Charities are expected to play a central role in the big society, delivering more public services. But with so many doubts surrounding the government's agenda, there are fears that big society will mean big risk.
Taking on contracts to deliver public services poses a number of threats to charities and they might have to take out extra insurance to cover the risks associated with working with new staff, volunteers and beneficiaries in unfamiliar areas. Failure to do so could leave them vulnerable to costly legal claims.
A number of risks cannot be insured against, such as various financial and reputational threats, and charities need to think seriously about how to manage risk internally. One of the biggest risks of providing new services is financial loss. Contracts are increasingly awarded on a payment-by-results basis, which can leave charities with significant gaps in their finances while they wait for payment that is not guaranteed.
The crime reduction charity Nacro runs training and education services for ex-offenders. "Contracts are becoming more outcome-driven," says Liz Walker, Nacro's director of finance and resources.
"That is a funding risk. It is a gamble - trying to get offenders to stay in a job for X number of weeks is a significant challenge when a lot of the people we work with lead very chaotic lives."
The payment-by-results culture also means charities will have to look more closely at how they demonstrate outcomes. "One of the key things will be management information systems," says Walker. "Charities need to tighten up and demonstrate that they are delivering results."
An important financial risk is that charities might inherit staff on Tupe contracts, which protect terms and conditions of employment.
The mental health charity Rethink currently receives about 95 per cent of its income from NHS and local authority contracts to deliver services such as nursing, advice and back-to-work services.
Andrew Hodges, the charity's director of finance, performance and IT, says inheriting staff on higher salaries is all part of the process. "We factor that in to the cost of the service and have to make sure we can recover the cost," he says. On pensions, Hodges says charities should negotiate with commissioners to make sure they are not burdened with an unfair proportion of the costs.
Many of the risks associated with taking on more public services can be mitigated by insurance. Providing more services means helping more people, which in turn increases exposure to risk.
"The more staff and volunteers you have, the greater the risk," says Hira Choudhury, managing director of Unity Insurance Services, a specialist voluntary sector insurance firm. "It is quite hard to control that network of people, and inevitably people make mistakes.
"With the economic downturn, people increasingly want to claim from someone," she adds. "There is a growing trend towards employees taking charities to tribunals. A lot of charities could now face employment malpractice issues, so they need to look at employment practices liability."
Choudhury recommends employer's liability insurance and professional indemnity insurance for charities offering advice services, and public liability insurance for organisations where there is the possibility of injury or volunteer error. Charities also need to make sure they have the right cover for property, material damage and theft, as well as adequate protection for their trustees.
"You need to have a good conversation with your insurer at the outset," says Choudhury. "Make sure they know everything you are doing, including any events you have planned. If you are doing something new, you will have to look at the risks and costs involved."
According to Nick Rudnai, a partner at the voluntary sector brokerage Case Insurance, it is becoming increasingly important for boards to have some knowledge of insurance and risk management. "There is a very good case for both the chief executive and the trustees being aware of these issues," he says.
"You need to have someone who can take a pragmatic look at what the risks are and what it is reasonable to transfer to the insurers. It doesn't necessarily have to be someone who is part of the trustee board, but someone available to the board who can talk to the trustees."
Small must flourish
Many smaller charities do not have the resources to take on the risks associated with public service delivery. So with the increased focus on contract culture is there a danger that small charities could be left on the sidelines? "There is a potential for that to happen, and it must be actively discouraged," says Nick Carey, policy officer at the chief executives body Acevo. "But many prime contractors are paying attention to this. It is important that both small and large organisations get the opportunity to flourish. The regulatory environment needs to protect the rights of providers of all sizes."
Some small charities are forming bidding consortia to share the risk across several organisations. But according to Paul Emery, head of charities at insurance firm Zurich, commissioners might view a consortium as a riskier option than a single, larger organisation. "If a charity needs to grow or team up with other charities in order to deliver a service, that might be considered less resilient," he says. "As the supply chain becomes more fragmented, there is more risk."
The big society might bring big risks, but it also brings big opportunities. "When you enter a new market there are always risks and opportunities," says Carey. "It is important for charities to be able to capitalise on these opportunities.
"But they will need to look at the full range of risks," he says. "Don't jump into it purely because of the money. Make sure you are ready - that you have the right governance, internal controls and staff training in place, and that the work is aligned with your mission."