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A Perfect Storm for Nonprofits: Risk Engagement Is Critical

December 20, 2017

Danger_riskThe nonprofit sector has been described as "resilient," and for good reason, given the number of constraints — funding, regulatory, operational — it must contend with.

However, as we reflect on a year marked by a series of shocks — including a series of natural disasters, determined efforts to repeal and replace the Affordable Care Act, and policy changes likely to affect future federal funding for the sector — a perfect storm is gathering that will be challenging to navigate even for organizations accustomed to risk. As we head into 2018, reducing your organization's vulnerability to external shocks will be key to its sustainability. The good news? There are things you can do.

As I write this, state governments are bracing for the possible loss of Children's Health Insurance Program (CHIP) funding, and major tax legislation is headed for passage — legislation that could lead to a dramatic reduction in charitable giving, result in the loss of health insurance for an estimated thirteen million Americans, and raise taxes over time for middle- and low-income earners. And all this is happening against the backdrop of a possible government shutdown. Even one of these outcomes could easily upend the delicate balancing act that nonprofits operating on razor-thin margins must maintain.

Events playing out in Washington also underscore how important it is for nonprofit executives and boards to have tools in place that they can use to identify, assess, prioritize, manage, and ultimately mitigate vulnerabilities related to unforeseen developments.

Over nearly forty years as a nonprofit consulting firm working to help organizations meet their goals and fulfill their missions, Community Resource Exchange has seen the vast majority of our nonprofit clients evolve from being risk-averse to being increasingly ready, or at least willing, to engage with risk. This has been especially apparent in their focus on internal — and somewhat predictable — risks related to operational matters, including meeting legal and regulatory requirements and financial obligations.

We recently confirmed this shift during a year-long initiative to study how nonprofits perceive and respond to risk. Today's organizations are experiencing less vulnerability in areas of governance, financial oversight, legal compliance, employment practices, workplace issues, and volunteer management. (The exception is risk vulnerability in succession planning, which hasn't kept up with generational leadership changes in the sector.) While such risks need to be assessed on a regular basis, many organizations that we worked with report having developed sound policies and systems for managing them.

The key finding from our study, however, is that external factors pose the greatest risk to nonprofit sustainability. While external events are out of our control, organizations can mitigate the impact of even the most unexpected shock by educating themselves about where their vulnerabilities lie and by planning for the unexpected.

With that in mind, here are some things your organization can do to prepare:

First, look it in the eye. Conduct an informal or formal risk self-assessment so that you and your team know your areas of vulnerability.

To make self-assessment as easy as possible, we leveraged our findings to build a holistic assessment tool that's been successfully tested and shown to help nonprofits evaluate various potential risk scenarios, both internal and external. CREFT (the "CRE Fitness Test") is the first risk assessment tool that makes it easy for nonprofits to examine their vulnerabilities from different angles and to solicit input from multiple layers of leadership to ensure a comprehensive picture of risk across six operational and performance categories.

Develop a crisis plan. Our study found that nonprofits are particularly ill equipped to manage and respond to unfavorable press coverage or events that result in a loss of public trust. Still, nonprofits can mitigate the worst outcome of even the most unexpected event (e.g., injury or financial impropriety) if they're prepared. The key is to develop a crisis communication plan which includes a blueprint for action that can be implemented at the first sign of trouble.

Organizations that are unprepared for natural disasters (including extreme weather events) that threaten their ability to deliver services also are at higher risk. While it may not be possible to predict the timing or severity of such disasters, it's important that your organization develop and review plans for maintaining safe and efficient delivery of services in the event of one.

The same goes for political developments such as the loss of a government contract, a government shutdown, or changes in tax policy. In the current political environment, it is especially important for nonprofits to identify their most vulnerable sources of funding and develop a plan of action in the event of delay or the loss of that support. In addition, developing a staff plan, a contingency operations plan, and an internal communications plan (with options for advance engagement) can all help you weather the storm should a funding shock materialize.

Ask for help. Once you've assessed your organization's vulnerabilities, form an internal committee to review and update your policies, procedures, and crisis plans. Stay vigilant, and don't hesitate to seek outside consulting advice for objective, strategic thinking and guidance.

As you catch your breath and reflect on the events of 2017 — and start to look forward to 2018 — now is the time to assess your organization's vulnerability to risk. It'll be the best way to start the new year and benefit your team, your board, and the community you serve.

Katie-Leonberger_for_PhilanTopicKatie Leonberger is the president and CEO of Community Resource Exchange, a NYC-based nonprofit consulting firm serving the social sector for nearly forty years.


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