Nonprofit Worst Practices – How Nonprofits Have Dealt With Risk
Dealing with risk is a challenge that every nonprofit faces. Addressing those risks properly is what separates high performing nonprofits from the ones who go bankrupt. SeaChange and Oliver Wyman recently conducted an extensive study of the nonprofit community and have generously shared their very useful findings in their RISK MANAGEMENT FOR NONPROFITS Report. Reprinted below with permission from the Reports’ authors are some of the nonprofit community’s worst practices – with lots of lessons for all of us on how to avoid the pitfalls itemized. Thanks SeaChange and Oliver Wyman!
THE TRACK RECORD: HOW NONPROFITS HAVE DEALT WITH RISK
The nonprofit sector’s overall fragility means that many nonprofits will experience financial distress. SeaChange and Oliver Wyman interviewed executive directors, board leaders, and funders of nonprofits that had struggled. Some went bankrupt. Others were rescued at the 11th hour by other organizations. Others “saw the writing on the wall” early enough to enter into an orderly merger or dissolution. Across the discussions, several themes emerged, as did some “worst practices.”
1. The organizations were fragile to begin with. Before the crisis hit they had limited resources and several years of deficits that had eroded whatever resources had once been in place.
2. The organizations had a longstanding challenge in recruiting and retaining a strong chief financial officer.
3. The crisis was precipitated by an event: the departure of the executive director; the non-renewal of an important funder; a change in government priorities or in the nature of government funding; a very meaningful (25-50%+) increase in scale; a real estate project that was large compared to the operating budget; or the emergence of a contingent liability (e.g., a Medicaid audit).
4. The organizations failed to do explicit scenario planning despite facing inherently uncertain situations. They did not pay enough attention to contingencies and milestones. Organizations were surprised by crises that could have been foreseen.
5. Trustees were not made fully aware of important long-term trends in financial performance or the operating environment. Important trends were masked by an exclusive focus on annual budgets, and year-to-date and year-over-year “rearview mirror” comparisons.
6. Trustees did not get timely, actionable information at the appropriate level of detail (i.e., by contract, program, or project) before or during the early stages of the crisis.
7. Trustees took too long to realize that there was a problem and then delayed taking action even after they had decided it was necessary. Executive directors and trustees suffered from magical thinking, particularly with respect to fundraising.
While there is a risk of 20/20 hindsight, we believe that many of these struggling nonprofits would have fared better, with less disruption to clients, had they put in place some or all of our recommended practices.
SeaChange Capital Partners is a merchant bank focused exclusively on the nonprofit sector and itself a nonprofit. SeaChange assesses nonprofit risk in all aspects of its business – mergers and collaborations, lending/investment, and advisory work – and has observed first-hand both the critical difference that risk management can make for nonprofits and the wide range of risk-related practice in the sector.
Oliver Wyman is a global management consulting firm, and part of the Marsh & McLennan Companies (MMC), a global professional services network with brands and affiliates in more than 100 countries. Oliver Wyman’s management consulting business has more than 4,000 consultants working out of offices in over 50 cities, spread across some 26 countries.