Strategic cost control considerations for NFPs

By Matthew Wilson - April 28, 2020

In turbulent and uncertain times, when there is a shock to the economy like we are currently experiencing, organisations may see a significant drop in their revenue. This proves challenging for any sector, but especially so for not-for-profit organisations (NFPs). NFPs will face significant reductions in income derived from discretionary spending by individuals and businesses.

Reduced government funding, particularly through grants, may also have a substantial impact on the financial viability of NFPs over the medium term. As a result, organisations are necessarily focusing on cost-cutting measures to dramatically reduce expenditure and remain operational throughout this period.

However, this can be one-dimensional and focus only on short-term outcomes.  For an NFP to recover and be financially viable and sustainable, they need to also continue to focus on their strategic long-term objectives.  They should seek insights into how their customers and key funding sources are reacting, or are likely to react, so that they are best placed to better manage reducing, redirecting and controlling costs. History shows us those organisations that take this approach come out better and stronger than those that take the short-to-medium term view.

How can NFPs stay strong in the long term?

In an earlier piece, we provided a checklist of the key commercial considerations that NFPs need to address. Cost-cutting measures form part of these considerations, but NFPs also need to redirect and control costs, so they are aligned with and support its core capabilities. This is the kind of strategic focus needed to ensure NFPs emerge from this time in an even stronger and in a more stable financial position.

It needs to be said that this is a top-down exercise. Boards and executive leadership teams need to consider what their organisations will look like in the next three, six and twelve months, and beyond. There are many tools, methods and approaches to assist an organisation in undertaking this strategic analysis. Regardless of the tools or processes that are applied, this analysis needs to deliver on three key objectives:

  1. Agree on your organisation’s core capabilities.
  2. Agree on the strategic importance of these capabilities.
  3. Adjust and align costs with core capabilities in areas of strategic importance.

Agree on your organisation’s core capabilities

Your board and leadership team will first need to agree on what are the organisation’s core capabilities.. For example, is it your organisational culture and systems that allow you to connect with customers and deliver on outcomes under the NDIS? Or, is it your organisation’s ability to deliver on larger government programs, or specific services through fee-for-service arrangements that is your organisation’s strength? Taking the time to review and identify what capabilities have delivered the most income and impact for your organisation in recent years will provide a good basis for making these decisions.

Agree on the strategic importance of these capabilities

Based on these core capabilities you’ve identified; your organisation needs to assess whether these capabilities will continue to be in long-term demand. To that end, complete a market analysis of your sector over the medium to long term. Throughout this exercise, you may identify core capabilities that are no longer of strategic importance due to medium- and long-term industry changes. In these instances, your organisation will need to make decisions on whether you reduce, refocus, pivot or continue with your primary activities.

Adjust and align costs with core capabilities in areas of strategic importance

The NFP sector understandably relies on government funding, as well as indirect funding sources, such as the NDIS, grants and discretionary spending for its income. While your organisation may be supported with various government initiatives in the short term, NFPs need to take the opportunity to pause and think more strategically about their long-term funding sources and costs and align them accordingly.

Consider what costs the organisation will need to continue incurring, control or can do without to focus on the core capabilities that strengthen your financial stability. This will enable you to reduce, redirect, manage and control costs with a focus on those areas that you consider are of strategic importance. For example, some of your fixed costs may need to become variable as demand decreases or increases. You may also need to reduce or eliminate costs that are not aligned with or support your core capabilities. Some cost-cutting and control initiatives will have immediate impacts, and some will result in adjustments over time. Whatever action you take must align with your core capabilities and the long-term direction of your organisation.

Looking ahead, what’s next?

The way you approach, manage and implement reducing costs across your organisation is likely to significantly impact how you navigate challenging times and continue to provide your core services. History shows it is organisations that can adapt and adjust with a view to the future that are more likely to emerge from survival mode better than those organisations that cut expenditure without long-term consideration.

Pitcher Partners has a team of professionals who specialise in working with the NFP sector. If you’d like to discuss your organisation’s strategic direction in the short to medium and long term, please contact one of our specialists below.

Read the other pieces in our NFP series:

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