The Opportunities and Challenges of the Changing Public Services Landscape for the Third Sector in Scotland: A Longitudinal Study: Year Two Report

3. THIRD SECTOR CHALLENGES AND RESPONSES

Chapter Summary

This chapter examines the various ways in which TSOs have responded to the recent policy and funding changes and how they are preparing for spending cuts in the future.

Responding to funding opportunities and the potential for 'strategic drift'

There was a potential tension for some TSOs between adapting their services to ever-changing policy priorities on the one hand and maintaining their organisational "identity" on the other. This concern over the potential for 'strategic drift' had led many to recently take stock through strategy reviews which refocused and defined their purpose and strategic direction.

Organisational reviews

Strategic plans had been developed within a number of organisations. These aimed to identify what the organisation needed to do in order to survive and develop and provide a strategy to achieve these aims. These helped to guide organisations through particularly challenging times.

Making cost savings and remaining competitive

Many TSOs were looking at how they could make cost savings and remain competitive, thereby improving resilience. Strategies explored by organisations included:

• Organisational restructuring
• Redundancy planning and reducing staff costs
• Considering how to best utilise property assets, through for instance, property rationalisations (closing satellite offices and centralising into one space)
• Mergers with other organisations.

Diversifying the funding base and social enterprise

Many TSOs were thinking about how to diversify their funding base to become less reliant on public funding. Along with other activities such as organisational reviews and making cost savings to remain competitive, this indicates an increasingly 'social enterprising' approach to the management of TSOs. Many TSOs had also looked into the possibility of increasing income from business activity; although this was not appropriate for all TSOs, depending on a number of factors which are explored later. Some were pursuing strategies to increase fundraising in order to diversify their income.

Competition

There was on-going concern about the challenges for TSOs faced from potential public and private sector competitors, particularly from local authorities who were also potential deliverers as well as funders of services.

Governance and leadership

Senior management and Boards within TSOs faced a number of challenges presented by the changing policy and financial environments.

The pace of change created a need for strong, consistent leadership and the provision of direction to staff as well as challenges in maintaining staff morale and supporting staff through the changes that were happening. This demanded skills in managing change as well as leadership. Managers in smaller organisations often had to embrace a wider range of roles since increasingly important specialist support roles were not available to them, e.g. marketing, information technology, human resource management, operations management.

Board of Directors and/or Trustees of TSOs could potentially offer valuable skills, knowledge and experience to support CEOs/Directors in their role. A number of organisations noted a welcomed increase in involvement of their Boards over the last year in order to support organisations in meeting the challenges. A good spread of knowledge and experience among Board members was valued, and having some members from the private sector could provide valuable business experience.

Introduction

3.1 The Year One report examined how TSOs responded to the challenges that they faced for example by:

• adapting their services to fit with changing policy priorities;
• organisational restructuring to remain competitive; and
• looking at ways in which they could diversify their funding bases.

3.2 These issues had become more prescient in Year Two. This section begins by exploring how TSOs have been responding to changing funding opportunities and the potential challenge of 'strategic drift' which was of increasing concern within organisations. We then look at the emerging trend of TSOs carrying out organisational reviews and what these entailed. Many more TSOs had been making cost savings in order to remain competitive and we examine the varied strategies for doing this, including: restructuring, redundancy planning and reducing staff costs, property rationalisations, mergers and the impact on internal capacity. This section also examines the approach of TSOs to diversifying the funding base and developing social enterprise activities, and, finally, the challenges of competition for TSOs.

Responding to funding opportunities and the potential for 'strategic drift'

3.3 In Year One a number of TSOs had adapted their services to take account of policy and funding focus (particularly on employability). In Year Two, the potential tension for some TSOs between meeting policy priorities on the one hand and maintaining organisational "identity" (e.g., ethos and mission objectives), seemed to become more prominent. One worker felt there had become too much of the 'tail wagging the dog' reflecting a feeling that external policy had become too dominant over the original organisational purpose.

3.4 The number of new policies and funding mechanisms coming in over the previous year had caused overload in one organisation:

We are like most Third Sector Organisations in that we will try and align our work and find the solutions which will allow us to do what we're constituted to do in a way that matches the political environment. Across the team we do have a fatigue, because [the policy and funding environment] is always changing.

Manager, Local Health and Social Care Provider

3.5 This had led to many organisations recently taking stock through strategic reviews which refocused and defined their purpose and strategic direction. Some argued that they needed to go back to their original reason for being a TSO and refocus on their core client population and activities rather than chasing contracts and gradually moving into other areas which diluted their focus. For instance, one organisation felt that over the years it had shifted its focus toward the employability agenda at the expense of its core client group of disabled people. See Case Study One below.

3.6 The process of broadening out the range of services provided by TSOs was encouraged by the expansion of funding opportunities in the previous decade. Now TSOs face the same dilemma but without the same funding opportunities: do they broaden out what they do in order to 'chase' the limited funding that is available, but with the danger of 'strategic drift' or stick with their core activity and hope that there is enough funding in that narrower area?

3.7 However, one organisation adopted a slightly different approach. This organisation took its priorities from their own assessment of local community needs and responded to these, rather than responding to shifting policy priorities:

Over the years we have stayed fairly true to [the organisation's] key message, maybe over the years we have developed new services that fit with that and the policy changes and every now and again it coincides with us. I would say one area where we are diverging is another one of principles is that we see education as a route out of poverty and I think that idea has lost popularity with policy makers...but we'll just stick to that because we really firmly believe it's true...and maybe in a few year's time the policy will come back round again.

Senior Manager, Local Learning Provider

Case Study One: Focusing on delivering services to a core client group

The case study below demonstrates how one of the third sector organisations participating in the study had dealt with the challenge of mission drift through conducting an organisational review and refocusing on their core mission

CASE STUDY ONE

Organisation A provides support, education and employment services to, and campaigns and advises, disabled children and adults with a range of physical and learning disabilities. They work solely in Scotland and provide education and learning services for children and respite/short breaks and family support. They manage two grant aided special schools as an alternative to mainstream placements for young people with additional needs.

Organisation A implemented an organisational wide review of their objectives. The purpose of the review was to ensure service contracts were being delivered within budget and that frontline staff were not undertaking additional non-contracted activities.

Senior managers expressed concern that in recent years there had been a drift away from the core principles upon which the organisation had been founded. Part of the reason for this drift was an increase in non-contracted activities delivered as part of care contracts. There was a perception that the organisation had lost sight of what their purpose was. Senior managers were critical that, within the care sector, too many service providers were focussed on providing employment for their own clients whilst drifting away from the provision of high quality services for disabled people. A senior manager described how:

I think there's a number of service providers like ourselves where we lost sight of why we exist and I think someone once made a criticism that lots of service providers were there to provide employment and not to provide services for disabled people and in this business, that has become true and we took the opportunity last year to challenge that.

During the period 2010 - 2011 managers ensured that there was a renewed focus on delivering only those services that the organisation had been contracted to deliver. Managers realised that frontline staff were delivering additional services above and beyond the number of hours stipulated in the original care contract.

The principal outcome of the review has been a greater focus on the terms of delivery and the avoidance of additional non-contracted activities that were not directly related to the provision of care for disabled people, for instance providing travel to and from activities. The terms and conditions of frontline staff were changed to ensure a better alignment with the aims of the contract.

As a result of these changes, a senior manager thought the organisation was in a good position to withstand anticipated cuts in public funding because they had retained a focus on delivery to their core client group: those with physical disabilities. By continuing to provide services to the same client group, the respondent felt that the organisation remained close to its founding principles.

However, there were challenges in terms of managing the change, particularly in relation to staff terms and conditions. This meant challenging existing assumptions about the way staff worked:

We probably did come over lots of work to rule attitudes within our staff and one of the things we looked at was to say: 'Can we provide the same quality for less?' and the answer was yes. Unfortunately for the workforce to do that we had to challenge a lot of the previous assumptions - unions to change terms and conditions of employees but we believe we've done it for the right reason and that was to go back to being a charity again.

Organisational reviews

3.8 As Case Study One demonstrates, many organisations were reviewing their activities with organisations at different stages in this process. A couple of organisations had carried out reviews earlier, resulting in them developing 'strategic plans'. Within these organisations, service reviews remained on-going so that they would be able to respond to the changing policy and funding environments. For an example, see Case Study Two below.

3.9 In one organisation, a Five Year Business plan had been developed out of consideration of what the organisation needed to do in order to survive:

One of the key elements from that (the organisational review) was about growing ourselves as an organisation, becoming much bigger and much stronger and much more robust and about having social enterprises which would generate income and pay for themselves and not be reliant on subsidy through Service Level Agreements or ESF or whatever else to pay for some of the core staffing costs.

Senior Manager, Local Employability Provider

3.10 Other organisations were beginning to take stock in response to the changes in the policy and funding environments:

For us internally as an organisation, it's making us take stock, what we're about and what we're doing and reviewing what our purpose is and in a way then being able to assess what it is we're going to be prioritising and the sorts of areas we'll be wanting to protect

Senior Manager, Equalities Focus Group

3.11 While this presented challenges, many were positive about the opportunities this created:

There's a positive side of having to look at what you're doing...having to look at a leaner, meaner...sometimes there's something quite exciting about taking what you did and look at how, from a business perspective, you could make more money with less effort at times...

Senior Manager, Equalities Focus Group

3.12 However, this process led one organisation to question whether they actually had a future. They had taken some time as an organisation to ask "are we needed?" and had not, at that point, been able to find a satisfactory answer:

I'm not sure...we're either too small or too big in some senses to actually fit the bit of market we think we are in at the moment. In other words we're not local, we're not community projects so we don't really pull in that money. We have a national profile but we only have an office in Edinburgh, so we are working across Scotland from one base. I think that is beginning to cause us problems... I don't think we're quite right in some ways to be making the best of the opportunities that are there, both at the national level and at the local community level. It's a bit of a conundrum actually.

Senior Manager, Equalities Focus Group

Case Study Two: Following Through on the 5 Year Corporate Strategy

This case study describes the key elements of the 5-Year Corporate Strategy (starting 2009/10) within SAMH and how they have been progressing. The case study also looks at some of the reasons for developing the Strategy, one of which was addressing 'mission creep' (also see 'Responding to funding opportunities and the potential for 'strategic drift', 3.3-3.7).

CASE STUDY TWO

Scottish Association of Mental Health

SAMH (Scottish Association for Mental Health) supports those with mental health problems, those who have homelessness issues, those who have addiction issues and those who experience social exclusion, through the provision of accommodation and rehabilitation. They are committed to the principles of user involvement and in doing so challenging discrimination.

In 2008, a new Chief Executive (CE) was appointed to lead SAMH. With the support of the Board, the CE aimed to develop a strategic focus for SAMH. Prior to this time, there had been some 'mission creep' whereby the organisation had become dependent on public funding. They now wanted to re-establish their identity as an independent charity. To this end, SAMH created a Corporate Strategy which provided a new strategic direction for the organisation and set specific targets to be achieved over five years - starting in 2009/2010. The strategy includes 5 key themes with 16 outcomes related to these aiming to give the organisation consistency of direction over the longer term. To reflect shorter term external changes, key performance indicators are reviewed annually. The overall aim was to expand service provision beyond traditional local authority-funded models to encompass charitably-funded services as well as to increase campaigning and awareness-raising activity. As part of that strategy the organisation needed to identify cost savings in order to be able to invest in the areas identified in the strategy.

Ultimately our aim is to support more people [with mental health problems] in high quality services… the challenge to that is to compete at the moment and particularly over the last year we've had to … radically look at our cost structure and financial model in order to be able to still compete in what is a very competitive market in terms of a cost perspective.

Senior Manager

The organisation needed to make changes in two key areas: management restructuring, and changing staff terms and conditions.

The purpose of the restructuring was to create a leaner, flatter management structure which could respond quickly and flexibly as required. This was a difficult decision because it meant making a number of staff redundant in the short term, but in the longer term it would ensure a more focused and effective organisation.

The Strategy also involved increasing workforce flexibility, for instance, staff in different locations being able to cover for each other. To this end, the organisation in consultation with the union changed the terms and conditions of staff. This included increasing weekly hours from 35 hours to 37.5 hours and rolling most statutory holidays into an increased annual leave entitlement.

By Year Two, the new management structure and staff terms and conditions were bedding in. These had entailed cultural change within the organisation and effective communication and information had been important in that process. For instance, part of their enabling strategy was to communicate differently with staff during the initial period of change. This included speaking to over 300 staff (out of 750) face-to-face in regions all over Scotland over a period of three months. It also included periodic bulletins distributed to all staff outlining what was happening and how staff could engage with the process.

The organisation were also looking at other proposals in the strategy, such as property rationalisation (closing satellite offices and centralising staff into a fewer number of central offices). By Year Two, the organisation had just completed the rationalisation of several existing Glasgow offices into one head office, thereby saving on rental costs. As they had jointly purchased this new office (with another TSO), they also acquired an asset. Next on the agenda was to look at rationalising properties in other areas.

The review of staff roles remained on-going, and where a member of staff left a post voluntarily, the role was reviewed before recruiting a replacement.

By April 2011, the organisation had saved £2M. This enabled them to help fend off some of the immediate funding pressures as well as giving them investment funds that they could decide how to allocate in line with their strategic aims. The Corporate Strategy was helping to guide SAMH through a particularly challenging time. It helped to keep the organisation focused on the longer term, although it meant significant changes in the shorter term. As a result the organisation hoped to come through the changing times in a stronger position.

Making cost savings/remaining competitive

3.13 In Year One, some organisations had anticipated the need to become leaner and move towards a more business-driven model. By Year Two, many more TSOs had been looking at how they could make cost savings and remain competitive, thereby maintaining resilience. Strategies explored by TSOs included:

• Restructuring
• Redundancy planning and reducing staff costs
• Property rationalisations
• Mergers.

Restructuring

3.14 A number of organisations had taken part or were undergoing organisational restructuring. For those who had carried out organisational reviews earlier (see above and Year One report), the new structures were still bedding in. Others were currently undergoing restructuring which included: restructuring at head office; integration of services and restructuring leadership teams.

Redundancy planning and reducing staff costs

3.15 A number of organisations were considering the possibility of making redundancies, with a number already having carried this out, resulting in reductions in staff numbers. However, as noted earlier, a number had chosen to reduce staff costs by reducing staff time. As we have already seen, one organisation had adopted a policy of not automatically replacing a staff member. Another had frozen recruitment. Others had or were looking at altering terms and conditions for staff in order to reduce costs and increase flexibility, particularly in relation to responding to the personalisation agenda. Also see 2.66-2.68.

Property rationalisations

3.16 A number of organisations had or were considering how to best utilise their properties. In one organisation this involved closing satellite offices and centralising staff into a fewer number of central offices. See Case Study Two (above).

3.17 Another organisation was also in the process of rationalising their properties onto one main site while others were beginning to examine how they make the most from of their property assets in terms of maximising income (e.g. through renting out).

Mergers

3.18 Three of the TSOs had merged or were in the process of merging with other organisations²⁷ . In two cases, the main reason for the organisations to merge at the current time was to ensure the sustainability of existing projects:

You come to a window of if we [merge] now we are an attractive offer. If we do it in 2 years time, that may not be the case. So do you [stick] it out…and hope that you've got the platform in a couple of years time to grow again or do you say actually we're attractive now, let's just do it now, and we can follow that growth model through?

Senior Manager, Employability Focus Group

3.19 The benefits the TSOs hoped to achieve by merging included:

• making savings on central costs, such as administration and management, through sharing some of these facilities;
• to gain benefits of development synergies in activities;
• efficiencies of scale; and
• to extend services beyond existing provision.

3.20 The advantages were perceived to be:

• greater stability;
• to be able to offer more to clients;
• a positive culture change in the organisation;
• focus on direct delivery;
• greater ability to attract private funders;
• reduced competition (by merging with competitor); and,
• opening up access to 'new' pots of money.

3.21 For instance:

The big thing was about being part of a bigger organisation with a bigger footprint where you could reach more people and potentially do more of the work that we do, on a larger scale, and the back office stuff shifting to a corporate centre relieving me of at least 60 per cent of what I do…The other thought being: 'well if we didn't go in with them they would be building it up themselves and taking our markets and working with our clients and taking our budgets'.

Senior Manager, Employability Focus Group

3.22 However, one felt it was important that the organisation kept to their core mission (i.e. avoided "strategic drift") and maintained 'business as usual' as far as clients were concerned. It was also recognised that there would be a need for a period of readjustment following a merger, in order for the new structures to bed in and staff to adjust to the changed environment.

3.23 In a third organisation, the merger was in progress and consisted of a large TSO taking over a much smaller local TSO with which they had an existing partnership. The small local TSO had lost a tender and as a result they had no income. The large TSO chose to merge with the organisation in order for the smaller one to continue to remain in existence:

That was more about, I suppose, sector leadership really, to say 'no we don't think this organisation should disappear, we think we can do something about it'. Obviously it's an on-going thing to make it happen. It's the first time we have done anything like that, but it was a way of saying 'look we're quite a big organisation, we cannot absorb you, because they will still remain as an entity...'

Senior Manager, National Health and Social Care Provider

3.24 It was not clear at that stage how this merger would turn out practically or financially, or whether the large TSO would be in a position to 'save' other smaller TSOs in a similar fashion in the future.

Internal capacity

3.25 In Year One, some mentioned that maintaining core funding would be important in order to maintain internal capacity of the organisation in the future. This was still a concern in Year Two with fears that less funding would mean less money to cover overheads and core costs. This could lead to reduced organisational flexibility as well as the potential loss of expertise as skilled staff left the organisation. In some cases, cash reserves were being eroded because they were being used to cover funding gaps and a number of participants reported that some local authority funders were reluctant to award money if a TSO had good financial reserves. However, some felt this had consequences for TSOs getting through the difficult financial times and undermined the business principle:

There is a general requirement to have three months reserves. Everybody in principle says it should happen and yet it is a real struggle to do it. The council says "Oh, they've got reserves, don't give them any money"….That is another way that the environment doesn't work with the business principle because people believe we should be operating social enterprise so any reserves we build up are our capital for the business and not money the local authority can plunder back. They can't play it all ways. They can't tell us that we have to be social enterprises and then keep dipping into our business capital.

Senior Manager, Equalities Focus Group

Diversifying the funding base and social enterprise

3.26 In Year One many organisations were considering how they might move forward to best meet the challenges presented by the current policy and funding environments. By Year Two more organisations were talking about diversifying their funding base to become less reliant on public funding which may indicate more of a 'social enterprise' approach being taken (see Year One report). As highlighted in the Year One report this was not so much about the establishment of 'social enterprises' as organisational forms but rather the adoption of a range of managerial activities (such as marketing, business panning, strategic positioning, etc.). Some of the activities discussed earlier in this report, such as organisational reviews and making costs savings to remain competitive, were also argued as being part of this 'enterprising' approach to the management of TSOs.

3.27 In particular, participants in the workshop carried out in June engaged in a debate around this increase in social enterprise. There was agreement both that there was an increasing 'blurring of the lines' between TSOs, businesses, social enterprise and the public sector and the growth of 'hybrid organisations' across these sectors and that 'social enterprises' represented only a small subset of the overall sector. What was most significant was not this smaller subset but the way that TSOs, as a whole, were responding to financial and service pressures by becoming more enterprising. Some respondents did voice concern that the Social Enterprise model was problematic as it was not necessarily geared towards social need, while others described the current practice of commissioning public services as meaning that all TSOs were now forms of 'social enterprise'. It was pointed out that across most Boards of Directors/Trustees, trustees are increasingly selected for the business skills and experience though there was disagreement over whether this was evidence of a more performance related focus on organisational mission or a replacement of the 'voluntary ethos' with a business one.

3.28 Specifically, in Year One there had been some discussion about the pros and cons of social enterprise activity whilst subsequently most of the participants admitted to exploring a range of approaches to a more business-like approach to their mission-critical activity. However, such an approach was not universal. One TSO said that it had considered such an approach but ultimately dismissed it because they could not identify a current viable market for their potential training products.

3.29 A number of challenges around social enterprise activity were raised in Year Two:

1) A social enterprise (or enterprising) model was not suitable to all TSOs, especially those working with particularly vulnerable or high needs client groups where a business orientation was not appropriate.

2) There needed to be a viable business idea, which could be put into practice, and this was not always possible.

3) The business environment (particularly for training) was perceived to be very competitive currently, especially with free alternative training which was offered by government.

4) TSOs were becoming more focused upon recruiting staff with specific business skills, such as marketing or planning, as well as client-specific skills.

5) Government regulation was argued by many as a real barrier to enterprising activity by TSOs because of the additional resources required. Also see 2.37-2.39.

6) Having many different funders of TSO activity had the advantage of spreading the risk of loss of funding, but generated a lot more work in terms of monitoring and compliance.

7) There was concern that some funders did not fully understand the implications of a social enterprise business model for TSOs, compared to private sector business (for instance, by being reluctant to fund TSOs which had financial reserves or attempting to re-appropriate 'underspends', which were actually part of effective sustainable business practice).

8) There were difficulties around accessing and understanding social enterprise intermediaries, e.g. those organisations that aim to support social enterprise activity, in order to gain support to develop social enterprise activity.

9) Some TSOs perceived a need for 'serious investment' in order to develop as a business. To this end, they needed to be able to access private finance, which was perceived to be difficult. Also see 2.52-2.56.

10) A few respondents felt that sometimes it might be better to start 'pure' businesses rather than develop hybrid organisations that could be complex to manage.

Case Study Three: Diversifying the Funding Base through Social Firms

This case study demonstrates how Forth Sector have diversified their funding base through developing different forms of business activity. This TSO is making significant capital investments in order to ensure their future.

CASE STUDY THREE

Forth Sector

Forth Sector provides 'employability support to aid the recovery of people with mental health problems'²⁸ . Forth Sector seeks to achieve this aim by offering placements within businesses owned by the organisation and providing pre-employment and in-work support to enable individuals to sustain employment.

Forth Sector undertakes various forms of business activity. One of these includes operating several small firms. These include a laundry, a soap making business and a guest house which offer supported work placements for clients. The other activity they carry out is providing support for other social enterprises through the Forth Sector Development arm.

In recent years the businesses have been a state of flux, with a lack of investment and the economic downturn affecting the viability of some of these. Forth Sector Development, however, has been doing well picking up a number of major contracts to support other third sector organisations to develop social enterprise activity. In the last year, the organisation made the decision to set up Forth Sector Development as a separate company from Forth Sector, the charity. Forth Sector Development, however, still has an important role in the charity, particularly since the social businesses are struggling:

[Forth Sector Development] covenants surpluses to Forth Sector, the charity. It is a social enterprise...it is there to generate income and really support the rest of the organisation given that...the businesses at the moment aren't creating a surplus and in fact have been operating at a loss...it has in the past quite heavily subsidised the other parts of the organisation. It's an important source of income...we are trading on our intellectual capital.

Senior Manager B

Another important decision was to rationalise the social firms. In order to access some of the organisation's capital assets, they are planning to sell the Guesthouse. They are also investing in another laundry business in order to complement their existing business. At the same time, they have been awarded £1M from the Scottish Investment Fund in order to develop a purpose-built employability hub at a site at Duddingston Yard in Edinburgh's Craigmillar area. With additional funding which they hope to win from the National Lottery, they hope to have completed the build and move by summer 2012. This was all part of a business plan that was developed to help the organisation survive:

One of the key elements from that [the business plan] was about growing ourselves as an organisation - becoming much bigger and much stronger and much more robust and about having social enterprises which would generate income and pay for themselves and not be reliant on subsidy through Service Level Agreements or ESF or whatever else to pay for some of the core staffing costs.

Senior Manager A

At the same time, they are also looking at what to do with the other social firms that are not proving profitable:

It's about deciding where you are going to put your energy...and resource...if you're spread too thinly you could be starving those businesses that have the best chance of success of the resource that they need and actually propping something up that is frankly limping along. I think you've just got to make those decisions.

Senior Manager B

One senior manager attributed a lack of capital investment in the social firms at an earlier stage as an issue that limited their potential for success. Learning lessons from past experience, the organisation hopes that through significant investment now, they will move forward towards a successful and sustainable future.

Fundraising

3.30 A small number of organisations explicitly mentioned pursuing strategies to increase fundraising within their organisation. These included increasing the amount from private donations and legacies, and encouraging members of the organisations (including volunteers and clients) to engage in more fundraising activities on behalf of the organisation. For one organisation in particular, fundraising was an important part of their overall strategy. They had increased their income generated from fundraising in the last year, and hoped to improve significantly upon this in the future. Their biggest barrier to developing fundraising activity had been difficulties in recruiting a suitable candidate to fill the Head of Fundraising role. However, they had recently appointed a Head of Fundraising, who would develop and lead on this activity.

Competition

3.31 The Year One report looked in some detail at the challenges TSOs faced from potential competitors, including the private sector and public sector providers. In Year Two some were still concerned about potential competition, particularly from local authorities. However, there appeared to be a great deal of variation between local authorities in their practices. One respondent felt that some local authorities were 'cherry picking' some services that they would deliver themselves, in particular taking on the less expensive-to-run services and leaving more expensive services (e.g. night services) for the third sector to pick up. Another perceived that some local authorities were tendering out fewer services in order to retain their own staff. Another respondent who had feared local authorities would protect their own staff and services at the expense of cutting services delivered by the third sector was happy to find that this had not actually happened. This respondent perceived that the TSOs funding had been continued while at the same time local authorities were making redundancies amongst their own staff:

One of our local authority funders have indicated we are likely to get the same level of funding while they are making redundancies in their…staff, so seeing the value of continuing to fund us to deliver the work that we already deliver even though they have to make redundancies within their own staffing team. I think that might be a picture that emerges more and more going forward...

Senior Manager, Regional Learning Provider

Local authorities are tendering less - trying to retain staff and maintain their own services. Local authorities appear to have two approaches. Some genuinely think: 'I can get better value by potential work in-partnership, putting things out to tender' but a number are taking: 'let's batten down the hatches and let's look after our staffing numbers'.

Senior Manager, National Employability Provider

3.32 It was not clear the actual impact private competitors had had on the TSOs by Year Two, although the outcome of the Work Programme awards in Scotland (known in April 2011) suggested large private sector contractors had done better than TSOs, at least at prime contractor level. Some respondents who took part in interviews had been concerned that TSOs, particularly smaller ones, would be marginalised in the programme. Also see 2.12-2.18.

Governance and leadership

3.33 The Year Two fieldwork specifically set out to identify key emerging leadership issues faced by the changing policy and funding environments in a way that was not done in Year One.

3.34 The challenges facing the third sector are also challenges for leadership in managing organisational responses. We have already explored some of the key challenges for leadership through, for instance, responding to funding opportunities and the potential for 'strategic' drift, organisational reviews, making costs savings to remain competitive and diversifying the funding base. This section explores the more general challenges faced by senior managers and Boards of Directors/Trustees in TSOs.

Challenges for senior management

3.35 When questioned about the challenges of leadership in the current policy and funding environment, respondents gave varied responses.

3.36 Dealing with the pace of change could be a challenge. In particular, it could be difficult to be pro-active when a lot of time was taken reacting to changing agendas and circumstances.

We are making a best guess...which is made based on the information that we have this week which might not be the information next week, therefore best guess (this week) isn't best guess next week.

Senior Manager, Local Employability Provider

3.37 This presented challenges in terms of giving strong, consistent leadership and direction to staff in the organisation. Yet at the same time, it also became more important to maintain staff morale as well as supporting staff to embrace the changes that were happening. For senior managers, managing insecurity and low morale among staff (generated by uncertainties over funding and/or organisational change) could present challenges that had not been there in previous times.

3.38 However, the staff who took part in the research generally understood the current circumstances within which organisations were operating and although 'nobody likes change' they appreciated professional and supportive management in managing change. For instance, consulting with staff on potential changes, including service closures, restructures and voluntary severance appeared to be appreciated by staff where these were carried out.

3.39 The current environment also presented challenges to leadership skills for some, particularly in smaller TSOs. It was not possible in smaller organisations to have specialist support roles, for instance, in marketing, information technology, human resource management and operations management, yet these were becoming increasingly important. It often fell upon the CE to embrace this wide range of roles, yet it could be difficult for any one individual to be an expert in all. This was particularly noted in relation to the growing need for business skills and human resource issues.

Board of directors/trustees

3.40 A number of TSOs reported that the Board of Directors/Trustees of their organisations had been more involved in the last year or so, mainly because of the increased challenges presented by the changing external environment. Leaders in organisations had been looking for increased support from Boards and they had generally found Boards stepping up to the mark. Boards had been involved in various organisational reviews that had been undertaken or were on-going in organisations as well as in major funding bids:

I keep reminding them it's their responsibility; ultimately it's their responsibility. I've found that they are more involved in terms of scenario planning and looking at financial strategies, the worst case scenarios, the best case and so on. It's kind of engaged them more.

Senior Manager, Equalities Focus Group

The board has become much … stronger. They are much more clear about their role and responsibilities as Board members. We have several new people on the Board who are very experienced, who are very capable and very competent.

Senior Manager, Local Employability Provider

3.41 Boards had also looked at their own skills and experiences and the needs of the organisation so that any gaps could be filled. The ideal make-up of a Board of Directors appeared to be one which had a wide range of skills and experience, including understanding of the client group, knowledge of policy and law and business skills so that they 'have a good spread of knowledge and experience and then they can advise us and help us to make sure that we are doing sensible things' (Senior Manager, National Health and Social Care Provider). Increasingly, business experience was perceived to be valuable, and some organisations had set out to increase the numbers of members from the private sector. This respondent explains how the private sector experience of some Board members had been useful when examining options for the organisation moving forward:

They got very involved and animated...some of them wanted something to do and a crisis is what they needed...that's when the person from the bank and the person with the housing background said...'I'll go away and look at the options for the property'...I said 'we need to move towards having an organisational plan that's outcome based and currently it isn't' and they said 'we'll work with you on that'...and another group is looking at scenario planning should the funding reduce and what it would mean for staffing levels etc...so certainty during the time I've been there I think they've been very involved.

Senior Manager, Equalities Focus Group

3.42 One chief executive (CE) felt that the Board of Directors in her organisation were not as involved as those in other organisations seemed to be: "We are certainly looking at...getting people with more skills we need on the Board" (Senior Manager, Equalities Focus Group). The CE also felt that the set-up of the Board of Directors was not as efficient as it might be with meetings occurring too regularly (every six weeks) generating additional preparation work. Another CE explained that his organisation's Board had had a similar structure but this had been reviewed and changed a few years ago. The constitution, set up and structure of the Board had been simplified. The Board meet quarterly, with members working closely with the CE (who also sat on the Board) in between times on pieces of work such as funding bids. This was perceived to work well in supporting the organisation.

Conclusion

3.43 Many TSOs were making significant efforts to respond positively and pro-actively to the challenges presented by the changing funding and policy environment. Many had taken the opportunity to look at their priorities and how they wanted to move forward (some had even done this earlier). The majority had looked at a variety of strategies to cut costs and remain competitive, as well as diversifying the funding base (and social enterprise in particular). This presented challenges to leadership and governance, but senior management and Boards of TSOs were, on the whole, rising to meet these challenges.

3.44 It is important to recognise that there is no reductive response to the current economic climate, no 'one size fits all'. For some TSOs, mergers are an appropriate response, for others they are not. It is also important to recognise that innovation is only one response to the current situation. For others a more cautious 'sticking to the knitting' may be more appropriate. Proactive responses, like mergers and innovation, offer creative ways to respond to these straitened times. However they can also consume resources unnecessarily, at a time of resource scarcity. What is required therefore is a contingent response by TSOs that matches the response to the needs of their organisation, members and/or users.