Managing Risk In The New Normal

December 14, 2012       Melanie Lockwood Herman      

As you prepare to flip the page on your old-fashioned paper wall calendar and toast the New Year, are you thinking about risk? What adventures await your nonprofit in 2013? What risks will pay dividends, and which will you be regretting at this time next year?

After four years of endless budget crunching, painful belt-tightening and paltry investment earnings, many nonprofit leaders can’t help but wonder: What’s next?

If we’re talking about risk, you’ll want to consider the following issues as part of your “new normal” for 2013. Rather than obsessing about the past and looking over your shoulder, it’s time to prepare for the landscape of risk that your organization will face in the year to come. Items that will be dotting that colorful landscape are certain to include:

An Uptick in Claims Alleging Wrongful Employment Practices — A leading insurer warned recently that while claims against for-profits are starting to wane after a surge at the front end of the recession, claims against nonprofits are growing in number and will likely peak in the year ahead. If you haven’t already faced a claim stemming from a reduction in force (RIF) or termination for cause, get ready.

Review your files and your personnel policies to make certain you are prepared to mount the strongest possible defense. Do your actions line up with your written policies? If not, repair the disconnection by updating your policies or by holding supervisors accountable for compliance.

Warning: Turnover Ahead — As economic conditions improve, so will job prospects for your top performers. Are you ready for some turnover? Managing the risk of turnover includes ensuring that more than one person is up to speed on critical roles and tasks.

Assigning the role of relationship manager with major donors to a single professional is a mistake you can’t afford to make. Allowing one staff member to control your vital IT assets and decisions is another. The word “backup” applies to roles and tasks as well as data. Many leaders imagine that when the economy starts firing on four cylinders again, poor performers will “move on.” Don’t be naïve. When nonprofits start hiring again they will be looking to lure your top performing finance, development, IT and HR staff.

Impact Will Matter Most — If your donors aren’t already asking about the “impact” your nonprofit is having in the community, they will be soon. The “impact” movement (it’s not how much you spend, it’s what you accomplish that matters) is gaining momentum. It will finally gain permanent traction in 2013 and replace the worn-out focus on inputs (how much you spend) and the absurd overhead-to-programming spending litmus test.

The percentage of each dollar raised spent on “programs” is not an accurate nor particularly helpful gauge of your nonprofit’s ultimate effectiveness. If you’re not prepared to answer the question — what impact are you having — there’s no time to lose.

What’s at risk? Only your credibility with individual and institutional donors, fiscal health and financial sustainability.

Low Prices Not Guaranteed — Buyers of com­mercial insurance policies have grown ac­customed to a record-long “soft” market. No sector has benefited more than nonprofits.

What’s a soft market? The term refers to a period of time when coverages are easier to buy, broader in scope, and more competitively priced. Soft market conditions are ideal when an organization is buying coverage for the first time, or seeking higher than previous limits of liability. When the market cycle shifts to its “hard” phase, insurance buying will be more painful for many nonprofit buyers, and certainly more expensive.

The take-away is that there is no time like the present to put in place the coverage types and limits that suit your nonprofit’s exposures. Work with a trusted insurance advisor (agent, broker or consultant) to evaluate the adequacy of your current collection of coverages, as well as your limits and deductibles. Make adjustments now, while you still have maximum flexibility.

A Narrow View of Risk Won’t Do the Job — Many nonprofit leaders have approached risk management as a discipline for addressing financial or finance-related risks, such as the risk of fraud or poor investment returns. The truth is that risks lurk in every facet of operations and strategy setting.

If you haven’t done so already, get a multi-disciplinary team focused on surfacing your critical risks and addressing them head on. What major adjustments or fine-tuning is re­quired based on the collective wisdom of your diverse team? What risks need a collaborative problem-solving ap­proach? How has well-intentioned risk management limited to the silos of your nonprofit failed your mission? What perspectives are missing when the risk management committee meets?

No Partner is Above Suspicion — Nonprofit leaders embrace partnership opportunities like retail shoppers at a post-Thanksgiving sale. Yet many partnerships conclude with unmet expectations and disappointment at the checkout counter. Instead of entering blindly into partnerships hoping for a “win-win,” approach your partnerships and collaborations like a “bride-zilla” at a Rodeo Drive wedding dress shop. Ask lots of questions. Try things on for size before making a long-term commitment. And, bring an entourage to help you see how the partnership looks from a variety of angles.

Never make assumptions about a partner’s motivations, fiscal health or capabilities: ask, research and strive for an informed view before you sign on the dotted line.

If recent years are any indication, 2013 will be a year of good and bad surprises for the nation’s nonprofits. While it’s impossible to predict what crises and mundane risks your nonprofit will face, the list above is a good starting point. Remember the importance of surfacing and understanding risk issues before you supplement or adjust your risk management program.

Risk-taking is fundamental to mission fulfillment. Even before the year begins, you know you’ll be taking lots of risks to survive and thrive in 2013. Make certain that your risk-taking and risk management are calibrated to help you succeed. E

Melanie Herman is executive director of the Nonprofit Risk Management Center, a national nonprofit resource center offering practical advice and affordable resources to nonprofits in the U.S. and around the world. To learn more about the Center, visit www.nonprofitrisk.org, or contact her at Melanie@nonprofitrisk.org