MA NA GE ME NT & A CCOUNT ING

Manage Risk & Enhance

Performance in the 3rd Sector
Patrick Ow

Every organisation exists to get results. This includes private, public and third sector
organisations like non-governmental organisations (NGOs), non-profits, charities,
religious groups and voluntary organisations. Enhancing performance through systematic
risk management processes especially within the third sector is often a challenge, which
differs significantly from private sector risk management techniques due to the sector’s
lack of resources and risk management expertise.

I
t was only until recently that the fol- poses. They are active in a wide range of hood education, healthcare, politics, reli-
low-on from the risk management areas, including the environment, humani- gion, research and sports. It is therefore a
hype in the private sector has im - tarian aid, animal protection, education, the c h alle ng e for us to obje c tive ly or ad -
pac te d pu b lic and th ird s e c to r arts, social issues, charities, early child- equately measure an organisation’s long-
organisations. As we fully understand and term impact within the sector.
appreciate that performance management To put things into perspective, third
and risk management complement each sector organisations do play an im -
other, coupled with pressures on por tant par t in any econom y.
third sector organisations to be Australia estimated in 2005
more transparent and effective that the giving of money,
in the utilisation of its fund- goods and ser vices to
ing, we can see an increase n o n - p r o f i t
in how we can objectively o rg an is atio ns by
m e as u r e th e pe r fo r - ind ivid u als and
mance and long-term im - b u s ine s s e s to tal
pac t o f th ir d s e c to r AUD11.0billion per
organisations, holding ye ar, wh ic h e x -
the m re s pons ible and cludes giving in re-
accountable for their ac- sponse to the Asian
tions (or inactions) and tsunami crisis in late
with h old ing fund ing if 2004/early 2005. In
goals are not met, taking th e US, th e r e are
them elsewhere to m ore 88,509 private founda-
e f fe c tive and e f fic ie n t tions with a total giving
organisations. o f USD 27.6 b illio n in
Third sector organisations ex - 2000, wh ils t in th e UK,
ist with the primar y objective of th e re are appro x im ate ly
supporting or actively engaging in ac- 10,900 private trusts with an an-
tivities of public or private interest without nual giving of approximately £2.0 bil-
any commercial or monetar y profit pur- lion.

September 2008 • ACCOUNTANTS TODAY 31

Manage Risk & Enhance Performance in the 3rd Sector

Tactical Risk Elements — Third Sector Organisations

Risk Element Constituents Description
Risk to Reputation, International/L ocal Standing International and local perception and standing with key
Goodwill and Donors; partners; beneficiaries; local and international stakeholders drive funding and reputation.
Branding NGOs; governments.
Support In-Country Extend of support, either financial or non-financial, given
Public; partners; communities; governments; interest b y vario u s s tak e h o ld e rs fo r th e d e live r y o f th e
groups e.g. other NGOs/INGOs, etc.; private sector. programmes or activities.
Integrity Transparency and accountability are key areas of concern
Transparency; accountability; public relations; brand/ by stakeholders within the third sector, especially in the
marketing guidelines. wake of private sector organisational scandals and collapses.

Risk to Effective Strategic Alignment Large number of organisations do not implement their
and Sustainable Programming, targeting, design; policy development, strategies, missions or visions. Staying on course, whereby
Outcomes. engagement; advocacy; consultation, collaboration; poverty individuals have a clear line-of-sight between their per-
reduction; capacity building; gender equality, culture formance and the achievement of organisational goals, is
sensitivity; hazards, diseases. often overlooked, especially in the third sector due to lack
of technical know-how and poor SMART performance
indicators. (SMART — specific, measurable, achievable,
realistic and timed). Proxy indicators may be required.
Governance Good governance drives long-term sustainable outcomes
Partner stability; donor guidelines; project management; for the organisation.
knowledge management; data integrity
Macro Macro issues impact upon sustainable outcomes and the
Political, economic; social; business practices. ability to sur vive in the long-term.
Sustainability All activities or programmes must be sustainable and
Impact, reach; internal (design/implementation) factors; impact upon or make a difference in the lives of benefi-
policy, technical, financial, skills, infrastructure; environment. ciaries, whilst satisfying the requirements of the donors.
Risk to Output Performance Organisational per formance guided by SMART mea-
Deliver y and Programme identification, design, appraisal, implementa- sures ensures the implementation and achievement of
Efficiency tion, evaluation; meeting expectations; quality, fit for organisational goals.
purpose; timeliness, cost; accountability, compliance;
consultants, volunteers; processes, workflow.
Delivery The “how” of programme or ser vice deliver y.
Authorities, approvals; contract terms; performance criteria;
outcome measures; legal risks, disputes, variations;
reporting/monitoring
Impediments “What are the barriers in achieving the goals” – this is a
Logistics, supply constraints; social, institutional; working dynam ic list that needs to be tailored to individual
environment; travelling, transportation; force majeure; hazards. organisations and to unique operating environments.
Procurement/L ogistics Potential areas for cost savings and fraud/abuses.
Selection; fraud, viability, probity; capability, availability.
Governance Good governance ensures readiness to respond within
Risk to Capability,
Decision-making, accountability (especially on roles and a framework that enables capacity and capability build-
Capacity and
responsibilities); coordination, communications, information ing, both in terms of workforce (and individuals) and
Readiness
management; reporting, monitoring. the organisation as a whole.
Operations Operational areas of interest, which need to be tailored
Ethics, integrity; fraud; segregation of duties; health, safety, to individual organisations and to unique operating en-
security; knowledge, skills, motivation; human resource; IT, vironments.
technology; legal, regulator y; insurance; systems, pro-
cesses; business continuity/disaster responses.
Productivity Productivity issues are often overlooked within third
Efficiency, effectiveness; performance; outcome measures; sector organisations — “what gets measured, gets done”.
leadership, structure.
Financial Management Good financial management is the cornerstone to capac-
Asset management; cash flow; currency, interest; internal ity building, with the ability to sustain funding highs and
control; planning, budgetar y. lows.

Risk to Fund Competition
Raising and Funding Public relations, visibility, appeal; donor “fatigue”; funding
mix; cause marketing; meeting donor expectations/
commitments; understanding donor motivations; brand
misuse; conflicting priorities/expectations.
Income
Theft, fraud; accountability; payment channels; cash
management; fund raising; licensing; tax deductions.
Privacy
Information/database security; authorisation; accessibility.
Organisations face competition in various ways and de-
grees, and shifting to “sales” instead of mere “fundraising”
minimises donor “fatigue” and “crowdedness” (of similar
cause-related organisations) that operate predominantly
within this sector.
Income or revenue management drives organisational
lo ng -te r m s us tainab ility to pro vid e s e r vic e s and
programmes to their beneficiaries.
Keeping donor’s and beneficiary’s information secure and
private according to privacy/confidentiality principles in-
creases organisational integrity and transparency.

32 ACCOUNTANTS TODAY • September 2008


Risk management standard AS/NZ 4360
defines risk as “the chance of something
happening that will have an impact upon
objectives”. If third sector organisations
want to increase or enhance their perfor-
mance, achieve their objectives and/or to
have a sustainable outcome/impact in their
activities, they would need to manage risk.
It is only through proper risk management
that organisations per form and achieve
their goals.
Some of the common risks that third
sector organisations encounter are as fol-
lows:
1 Strategic management
a. Non-alignment of performance against
organisational mission, vision, strategy
and goals.
b. Ineffective internal and external com -
m unication, coordination and team -
work (organisational silos, “it is not my
job” culture).
c. Insufficient public and private sector
collaboration and partnerships.
d. Weak succession and business continu-
ity planning.
e. Lack of diversity and depth in revenue
sources, with dependency on limited
revenue sources.
f. Adverse impact from external forces
(e.g. economic) and publicity.
g. Ineffective organisational structure,
unclear roles and responsibilities.
h. Lack of ‘signature ’ products or ser-
vices, especially in an overcrowded
market.
i. Ad voc ac y oppor tunitie s m is s e d or
poorly responded to.
j. Brand awareness declining, leading to
decline in fund raising, revenues and
support.
k. Lack of measurable and sustainable
s h or t-te rm outc om es (res ults ) and
long-term impact.
2 Fund raising, marketing and communica-
tion
a. Unable to expand existing donor base.
b. Existing donor donations, loyalty and
retention on a decline — donor “fa-
tigue”.
c. Ineffective or poor donor communica-
tion and marketing.
d. Poor reputation, branding and public-
ity.
September 2008 • ACCOUNTANTS TODAY
Manage Risk & Enhance Performance in the 3rd Sector
3 Programming or service delivery
a. Poor programme design, proposal, imple-
mentation, monitoring and evaluation.
b. Inadequate capacity and capability to
manage project/programme portfolio.
c. Non-com pliance with donor require -
ment and government regulations.
4 Financial management
a. Poor cost management.
b. Inadequate cash flow management.
c. Suppression or overriding of internal
controls and processes.
d. Untimely and inaccurate reporting.
e. Lack of multi-year planning and budgeting.
5 Human resource management
a. Unable to attract com petent and/or
skilled staff.
b. Poor people management skills.
c. Insufficient resources to manage activi-
ties and priorities.
d. Unable to develop and enhance staff ca-
pability and capacity.
e. Lack of clarity in roles, responsibilities
and accountabilities.
6 Information management (soft and hard)
a. Ineffective information management sys-
tem (IMS) and procedures. (Effective risk
management requires timely and accurate
information for decision- making, thus the
need for IMS)
b. Needs of users and business requirements
are not adequately met due to ineffective
technology and/or lack of knowledge, un-
derstanding, or design of user requirements.
c. Erroneous, inappropriate or untimely deci-
sions made due to inaccurate processing or
availability of information or documentation.
d. Confidential/ secure information being
leaked out to the public or media.
Some of these risks can also apply to pub-
lic and private sector organisations and can
be modified as such.
There are three levels of risks that af-
fect organisations generally:
1 Strategic Risk — Current and prospective
impact on revenues, funding and fund raising
arising from adverse business decisions, im-
proper implementation of decisions, or lack of
responsiveness to industr y and economic
changes. This risk is a function of the compat-
ibility of an organisation’s strategic goals, the
business strategies developed to achieve these
goals, the resources deployed against these
goals, and the quality of implementation. Strate-
gic Risk Assessment focuses on the broad en-
terprise or organisational risk issues that occur
at board or CEO levels of an organisation.
2 Tactical Risk — Assessing tactical risk is
important, as this is the area which bridges
the gap between strategic and operational
decisions in the organisation. It is the area
where broad implementation of decisions
and achieving goals takes place. Tactical
Risk Assessment should therefore focus on
the medium term choices that occur within
the framework set at the strategic level.
3 Operational Risk — Operational Risk Assess-
ment occurs within the framework of the tacti-
cal decision maker’s focus. This level focuses
on implementing tactical and operational deci-
sions. Generally, operational risks are potential
day-to-day operational losses or issues resulting
from inadequate or failed internal processes,
people and systems or from external events.
For third sector organisations, tactical risk
can be specifically categorised into risk ele-
ments (see Table on previous page)
The unique risk universe above seeks to
practically demonstrate the complexity and
challenges third sector organisations con-
stantly face. There is already a wealth of in-
formation generated on risk management
practices within the private sector.
But with the demands for transparency
and accountability, we need to focus on how
we can bring the maturity of risk manage-
ment approaches and techniques in the pri-
vate sector into the forefront of public and
third sector organisations to a level where
governance, effectiveness and efficiencies
can be adequately and satisfactorily main-
tained, knowing that there are different work-
ing cultures and unique drivers that domi-
nate organisations within these sectors.
Understanding of the context is vital and
modifications to private sector approaches to
risk management may be required so that pub-
lic and third sector organisations do not get
bogged down with technical jargons or techni-
calities but just practicalities in implementation.
It is only through the proper implementation
of risk management techniques within these
organisations that we can see increased or en-
hanced performance, effectiveness and effi-
ciencies that can be objectively measured. AT
The writer can be contacted at patrickow @gmail.com.
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