The coming recession: What does this mean for South African nonprofit organizations?

By Marcus Coetzee, March 2008

The global economy is on the brink of a downturn, possibly a recession. Turbulence and opportunity lie ahead; our currency is under pressure and may continue to devalue. What does this mean for South African nonprofit organizations? How should they respond?

What is a Recession?

An economy is in recession when economic growth rates decrease for two successive quarters. Recessions are part of the normal economic cycle.

What happens to countries in recession? Their currency will tend to devalue as a result of poor economic growth and investor confidence. This contributes to inflation. Central banks usually respond by increasing interest rates to balance inflation with money supply. Bad debts may also increase as optimistic investments fail to perform and customers fail to buy. People and companies consider “downsizing” – some even declare bankruptcy. Such factors lead to people and companies becoming much more careful regarding how they spend and invest their money.

Now, what does this mean for nonprofit organizations, and how should they respond to this challenge?

How can Nonprofit Organizations Respond to a Recession?

We have put together seven recommendations for nonprofit organizations to consider.

1. Be careful with international investors

Local nonprofit organizations with international investors may find that these investments are worth more rands than before.

However, costs will increase owing to domestic inflation. These international investors will also feel pressure to combat the recession in their own economies and invest there instead. Nonprofit organizations with international investors should therefore seek to diversify their income.

It may also be wise for nonprofit organizations to focus on securing increased funding from international donor organizations with capital investments. These investments are fairly resilient during recessions and benefit from interest-rate increases. However, this will mean that competition for donor funds will be intense – proposals will need to be very compelling.

2. Sell strategic benefit to South African companies

South African companies will need to tighten their belts. Although corporate social investment (CSI) may still increase, corporations will want more from their investments than before.

CSI is likely to replace corporate philanthropy as corporations seek business and strategic benefits from their social investments. Successful nonprofit organizations will research how they can improve a company’s strategic position before pitching to them. Naive nonprofit organizations will continue to post generic ring-bound proposals to unknown companies . and waste their postage budgets.

3. Investigate additional sources of income

Philanthropy comes under pressure during recessions as people and companies tighten their belts and try to contain expenses. This means that nonprofit organizations may find themselves with “poorer” benefactors than before.

In response, many more nonprofit organizations will seek to become social enterprises and earn additional income through business-like activities. Such organizations will find the funds to increase their impact and manage their financial risks. Organizations that fail to do this will find themselves at the mercy of their investors. They will struggle to sustain or expand their operations.

4. Become leaner, more focused and efficient

As budgets become tighter, nonprofit organizations will need to become leaner (not meaner) and more focused. Nonprofit organizations will start adapting and adopting the principles of lean companies and lean consumption.

Experience has shown that there is a right and a wrong way for organizations to become lean. The wrong way is for them to cut costs that undermine their capability to deliver and attract investment. The right way is for them to become more focused and strategic, to continue to invest in their capabilities and to ensure their core processes are efficient and effective.

5. Demonstrate value for money

Nonprofit organizations will need to show that they are good value for money. They will need to prove to their investors that they achieve their promised outcomes (not outputs) at a fair price.

Some investors may even decide to invest in socially focused businesses (instead of nonprofit organizations) to achieve a social purpose. There will also be some investors that want their money back in order to recycle their capital and invest in other social ventures.

Nonprofit organizations that earn much of their own income and can demonstrate how well they’ve achieved their outcomes will thrive. Those that don’t will struggle to find the funding they need to fulfill their purpose.

6. Retain talented staff by trimming poor performers from the team

As inflation affects the cost of living, skilled staff will consider migrating to the private sector in search of higher salaries. This presents a challenge to cash-strapped nonprofit organizations.

Some nonprofit organizations may elect to resolve this problem by trimming the poor performers from their workforce in order to ensure they have the funds to retain their talented staff.

7. Improve the performance of staff

With less money than they need to fulfill their purpose, nonprofit organizations will need to find ways to improve the performance of their staff.

Organizations will need to focus on two main areas. The first is on improving the ability of their staff to deliver. The second is on monitoring what their staff achieve (not just how well they comply with their job description) – they should reward high performance.

8. Pursue new opportunities

As the cost of living increases without sufficient economic growth to compensate, a downturn or recession will undermine efforts to reduce poverty in South Africa. Amidst increasing need, the government may find that it has less to spend on social development than before.

Although unfortunate, this presents opportunities for nonprofit organizations to take the initiative and expand their services. Entrepreneurial organizations will find innovative and cost-effective solutions to social problems. Job-creation projects are especially likely to attract attention from social investors.

Conclusion

Economic downturns and recessions are natural phenomena that occur as economies breathe in an out. There are periods of irresponsible optimism balanced with periods of consolidation and reality. If they respond appropriately, nonprofit organizations can emerge from the recession far more capable and successful than before.

This presents an opportunity for those nonprofit organizations that are up to the challenge.

Marcus Coetzee is a business strategist who helps leaders to think clearly about the future. To find out more about how he can help you, call 0828799131 or visit Marcus Coetzee.co.za.

Cultivating strategic clarity.

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