Spotlight on innovation

Funding constraints and changing government policy are causing concern in the not-for-profit sector, but also the opportunity to innovate.

The not-for-profit (NFP) sector is an essential part of the Australian economy and society, but there is no doubting the sector is undergoing significant change. 

Rising youth unemployment, a slowing economy, funding constraints and an ever-changing policy framework are all contributing to create a sector that is facing intense scrutiny and increased pressure to perform.

According to estimates from the Australian Bureau of Statistics, there were approximately 57,000 economically significant NFP organisations in Australia in 2012-13.

In total, these organisations generated over $107 billion in income and employed more than one million people – approximately 8 per cent of the workforce.

Yet the NFP sector continues to face significant challenges.

According to a 2013-2014 Grant Thornton survey on the Australian and New Zealand NFP sectors entitled Doing good and doing it well?, funding and fundraising were identified by 68 per cent of Australian respondents as major issues facing NFP organisations.

In that same survey, government and compliance with government regulations, including new governance standards set by the Australian Charities and Not-for- profits Commission (ACNC) and the introduction of the National Disability Insurance Scheme (NDIS), were also cited as particular concerns in Australia.

In addition, almost a quarter of respondents cited government as an issue.

Government policy

While domestic and global economic factors are creating downward pressure on many NFP organisations, it is ever-changing government policy and the tightening of funding that is having the greatest impact on the sector.

The threat to abolish the ACNC, which was set up in 2012 as the primary regulator for the sector with the aim of reducing red tape for NFPs, is of significant concern.

So too are the cutbacks to the Australian aid budget, the most recent round of which were announced in December last year. The $3.7 billion cut to the aid budget – on top of the $7.6 billion cut in May 2014 – by Treasurer Joe Hockey saw Australia’s generosity towards the world’s poor fall to an all-time low.

“Rising unemployment and a slowing economy are of course serious issues that our country faces right now, but it must be noted that Australia’s overseas aid program has been disproportionately affected by budget cuts over the past two years,” says George Savvides FAICD, chairman of World Vision Australia.

Indeed, the world is currently facing some of the greatest humanitarian challenges of all time; conflicts in Syria and northern Iraq, south Sudan and the Central African Republic as well as the outbreak of Ebola in west Africa, mean that the aid and development sector is finding it increasingly difficult to provide much-needed assistance to the world’s most vulnerable.

“The number of displaced people and refugees on the globe sits at unprecedented levels, and yet the Australian Government has continued to reduce overseas aid spending to a historic low. These decisions are at odds with the context in which we live and defy the values that Australians believe in,” Savvides adds.

Seeking opportunities

While the funding challenges facing the sector are plentiful, they are unlikely to go away. As a result, many NFPs are looking for new ways to reach those in need by tapping into new income streams and adopting more flexible and innovative business models.

This is where good governance is critical. An effective board should always have one eye on cost-effectiveness while also ensuring that the most funding possible gets to where it is needed.

At the same time however, it is also important for boards to focus on keeping the organisation healthy and strong to ensure it is sustainable into the future.

“Part of the challenge is trying to find other ways to engage,” says Robert Knowles AO, chair of The Brotherhood of St Laurence.

“A well-governed organisation is one that has a good approach to risk management. It is about diversifying funding streams without getting too far away from the organisation’s core activities. This should be a very active area for the board.”

Savvides agrees. He says: “NFP boards play a critical role in these testing times to ensure risk management and alignment between board and management is strong.”

A shrinking market

Another factor that continues to dominate the NFP sector is consolidation and collaboration. According to the Australian Institute of Company Directors’ 2014 NFP Governance and Performance Study, 67 per cent of NFP directors said they worked in collaboration with other NFPs to advocate for their sector. Similarly, 30 per cent of boards said they had discussed or taken action to merge their organisation in the previous year.

Knowles says that collaboration with other community organisations as well as mergers are a sign that the NFP market is changing shape. “Consolidation in the sector is not a concern, it is a good thing,” he says.

“Those that have too narrow a focus in their service delivery model, and who fail to innovate, will always find themselves in a vulnerable position. Whereas those companies with surpluses each year can continue to reinvest and innovate those funds rather than operating on a hand-to-mouth basis,” he adds.

With the landscape unlikely to change any time soon, the outlook of the NFP sector is likely to remain uncertain, particularly around the issues of regulation and funding, both of which are of critical importance.

Such uncertainty has already led to some degree of anxiety in the sector. However, it is essential that boards work with management to create a robust framework that enables innovation and the evolution of business models without moving too far from the core business focus.