No wonder NfPs are struggling – when normal business rules don’t apply

chris-minnochHow do you run a successful business? Accepted wisdom tells you to keep your cost base as low as possible; to anticipate and respond to the needs of your clients; to provide exceptional levels of customer service; and to be connected.  You also need strong leadership and the dynamism to act quickly and effectively when the market changes.

  • Chris Minnoch is operations director at the Legal Aid Practitioners Group. This is the first in a regular column for Legal Voice.

So, if you apply these principles to not-for-profits providing legal advice, the analysis tends to be quite positive: low overheads; no shortage of clients receiving outstanding services; well-connected in their local community and with policy-makers and funders.  They often have a strong leader or team at the helm, and they morph their services to meet client demand and the changing priorities of funders.

So far, so good.  But most NfP advice organisations are struggling to make ends meet, can’t budget beyond 12-18 months, and can rarely reinvest in staff development and infrastructure.  And that’s because accepted business principles don’t necessarily apply to the NfP advice sector.  Client demand outstrips the ability to respond.  Public funding arrangements are short-term and don’t reflect the cost of delivery. Funders are often looking for ‘innovation’ rather than a continuation of tried and trusted methods for delivering advice.  And most agencies are fundamentally and morally opposed to charging clients who need advice because those clients are living below the poverty line.  Where agencies have dabbled in charging for services, it has yet to provide that mythical, unrestricted income stream. Excellent client care can and does lead to word-of-mouth referrals from clients, but what good is that if you’re turning people away from over-subscribed drop-in clinics?

Until February this year, I was managing an NfP advice agency in south east London. We had a small but dedicated staff team, trustees who did what they could, and volunteers who went above and beyond. We had a fairly stable funding base, having being sheltered from the worst effects of the legal aid reforms, with a constructive if sometimes fractious relationship with the local authority, and with solid partnerships in place across the sector. We had no shortage of clients and no shortage of ideas on how to enhance our offering.

If I was managing a small business in a commercial setting, I think it would have grown and turned a pretty decent profit with those factors in place. Yet the NfP advice sector simply doesn’t operate like that. Not being able to charge market rates for your services, let alone think about long-term investment through an in-built profit margin, means you are totally beholden to the value that funders and commissioners place on your outcomes and outputs (all NfP advice managers have just ducked under their desks at the mention of those two words).

The difficulty for those running NfP advice agencies is that the maths just doesn’t work. They are expected to have sound governance, and management and systems in place despite a lack of resources. Although funders know the reality of your average NfP’s balance sheet, there is still a general expectation that volunteer trustees provide expert oversight, that managers (who are often lawyers) can simultaneously manage people, services and systems, and that money can be squirreled away for a rainy day. But funders and commissioners also expect NfPs to ‘engage with stakeholders’ and demonstrate that their services produce ‘soft outcomes’ that change lives. These are both worthy aspirations and chime with the charitable objects of NfP agencies, but does anyone really understand what it costs to deliver them?

Most funders now accept that they will fund services on a full cost recovery basis, but there are a number of fundamental flaws in this approach in an NfP setting:

  • NfPs have not traditionally been very good at understanding the true cost of their services. This is a particular issue when calculating staff input because many NfPs (and solicitor firms) rely heavily on staff doing unpaid overtime. While this is what fuels the sector it distorts the cost base.
  • NfP managers tend to cover too many bases. When I was managing a frontline agency, all of my peers were HR directors, ICT managers, mentors and coaches for other senior staff, the sole resource keeping their board functioning, fundraisers, compliance officers, networkers, business planners, policy leads and, more often than not, the person who fills in at the drop-in session when an adviser calls in sick. With managers doing so much, and advisers stretched to meet targets, can anyone really calculate the cost of overheads and can these be compared accurately to the commercial sector?
  • NfPs tend to undervalue the value of the widgets they produce. Some work has been done recently to understand social impact and/or develop a ‘social return on Investment’ concept for legal advice work, while others have tried to calculate the savings made to the state from investment in advice. Neither approach has radically altered the approach of public funders. And from a business perspective, if you suggest to an NfP that they charge commercial rates for commercial services such as training, they balk at the thought.

Ultimately, even if NfPs could overcome the above, funders and commissioners probably won’t pay commercial rates for services delivered by NfPs. Given the scarcity of resources, and so many good causes to support, this is hardly surprising. But take a former colleague of mine who has an encyclopaedic understanding of the welfare benefits system and the wherewithal to apply his knowledge to a complex and vulnerable client group.

A commissioner calculated a rate of around £60 an hour for specialist welfare benefits advice when the contract went out to tender. However if you apply his skill and expertise to a commercial setting he could charge around fives times that without an eyebrow twitching. That same commissioner will happily pay that rate when they need advice on a commercial lease or an employment dispute. What’s the difference? The end beneficiary of the service.

So, can NfPs change this dynamic? This is not a new issue – the Advice Services Transition Fund was set up with the lofty ambitions of making NfPs more enterprising and self-sufficient. Other funders and management experts are also seeking to address this issue. Some funders, like the London Legal Support Trust and The Legal Education Foundation are genuinely concentrating on quality, innovative models and sustainability. The Low Commission recommended a national advice strategy that would, at least in part, concentrate on the health of the organisations delivery services. CASS Business School is supporting NfP managers to develop leadership skills. Here at LAPG, we’re providing training and pulling together resources to share good practice across the sector. But, ultimately, the future sustainability of the sector will come down to what public bodies and grant funders are willing to pay for services.

As a result, I think the NfP sector has got to take the initiative to properly demonstrate the real value of free legal advice services. This is already happening in some organisations and through umbrella bodies like Citizens Advice, the Law Centres Network, Advice Services Alliance and AdviceUK. But a systematic, methodical and joined-up approach to developing this argument is needed now more than ever before.
LAPG runs an intensive course for those managing or aspiring to manage a legal aid practice.  It has also been commissioned to run a series of workshops for not-for-profit advice providers, focusing on innovative ideas for income generation and organisational development. More here




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