What do we know about what happens to the sector in a downturn?

On Monday NCVO hosted an economic summit to discuss the best ways to support the sector in the likelihood of a recession in the months to come. In preparation for the summit, Karl looked for available evidence about what happens to the voluntary and community sector in economic downturns, including both historical and contemporary evidence from the UK and abroad. It was an interesting and challenging task, as Karl explains:

Evidence about what happens to the sector in a downturn is limited and often conflicting. There is a limited amount of long-term trend data, compared with a considerable amount of media conjecture and anecdotes.

This is a summary of what he found.

The headlines

Some organisations will fail; others will emerge stronger; some parts of our sector will face increased demands, others fewer. Some income sources and costs will decline; others will increase. In the short-term mid-sized organisations in particular are financially vulnerable.

Government funding (grants/contracts) and donations/purchases from the public are crucial to the ability of the sector to emerge from any downturn as together they account for three-quarters of total income. Evidence suggests charitable giving is relatively resilient in a downturn; therefore, the funding practices and policies of statutory contractors and funders will have a major impact on the health of the sector.

How will the sector and individual organisations fare in a downturn?

  • The sector’s total income does not necessarily decrease in economic downturns.  While in previous downturns, some charities reported decreases in income, approximately an equal number reported increases, with the other third reporting no change.  This leads to the conclusion that organisations experience downturns differently. Responses therefore may need to be individual and targeted.
  • Most organisations have limited assets (or ‘capital’). The sector’s assets are held by a relatively small number of organisations, mostly foundations. Mid-sized organisations in particular have been unable to build surpluses and therefore reserves. These organisations in particular are susceptible to short-term falls in income.
  • The largest organisations are more capable of resilience.  Although there is anecdotal evidence of large charities making redundancies or scenario planning for 10% cuts in income, evidence generally points to the resilience of large or more established charities during an economic downturn. Resilience reflects better strategic planning, larger assets, relatively diverse income streams, and greater capacity to fundraise effectively. 
  • Smaller or less established organisations are the ones more likely to suffer hardship. A recurrent message from umbrella bodies is that during an economic downturn the strong get stronger and the weak get weaker (see polarisation of the VCS). Whilst larger organisations typically have wider resources to draw from (including larger financial reserves) and a more specialised workforce (including professional fundraisers, campaigners, and volunteer co-ordinators) who can respond to shifting needs, smaller organisations may lack the capacity to adapt quickly in order to cope with increased financial or service pressures.

What happens to income in a downturn?

  • Government funding policies, practices and attitudes are crucial. 36p in every £1 is from statutory sources. However, evidence from the last recession suggests both central and local goverments cut funding. Of those who experienced a change in their relationship with government, one third cited cuts in funding. More recently, evidence suggests practices (such as late payment) can still lead to problems with cashflow.
  • Charitable giving from individuals does not fall in economic downturns.  There is historical evidence from both the UK and US which demonstrates that recessions simply slow the rate of increase in charitable giving. Just as giving has failed to keep pace with increases in GDP, it will probably not fall proportionately as GDP contracts. Evidence from NCVO/CAF to be published in December suggests in the last year charitable giving levels showed a small increase.
  • Donor attitudes and habits may change. Anecdotal evidence suggests that donors focus on causes they already support; and they change how they give so that more reaches the cause (see planned individual giving).
  • Corporate giving varies with economic performance.  There is conflicting research on this issue, but it appears that falling profits may generate a reduction in corporate giving.  In general corporate giving is more closely related to economic performance than a reaction to the wider economic climate, with corporate donations in the UK having increased steadily over time.
  • Charities’ investment and legacy income will be affected by the falling value of assets (equities, bank deposits, property) and lower interest rates.   The value of legacies will be impacted upon by falling property prices and the fall in value of investment portfolios. Falling investment income will mostly hit trusts and foundations – evidence suggests that a majority will maintain or reduce grantmaking (see stock market performance).

What happens to staff and volunteers in a downturn?

  • Some VCOs are cutting staff, but this may not be widespread.  Staff costs represent almost 50% of total expenditure and anecdotal evidence suggests some VCOs are making redundancies. However, the concentration of staff in contract-funded social care activities may limit redundancies in the sector. Rising unemployment may place downward pressure on costs.
  • Skills gaps and shortages may ease. The relatively widespread skills shortages reported in recent years may ease as there is more competition for jobs.
  • The impact on the unpaid workforce is mixed.  While there also may be a potentially larger pool of volunteers, there are costs associated with volunteering to both the volunteers themselves (eg transport), and organisations (eg training and management).  Without organisational support (such as reimbursement of expenses) volunteers tend to drop off, and as the costs associated with volunteers rise, organisations’ capacity to use them is reduced.      

What happens to the need for the sector in a downturn?

  • Sub-sectors fare differently. In the last recession some parts of the sector in the UK saw an increase in income, such as international aid and faith-based organisations. Other areas of work (including housing, general social services, community and economic development and the arts), saw needs (unemployment, homelessness, poverty) grow more severe whilst income fell.  
  • The impact of the downturn on need for VCS services will also be uneven, both sub-sectorally and geographically. Levels of need are likely to change in both directions.  There will likely be a higher need for welfare services, advice and counselling (e.g debt, housing, employment), but a lower demand for fee-charging leisure and cultural activities (e.g theatres). 

Want to know more?

Last updated at 15:08 Mon 18/May/09.
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Caroline's picture


Third Sector Foresight

Related to the above point that skills gaps and shortages may ease, I have just read an article showing some anecdotal evidence that non-profit organisations in the USA have seen an increase in volunteers since this time last year. This has been a suggested outcome of the recession by many people, so it will be interesting to see if this increase happens in the UK as well. In preparation you might like to consider the following:

*Can your organisation offer useful volunteering opportunities to skilled people?

*Do you have the support mechanisms to ensure volunteers are employed in th most appropriate ways?

*Are there areas of your work that you would like to develop that need certain skills? Perhaps these are where you could employ new volunteers?

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