Charities need to be a vital part of the UK’s productivity drive

By Jack Larkham, Research and Policy Analyst

Tackling stagnant productivity growth is a priority for the UK, but charities are entirely absent from the policy agenda

Throughout the last decade, the UK’s productivity growth has slumped. It is a rare source of agreement among economists that productivity growth is vital to increasing quality of life, and that tackling the productivity problem is one of the biggest challenges facing economic policymakers in the UK.

Yet to date, charities have barely featured in the debate.

Armed with vast swathes of data, considerable time and effort has been expended by government, business leaders, and academics in an attempt to understand the UK’s productivity problem.

This evidence base has been used to inform a variety of government plans, strategies and reviews, which in turn have led to an array of policy interventions. These interventions have been aimed at stimulating business growth and raising productivity, with the formation of LEPs, local Growth Hubs, the British Business Bank, Be the Business and Help to Grow schemes, to name just a few.

But these have all been focused on businesses, with the charity sector not only overlooked but often explicitly excluded from these efforts. Indeed, though there have been high-profile calls for it, there isn’t even an official measurement of charity sector productivity.

The current operating environment and the scale of public spending on the sector means a focus on boosting productivity is a must for both charities and policymakers

Improving the productivity of charities isn’t about a crude attempt to cut costs or increase the volume of activity at the expense of quality, it is about increasing their effectiveness. In other words, it is about maximising their charitable outcomes using the resources at their disposal.

The current operating environment means maximising productivity should be right at the top of the agenda for the charity sector – and, of course, for many organisations it is. Charity income fell during the pandemic, with a quarter of charities reporting a drop of over 40%. When we surveyed charities last October, almost six in 10 reported an increase in demand – with over a quarter reporting demand rising by more than 25%.

More recent economic developments offer little respite. High inflation is eating away at charity reserves and eroding the value of existing donations, grants, and contracts. While the subsequent cost of living crisis is hitting disposable incomes and triggering a sharp growth in the number of people in poverty. Consequently, much of the sector is likely to be exposed to another financial hit and a simultaneous second wave of demand.

Fixing social sector productivity is not a short-term challenge, a thriving charity sector is a fundamental part of national wellbeing. The crucial role of the sector is widely recognised, with 98% of MPs and councillors and 84% of the public agreeing that charities play an important role in the UK. Optimising the performance of the sector is a long-term investment in both society and the economy.

Integrating the charity sector into its broader productivity policy agenda should also be a priority for government, at the very least because it invests so heavily in charities. In 2018-19, central and local government spent around £15 billion on grants and contracts with charities. Commissioning charities to deliver vital public services is a large part of that spend, with recently published research showing that between 2016 and 2020 almost 11,000 charities won government contracts totalling £27.5bn. On top of that spending is the income that government forgoes in the shape of charitable tax reliefs, which the Charity Tax Commission has calculated to be worth around £5bn per year.

Innovation, people, behaviours, and the flow of knowledge and ideas are vital to increasing productivity

Given the significance of this debate for both charities and government, the Law Family Commission on Civil Society is investigating what can be done to achieve a more effective charity sector. Drawing on evidence from across different sectors, it is clear that four key factors have an enormous impact on an organisation’s level of productivity.

First, innovation. It is usually thought of in terms of using new technology, but it also includes the development of new services, processes and products that can reduce costs or increase output or quality.

Second, the nature and use of the workforce. In particular, the implementation of good management practice, increasing skills and training, improving health and wellbeing and addressing levels of diversity are all shown to have a positive effect on organisational productivity.

Third, research by the Behavioural Insights Team has identified a number of behaviours which influence an organisation’s approach to productivity improvement. These include a lack of appetite resulting from overconfidence in one’s own ability, a lack of awareness of performance relative to peers, insufficient resources dedicated to identifying and applying new ideas, and too much focus on immediate day-to-day operations at the expense of longer-term improvement.

Finally, the organisations and networks that help the flow of knowledge and ideas are key catalysts for both behavioural and practical change. This ranges from the provision of simple information, benchmarking tools and opportunities to participate in peer networks, to the more intensive provision of diagnostics and consultancy, right up to the supply of products and services which can be deployed to boost organisational performance.

When it comes to the charity sector, there is plenty of evidence about the state of play in relation to some of these factors, while very little is known about others.

Evidence generated pre-pandemic shows large gaps in technological adoption among charities, with just over half (56%) classified as possessing the necessary levels of digital development. However, it is widely recognised that the Covid response increased levels of technological adoption in the charity sector – in particular through digital service delivery and fundraising. There is also evidence that the sector was highly innovative during the pandemic, with changes to operating models, services, fundraising, and increased collaboration.

In terms of workforce, there is a lack of empirical evidence on the implementation of good management practice within the charity sector and little is known of charity leaders’ opinions about or perceptions of barriers to change. From a skills perspective, the workforce is generally better educated than the wider economy. Despite this, over one in 10 (13%) charities surveyed report a skills gap in their workforce, while almost one in five (19%) say they have vacancies due to skills shortages. In particular, survey data identifies a digital skills gap, with almost half of charities (48%) saying this is holding them back.

Charity trustees surveyed in 2017 reported a lack of relevant legal, digital, fundraising, marketing, and campaigning skills at board level, while previous research identified that the sector is three times less likely to invest in leadership development than the wider economy, with an estimated average of 0.5% of annual income spent on it.

However, there is a lack of research into the amount of time and money charities are investing in digital skills and management training, and little insight into barriers, motivations, and experiences.

The Law Family Commission’s recent survey identified significant anxieties about staff health and wellbeing, with three quarters of senior managers concerned about burnout among their paid workforce. And analysis of workforce statistics identifies below average levels of racial and socio-economic diversity among charity sector staff and a greater than average gender pay gap.

There are also evidence gaps relating to behaviours and attitudes towards productivity growth within charities, in particular how charity leaders perceive their organisation’s performance relative to their peers. There is little research into the amount of benchmarking and networking that charities undertake, the effectiveness of infrastructure that supports the flow of knowledge and ideas, and how well the sector’s needs are being served by it.

Qualitative research does identify a common belief that charities lack sufficient absorptive capacity to invest time and money into changes that would improve their performance. Charity leaders often identified a state of ‘constant firefighting’ or a lack of ‘bandwidth’. This was often coupled with a lack of skills and knowledge – with both generally explained by a lack of finance and/or restrictive funding practices.

So, what’s next?

Boosting charity productivity is an overlooked opportunity in the campaign to tackle the UK’s productivity problem. Both charities and policymakers have a shared interest in doing so and both have a role to play.

Addressing the evidence gap in this area is clearly vital. An absence of data means there is little research into charity productivity, but evidence gleaned from studies of the private sector identifies a number of key factors which effect how productive an organisation is. When we review the charity sector in light of these factors, it is possible to identify where the sector performs well, but also where the opportunities for improvement are.

As such, the next stage of work for the Law Family Commission on Civil Society is to try and fill those gaps, using the knowledge and insight of those who work in the charity sector, as well as those who work outside it. In particular, we will soon be surveying charities to get a sense of how many undertake some of the productive practices we have identified in our research to date.

We will be following this up with a variety of focus groups to explore charity leaders’ perspectives on productivity, their experiences of adopting technological innovations and making improvements to their workforce. We will also be identifying barriers to implementation and possible solutions for overcoming them.

If you are a charity trustee or senior leader and would be interested in participating in this research, please sign up to one of our focus groups.