Think Tanks Stress Test

A stress test for think tanks can help determine their long term sustainability -financially and otherwise. Funders and think tanks alike cold use this to determine if the organisation is ready to withstand future shocks.

I have been thinking that sustainability of think tanks tends to be equated to funding. When discussing their grantees’ sustainability, funders emphasise they capacity to seek out and raise alternative sources of funding. in other words, success looks like this: in 2005, the funder A represented 40% of the think tank’s budget; by 2010, it represented only 10%.

But is sustainability all about money? More money? I do not think so. I think sustainability needs to be understood as a broader issue: one that has more to do about governance and management than about fundraising.

Forecasting

I had this conversation with a think tank funder in Central America and Vanesa Weyrauch, who is developing a fundraising course for think tanks, and decided that what was necessary was a kind of ‘stress-test’ that could be implemented by think tanks themselves (and their supporters).

The objective of a Stress Test is to assess the sustainability of a think tank in light of possible external and internal shocks, considering all the different governance arrangements, business models, capacities, skills, etc. that are possible. I sought advice from friends in the private sector who have to address these issues on a regular basis. How would the CFO of a large corporation address its sustainability?

What they suggested wasn’t just a set of questions (as I have outlined in this blog post) but a forecasting tool that puts these questions into practice (in future blog).

The logic behind using a forecasting tool is sound. We can look at think tanks balance sheets and assess if they are financially sound or not. But looking at last year accounts can only tell us what happened. If the think tank is deep in the red it will be too late. Finding out that the think tank has a cash-flow problem today is not as useful as it would be to find out that the think tank will have a cash-flow problem in a few months.

A good forecasting tool allows a team or organisation to predict if, when, and how, changes in the internal and external environment (and more sudden shocks in particular) will affect them. They allow teams or think tanks to make provisions for those effects or altogether avoid them.

This blog post considers, first:

The various possible shocks that may affect think tanks,
How different factors condition the effect these shocks have on the think tanks, and
What king of questions about the sustainability of think tanks can be answered by the model.

The forecasting tool is presented in a second post. The following sections have been improved by Vanesa Weyrauch’s comments. Vanesa is working on a fundraising and funding models course for think tanks that promises to address a number of these issues.

Shocks

What kind of shocks could affect think tanks? Shocks include (but are not limited to):

The sudden loss of a key funder or a proportion of the think tank’s funding
An unexpected loss –e.g. due to poor financial planning, an unfulfilled contract, a penalty due to undelivered products, etc.
A sudden loss in reserves –e.g. due to a financial downturn
A sudden rise in funding –e.g. by means of a large project or a large grant awarded to the organisation
The sudden loss of senior staff –e.g. Executive Director, Senior Researcher, Heads of Programme or Department, Senior Operational Staff, Head of Communications, etc.
The sudden loss of several other members of staff
The sudden recruitment of new members of staff –e.g. in case of new programmes or replacement of staff
A sudden rise in fixed costs –e.g. rent
A sudden change in taxation or employment legislation
A sudden change in NGO legislation -e.g. limits to foreign funding for NGOs.

Effects of the shocks

These shocks could affect think tanks in a number of different ways, for example:

A sudden loss of a key funder or a proportion of the think tank’s funding, (for instance, due to an unexpected loss) could lead to forced redundancies, it could even bankrupt the think tank, or force it to take on contracts with clients that severely affect its mission.
A sudden rise in funding could affect the think tank’s internal relationships, for instance empowering certain programmes or researchers over others (or at the expense of others), or overwhelming the organisation’s capacity to manage its finances, etc.
A sudden loss of staff may translate into a sudden loss of income due to large reliance on them to generate it and thus force the think tank to close entire programmes (even programmes of great strategic importance for the think tank).
The sudden loss of senior staff may lead to a leadership crisis and undermine its capacity to effectively generate and allocate funds, especially if the think tank is unable to quickly recruit a replacement, for instance, of its executive director.
A rise in fixed costs could also lead to forced redundancies or the need to move to cheaper offices, or even cancel contracts or fire staff.
A sudden change in taxation or employment legislation could force the think tank to pay higher taxes or incur in unexpected penalties; it may even make the think tank liable to heavy fines or lawsuits; it may also deter or prevent the think tank from receiving certain types of funds.
A sudden change in how NGOs are funded could affect think tanks, too. They may fall within the category and find that several of their funders will be banned from supporting them im the future.

Explaining factors and implications

Each think tank is likely to be affected in different ways. These differences can be accounted by differences in the nature of the organisations and their environments. The effect will depend on a number of factors, including:

Key factors:	What are the possible (only possible; others may be true as well) implications of this?
Their legal and governance arrangements: Are they for-profit? Are their professionally managed (i.e. not managed by an elected board or council) non-governmental/ non-profit organisations? Are their hosted by a ‘private parent’ institution such as a university? Are their hosted by a ‘public parent’ institution such as a ministry or research institute? Are they membership-based associations? (in which the members are the board members) Are they membership-based associations? (in which the members are the researchers and key staff)	For profits will have to pay taxes on profits so they will have to consider this in their financial modelling but they will also be barred from accessing grants that may be only available to non-for profits. On the other hand, they may be easier to manage since their partners would have the ultimate say. Professionally managed think tanks (non-for profit) will be easier to manage but may not be able to command the commitment of their boards and staff, which would be easier for membership-based models. Membership based think tanks may be able to leverage the support of the group in difficult times but could also be slower to react to shocks. Hosted organisations may be able to weather sudden income loss (for whatever reason) through institutional subsidies but could be barred from certain funding opportunities precisely because they are hosted by (and therefore dependent of) another institution.
Their income models: Is their funding mainly derived from projects won by and managed by individual researchers? Is their funding mainly derived from projects won by and managed by programmes or departments? Is their funding mainly derived from institutional grants won by and managed by programmes or departments? Is their funding mainly derived from institutional grants won by the organisation and managed by programmes or departments or individuals? Is their funding mainly derived from the organisations’ own endowments or subsidies from ‘parent’ institutions? Is their funding mainly derived from long-term institutional grants (e.g. government funding)? Is their funding mainly derived from commercial activities such as trainings, sale of publications, rent of office space, income from IP, etc.? Is their funding mainly provided through contracts (for specific products or services) or grants? Is their funding mainly short-term, mid-term, or long-term? Are their main funders public bodies, foundations, or the private sector? Are their funders mainly domestic or foreign? What is the share of their total income for each funder and funding mechanism? –i.e. is any one over-represented? What is the rate of growth for their income (overall) and each source and mechanism? What are the paying mechanisms and schemes from major donors (i.e. governments that pay most of the contract in arrears)?	Short-term project funding think tanks may find it harder to deal with the loss of staff since they would likely be necessary to raise funds. On the other hand, long-term project/programme funding could award the think tanks more time to replace key staff without this translating into a loss of funding. A funding structure in which a few funders concentrate a significant proportion of the share of income (e.g. 20% or more) could place the think tank at risk. Domestic funders may be harder to convince at first but easier to maintain in the long run as they would need less effort to maintain informed. Publicly funded think tanks may be limited in how they are able to use the funds; so will think tanks funded via contracts. On the other hand, think tanks funded through foundations or grants may have greater liberty to reallocate funds in the case of emergencies. Commercial activities including rent may provide the think tanks with a constant income stream (often quite profitable) but could make them liable to taxes or demand certain legal reforms within the organisation. If individual researchers lead fundraising efforts then the think tank might be free from remuneration commitments to its staff but may find it hard to support unprofitable programmes (and researchers) even if they are of strategic importance. Organisationally managed budgets, on the other hand, could cross-subsidise less profitable parts of the think tank but would make the think tank responsible for its programmes and researchers.
Their cost structure: Do they own or rent their offices? Is their staff fully employed or employed on short-term consultancy contracts? –i.e. how flexible is their workforce? How expensive is its workforce relative to other expenses? What percentage of the income is spent within the organisation? –i.e. what percentage of the budget is made up of ‘reimbursables’ or costs attributed to contractors? How much of the costs are linked with the research programmes versus the general /centralised units? Are these costs paid by different sources? How flexible is each? How large are their overheads and what percentage of them is paid for by individual projects or grants or from sub-contracting? What is the rate of growth of their expenses (overall) and for each line (rent, staff, facilities, etc.) and mechanisms through which these are incurred (long term contracts, permanent staff, contractors, etc.)? What is the size and rate of growth of their reserves? How much does it put aside for contingencies such as maternity leave or sick leave?	If the organisation owns it offices it could use them to raise new funds (remortgage, rent part of them, etc.). Also, an increase in costs would not be linked to rent. Full time staff is harder to make redundant than short term staff; while working with consultants could actually lead to profits (from overheads) for the think tanks. Sudden changes in the funding environment could be handled better by think tanks with a small full time workforce and a larger part time or consultants/associates pool. On the other hand, consultants or associates may not be as loyal and may not support the think tank during difficult times and may not be around when the think tank needs them to grow. Low overheads make think tanks more competitive but high overheads could help them to grow their reserves. Depending on the growth of their expenses think tanks may be facing different challenges. Fixed costs could be addressed by recruiting more income-generating staff but variable costs would only get worse if the think tank resorted to a growth strategy based on more staff. The absence of reserves may limit think tanks’ capacity to invest in their own development and could force them to drastically downsize or turn to alternative sources of funding to cover their losses. In the absence of reserves the think tank may not even be able to fulfil its commitments to its staff: e.g. providing maternity and sick leave.
Their organisational capacity: Do they have a professional Executive Director? Do they have a professional/full time senior management team? Do they have a senior financial officer/manager? Do they have a senior communications officer/manager? Do they have a senior human resources officer/manager? Do they have a central professional business development/fundraising team? Do their research teams/programmes/departments have management/admin/communications capacity?	Depending on their organisational structure different people will be responsible for decisions to handle crises. Their experience will matter in these cases.

Questions to answer

In essence, the forecasting model allows the users (a team, a programme, a think tank) to test the soundness of the organisation’s business model a few months or years in the future. It makes it possible to address ‘what would happen if’ kind of questions with a view to making decisions now that could guarantee the sustainability of the organisation.

The forecasting tool could therefore be used to stress-test the organisation by attempting to answer some of the following questions:

What effect would the loss of income have on the think tank’s capacity to deliver its research commitments?
What effect would the loss of income have on the think tank’s capacity to deliver its commitments to its employees?
What effect would the loss of income have on the think tank’s capacity to deliver its commitments to its creditors and contractors?
What effect would the loss of staff have on the think tank’s capacity to deliver its research commitments?
What effect would the loss of staff have on the think tank’s capacity to raise the income it needs to deliver its commitments to its staff and contractors?
What effect would sudden jumps in the budget have on the think tank’s capacity to deliver its mission and/or to maintain the overall organisational health? -i.e. quality, relevance, good working environment, etc.
What effect would a sudden jump in staff would have on the think tank’s capacity to deliver its mission and/or maintain its overall organisational health? –i.e. quality, relevance, good working environment, etc.

The next post will explore the forecasting tool.