring for older people or helping those with a disability live independently, has offered opportunities to the voluntary sector,

particularly those looking to take on more work or diversify their income away from donations and grants. Yet by pursuing commercial contracts, the charity sector has been exposed to new areas of risk.

Spending cuts and the threat of sudden funding withdrawal put organisations that service government contracts in a vulnerable position. Trends towards payment-by-results contracts, such as the Department for Work and Pension’s Work Programme, which only pays pro-viders in full when service users have been in work for a set period of time, involve charities taking on more risk. Time-consuming bidding processes for such work can harm an organisation’s financial sustainability and short-term contracts can unbalance income.

The landscape of public services delivery has altered dramatically since the mid-1980s when contracting-out to voluntary organisations began to gather momentum. Today’s picture is one of a mixed economy of local and national service providers, from big-name charities, such as Age UK, which provides care in the home for older people and other paid-for services, to social enterprise start-ups, consortia and partnerships with private-sector contractors. Such approaches include the four-year payment-by-results contract to reduce reoffending rates at HMP Doncaster, involving private company Serco and not-for-profits Catch 22 and Turning Point.

Recent research by thinktank New Philanthropy Capital (NPC) reflects the charity sector’s concerns around con-tracts. While 70% of charities surveyed said they had confidence in their skills and capacity to bid for public sector contracts, 90% believe they faced a riskier future in the current commissioning environment. More than half the 100 respondents said payment-by-results contracts would have a negative impact on their finances.

Diversity of income So what can charities do to ensure they have the skills and confidence to make taking on contracts worth the risk? This question was at the centre of a Guardian roundtable discussion organised in asso-ciation with voluntary sector insurer, Ecclesiastical Insurance.

For some participants, addressing neg-ative attitudes to public service contracts was fundamental. Peter Kyle, deputy chief executive of charity leaders’ organisation Acevo, said there was a need to move away from debating whether dependency on contracting was “morally right”. “I’ve never heard us debating whether small charities are acutely dependent on foun-dations or on one individual,” he said. “Every organisation needs diversity of income and many concerns are misplaced. [Public sector contracting] is something we need to celebrate, but we need to nego-tiate in the right way.”

Organisations should be clear why they are involved in public service delivery, agreed many around the table. Learning disability charity Mencap undertook a piece of work to look at this. It concluded that contracting could enable the charity to deliver high-quality services that it couldn’t do on voluntary income and provide a basis for innovation for its service users.

According to Mencap’s chief executive, Mark Goldring, keeping those aims in sight is paramount – even if it means not pursu-ing contracts. “Do we ever walk away? Yes, we do,” he admitted. “We walked away from a five-year contract because we were not willing to take the implications for us. That’s not to say we were weren’t disap-pointed, but we do not take just anything thrown at us.”

Richard Hawkes, chief executive of dis-ability charity Scope, added a warning to charities about the potential for “mission drift” as charities chase contracts. “The minute contracts are our lifeblood then we might as well give up because we lose the ability to exist,” he said. “We don’t just exist to run services; we exist to bring about positive change. We need to influ-ence and shape the agenda, proactively developing new initiatives with local authorities.”

With the emergence of bigger contracts and a focus on outcome-based approaches, such as payment by results, which organ-isations look best placed to benefit? For some around the table, the clout

Voluntary organisations are increasingly targeting public service contracts to diversify their income, but they must understand the challenges and financial implications of bidding for such work. Liza Ramrayka reports

form of due diligence (for example, checks into financial health) on other consortium members, despite planning to enter into a contract to deliver services with them.

Some didn’t feel the need because they had worked with these organisations previously; others were relying on the consortium or the commissioning body to undertake appropriate due diligence.

Models such as “any qualified provider”, which allows NHS patients to choose who will provide their treatment, from hospitals to voluntary organisations, can signal both opportunity and risk for charities. “The delivery model is changing so it is about managing the risk of sub-contracting,” said Louise Pritchard, managing director of services at Action on Hearing Loss.

Caroline Cooke, the Charity Com-mission’s head of policy engagement and research, felt good governance was vital. “Being a well-run, well-governed charity has to mitigate the risks,” she said. “Some charities are not assessing the risks with their trustees and undertaking due diligence.”

Contracts can expose charities to new areas of work such as staff transfers, property management or domiciliary care. Cooke reminded participants that

Charities are seeking additional income by bidding for public service contracts, such as providing support for people with a disability Simon Rawles

incorporation was important for charities involved in contracts, to ensure that a lim-ited company and not individual trustees took on any liabilities.

Phil Duffy, charity and community underwriting consultant at Ecclesiastical Insurance, said the insurance industry was concerned about charities not being aware of what they were getting in to. “Taking on a contract brings extra respon-sibilities. Some charities will be stepping outside a comfort zone or outside their constitution. It’s more about being pre-pared as a charity, not whether you are small or large.”

Taking the “balanced scorecard” approach – a series of linked measures to track different aspects of performance – could help charities navigate risk, sug-gested Professor Paul Palmer, director of Cass Business School. Appropriate reporting systems, a clear understanding of costs, and a grasp on competition and external forces all contribute to an organi-sation’s sustainability, he said.

Better collaboration in the sector can reduce some of the risks for charities. Mencap and Scope are part of Disability Works UK, a consortium of eight national disability charities that has been sub-contracted to deliver the government’s Work Programme. “It’s a big contractor … which brings clout and the ability to take risks,” explained Hawkes. “I don’t think there’s enough of that in the sector. There are not enough proactive mergers because merger is seen as failure.” He also called on the sector umbrella bodies to encour-age more mergers and joint working.

Developing the right skills and sup-port will give charities the confidence to challenge commissioners and negoti-ate the best deals for their organisation and service users. Hawkes said contracts could offer the sector opportunities, but reminded charities to see the full picture. “Be clear about the benefits to benefici-aries,” he said, “and be brave enough to walk away.”

Key discussion points

• Around a third of charity funding comes from government sources, accounting for £13.9bn in 2009-10.

• Charities’ income from statutory grants has declined steadily from a peak of £5.3bn in real terms in 2003-04 to £3bn in 2009-10.

• There has been an increase in contract income for charities, from £4.3bn in 2000-01 to £10.9bn in 2009-10.

• Income for charities from statutory bodies’ contracts has increased by 157% in 10 years.

Source: The UK Civil Society Almanac 2012, published by the National Council for Voluntary Organisations

Roundtable report commissioned by Seven Plus and controlled by the Guardian Discussion hosted to a brief agreed with Ecclesiastical Insurance (www.ecclesiastical.com) Paid for by Ecclesiastical Insurance Contact Rachel Joy on 020-3353 2688 (rachel.joy@guardian.co.uk) For information on roundtables visit: guardian.co.uk/sponsored-content

At the table

wielded by large charities and the niche or local knowledge of smaller ones mean medium-sized organisations may struggle for a place at the contracting table. Others such as Caron Bradshaw, chief executive of the Charity Finance Group, disagreed with this analysis. “The goalposts aren’t just moving, they’re being taken off the pitch,” she said. “This is about whether the other party is playing by the same rules, not just whether an organisation is good or bad.”

Several participants echoed this view: the procurement process “could use improvement”; charities being asked to reduce the cost of contracts “with no dialogues”; contracts are being cancelled with “no negotiation”. But many par-ticipants agreed that charities should be masters of their own fate, rather than con-forming to “poor me” public perceptions. Kyle said: “It is the fault of charities if they don’t manage [negotiations] in a profes-sional way.”

Research published by the Charity Commission in 2011 found that some small- to medium-sized charities were not fully assessing the risks of delivering public services as part of a consortium. There was a tendency not to carry out any

The Guardian roundtable in association with Ecclesiastical Insurance

Paul Palmer Associate dean and director, Cass Business School

Caron Bradshaw Chief executive, Charity Finance Group

Richard Hawkes Chief executive, Scope

Caroline Cooke Head of policy engagement and research, Charity Commission

David Kingsmill Director of finance, Addaction

Dan Corry Chief executive, New Philanthropy Capital

Louise Pritchard Managing director of services, Action on Hearing Loss

Martyn Turner Charity and community underwriting manager, Ecclesiastical Insurance

Peter Kyle Deputy chief executive, Association of Chief Executives of Voluntary Organisations

Mark Goldring Chief executive, Mencap

David Brindle (Chair)Public services editor, The Guardian

Phil Duffy Charity and community underwriting consultant, Ecclesiastical Insurance