3 Major Issues Facing the NFP Sector

BackgroundThe purpose of this document is to record the insights of an outgoing OCS employee into some of the major issues facing the NFP sector into the future. Its content is based solely on the unique perspectives of one individual and it is in no way intended to be either comprehensive or representative of the views of OCS, DPCD or the Victorian Government.

OverviewThe NFP sector is extensive, diverse and complex. It is currently facing a broad range of challenges which include some that are similar to the ones outlined below. Among these common and abiding challenges, this document attempts to identify those themes that will become increasingly important across the sector generally and will manifest in new, and possibly unexpected, ways.

The three major issues identified as best meeting these criteria are:

Sources of funding and income Approaches to service delivery and coordination across the sector Resolution of dilemmas of identity and direction.

Each of these themes is broadly expanded upon below followed by a conclusion which considers Community Development (CD) Branch’s role in assisting the sector to negotiate the associated challenges.

Funding and IncomeThe NFP sector will always need to find ways to meet their costs and this has always been a universal concern. This will remain the major issue it has previously been, but will become increasingly challenging into the future as the funding options and models available to NFPs become significantly more complex. The fundamental nature of the way that individual organisations secure funding is undergoing a profound transformation which will leave no NFP unaffected.

Traditionally, NFP fund-raising has been largely focussed on competing for a share of a scarce supply of what has essentially been ‘free money’ from a severely limited collection of benefactors, predominantly government agencies and individuals. To some extent, the stability and consistency of this income created a conservative, in some cases fatalistic, approach across the sector which reduced the scope for real growth, innovation and cooperation between ‘competitors’.

This is already changing and will continue to change to the point that sole reliance upon traditional funding sources is unlikely to remain viable for long. Where once these benefactors were willing to provide regular or repeated grants or donations to NFPs based entirely on reputation or a sense of obligation, an emerging economic literacy, as much as anything else, has led to a shift towards strictly targeted, project specific payments which impose high expectations and demand verifiable results.

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At the same time as governments and individuals are becoming more irregular and selective in their support of NFPs, many alternative funding sources and models have emerged, and a period of real opportunity for growth and innovation is commencing for the NFP sector. The corporate sector is becoming more involved in social investment and many NFPs are developing commercial arms to supplement the income they receive from external sources. There is also an increased sense of collaboration between an expanding set of stakeholders, and it is becoming much less common for a significant project to be conducted by a single organisation from a single source of funding.

The major issue for the NFP sector arising form this profound transformation will be that such a complex and dynamic range of available funding options and combined funding models will require a sophisticated strategic approach and a well developed set of skills to negotiate. With funding models continuing to evolve and develop into the foreseeable future, the main challenge will be that the expertise and experience essential for effective operation within an environment of such flexibility and uncertainty will be in extremely short supply.

An interesting irony is that as a direct result of business acknowledging the value of social capital and becoming more directly involved with the NFP sector, those who have rejected the pursuit of profit must now embrace economics as a discipline in order to survive the opportunity-rich environment that is developing. Many organisations and individuals within the sector will fail to recognise, accept and appreciate some of the subtleties of the emerging environment and may struggle to properly manage the upcoming period of continuous transition.

Service Delivery and Coordination The real purpose of the NFP sector is to provide services, in one form or another, to a specified group of clients. It is every NFP’s major focus and will remain the dominant factor which determines their perceived success or failure. Unavoidably entwined with issues surrounding funding and income, service delivery and coordination between NFPs is also undergoing a significant transformation. The conservatism and competitiveness that has traditionally been widespread in the sector is in the process of being exposed by emerging economics inspired benchmarks as being wasteful and inefficient.

The continuing application of economics based standards to determine the effectiveness of NFPs’ activities will necessitate an erosion of the ‘silo’ mentality that has influenced some elements of the NFP sector’s approach to service delivery and has reinforced an abiding reluctance to coordinate unreservedly across the sector. The diversity of the sector and the fact that each individual NFP serves an entirely unique group of clients, will ensure that the resulting changes in the ways that NFPs conduct their core businesses will have a variety of vastly different, and difficult to predict, impacts across the sector into the future.

Fundamental changes in the sector’s willingness to work together for mutual benefit are beginning to emerge with the creation of community hubs allowing much needed, but otherwise prohibitively expensive, community infrastructure to attract government and corporate funding. A similar trend, on a much smaller scale, is the increasingly common consolidation of local football and netball clubs, which allows financially tenuous NFPs to survive by sharing resources, including human and social capital. For a range of reasons,

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not least being stubborn aversion to change, these collaborations would have been extremely difficult to achieve a surprisingly short time ago.

While the benefits of a more cooperative NFP sector are becoming generally accepted there remain some existing service delivery challenges which are likely to intensify, largely coincidentally, as the sector replaces its traditional conservatism with a more flexible, economically driven approach. At the broadest level, these challenges include rising costs; reduced funding; difficulties with recruitment and retention of staff and volunteers; rapidly shifting client demographics, especially in categories of age, geographic location and culture; increasingly complex client profiles and needs; changing expectations attached to conditional funding models; growing administrative, governance and reporting requirements; and uncertainty surrounding the potential for disagreements with other service providers over responsibilities and jurisdictions. These issues will significantly affect the environments in which the NFP sector operates, making them both more complex and more demanding.

Similarly to the issues around funding and income outlined above, the major challenge for the NFP sector in regard to service delivery and coordination will not be the traditional one of limited options, but one of almost limitless options combined with severely limited experience and expertise. Entrenched in a succession of unfamiliar scenarios, NFPs will be forced to make decisions about how they allocate their limited resources, not least of which will be human capital. Many will struggle to adapt to this potentially difficult environment without compromising the services that they provide for their clients.

With many struggling to avoid the perils of either spreading their resources too thin or failing to reach their full potential, survival for individual NFPs in the years ahead will depend largely upon finding a comfortable space in which to operate and, perhaps more importantly, defining the boundaries outside which they do not operate and remaining inside them. This will be a significant challenge for many NFPs and for the sector in general. It is likely that some will fail because they do not take this challenge seriously enough, either clinging grimly to their traditional service models or becoming distracted by the glamour of the economics and neglecting their core business.

Dilemmas of Identity and DirectionAs the NFP sector confronts the various issues outlined above, a range of different perspectives of identity and direction will develop across the sector. This will create some degree of polarisation as various stakeholders try to assert their views and influence others. In turn this process will create a series of dilemmas, the most profound of which will be whether the dilemmas themselves should be considered to be ‘moral’ or ‘strategic’. The established diversity and complexity of the sector will now possess a progressively dynamic quality that will both fuel the creation of these dilemmas and make them increasingly difficult to resolve with any degree of permanency.

To some extent, a fundamentally ‘moralistic’ perspective is likely to emerge, which will attempt to resist the inevitable changes in the nature of the sector’s emerging funding and service models, insisting that a dollar spent on anything other than directly delivering services has been grossly misspent. An opposing ‘strategic’ perspective will almost certainly respond by providing an endless stream of economic modelling which ‘proves’ that the future rewards from investing all available funds now will far outweigh the short-term disadvantage,

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to a small number of clients, caused by delivering no services. Thankfully the perspectives of the vast majority of the sector will recognise that both of these extremes are ridiculous, but across the spectrum that falls between them are many issues of potential contention.

One of the most challenging issues facing the NFP sector will be how it responds to its various expectations of government. Many individuals will firmly believe that their particular area of activity, or even their particular organisation, is deserving of special consideration and warrants reliable financial support from particular government agencies. The approach that these NFPs adopt to lobbying and planning for this support will have a defining effect on both their self concept and on the way they are perceived by external stakeholders. Those NFPs which become openly dissatisfied, either demanding or rejecting various types of government support on a matter of principle, may be seen to be making a strategic error, while those that enthusiastically embrace the emerging flexible models may be seen as compromising the sector’s traditional values and undermining other NFPs.

As the sector considers its strategic expectations of government, a significant complicating factor will be the ideological division between Australia’s major political parties. In general terms, this hinges on whether government’s key responsibility is to protect the vulnerable from sustained disadvantage or if government should withdraw its ‘interference’ in the market and allow the resulting prosperity to benefit all, with the disadvantaged receiving assistance from philanthropy and the corporate sector. The expected future fluctuations in support for the NFP sector as governments alternate will create a major challenge of uncertainty for many NFPs. These affected NFPs will face a difficult dilemma of protecting themselves against ‘wasted time’ versus ‘missed opportunities’, as they decide upon their degree of interaction with, and reliance upon, various incumbent and alternative governments.

Decidedly more complex, and potentially far more contentious, are the issues over the NFP sector’s interactions with and reliance upon the corporate sector. Among individual NFP’s, the most serious challenges will be how trusting they are in their dealings with the corporate sector; how selective they are when deciding which organisations to become involved with; the degree to which they associate themselves with their corporate benefactors; the nature of the legal arrangements that they enter into; and to what extent they allow their ‘partners’ to represent them to the public. These issues of trust, and in many cases mistrust, have the potential to create significant divisions across the sector. Individual NFPs will need to consider very carefully how they value both their special status as part of the NFP sector and their vital relationships with the corporate sector when resolving these dilemmas of ‘reputation protection’ versus ‘financial rewards’.

Perhaps the most critical challenges facing the NFPs into the future will surround their choice of business models and approaches to competition within the sector. As the NFP sector becomes increasingly accepting of the principles of economics, the fundamental dilemmas which face the business sector will grow in relevance. In simple terms these involve decisions on whether to pursue a competitive advantage by providing a superior or a low cost product; how to distribute expenditure between competing internal and external concerns; how to arrange organisational structure and reporting lines; whether to invest or spend available capital; whether to expand or consolidate operations; whether to undertake particular joint ventures; whether to diversify vertically (along supply lines); whether to diversify horizontally (into new markets); and whether to outsource certain activities.

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Each of these decisions balance certainty against opportunity, and involve the acceptance or rejection of increased risk in the pursuit of enhanced returns. They also require individual organisations, in a dynamic and essentially competitive market, to declare their willingness, or unwillingness, to encroach upon the established and prospective territories of their peers. Into the future, how effectively the NFP sector resolves these dilemmas of identity and direction will have a major influence on how individual NFPs, and the sector as a whole, are perceived and treated.

The Role of Community DevelopmentAs the NFP sector undergoes the transformations outlined above, CD must also continue to adapt to an increasingly flexible and dynamic environment. Government’s traditional role in supporting NFPs, as the dependable distributor of regular funding to established agencies, has evolved into a much more sophisticated approach, in which it implements specifically targeted initiatives; facilitates innovation, including new funding and service delivery models; fosters capacity building; encourages collaboration between stakeholders; and seeks efficiency gains through the reduction of administrative burden. This shift has been a causative factor in the continuing transformation of the NFP sector, and as the sector changes the role of government generally, and CD in particular, will need to continue to evolve.

The nature and extent of the support that CD is able to provide the NFP sector will be largely dependant upon DPCD internal structural and strategic limitations as well as the policies of the government of the day. The particulars of these defining influences, into the future, are impossible to predict with any real certainty, but it is clear that one of the most important challenges facing CD will be ensuring that it operates clearly within the scope of these directives. There may be scenarios where staff members could become frustrated with the necessity of allowing elements of the sector to struggle, or even fail, as the emerging market based environment becomes established. It is important for the CD executive group to show strong leadership in guiding the team through these potential frustrations.

The NFP sector will also benefit from CD accepting a fresh leadership role as the sector faces the myriad of issues before it. In an uncertain and dynamic environment there will be some within the NFP sector that will expect the government to protect it from the perils it faces. Occasionally the support provided by CD may fall short of some of these expectations; however there will be an opportunity to create a sense of security for the individuals, in particular, involved in the sector by exhibiting a combination of patience, consistency and understanding when dealing with these disappointed parties. It is also important that the sector itself also provides strong leaders, and that CD liaises closely with these figures to ensure that an atmosphere of solidarity, or at least mutual respect, prevails.

While its role may be changing, government will remain a major player in the NFP sector and will exert a huge amount of influence, especially where the sector welcomes its involvement, such as in areas where service providers are unable to meet the current or anticipated demand for services. This influence can be strengthened through extensive communication and coordination between agencies and levels of government, leading to the consolidation of multiple small and medium sized projects, with a common theme, into strategically implemented major projects or clusters. In particular, CD involvement in the planning and

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development of practically sustainable Greenfield sites within the growth areas on Melbourne’s fringe will be invaluable to the viability of these projects.

A related possible future role for CD may be to assert influence on the three levels of government, and perhaps the corporate sector, to accept increasing portions of the nominal risk attached to some of these Greenfield projects, in order to alleviate the uncertainty, instil confidence, and thereby, attract both further investment and potential service providers. Transferring to government what is, for it, a relatively minor collection of risks will facilitate opportunities for the sector to prosper, on a project by project basis. As more of these individual projects succeed, this will significantly reduce the perceived, and real risk, for future similar projects. As this process continues, the cumulative effect will have a range of positive impacts on the NFP sector, the community and government. Not least of these will be an abiding public confidence in the NFP sector, in the economically driven models it operates and the government that supports its success.

In addition to supporting individual projects, CD will also need to take an active role in monitoring and guiding the NFP sector through the transformation it faces. There will be a neutral observer or ‘umpire’ function that CD could play a part in filling. While it is unlikely that CD will be in a position to become directly involved in conflict resolution, or protecting NFPs from being manipulated or misled by their more powerful corporate partners, for example, it will have some degree of responsibility for ensuring that there are structures in place to deal with these, and many other, existing and emerging issues.

Into the future, CD will need to continue to monitor the NFP sector on a number of levels, consulting closely with its stakeholders and empowering individual NFPs by involving and familiarising them, wherever practical, in the workings of government. Next to maintaining an accurate understanding of the issues which are facing the NFP sector at any given point in time, probably the most important role for CD into the future will be to act proactively on its observations. In broad terms, this will require balancing the restrictions imposed by structure and policy with the best interests of the sector; canvassing relationships across a diverse range of stakeholders; utilising innovation to refresh and update programs; and being positive in supporting the sector to approach its challenges with both confidence and realism.

Paul Shoobridge

January 2013.

This document remains the intellectual property of the Victorian Government.

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