Martyn Drake: Exiting service delivery is not the only option

Government funding of charities fell by £1.6bn in real terms between 2009 and 2016, but rather than handing back contracts at once, there are other options to explore

Martyn Drake
Martyn Drake

Despite having been scientifically debunked, the fable of the frog and boiling water continues to thrive in business commentaries as a metaphor for the propensity of organisations failing to react to slowly changing environments.

The point being that, although frogs might not actually stay sitting in water while it gradually heats up, organisations do. But is that really true?

Last month, the disability charity Hft released its third annual Pulse Check report on the social care sector. One of the main headlines reads: “45 per cent of providers have had to close down services in the past year, and 52 per cent warn they will need to do so in the near future.”

Clearly there’s no shortage of charity frogs reaching for their towels.

The pressure driving this trend might be most visible in social care, but it’s running right across the UK’s public services. According to data from the National Council for Voluntary Organisations, government funding of the sector, combining all grants and contracts, peaked in 2009 at about 37 per cent of total charity income. By 2016, it had fallen to just 29 per cent, the lowest percentage in the NCVO’s 17 years of collecting data.

In real terms, that’s £1.6bn less income in 2016 than in 2009, despite escalating demand. And while we don’t yet have figures for the past two years, all the surveys say it’s fallen even further since then.

Handing back contracts and exiting services might well be the best strategic option. When commissioning reaches the level of “minimum required to stay legal”, it surely can’t be the role of charities to fill the rows in another tender spreadsheet, desperately competing with each other to drive any last vestige of value out of service provision.

But exit is not the only option, and there are other avenues worth exploring first.

Cost reduction is invariably the first port of call, and many charities I’ve worked with have trimmed as much as they can, if not more, from overheads and operations.

But to be sustainable, true-cost engineering needs to be more than an analytical exercise. It needs to be a strategic innovation challenge to find and demonstrate radical step-changes in efficiency through comprehensive service and process redesign, the wholesale application of technology, and in outsourcing and partnerships.

It’s essential we recognise, while there’s still time to invest, that it’s not sustainable to address a systemic funding decline through annual cost-cutting.

The second option is expertise leadership: picking a niche in which your organisation can become the recognised authority.

Expertise leadership creates a price-premium in any market and opens wider opportunities for training, accreditation and advisory services. But like true-cost engineering, it also takes time for innovation and brand development, money, for investment in research and skills, and very clear choices around where the organisation will lead and, more importantly, where it will cede the ground to others. Nobody can be expert at everything.

The third, and often the default option, is subsidisation: using other income sources to fill the gap in public funding. Whether to subsidise the withdrawal of the state is an ethical question each charity must answer for itself, but there are plenty of successful examples.

In 2015, Skills for Care took the decision to consciously shift from “we do what the Department of Health pays us to do” to “we do what social care employers need us to do, some of which the department will pay for”.

Its work is still largely funded by a block grant, but is now subsidised with almost £3m of commercial income from its client base.

The House of St Barnabas is something of a poster child for social enterprise, having closed its doors as a homelessness hostel in 2006, after 140 years, only to open again seven years later as an out-and-out social enterprise, entirely replacing its reliance on the state with commercial income.

The NCVO is another example, having migrated from a reliance on government for 45 per cent of its funding in 2012, to only 2 per cent by 2018, with all the rest now generated from commercial activities.

Commercial is not the only solution. Capital fundraising has long been a standard way to top up budgets in the health and education worlds, but the point is that subsidisation must be a strategic decision because it is a response to a strategic challenge.

There are plenty of charities that already subconsciously subsidise, often out of reserves, by continuing to deliver far more than they’re commissioned to do, whether out of front-line compassion or a central lack of discipline.

I make no value judgements on the rights or wrongs, but it’s neither fair on your team nor commercially sustainable to continually delegate these big moral and financial trade-offs to the front line. The parameters and protocols, alongside the funding implications, have to be decided by the board.

Of course, there is a fourth option: to struggle along, waiting for a big cash injection into public sector services that will probably never come, a procrastination that will almost certainly end with an ungraceful exit under financial duress. How hot does the water need to get before your organisation will climb out?

The point is this: these questions should be constantly on the agenda of every charity providing public sector services right now because, in the immortal words of the Canadian rockers Rush: “If you choose not to decide, you still have made a choice.”

Martyn Drake is founder of the management consultancy firm Binley Drake Consulting

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