Wolves have figured prominently in fairy tails and fables throughout history and the run-down is generally the same:
1) There is a wolf encounter
2) Someone or something is sacrificed
3) The wolf is slaughtered.
A pretty destructive narrative. Now, what if we were to change that story-line:
1) Wolf encounter never happens or is limited to a minor scuffle
2) Wolf goes home
3) Protagonist goes home.
A less interesting story, but from the perspective of a nonprofit organization, a more desirable result. THIS, in effect, is the goal of risk management.
While serious exploration into the concept of risk goes back as far as the Renaissance, formal, institutional application of risk management starts to appear in the latter half of the 20th century. Today, top-down risk management programs are common in the financial, health care, transportation and most recently, technology industries, to name but a few. Not only do risk management programs address significant organizational problems before they occur, but can also increase the success rates of programs and services as much as 15% or more and increase cost efficiency by 17% over projects executed without risk-management principles (1).
Recently industry organizations and publications have called for nonprofits to adopt formal risk management (see NPQ, Stanford Social Innovation Review and AICPA). And the case is strong. Nonprofits account for 5.5% of US GDP, employ over 10% of the workforce, and pay nearly 10% of national wages (2).
Yet research by Oliver Wyman, SeaChange Capital Partners and GuideStar found that:
- 7-8% of nonprofits are technically insolvent,
- 30% have minimal cash reserves and/or short-term assets less than short-term liabilities and
- Approximately 50% have less than one month of operating reserves (3).
Coming from the financial services industry, where risk management practices are required by law, my business colleague and I set out to understand what risk management means to social sector organizations. Specifically, what wolves were at their doors, what mechanisms were they employing to keep them out and how much was the cost to the organization? Our informal study of a wide mix of nonprofit organizations found that leadership estimated an average $4 million in potential, direct and indirect losses due to risks they were not controlling or could not control. As investment advisors focused on addressing the investment needs of the nonprofit sector, this concerned us.
While implementing institutional risk management takes strong leadership support, determination and explicit accountability, the process does not have to be complicated and can be rolled out in small steps for big impact.
So where to start? Read the next article in the series on how to identify risk.
(1) Project Management Institute
(2) US Bureau of Economic Analysis NPQ, https://nonprofitquarterly.org/2016/03/10/nonprofits-in-america-new-research-data-onemployment-wages-and-establishments/.
(3) The Financial Health of the United States Nonprofit Sector: Facts and Observations, Oliver Wyman, SeaChange Capital Partners, GuideStar, January 2018.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!