NFPs and risk: New frontiers
21 June 2021 at 4:49 pm
Dr Anand Kulkarni and Lea Corbett from Map consulting group consider why the best approach to risk management is through an opportunity focus.
“When written in Chinese the word ‘crisis’ is composed of two characters – one represents danger and the other represents opportunity.” (John F. Kennedy, 12 April 1959)
We live in an age of disruption. COVID-19 has transformed the world, arguably like nothing else before it. Its ongoing impact has been felt in all segments of the economy, society and the environment, and in all business types. The NFP sector is not immune by any means, indeed it is on the front line for essential social services and activities.
While this article draws on our experience of the COVID-19 disruption, the analytical frames of reference are equally applicable to other disruptions.
Risk identification and management is crucial for an organisation’s sustainability. When one thinks of risk, however, it is often in the context of compliance, meeting standards and regulatory requirements. While these things are important, putting an opportunity lens on risk is equally, if not more valid.
Risks and opportunities
To that end, we suggest an approach to risk management through an opportunity focus. This may take the form of a comprehensive scanning to identify the broad challenges or risks facing a sector, followed by distillation of the specific organisational impacts.
Four types of risk stand out: Strategic, financial, operational and reputational. For the purposes of this article, we’re going to focus on strategic risk, which measures the extent to which the realisation of overarching objectives, roles and functions are impaired by risk.
Some of the big challenges and consequent strategic risks facing society, especially from COVID-19, can be broken down into the following related aspects:
- Economy wide structural change and dislocation (employment loss, business exits, redundant capital and investments, broken supply chains).
- Spatial dislocation (heightened divides on income and access to essential services between and within local areas). SGS Economics and Planning shows lower socio-economic regions in Melbourne and Sydney had far worse job outcomes compared to wealthier locations.
- Social fissures (violence against women, mental health concerns, social exclusion directed at various ethnic and other groups and the rise of “COVID nationalism”). According to the Australian Institute of Health and Welfare, between March 2020 and January 2021 almost 11.5 million Medicare subsidised mental health related services were provided.
- Essential service delivery impediments e.g backlogs, increased demand, delays in roll out of COVID-19 vaccinations.
- Growing inequality e.g female labour force participation and employment. According to the McKell Institute the rate of job loss for females in Victoria was five times that of males during the pandemic.
- Government policy reforms e.g the calamitous early months of the pandemic in residential aged care only increased the imperative for reforms to the aged care sector including $18 billion in additional funding in the latest federal budget. Big ticket items included almost $4 billion to mandate a minimum 200 care minutes including 40 minutes with a registered nurse daily for aged care residents, and $6 billion for 80,000 more home care packages.
- Organisational “disruption” (hybrid working, unsustainable business models).
The NFP sector is front and centre in addressing many of these challenges and risks in areas related to domestic violence, mental health, education and training, employment services, aged care and social inclusion, among others.
Opportunities for deepening and broadening the commitment to a better civil society abound in developing new business models and new service delivery approaches in direct response to these risks. For example, can NFPs be larger scale employers to address labour market downturns, and/or provide education and training support specifically for those seeking re-skilling and upskilling in the wake of COVID-19? Will COVID-19 usher in a new era of socially responsible businesses with NFPs leading the charge? Can the roll out of the COVID-19 vaccination be a joined up local community health led effort?
Create a risk mindset
All NFP organisations – large and small – should care about risk and aim to create a mindset of risk identification and management. This often begins at the board level but ultimately requires buy-in at all levels of the organisation. Risk needs to be thought of not as an impediment to what you do, but a chance to seize on opportunities and re-set.
Embedding a risk approach in your organisation is more an attitudinal and mindset function, rather than a technical one per se, especially where budgets and resourcing are tight. Key are the free flow of information and breaking down of silos which can occur even in the smallest of organisations.
The process could start with the establishment of a risk committee, with members encouraged to set aside time to:
(a) identify the risk factors in the operating environment that will shape the NFP and the sector it operates in over the next year and five years, bringing together the different experiences and perspectives and “gut feel” across the organisation;
(b) consider how these factors specifically could impact on the organisation through some form of rudimentary SWTC (strengths, weakness, threat and competitor action) type analysis; and
(c) determine the menu of possible opportunities for the enterprise stemming from the risks or challenges. The chance to broaden and diversify to capture new frontiers certainly should be part of your thinking.
Once the opportunities are identified, there needs to be a sense of how far the organisation is willing to go to capitalise on opportunities. This is where some form of risk appetite discussion is required – the degree of risk an organisation is comfortable with in pursuit of its goals and strategic objectives. This exercise may be formal and quantitatively driven or less formal and more qualitative. The risk appetite would involve deliberations around the extent of skills and training needed within the NFP, required capital raisings, any investments in marketing and tradeoffs in terms of what activities might need to be foregone.
The committee undertaking the collective risk action needs to obtain board approval for the risk- opportunity and appetite early on. It is also important that risk identification is conducted a number of times a year and presented to the board, ideally quarterly, but more practically twice a year. This will enable the pursuit of opportunities to be adjusted in the light of any changed conditions, ensuring that risk management is both a rigorous and flexible activity.
Developing a central risk register
All risks and their subsequent revisions should be recorded so that all can have access to them as important frames of reference. A central risk register would specify the risk, its impact, the opportunity that the risk provides, the risk attached to the opportunity itself and the accountable person/group in the organisation.
While there are a number of technologically savvy risk products in the marketplace to record risk, a simple spreadsheet system would suffice. Again, the emphasis should lie in sharing risks through a robust culture, not on technology.
Practical assistance is available. Strategy and risk experts should be able to assist you with:
- environmental scanning and its distillation;
- risk and opportunity identification in conjunction with your staff;
- risk appetite discussions and statements;
- risk governance advice; and
- risk measurement development and assessment.
Just remember, risk management is an organisation-wide construct. When turned on its head it can be a source of rewarding opportunity and growth for an organisation and its stakeholders.