Rethinking the Business of Charity

It is a great privilege to be invited to give this lecture.

Mergers are one of the options that charities should be considering in the current climate.

However, today I want to argue for a much broader re-think of the business of charity.

The need to re-think the business of charity, is not new.

In 1889, Andrew Carnegie, a US steel magnate, wrote in “The Gospel of Wealth”, “One of the serious obstacles to the improvement of our race is indiscriminate charity.”

However, it is more urgent than ever.

Prior to covid-19, it was clear our sector’s business model was already "broken”.

Many charities were only surviving because of their historical investments in fundraising and financial reserves.

There are simply too many charities, chasing too few dollars, all generally using the same business models in a sector experiencing declining fundraising returns at a time of escalating costs and demand.

New technologies, combined with limited progress on wicked problems and huge unmet need, means we need to seek new solutions to our greatest social and environmental challenges.

The covid-19 pandemic accelerated these strategic challenges, leaving even less time for charities to get their houses in order.

Unfortunately, many charities, despite their innovative beginnings, have become radical ideas stuck in concrete.

Today, I want to encourage charity management teams and boards to rediscover their courage to take bold decisions.

And philanthropists to re-think how they support the sector.

There are wonderful opportunities for us to leverage new sources of funding, new business models and new technologies to achieve a step change in our sector’s impact.

However, to take advantage of these opportunities will require us to much more clearly prioritise our mission over our organisations.

But let me begin by describing some recent conversations with sector colleagues.

Conversation one

A couple of weeks ago I was chatting to a colleague in another charity. We were discussing an opportunity to create an impact fund to invest in for-profit businesses aligned with the charity’s mission.

This charity had, through careful stewardship, accumulated a very large endowment fund.

When I suggested that the charity might like to use a small part of the endowment fund to establish an impact fund, my colleague said that was highly unlikely.

The directors were extremely proud of the financial returns that they were generating and would not be willing to compromise those returns by establishing a mission aligned impact fund.

Conversation two

Last year, as the global pandemic took hold, another charity leader called me for some advice. She said that prior to the pandemic they were struggling and the situation had now become dire.

We discussed their business model and potential sources of new funding but it seemed pretty clear to me that they faced some fundamental challenges.

I suggested that she should consider a merger with one of the many organisations that had a similar mission, allowing them to reduce back-office costs and create cross-selling opportunities to generate new revenue.

She became defensive and indicated that a merger wasn’t "on the table”.

I have had the same reaction from many CEOs and directors when I have raised this issue, irrespective of the business case for a merger.

* * *

These two examples involve very different organisations: one is very successful, in a strong financial position; the other is small and facing an existential crisis.

But in both cases, their leadership is confusing means with ends.

For-purpose organisations are created to achieve a social or environmental good.

Subject to your director duties, the merits of a decision should be determined by whether or not it advances the organisation’s mission, not the organisation.

The Australian branch of Save the Children was created in Australia over 100 years ago, just months after the organisation was founded in London.

Since then, it has grown to be one of Australia’s largest charities.

And over that period, it has received billions of dollars in revenue.

However, when I joined as CEO it had very modest net assets, and for most of my tenure as CEO, we have had negative free cash.

Successive boards and management teams have decided that it’s more important to use the organisation’s income to support the immediate health, education and protection needs of children than to build the organisation’s assets.

It’s hard to argue with that decision.

Imagine explaining to a mother whose child needed life-saving help that you thought it was better to build an endowment for your organisation’s future.

Of course, it’s the role of directors and senior leaders to weigh up the immediate impact of expenditure with the potential to have greater impact for the mission in the future.

And I am among the first to argue that many organisations have underinvested in building their back-office capability.

However, I suggest that too often the expected returns and risks of social investment decisions are not carefully enough calculated.

If boards and senior management were truly weighing up the strategic risks their organisations faced and the potential benefits to their mission, I think we would see leaders far more prepared to take on the difficult task of transformation.

And transformation is desperately needed.

Last month, the latest in a number of NDIS providers, Disability Services Australia, was placed into administration.

The not-for-profit employed more than 1,600 people across New South Wales and supported more than 1,500 people with a disability.

Its CEO said the organisation had faced "a number of financial constraints" which have been compounded by the pandemic.

Last year, Oxfam Australia cut its Australian workforce in half citing financial difficulties stemming from years of reduced fundraising income and a “persistent decline in overseas aid budget” well before the coronavirus pandemic hit.

It also made significant cuts to its global workforce. 1

World Vision Australia has undergone a series of restructures.2

Many other NGOs are under similar pressure.

They face a stark choice: to “transform, die well or die badly”

I want to spend some time talking through these three options.

First, transformation.

A few months after I was appointed CEO of Save the Children, the Abbott government was elected and immediately slashed overseas aid.

As the government’s largest NGO partner, Save the Children was hit hard.

Like Oxfam and World Vision, Save the Children was also experiencing falling private giving to international development, despite increasing investments in fundraising.

And expectations of donors and regulators were rising, increasing costs.

It was very clear to me that if Save the Children was to fulfil our mission in this new strategic environment, we needed a dramatically different strategy.

We sought to significantly diversify our business model.

We expanded our work in Australia, especially in rural and remote Australia where our development approach was likely to be far more effective than traditional service delivery.

We now work in over 200 locations in Australia, with 750 staff and a budget this year of more than $50 million.

We pursued accreditation with a number of global multilateral funds.

We have become the only development agency in the world to be accredited by the Green Climate Fund, and now have a pipeline of projects valued at over $400 million.

We invested time identifying merger opportunities where we thought one plus one could equal three.

We started new social enterprises like CEI [the Centre for Evidence and Implementation] and IE.

Five years after we founded CEI, it employs nearly 50 people in Melbourne, Sydney, Singapore and London.

It’s undoubtedly the region’s leading evidence intermediary.

More importantly, CEI is providing advice to governments that are having significant systemic impact on issues that go to the heart of Save the Children’s mission, like out-of-home care.

Last year, we launched our first Impact Investment Fund.

We have now made four investments, mostly in edtech and e-health businesses.

There is an urgent need for the sector to invest more in scaling up those interventions that are showing the greatest promise.

Sector-run impact investment funds are one source of funding for such scaling up.

As Greg Coussa recently agued in the Stanford Social Innovation Review, “Innovation is a dime a dozen. Scaling innovation is the diamond in the rough.”

And every year at Save the Children we have renewed key back-office systems to ensure that we are efficient and able to capture and analyse the data we need to be as effective as possible.

While we are still at a relatively earlier stage, we are seeking to use new technologies to close the growing gap between need and available resources.

New technologies provide enormous opportunities but it's also an area where the charity sector seems a long way behind.

Covid has triggered digital leaps forward that were expected to take years.

The mass migration of workers to home that might normally be expected to take a year was done in weeks.4

Mobile money and digital payments soared as we stopped using cash. 5

Global internet traffic increased by 70%.6

Despite these examples. Despite the increasing pace of technological change. Despite Covid. Despite all the challenges the charity sector faces, too many charity leaders appear to act like our sector is somehow immune.

As a sector, if we are to reduce costs, we must extract greater efficiency from our back-office.

This will require investment in modern cloud-based finance and human resource systems, digital collaboration tools (like Mural, Google Docs) and communication tools like Slack or Microsoft Teams.

If we are to continue to receive support from the public, we must be able to engage with them seamlessly across multiple digital channels and technology platforms, all chosen by them.

This will require investment in new customer relationship management systems, mobile enabled websites, and data warehouses.

And without modern back-office systems you are not going to have access to the data you need; or be able to leverage front-line technologies that greatly enhance your impact.

These back-office technologies need to be seen by management, the board and by supporters as critical enablers of your mission.

New technologies also provide opportunities to transform frontline service delivery.

Edtech, to combat school closures.

E-health to provide high quality access to health services in rural and remote Australia.

Fintech to more efficiently provide social protection programs in disasters.

Of course, we need to be careful of the gap between the prophesised potential and the real world results of many new technologies.

New technologies are often overhyped.

Many early initiatives fail to live up to their potential.7

We also know that new technologies can be used to do harm as well as do good.

We have seen far too many examples of some of our largest charities failing to protect supporter or beneficiary data from misuse.

Despite these challenges, charity leaders need to invest far more time understanding digital trends and their possible implications for the organisation’s mission.

We need charity boards to be spending more time interrogating management’s technology plans, to exploit new technologies as well as protect the organisation against its misuse.

And philanthropists need to stop viewing technology expenditure as administration to be minimised.

Returning to Save the Children’s transformation agenda, you can imagine that given our limited balance sheet and precarious cash position, this agenda required enormous courage from our board.

But when the pandemic hit and we were forced within days to all work from our home, Save the Children hardly missed a beat.

All our data was already in the cloud, able to be accessed securely from anywhere.

Fundraising was already leveraging new digital channels.

Through mergers and new social enterprises, we had access to edtech solutions that hundreds of millions of children needed to continue their education from home.

Of course, we have made mistakes along the way.

Not every initiative we have tried has succeeded.

But there is no doubt in our mind that our impact for children is much greater this year than before the pandemic.

This is the true test of our transformation success.

But I am the first to acknowledge that transformation is hard, for many reasons.

First, boards and executive teams have not focused enough on long-term strategic trends.

Second, despite the rhetoric about mission, most boards and management teams in practice prioritise the organisation over their mission.

This often happens because they lack the data and evidence they need to make better-informed decisions.

There has been too little investment in the evidence of impact.

Budgets for monitoring and evaluation are often significantly below what is required to produce reliable analysis.

When program evaluations do occur, they often focus on process, inputs or outputs, rather than outcomes.

These evaluations too often begin at the end of a program, rather than being planned during program design and integrated into the program logic and intended outcomes.

Evaluations are often of poor quality – because of a lack of independence, transparency and dissemination of results.

Third, there are insufficient incentives to make changes before value is destroyed.

Fourth, donors have starved charities of the capital they need. Donors want as much money as possible to be spent on direct program costs and see investments in organisational capacity as mere administration, to be minimised. This thinking is often encouraged by charities themselves.

Fifth, charities have systemically underinvested in IT for decades.

And sixth, they generally fail to create a continuous learning culture or invest in the professional development of their people.

If transformation is hard, dying well is too often seen as failure rather than success.

In the private sector, selling your business to a larger competitor is celebrated.

And it's often a great way for larger organisations to take great innovation to scale and rejuvenate their talent.

But in the for-purpose sector a merger is too often seen as failure rather than as an opportunity to broaden reach, deepen expertise or increase policy influence with government.

Save the Children has completed four mergers. They are difficult but the returns to mission can be significant. There are several types of benefits:

• Financial savings from reduced duplication – around $1 million per annum in the case of the Good Beginnings merger
• Access to new sources of funding – within nine months of merging with us last year, Library for All was able to double in size, largely by accessing institutional funding opportunities that were not previously available to it
• Access to deeper or more specialised expertise. We know good intentions are not good enough and that expectations of greater technical capability are growing, which can be very hard for smaller organisations to access
• Improved career opportunities for staff, increasing our ability to attract and retain the best talent.

Despite these benefits for the mission, most merger discussions founder not on lack of potential benefits but on concerns about brand, leadership and board positions and shared culture.

So, many charities are left to die badly.

Hoping that if they put off investments in new systems, delay staff salary increases or cut expenditure on professional development and training for another year their prospects will somehow change.

They won’t.

* * *

Charles Darwin’s theory of evolution demonstrates it’s not the strongest of the species that survives, nor the most intelligent, it is the one that is the most adaptable to change.

Unless charities face up to this evolutionary challenge and rethink the business of charity, they will fail the mission they seek to serve.