Vulnerability and resilience in the social sector: what we learnt through Covid-19

Supporting social purpose organisations through 2020 taught the Paul Ramsay Foundation and SVA key lessons about what leads to vulnerability or resilience in a crisis.

• SVA Quarterly
• Organisational effectiveness , Philanthropy , Systems change

In supporting 80 social purpose organisations funded by the Paul Ramsay Foundation (PRF) through the challenges of 2020, PRF and SVA learnt how funding, capability, and agility affect how organisations respond to crises. A key lesson is not surprisingly that significant investment is needed to strengthen the sector for the future.

Covid-19 impact

The Covid-19 pandemic had an immediate and profound effect on the social sector. Funding and resources dried up, with 50% of charities reporting a loss of revenue and volunteer hours dropping by two-thirds.¹ Many organisations had to make a sudden operational shift to a remote service delivery model. Yet the effects of the crisis on people, families and communities experiencing vulnerability meant that more than 40% of charities saw demand for services rise.² Social purpose organisations were caught in a challenging dynamic, needing to deliver more services, in a fundamentally different way, with less financial support.

A healthy social purpose sector may have been able to weather this storm. Yet long-term structural challenges have weakened the sector, and most social purpose organisations were already in a precarious financial position before the pandemic. Research in mid-2020 by SVA and the Centre for Social Impact (CSI) estimated that one in seven charities were at risk of becoming unviable due to the pandemic, putting 170,000 jobs at risk.³

A proactive response to the pandemic

As the pandemic hit, PRF, Australia’s largest philanthropic foundation, quickly moved to support the portfolio of social purpose organisations they fund (known as partners). An internal group was formed, the Sustaining Our Partners Taskforce, made up of Board members and senior management to support partners survive and thrive through Covid-19. The Taskforce was charged with ensuring partners remain financially viable and build their resilience, and, where possible, supporting them to capture new opportunities for impact arising from the unprecedented context of the pandemic.

“It was important that we supported our partners… to help them not only get through the pandemic but to emerge stronger from it.”

SVA Consulting was engaged to advise the Taskforce and individual partners to better understand the immediate financial and operational impacts of Covid-19. It also advised on how partners could take advantage of opportunities to increase their impact created by the pandemic.

“When the pandemic hit, we realised it would significantly increase disadvantage in Australia while also damaging the social sector’s ability to support and strengthen communities,” explains Greg Hutchinson, Director, Paul Ramsay Foundation and part of the Taskforce.

“It was important that we supported our partners in a considered, agile and strategic way, to help them not only get through the pandemic but to emerge stronger from it.”

As the full impact of the pandemic played out during 2020, the Taskforce took different approaches to supporting partners as their needs and opportunities changed.

At the start, the Taskforce focused on ensuring none of PRF’s partners were at immediate risk of going under. This involved a rapid financial health check across the entire portfolio, and a deeper investigation into a smaller number of partners that were feared to be at genuine risk. Thankfully, the expansion of JobKeeper to charities meant that far fewer organisations were at risk of insolvency in the short term than had been projected, though some emergency support was still provided.

Once the immediate risk had passed, the Taskforce broadened its approach, working directly with partners to identify how they had been affected financially, operationally, and strategically. Several themes emerged:

• Disruption to work – organisations delivering on-the-ground services were often forced to change their approach or found themselves unable to deliver what they had promised. Examples included a randomised controlled trial evaluating the effects of an intervention in schools having to scrap their data collection and start over, and several social enterprises had their entire business disappear almost overnight when tourism stopped and cafes were closed.
• Financial uncertainty – the funding landscape underwent a sudden upheaval, and organisations were no longer certain about their ability to find support for their work (especially from new funders) or in the case of social enterprises, a market for their offering. For example, a small organisation that relied on philanthropic funding suddenly found all of its proposed partners drawing back from their conversations and faced a sudden funding cliff.
• Strategic opportunities – the pandemic caused unprecedented shifts in the social and political landscape. For several partners, this created once in a generation opportunities to further their mission and create social change.

As the pandemic progressed, the Taskforce’s approach became significantly more tailored to the needs of partners.

“… listening to partners, reducing or removing restrictions, and increasing flexibility and funding, among others – have been guiding principles for our decisions.”

The supports provided by the Foundation were partner-led, with each partner able to receive support to understand their risks and articulate what would help them to emerge stronger from the pandemic.

PRF signed up to the Philanthropy Australia pledge for philanthropy’s response to the Covid-19 crisis.

“This has been a significant influence on our actions,” says Hutchinson. “Its core elements – listening to partners, reducing or removing restrictions, and increasing flexibility and funding, among others – have been guiding principles for our decisions.”

More information on the approach taken to understanding organisational resilience can be found in the Tools to Assess Organisational Resilience report to be published by PRF and SVA.

Lessons from the Taskforce

Through this approach, the Taskforce gained a deep understanding of what resilience and vulnerability means for the social sector in the face of disruption, and the supports social purpose organisations need to ensure ongoing positive social impact.

Key lessons were learned in the following areas:

Vulnerability

1. Funding mix is a key predictor of vulnerability

2. Regular analysis helps to understand the vulnerabilities

3. Grant funding can create unique vulnerabilities

Resilience

4. Agility is a protective factor

5. A crisis creates opportunities

6. Organisational capability needs to be strengthened.

1. Funding mix is a key predictor of vulnerability

There is a remarkable diversity of organisations in the social sector, from small environmental advocacy charities to billion-dollar universities, encompassing a wide range of causes, approaches and business models.

The pandemic threw the funding challenges of the social sector into stark relief. SVA’s Partners in Recovery: Financial Health Check identified that Australian charities have low reserves, significant funding constraints, rising costs, and a lack of discretionary funding to invest in organisational capability. Contributing to this is the sector’s current funding landscape, including inflexible output-based funding, deferred government funding, and revenue not covering the full cost of service delivery specifically overheads.

On top of these existing weaknesses, the source of an organisation’s funding was one of the key predictors of vulnerability in the early days of the pandemic.

There are three core sources of funding for social sector organisations: revenue from service delivery, grants from philanthropy, and government funding. Each funding source was affected differently by the pandemic:

• Service delivery revenue was highly variable – while some areas saw relatively little change (such as residential aged care), others were cut dramatically (such as social enterprise cafes or op shops).
• Philanthropy was somewhat variable, with long-term funding commitments generally being honoured but new funding more difficult to acquire given the initial effect of the pandemic on global financial markets.
• Government funding was relatively stable through the pandemic, especially for organisations that were part way through a multi-year funding agreement. However some organisations faced significant challenges with delayed renewals or funding negotiations. There is also ongoing uncertainty about how this will play out over successive Federal and state government budgets as the pressure to reduce Covid-related debt increases.

For example, a public health program, led by a social purpose organisation linked to a university, initially appeared to be at risk, as universities had significant drops to their service delivery funding during the pandemic. However, most of the organisation’s funding came from a long-term government grant which meant that, overall, the effect of the pandemic on its funding was limited.

2. Regular analysis helps to understand vulnerabilities

It is rare in the social sector for organisations to deeply investigate or analyse their finances and operations to understand their own vulnerability, or for funders to do this with grantees. One of the Taskforce’s key insights from the pandemic was that robust due diligence (a review of finances and operations) can be of great value to provide real insight into how vulnerable organisations are to a crisis.

Vulnerability is not just the likelihood of an organisation failing entirely and being forced to close. It is also the risk of the organisation having to substantially reduce its impact, by serving less people or providing fewer services, in response to a shock.

The Taskforce focused its due diligence with partners on understanding the impact of the pandemic on three elements of organisational performance: finances, operations, and capability.

• Finances – What is the risk that the organisation will become insolvent and be unable to pay its debts? E.g. is the organisation projecting it would run out of cash within months due to a fall in revenue? To answer these questions, the financial analysis examined how an organisation’s funding and expenses had been affected by the crisis. This gave insight into what levers were available to improve the situation, and what the organisation’s financial health might look like over the next few months or years.
• Operations and capability – Have the organisation’s operations been negatively affected by the crisis? Has its ability to create impact been reduced, either due to the response to the crisis, or due to other actions management are taking to remain financially healthy? E.g. was the organisation forced to stop delivering services or make staff redundant?

An organisation’s ability to weather a significant disruption is partly determined by its financial position, but arguably more important is the way it reacts to the crisis – including the flexibility it has to make changes, the operational adjustments it actually makes and the skills and capability of its staff to do this. This was assessed across the key capabilities of leadership, commercial agility, financial modelling, impact re-engineering, and technology.

One social enterprise working in healthcare and tourism was hit hard by the pandemic, with operations halted entirely at the start of the crisis and sales returning only very gradually. This, combined with an already lean balance sheet, meant that financial analysis raised serious flags about its viability and the Taskforce stepped in with financial support. The operational review by contrast, revealed that leadership capability was strong and the organisation had acted quickly to reduce costs where possible and find opportunities in the pandemic.

3. Grant funding can create unique vulnerabilities

Whilst having a significant proportion of funding secured with grants can be a real strength, managing the grant and the funder relationship presents a number of challenges for organisations in terms of ongoing financial sustainability. These were exacerbated by the Covid-19 pandemic.

The Taskforce identified some key considerations for funders and organisations receiving grants:

• Transparency and asymmetry of power: The inherent power imbalance between funder and funded organisation should be front-of-mind, as fundees may be more inclined to say certain things or act in certain ways because they believe their funder will approve.
• Intent and implementation: Clarity about what both sides should expect from the funding relationship is critical to a strong working partnership.
• Funding flexibility: Funding more flexibly (as advocated for by Philanthropy Australia at the start of the pandemic)⁴ can increase social purpose organisations’ ability to react adaptively and take advantage of new opportunities. Giving grantees ‘not only money, but also power’⁵ is a growing trend that makes the funding relationship less prescriptive and more holistic.
• Funding of core costs: The ability of an organisation to properly fund its indirect costs and invest in back-office support is especially important in times of crisis. A coalition of organisations, including both PRF and SVA, will be working together in 2021 on a research project to influence philanthropic and government funders to ‘pay what it takes’.
• Exit strategies post grant: Funders should work with organisations to create realistic exit plans for how the organisation will operate sustainably after the grant ends. Funders should also be as transparent as possible about the process and likelihood for future grant funding or renewals.

One example of the need for exit strategies was a small not-for-profit that was nearing the end of its philanthropic grant. Prior to the pandemic it had begun talks with alternative funders and created plans to generate fee-for-service revenue. Due to the pandemic, philanthropic funding opportunities suddenly dried up and revenue generation opportunities swiftly diminished. This created an existential threat to the organisation and led to it receiving support.

4. Agility is a protective factor

In the pandemic, one of the common elements that separated organisations that thrived from those that didn’t was their agility and the ability of their leadership to act decisively. Being able to respond quickly protected organisations from the worst of the effects of Covid-19 by allowing them to swiftly reduce costs, shift focus, or search for additional funding. It also made them more likely to take advantage of opportunities that presented themselves.

Many leaders had to make tough choices about retaining staff, continuing to provide services, or investing into digital delivery.

The ability of organisations to shift their operations rapidly is critical in a crisis. Organisations who were agile quickly adapted to new ways of working, moved in-person delivery to digital or other means, and instituted changes to staffing or resourcing.

An agile organisation necessarily requires strong and decisive leadership. The pandemic was a crucible for leaders who were forced to make swift decisions to protect their teams and their impact.

Many leaders had to make tough choices about retaining staff, continuing to provide services, or investing into digital delivery. Organisations with leaders that were able to mitigate the effects of the crisis quickly, and shift thinking into how they could actively seek out opportunities from the pandemic, were more likely to thrive.

One organisation working in mental health saw a significant increase in demand at the same time as they were predicting a 30% drop in fundraising revenue. Agility allowed them to adapt to the changed circumstances and continue to support those with mental health challenges. Strong management actions resulted in prudent cost reductions. They were also able to leverage the Covid-19 context by investing in their digital strategy and offerings.

5. A crisis creates opportunities

The pandemic upended society and led to dramatic changes in the Australian social and political landscape. While this has led to many trials for the social sector, it also presents opportunities for organisations with the resources and/or will and expertise to grasp them.

When working with partners, the Taskforce explicitly prompted them to think about opportunities, rather than just supporting existing work. This helped some organisations emerge from the pandemic stronger and more resilient. However other organisations were not able to identify opportunities, or were unable to move fast enough to benefit from them.

Two key opportunities have presented themselves to date:

• Political influence: Changes to the way governments engaged through the pandemic has allowed organisations to have unprecedented access and opportunities for influence. One organisation was able to capitalise on its existing expertise and respect within the early childhood sector to advocate to government more effectively than before and make significant inroads into its policy agenda.
• New or changed markets: Many industries were changed by the pandemic, and it took fast thinking by organisations to identify and pursue new opportunities for growth. Digital opportunities were identified but often as a stopgap to replace in-person services, while changing attitudes to cleanliness, health and exercise, and transport created more subtle chances for increased impact. Social enterprises were most likely to take advantage of these, with one creating an entirely new brand to take up the additional demand for services.

One social enterprise was faced with the near-complete loss of revenue in its main market in tourism. It quickly spun up a new venture that built on the existing staff and expertise while addressing a new market that had been far less affected by the pandemic.

6.   Organisational capability needs to be strengthened

The vulnerabilities identified by the Taskforce prompted investigation of ways to build capability in the sector as a protective measure. Through engagement with PRF partners and research into the social sector more broadly, there are some critical capability needs of social sector organisations which have been exacerbated by Covid-19.

Some of these needs include:

• Strengthening leadership capabilities: Investment in leadership development, specifically in change management, technological capability, advocacy, and stakeholder management.
• Improving business model sustainability: With 45% of organisations carrying less than six months of operating reserves⁶ and organisations experiencing greater operational and financial constraints than before the pandemic, there is an increasing need to clarify strategic priorities, explore diverse financing options, build internal capabilities and consider partnerships/mergers.
• Shifting to online service delivery: With 80% of organisations fully or partially moving to online service delivery during Covid-19,⁷ building digital and remote service delivery capability is critical.
• Supporting workforce wellbeing: The mental health and wellbeing of staff and volunteers has been critically impacted, making it more important that organisations can train, engage, and retain staff effectively.
• Better enabling collaboration and partnerships: Organisations need support to build community partnerships in order to sustain and increase impact, and there is a need for better collaboration with partners inside and outside of the charities sector.

One not-for-profit realised its most pressing need coming out of the pandemic was to build the skills and capabilities of its CEO and staff. The organisation had pivoted rapidly to online delivery, and was facing a challenge to scale an intensive advocacy campaign. Additional training and mentoring was needed to accomplish these goals effectively.

In reference to organisations’ capability, Hutchinson says, “Just as Covid-19 has revealed systemic inequities in its uneven impacts and effects, so it has highlighted existing strengths and gaps in organisational capability for our partners and for the Foundation.

“For our partners, capability gaps often relate to systemic funding issues. In the absence of full cost funding and/or funding for capability building, organisations can struggle to invest in critical areas of organisational effectiveness including financial modelling and digital capability.”

Protecting from future disruptions

The Taskforce, through a partner-led approach, effectively supported PRF’s partners to survive the first year of the pandemic and for some, even deliver additional impact in a changed world. Organisations facing a significant funding gap were rescued, partner capabilities were built, and opportunities coming out of the pandemic were quickly grasped.

…many social sector organisations will struggle to invest in capability building and organisational transformation.

In doing so, we learnt a great deal about how the sector responds to significant disruption. Social sector organisations have structural vulnerabilities which constrain their resilience to shocks. The set of challenges and constraints they face are different to those experienced by for-profit businesses and unless addressed will be ongoing barriers to their successful recovery.

Our work also highlighted the capabilities of social purpose organisations which are protective in a crisis. Philanthropists, government funders and social purpose organisations need to work together to nurture these protective factors.

Finally, even backed by trusted relationships with funders and with strong operational and financial management, many social sector organisations will struggle to invest in capability building and organisational transformation. Funding across the sector for this type of essential work is still a missing ingredient in preparing the social sector for the post-pandemic world.

Author: Sam Thorp
Contributors: Susie King, Malcolm Garrow & Annabelle Roxon