Tuesday, 28 October 2014

Is O.R. consultancy for the 3rd sector different from OR elsewhere? Ruth Kaufman says yes – and no

The keynote talk from Ruth Kaufman at The OR Society's annual conference (OR56)

What’s so special about the Third Sector?
Ruth Kaufman
Chair of Third Sector Special Interest Group

The OR Society’s Third Sector initiative has two main components: a Special Interest Group, and a Pro Bono scheme, matching O.R. volunteers with third sector organisations needing their input. But is there really any difference between doing OR in the third sector and doing it with a government or private sector organisation? Is “it’s for charity” really a good enough reason to work for free? This talk explores these challenges, taking charities as an example of third sector organisations.
It considers three areas of inherent difference between charity, private and public organisations – legal form, governance, and resourcing – and other factors such as organisational size, culture, and business environment. It goes on to consider the implications for practising OR in three broad areas: strategy, efficiency/effectiveness, and profitability. Finally, it explores the rationale for volunteering.

1.      Introduction
The OR Society’s Third Sector initiative has two main components: a Special Interest Group; and a Pro Bono scheme, where OR people offer to do free OR work for a third sector organisation.
When we established the initiative, the emphasis was on the size of the third sector, the lack of profile of OR in the sector, and the desire to promote and exploit OR more widely. We did not explore the rationale for a separate third sector group – is there really any difference between doing OR with a charity and doing it with a government or private sector organisation. Nor did we explore the rationale for volunteering. This talk begins to address the gap. It examines the structural differences between sectors, and goes on to look at what this means for O.R. in practice, and more briefly at the end, what it means for volunteering.
For the most part, this talk will look at charities, and just touch on other third sector forms of organisation – social enterprise, mutual, community amateur sports club, political campaign, and more – at the end. The talk itself will use examples taken from a variety of third sector practice; the examples are not included in this abstract.
What follows is based largely on direct personal experience, and learning from others who have been working in the field. It is not intended as a definitive statement of ‘what is’, based on systematic evidence-gathering, but as a trigger for debate and reflection.

2.      Differences between charity and private or public sector organisations
I will pick out three features that distinguish charities structurally from other organisations: purpose, governance and resourcing.
2.1 Purpose
Every charity must have ‘charitable purposes for the public benefit’, and these must be its only purposes. This is the single defining characteristic. It is fairly clear how this differentiates charities from the private sector – although many private sector organisations include some version of ‘public benefit’ amongst their aims. It is less clear how it differentiates them from the public sector. Many of the state’s activities are in fact delivered by charities: around 35% of charity income comes from statutory sources.
In private sector and charities, unlike the public sector, ultimate responsibility lies with the Board of Trustees. All Boards have to comply with a range of legal constraints, including the requirement to operate within the rules set by the charity’s governing documents. Some may also be part of a larger organisation that sets constraints (for example, all Women’s Institutes are independent charities and also part of the National Federation of Women’s Institutes), or be accountable to members, or funders where contracts or grants are conditional. But private sector and charity Boards alike have no democratic mandate, no statutory duty, and no accountability to citizens at large.  Unlike the private sector, though, charity Board members are (usually) unpaid, and may be elected by members rather than appointed.
2.3 Resourcing
Charity income may come from all the same sort of sources as private and public sector: revenue for services sold, grants made from taxation, investment interest, loans. But around one-third of charities’ cash income is donated from members of the public, corporates, charitable trusts and foundations or lottery funding. What’s more, charities are massively dependent on donations in kind, and in particular, volunteers (including Trustees).
Donations and volunteers are not exclusive to the third sector. There are many volunteers working with the statutory sector, and even the private sector. some in legally designated volunteer roles, such as magistrate, prison visitor, school governor, others informally offering their support reading to children, running hospital tea-rooms, or litter-picking. The recent cuts to the welfare state have blurred the lines further.
So, these characteristics do not rigidly separate charities from other organisations. Nonetheless, they have significant consequences for how charities behave, and follow-on consequences for O.R. in charities.
As well as these structural factors, it’s important to be aware of characteristics of the sector such as organisation size, employee numbers, and activity areas[1]. But the diversity of the sector means that each charity has to be considered independently – generalisations are dangerous.

3.      Is OR for charities different from OR for other organisations?
To begin to answer this question, this talk considers three areas of application: strategy, efficiency/effectiveness, and profitability.
3.1 Strategy
Although the underlying process of strategy development and implementation is no different for a charity than for any other enterprise, some important issues arise from the nature of the sector.
Articulating goals can be unexpectedly problematic. Charities are very often set up to undertake a particular activity which seems to be a Good Thing: for example, providing legal support to people with disabilities. But one activity can go with many goals, and different goals may demand different priorities, or delivery models.
Stakeholders may include staff, volunteers, trustees, funders, beneficiaries, members, and more. Many of these will feel a deep loyalty and commitment to the cause. What differentiates them from stakeholders in other sectors is that for many of them, that commitment is their only tie to the organisation. They will walk away if changes violate their view of what the organisation should be doing, or how it should be doing it. Strategy must take account of these relationship drivers and risks. 
Any charity that is dependent on the UK statutory sector for any of its income or activities, or that has UK beneficiaries that are in any way disadvantaged, is going through tough times at the moment. Financially, certainly; also because of greater numbers and needs of beneficiaries; and because of changes in statutory sector procurement, growth of competition both between and within sectors, reduction in support from the statutory sector, transfer of risk from statutory sector to its service deliverers, and pressure towards partnership working with no recognition of the associated cost.
Charities that do not have an IT-based operating model are similar to most other organisations that do not have such a model – data is valuable, and they may have lots of it, but there are problems in using it. The only difference with charities is that it is possible for a charity to be set up and run by an entire team of people with no expertise in business or data management, and survive for a long time on vision and inspiration alone. Many are highly professionally run, of course – but there is probably more scope for helping with the basic components of systematically analysing data, planning, and forecasting.
3.2  Efficiency/effectiveness
Dan Corry, Chief Executive of charity New Philanthropy Capital, has recently identified a number of barriers that, in his view, militate against charities improving productivity[2]. Some of his arguments are contentious, and will be reviewed in the talk. Nonetheless, it is true that  from the O.R. side we have seen relatively little drive for specific efficiency or effectiveness improvement initiatives. It has been notable within the Pro Bono scheme, for example, that only a small proportion of project requests have been for improvements in operational efficiency.
Instead, over the last few years, across the whole sector, there has been growing demand for evaluation, outcomes measurement, and impact measurement, and this has been reflected in Pro Bono requests. Indeed Dan Corry prescribes this as a solution to the problems identified. The assumption is that for the charity, such measurement will help the organisation recognise what it needs to do to improve; and that for funders, having this information enables them to channel funds to the more efficient/effective organisations. Significantly, both these assumptions skip over the step in the process which involves designing the efficiency improvements. This is the very point where O.R. should have the most distinctive contribution to make; and it is almost invisible.
Whatever the barriers and the means for their removal, what actually is the potential for efficiency improvement? Almost all charities are part of the service sector, and have processes that can be improved, priorities that can be adjusted, resources that can be better matched to need, just like any other service industry. Scope may be limited: many will have services which are dependent on one-to-one or one-to-few transactions between staff and beneficiaries, transactions which cannot be shortened because the nature of the human interaction is key; many are small organisations operating on a shoe-string already. But that still leaves plenty of organisations with scope for improving call-centre operations, improving logistics, improving appointment booking and client follow-up systems, reducing transport costs, and more.
3.3  Profitability
Profitability or, in charitable terms, breaking even or making a surplus, is an area where charities really are different. There are many possible sources of income which can exist independently of the service model of the charity.  Taking another expression from Dan Corry’s speech, the feedback loops between activity and funding are weak.
One consequence is that fundraising is a significant activity. Fundraisers have become sought-after professionals. Fundraising is an organisational function, and service process, that doesn’t exist in other sectors, and that can be supported by O.R. 
Another is that financial forecasting can be crucial. Many charities are dependent on a small number of chunks of funding, much of it ‘one-off’, and which may or may not relate to chunks of cost. This is made more complex by charity accounting rules, which are different from private and public sector, and do not aid transparency.  
A third is that where income is related to activity levels – for example where charities are providing services to local authorities under contract, or have grants to undertake specific activities, or are running a business –costing or pricing may not be  straightforward, and may benefit from modelling support.
Finally, in chasing profitability, charities may ‘follow the money’. This is a sensible thing to do for private sector organisations, but dangerous for charities. There can be a temptation towards mission drift, away from the objects for which they were founded towards those which are currently in vogue with funders or donors – potentially a strategic disaster.

4.      Where do values fit in?
It might be assumed that the key difference when working with a charity is the drive to do good, and the charitable values, that underpin the organisation and provide meaning to all its activities.
I have already suggested that ‘public benefit’ does not reliably distinguish charities from public or even, in some cases, private sector. People working with any organisation will tend to seek out meaning in their work. This may be easier to do in a charity, and certainly charities are more likely to be staffed by people who want meaning, and very unlikely to be staffed by people looking to make piles of money; but there is a lot of overlap.
Values are even less of a discriminator. Whilst most charities will have strong values relating to the ends - their direct beneficiaries, or achieving their charitable objects - these values do not necessarily stretch to the means: the way they treat staff or volunteers, the way they work with partner agencies, the way they manage their business. In practice, the values guiding charities’ day-to-day management are as widely variable as they are in any other sector.
The charity’s objects may not make much difference directly to the nature of O.R. work, but they are absolutely crucial when it comes to the decision to work, and even more to volunteer, with a charity. If you want to help bring about the same change in the world as the charity does, then it is exciting to have the opportunity to work with them. Whether you give your time for free is determined only by whether you can afford to, and how you prioritise this activity against all the others that you might do.
For Pro Bono O.R. volunteers, there are lots of potential benefits: interest, experience, contacts, learning, job satisfaction, building self-confidence, helping to market your profession. For some people, some of the time, these will be enough to justify an unpaid assignment.  Nonetheless, it is important to understand the charity’s objects[SH1] [3] and how it goes about achieving them. Charitable purposes cover a wide range. When you volunteer, you are helping that charity; and you need to assure yourself that what you are helping it to do accords with your own values and your own vision for a better world. Volunteering with a charity that does just that can be enormously satisfying.
There is a particular sort of opportunity that charities offer, which is relatively unusual: the opportunity to become a trustee. The O.R. person as trustee, especially of a small charity, can become both client and consultant. If well-managed, this resolves the perennial problem of small organisations in all sectors – lack of capacity to manage the consultancy they so badly need

5.      The wider third sector
The third sector is usually defined by what it is not: neither private sector nor public sector. It covers a surprising range of organisations, but three distinguishing qualities can be identified:
·         they are operationally independent of government;
·         they are “value-driven” – motivated to achieve social aims; and
·         they reinvest surpluses in pursuit of these social aims.[4]
What makes such organisations special – whether in terms of the nature of the O.R. challenge, or the reason for wanting to work with them – is a mix of the characteristics of charities and other sectors. This mix will have different components and different weightings, depending both on the legal form and on the specific organisation itself. 
6.      Conclusions
The question was posed at the start: what’s so special about the third sector. For the O.R. analyst as a rational detached professional, the answer lies not in “the values”, but in the nature of purpose, governance and resourcing. These are sufficient to generate a range of characteristics which shape the practice and content of Third Sector O.R.  But for the O.R. analyst as a person with wants, ambitions, and/or a sense of social purpose, what is special is the richness of the opportunity to satisfy some or all of these.

[1] Important sources of information are the annually-updated UK Civil Society Almanac (NCVO, 2014) and the Charity Commission  http://www.charitycommission.gov.uk/about-charities/sector-facts-and-figures/
[3] For those not familiar with charity jargon, the term ‘objects’ has a similar meaning to ‘objectives’, but carries legal weight. A charity’s objects describe what it has been legally set up to achieve; it may not do anything unrelated to its objects, and can only change them with permission from the regulator (in the UK, at least).
[4] Improvement Skills Consulting for the Third Sector  http://ianjseath.files.wordpress.com/2013/12/isc-third-sector.pdf accessed 19/6/2014.

 [SH1]Objectives?  Susan, ‘objects’ is the legal term describing objectives; it means the same, except that objects are enshrined in the charity’s constitution and cannot be changed without permission from the Charity Commission, so I’d prefer to keep it. Have inserted a footnote in case you think that helps – don’t mind if it stays in or comes out 

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