Are UK NGOs ready for the new world of lower funding?

NGOs in the United Kingdom have had a tough time in the past two years. Having taken a big hit to institutional income, due to reduced access to European Union funding after Brexit and a cut in the U.K. development budget, they are also feeling a squeeze on other sources of income because of the COVID-19 pandemic. Tim Boyes-Watson, the U.K.-based global director of insights and influence at Humentum, which supports NGO core functions such as human resources and finance, estimates that the sector may have lost access to more than £1 billion ($1.3 billion) of funding in total. This is a significant amount. In 2019, the U.K. international sector had a total income of just over £6 billion, according to the NCVO UK Civil Society Almanac, the prime source of information on U.K. voluntary organizations. This cash squeeze is particularly problematic because it represents a sudden change in direction for the U.K. NGO sector, which for the last decade has been characterized by rapid growth, particularly among larger organizations. Unsurprisingly, the cuts have provoked widespread pessimism. Just over a year ago, Bond, an umbrella group for development NGOs, found that 48% of its members said they might not survive the following two years. So far, most of those closures have not come to pass. To date, experts say, relatively little has changed within the sector. “The U.K. sector has probably lost £1 billion,” Boyes-Watson said. “But almost no one has merged or gone bust. We still have all the same fixed costs as we had before.” So how has this state of affairs come about? One reason is that NGOs have responded by scaling back programs, cutting staffers, and closing offices to keep the organizations running. Another is that although the cuts have been announced, the long lead time on international funding means that they have not yet hit the bottom line. For example, every EU contract issued this year was part of the previous seven-year budget, which U.K. organizations were eligible for. In addition, many contracts run over multiple years, meaning that the full impact of reduced funding will not be felt for some time. “Maybe the right balancing act is to take government money but not completely rely on it. That way if they pull the plug on you … it doesn’t close the organization.” --— Graham Mackay, chief operating officer, Business & Human Rights Resource Centre What happens next? As a result, the sector is still working out what it should look like in the coming years and what approach will serve it best in the long term. Many organizations are still coming to terms with the new reality, said Zoe Abrahamson, a senior funding adviser at Bond. “There’s just not going to be as much funding,” she said. “People need to recognize that and I don’t think they do at the moment.” Others are thinking tactically by looking at shaving costs, said Graham Mackay, chief operating officer at the Business & Human Rights Resource Centre. But so far, he said, new long-term strategies have not emerged. One possible reason for this is that it is still not clear where the Foreign, Commonwealth & Development Office will make cuts. Will there be more big cuts to multilateral funding, similar to the 55% reduction in the U.K.’s contribution to the International Development Association? Or will there be reductions in the funding pots that U.K. NGOs can access? Some budgets may fall to zero, Abrahamson said, but it is not yet clear which ones. Nor is it clear how much EU funding will be lost. Previously, U.K. organizations were overperformers in winning EU development funding, with both Bond and Humentum sources estimating that groups in the country captured a quarter of what was on offer. But it seems likely that this will now drop away fast. In theory, U.K.-based organizations will be able to bid for much of the EU funding they could previously receive — perhaps up to two-thirds of the total amount, according to David McCauley, chair of the Bond EU Funding Policy Group steering committee. But Brexit has seen a number of the U.K.’s experts in EU bidding leave the country, and U.K. organizations are fearful of being looked on unfavorably. For larger NGOs with branches in other countries, it now makes sense to channel funds through those sister organizations. Diversification of income For NGOs to survive in good shape, diversification of income will be key, Mackay said — something that he and other financial leaders had been pushing for some time. “We found a lot of organizations had become specialists in accessing particular types of funding,” he said. “We spent a lot of time pushing organizations to expand their supporter base, expand their fundraising. When the pandemic hit, everything shut down, and suddenly organizations couldn’t access funding from charity shops and public fundraising, and we wondered if we’d been giving the right advice. “But then when we saw cuts to government funding, that position reversed again. Suddenly public fundraising started to look like a more reliable source.” He draws parallels with the U.K.’s strong domestic nonprofit sector, which saw an explosion in government funding in the first decade of the new millennium, followed by a sudden drop, and then a leveling off over the last few years. “NGOs were the only part of [the nonprofit] sector which had confidence in government money anyway,” he said. “Maybe the right balancing act is to take government money but not completely rely on it. That way if they pull the plug on you, it might be bad for the service users, but it doesn’t close the organization.” NGOs are now actively looking at new sources of funding, Abrahamson said, including boosting their public fundraising, setting up trading arms, and looking more to voluntary sector donors. But a swift change of direction is not easy to accomplish. “There’s a big process of winnowing off institutional money which is causing more competition for cash from trusts and foundations,” she said. “People are also looking at social enterprise and social investment, but pivoting to these sources of funding is not quick or easy, especially if what you really want is just grants.” Focus on core functions Another possible response is to look at merging to reduce fixed costs. Abrahamson warns that a last-minute shotgun merger is rarely successful. “We have seen some organizations try to merge,” she said. “Here the problem is that you need to go into merger not at the moment of crisis, but with a long term plan.” Mackay also spoke about the need to set strategy and plan for the long term. “When we asked people how they planned to react to budget cuts, we got a lot of tactical responses,” he said. “People talked about closing programs or offices or making redundancies. We didn’t see as much evidence of long term strategic mitigation and realignment.” To look to the long term, he said, organizations need to look at properly resourcing their core functions. It is common, he said, to see underresourced leadership, finance functions, and management systems because it is hard to attract funding for these parts of the organization. As a result, NGOs can struggle to make clear, long-term decisions. “A difficult financial environment is a good time to look at that,” he said. “If you scrape by having the smallest possible finance team, that’s the stupidest decision you can make in these circumstances. It’s surprisingly hard to implement savings. You can’t have a situation where all your leadership are so busy they can’t do all the things they are supposed to do.” The coming years look likely to offer further challenges. At present, experts say, the next steps for NGOs will be a mixture of cost-cutting and waiting to find out what FCDO will do. Whether the future focus for the sector will be the emergence of new business models, the transfer of services abroad, or a reduced version of existing practices, is still to be seen.