The Resilience Paradox

What makes an organisation more resilient?

It’s a question that’s becoming more urgent everywhere, but especially so in the social economy where demand for services tends to go up, not down, just at the time when a faltering economy squeezes organisations’ income.

But how do we measure resilience; where does it come from; how do we create it? 

Conventional wisdom says… it’s about individual organisations; about balance sheet, profit margins, money; so it must come from money, and therefore more money from funders must make organisations more resilient.  

It’s an argument that is particularly audible in the world of social investment. 

And it seems obvious.

Until you look at the data.

We’ve been doing a spot of lab testing to find out…

Lab Coats On…

To investigate the extent to which social investment aligns with resilience, we digitally hoovered-up the financial data of more than 1,000 charities and social enterprises, financed by more than 100 funders, for the last 10 years, from sources that could tell us:

o   When, and how much, funders had financed our sample of charities and social enterprises over the last decade; and

o   What happened to the financial health of those charities and social enterprises during the same decade

We collected all the digital dust into a database.

And then we built some dynamic graphs to show us the picture of money coming into charities and social enterprises, overlaid with financial resilience (which we measured with our investor hats on, by tracking: turnover, net assets, net current assets, and net margin)

What we saw really surprised us.

Taking a random sample of 150 organisations to look at under a magnifying glass, we quickly found some examples where it looked like finance (including the support and changes that often come along with it) worked its magic, and organisations seemed to get more financially resilient, immediately after the finance arrived.

The challenge to our optimism, was that there were plenty more (the majority) of examples where the link between incoming-finance, and resilience, wasn’t clear, or wasn’t there.

It looked like there were cases where:

o   The money from funders made no difference

o   Financial health got worse after the funding arrived

o   Money was injected into organisations that were already on a strong upward trajectory, so the case for resilience was hard to find

o   Money was infused into organisations on a long-term downward trajectory without arresting the decline (in the acute cases it looked a lot like a doomed rescue attempt)

o   Money given at different times, had different results in the same organisation

o   Finance sometimes flowed into organisations with a long and healthy financial history, so the resilience case seemed elusive

o   Funding was associated with some positives and some negatives, for example, a rise in turnover for an organisation with a negative net margin, which meant growth ended up eroding their rainy-day reserves

Our lab testing convinced us that, if resilience is going to be sold as a reason for funding charities and social enterprises, we might, at the very least, want to understand what’s for sale.

So What?

The biggest aha! moment we had from looking at the graphs was to notice that so many organisations had a net margin of something close to zero; sometimes a little above, sometimes a little below.

It was an insight that sounded more obvious when we said it out loud:

What if most of the organisations we were looking at, because they are charities and social enterprises, were running thin margins and ‘only-just-enough’ balance sheets, intentionally, because they want to maximise their spending on the people and communities they support?

They would, if we’re right about what we’re seeing in the graphs, be literally behaving as not-for-profits.

And that mightn’t be just a cultural thing. It’s what regulation and the law asks them to do. Charity law, for example, positively encourages organisations not to hoard assets, because it points out that the charitable thing to do would be to use them for the purposes for which an organisation was created.

Speaking of a cultural thing, it might be that if resilience becomes shorthand for financial resilience, then we might be left with financial metrics for work that isn’t very measurable through money. ‘Count the money’; ‘follow the money’; ‘act like it’s money’, might be fine for the regular economy. But for the social economy?

If what we’re seeing in a randomised sample of 150 organisations is true of most, then maybe looking for resilience amongst the money is chasing rainbows.

Maybe resilience is to be found elsewhere too? In governance perhaps, or networks, or values, or somewhere else?

If resilience doesn’t come from financial capital, maybe it comes from social capital?

We plan to find out.