News analysis: Charity's collapse sounds a warning

What happens when charities over-extend themselves on public service contracts? Andy Ricketts reports.

The news that registered training charity and Pathways to Work contractor Instant Muscle has gone into administration (Third Sector, 5 March) has been seen by some in the sector as a cautionary tale for charities and voluntary groups involved in public service delivery contracts.

Instant Muscle experienced rapid growth after the turn of the century. It was registered as a charity in 1984, but in the past few years it operated more like a private company.

Financial information from the Charity Commission tracks the organisation's dramatic rise and fall. Its gross income in 2000/01 was listed as just less than £5.3m. This figure had almost trebled to £15.4m just four years later, as Instant Muscle gobbled up a succession of public sector contracts to provide services for long-term unemployed people through schemes such as Pathways.

The beginning of the end

Within two years, however, the organisation's income had fallen by more than £6m to £9.1m, leaving it with a deficit of about £300,000. The losses could not be sustained and the administrator was called in at the end of February, with instant redundancies for almost all of the organisation's 270 staff. The end, when it came, was swift.

The fact that Instant Muscle's demise came within 24 hours of the announcement by the Department for Work and Pensions that providers offering return-to-work services would be paid according to results is not seen as a coincidence.

A former Instant Muscle employee, who asked not to named, says: "Instant Muscle was very successful when the Government was putting adequate money into the sector, but it started to struggle when the last round of the New Deal was being tendered for.

"The Government is now expecting organisations to work for very little money, which makes it very difficult. The move to payment by results is only going to make this worse."

This claim is rejected by the DWP. "All organisations are asked to address the issue of their capacity to take on the work involved in the contracts they are bidding for," says a DWP spokesman.

"As we move towards larger, longer contracts weighted more heavily to achieving outcomes, we will make it clear to prospective bidders that they should fully assess their financial positions and understand the consequences of needing to establish delivery arrangements before any income from the contract will be generated."

Instant Muscle's financial position was carefully considered during the tender evaluation process for Pathways to Work, the DWP spokesman says. But the department failed to spot any weaknesses, and Instant Muscle landed a multimillion pound contract covering Sussex and Surrey, which is now likely be snapped up by another provider through the administration process. No one from Instant Muscle was available for comment.

So what lessons should voluntary sector organisations with public service delivery ambitions learn from the process?

Ben Wittenberg, director of policy and research at the Directory of Social Change, says the way in which public bodies provide funding is causing difficulties.

"The way local authorities are funding and commissioning puts pressure on organisations to be bigger," he says. "If you are bigger, you are more likely to get contracts." This, Wittenberg says, is an unintended consequence of the current funding environment.

Catherine A'Bear, chief officer, corporate affairs at the Shaw Trust, which landed five Pathways to Work contracts - the highest number of any charity - says the Instant Muscle situation is a warning sign. "I think it proves the point that public sector contracting has certain pitfalls that organisations need to be careful not to fall into," she says.

"One of the key lessons we have learned is to make sure that we are entering into contracts that are properly costed and we are not drawn into attempting to deliver services for less than we can deliver them for. We also need to make sure we aren't drawn in to being over-competitive with our prices."

Neal Green, senior policy adviser at the Charity Commission, says charities must be convinced that any contract they are getting involved with is a good deal for their organisation.

"A charity can go out of business in any context, but there are ways in which trustees can manage the risks," he says. "Charities should stick to their missions, guard their independence and know their worth.

"This means taking independent advice where necessary and going into any agreement with your eyes open - don't sign unless you're satisfied that it's a fair deal for your charity."

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