New report highlights nonprofit risk management in post-FEGS climate

Late last month, New York’s nonprofit community turned its attention to the Human Services Council’s examination of the pressing challenges facing nonprofits in the state. While few members of the community were surprised by the findings of HSC’s “blue ribbon commission” – recommendations that government agencies should fully fund contracts, involve nonprofits in program design, develop more sensible regulatory regimes and support nonprofits’ risk-management efforts – some observers suggested that HSC might have been too eager to “externalize” the blame for recent high-profile closures, focusing more on government failings than nonprofits’ need for introspection.

After just a few weeks, another report has come along to pick up where HSC left off. “Risk Management for Nonprofits” – the result of a partnership between SeaChange Capital Partners, a merchant bank that focuses on the nonprofit sector, and Oliver Wyman, a global management consulting firm – acknowledges the same environment that HSC highlighted, but focuses its recommendations on point-by-point steps that nonprofits and their trustees should take to stay afloat in a turbulent operating environment.

“This is the first-ever detailed and comprehensive look at New York City’s nonprofit sector,” said David Rivel, chief executive officer of The Jewish Board, the largest social services nonprofit in New York. “The scope of the data is impressive and will provide nonprofits – and those that care about them – lots to chew over for years to come.”

SeaChange and Oliver Wyman present a bleak reality. According to the report – which harnesses data provided by the nonprofit rating agency GuideStar – more than 10 percent of nonprofits are technically insolvent and 40 percent have almost no margin of error (for health and human services nonprofits, this number climbs to 50 percent). The report also underscores some alarming facts: the largest 5 percent of nonprofits provide almost 50 percent of total services in New York City, and roughly one-third of nonprofits rely on government dollars for upwards of 90 percent of their funding.

With these conditions and stakes in mind, SeaChange and Oliver Wyman offer an examination of “worst practices” that have led to nonprofit failures, as well as several recommendations for nonprofits to adopt.

The report urges nonprofits to recruit and retain strong chief financial officers and carry out “explicit scenario planning” that prepares organizations for unforeseen crises. It also warns against the pitfalls of only offering trustees regressive “rearview mirror” assessments, as well as failing to give trustees complete and actionable information during tough financial times.

However, the report explains that deliberate action can prolong, if not guarantee, survival. Suggestions include incorporating risk management into the widespread culture of organizations; recruiting board members with relevant financial experience; undertaking scenario planning that considers lease renewals and cost overruns; and establishing targets for operating results. The report also urges nonprofits to create “living wills” that could expedite program transfers in the event of a financial disaster.

Doug Bauer, executive director of The Clark Foundation, expressed optimism that the report’s findings would contribute to ongoing discussions between major actors as they attempt to set social services on a stronger course.

“This report is an important contribution to the ongoing dialogue between government, nonprofits and philanthropy about how to ensure that nonprofits can continue to play their vital role in providing a sustainable and functioning social safety net for all New Yorkers,” said Bauer.