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CHAPTER THREE THE VOLUNTARY SECTOR'S VIEWS

Introduction

3.1 The voluntary sector survey was designed to cover a sample of all organisations in the voluntary sector with an income of over £25,000. This was to remove, as far as possible, those organisations with a very small income where FCR was seen as being less of an issue. However, the view was taken that FCR was essentially about helping the sector as a whole to move towards sustainability. As such the survey did not focus, as some Advisory Group members wanted, solely upon the largest organisations. To do this would have effectively interpreted FCR as being something that was only relevant to part of the sector, rather than the sector as a whole. It was felt that this was not only divisive but was not the Executive's intention when recognising the need for FCR.

3.2 The survey questionnaire was designed and piloted with five voluntary organisations, using contact details supplied by SCVO. A series of amendments were then made to ensure that it was easy to fill in and that it would generate the information being looked for.

3.3 We then generated a stratified sample from SCVO's database based on:-

• Geography (local authority area);
• Type of activities (based on SCVO's 12 fold classification);
• Income band; and
• Year of establishment.

3.4 This sample was then used to generate a list of 300 organisations that were subsequently surveyed by e-mail. However, there was a low response rate to the initial contact which made it necessary to boost the sample size to 600. This was because:-

• Contact details were inaccurate, largely as e-mail addresses were out of date; and
• Addresses had changed.

This was the case for 121 addresses and did not include those that did not reach their destination. In order to ensure that at least 100 survey responses were collected telephone follow up calls were made.

3.5 The 100 responses give a response rate of 22% (assuming a sample of around 450 organisations excluding those with out of date or inaccurate e-mail addresses). The analysis of these responses in this Chapter is based on the number of respondents who answered particular questions. As not all respondents answered all questions the totals for the various Tables in the following sections may differ.

The profile of respondents

3.6 Table 3.1 looks at the sectors that the 100 survey respondents were active in. It can be seen that:-

• Community development & social enterprise made up the single biggest group completing the survey;
• Children & families made up the second largest grouping, accounting for 13% of all responses;
• Disability and social care accounted for at least 10% of all responses each; and
• There were relatively few responses from organisations working with older people and in the learning and housing fields.

Table 3.1 Sectoral breakdown of the survey respondents²

3.7 The survey was completed by a range of staff from the organisations. In the main, the chief executive, manager or director of finance filled out the questionnaire. In addition, when the questionnaire had been completed the person filling it in consulted the chief executive or finance director if that was not their position. This gives a degree of confidence that the survey has been completed by a member of staff with suitable knowledge to answer the questions.

3.8 The organisations completing the survey varied in size. Table 3.2 shows the size breakdown of the organisations as well as the number of volunteers the organisations could call on. It can be seen that:-

• 44% of all organisations surveyed can be considered as micro businesses having 10 or less staff;
• A third had between 11 and 50 staff so that eight out of ten respondents can be classed as small (having less than 50 staff)
• 12% of those surveyed had 200 or more staff;
• 19% of the organisations with volunteers fall within the 200+ sizeband; and
• Seven out of 10 can be classed as having a small number of volunteers (in effect less than 50).

Table 3.2 Respondents by Numbers of Staff and Volunteers

3.9 The gross annual income of the organisations surveyed also showed a high degree of variation. Table 3.3 shows the proportion of organisations in each income band. It can be seen that:-

• Almost half (46%) of those surveyed had an annual income in the range of £100,001 to £500,000;
• A further quarter had incomes of between £1 million and £10 million; and
• Only 15% of respondents had an income of £100,000 or less per annum.

The annual incomes for 2003/04 ranged from £35,000 to £35 million.

Table 3.3 Respondents by Gross Annual Income

3.10 This annual income figure was made up from income received from public bodies for delivering projects, investments, donations and income from other sources. However, we focus on the income from project delivery, as this is the area that FCR will impact upon.

3.11 Table 3.4 looks at the reliance on the public sector for income from project delivery. In total:-

• Just over half (51%) of the organisations that responded received between 81% and 100% of their income from project delivery for the public sector;
• A further 15% receive between 61% and 80% of funding from public bodies; and
• Only 13% of the organisations surveyed receive less than 20% of income from public sector sources.

Table 3.4 Respondents by Proportion of Income from Project Delivery for Public Bodies

3.12 Table 3.5 below shows the level of reserves held by the respondents in the 2003/04 financial year. It can be seen that:-

• 35% of respondents had reserves of between £25,001-£100,000;
• Just over one-quarter had reserves of £25,000 or less, although two had reserves of just £200;

• Almost one-fifth had reserves of between £1 million and 5 million; and
• One organisation (1%) had reserves of over £5 million.

Table 3.5 Respondents by Level of Reserves - 2003-04

The organisations with the greatest level of reserves were those working in the fields of disability, housing and social care. Total reserves from these three groups amounted to £32,724,429.

3.13 Table 3.6 shows gross annual income cross tabulated with the level of reserves. The Table shows that the level of reserves increases as the level of annual income increases, so that:-

• All of the organisations with an annual income over £10,000,000 have reserves of over £1,000,001; and
• By contrast, 56% of the organisations with an annual income level of less than £100,000 had reserves of less than £25,000.

Table 3.6 Gross Annual Incomes by Level of Reserves (Row percentages)

3.14 Over time a contradictory picture emerges on the level of reserves held by voluntary organisations. Table 3.7 shows what had been happening to reserves over the last year, two years and five years. It can be seen that there has generally been a positive picture over the last five years, with more respondents having increased their reserves than had seen them fall. More specifically:-

• Over the last year 48% of respondents had seen reserves increase whilst 42% experienced a decline;
• Over the last two years 47% experienced an increase, compared to 35% seeing a decline;
• Over half experienced an increase in reserves over the last five years, whilst 36% saw a decline; and
• Some respondents had seen reserves increase over the five year period but there had often been a high degree of year-on-year variation.

Table 3.7 What Has Been Happening to Reserves over the Last 5 Years (Row percentages)

Knowledge of FCR

3.15 Whilst FCR has become a higher priority since the Scottish Executive stated in the Scottish Compact that it recognised the need for FCR in bids for service contracts, there is still a degree of uncertainty around the concept. Table 3.8 shows the proportion of organisations surveyed who had heard of FCR. It can be seen that 16% of those questioned stated that they had not heard of it. Furthermore, 8% were unsure or didn't know. While this still means that almost eight out of ten organisations knew about FCR there are still those that don't even know about the concept, never mind try to apply it.

3.16 There was a higher awareness of FCR among organisations where reserves had increased over the last 5 years (85%) as opposed to organisations where the reserves had declined over time (62%).

Table 3.8 Proportion of Respondents who had heard of FCR

3.17 The level of understanding around FCR varies. Table 3.9 looks at the level of understanding of FCR by income level. The Table shows that understanding of FCR increases as annual income goes up. This is to be expected given that larger organisations are likely to employ specialist staff who are more likely to be aware of FCR.

Table 3.9 Respondents who had heard of FCR by Annual Income (Row percentages)

3.18 Respondents were then asked if their management committee or board had discussed FCR. Table 3.10 below shows the proportion who had discussed the issue. It can be seen that just over half had. This might imply that some organisations do not see FCR as a major issue.

Table 3.10 Respondents where FCR had been discussed by the Management Committee or Board

The practice of FCR

3.19 Just 14% of the respondents claimed to practice FCR on all contracts, though 48% used it on some contracts (Table 3.11). This still means that around one-third of the sector questioned was not practising FCR at all.

Table 3.11 Respondents Practicing FCR

3.20 Organisations with reserves that had increased over the last five years (15%) were more likely to practice FCR than those whose reserves had declined over the same period (7%).

3.21 Looking at this in more detail highlights an important issue. Where organisations do practice FCR they very rarely do this explicitly. Table 3.12 shows how the respondents implemented FCR. The picture that emerges is that:-

• Only 20% of respondents explicitly practice FCR;
• The vast majority (45%) vary their practices depending on the client; and
• A quarter implicitly practice full cost recovery, that is they recoup their full costs but do not do this in a way that the funder is necessarily aware of.

What seems to be shown is that respondents vary their practices according to what they think the funder will accept.

Table 3.12 Methods Voluntary Organisations Use to delivering FCR

The delivery of public sector contracts

3.22 The survey examined the services delivered by the voluntary sector for public bodies. The respondents deliver a wide range of services to a number of organisations as Table 3.13 shows. It can be seen that:-

• Local government is the source of over half (53%) of the contracts between the public and voluntary sectors;
• The Scottish Executive accounted for 23% of contracts;
• Just 5% came from Quangos or Non Departmental Public Bodies ( NDPBs) (such as Scottish Enterprise and Scottish Natural Heritage); and
• 8% of the contracts were with the NHS.

Table 3.13 Sources of Public Sector Contracts ³

Note: Respondents gave more than one answer.

3.23 The type of funding, or contractual relationships, between public bodies and the sector, can be many and varied. In the survey, respondents were asked to classify these relationships in terms of:-

• Grants, that is a financial contribution to an organisation given because the organisation is undertaking work that is seen as contributing to the public agency's objectives;
• A service level agreement ( SLA) where there is a financial contribution from a public agency that is for the purchase of a prescribed level of service from an organisation; and
• Competitive tendering, when a required level of service is prescribed and organisations are asked to bid for this. A variant on this is non-competitive tendering when there is only one bidder for a contract.

In addition to these relationships, money may be given to organisations in many other ways, for example through local outcome or partnership agreements. It is also the case, as the case studies found (Chapter 6), that the differences between these various funding mechanisms are often very blurred, with grants being treated as SLAs and SLAs as grants. Examples were also found of services being delivered for local authorities without there being any contractual agreement. Accordingly there are variations in both practices and terminology across Scotland. Given this, the classification of income sources shown in Table 3.14 is based on the respondents self-classification, rather than any attempt to impose standard definitions.

3.24 The ways that public bodies contract with the sector are shown in Table 3.14. It can be seen that:-

• Grants are the most common way of contracting for the delivery of services, accounting for 47% of voluntary sector income sources;
• Service level agreements are the next most common method, accounting for 34%; and
• There is a small proportion of contracts that are awarded competitively (10%) and a small proportion given on a non-competitive basis.

Table 3.14 Nature of Contracting Relationship between the Public and Voluntary Sectors

Note: Respondents gave more than one answer.

3.25 The funding period is also an important issue when dealing with FCR. Annual contracts can be reviewed to take account of recent cost changes, but mean that the sector is in a perpetual state of flux and is less able to plan strategically. Whilst three year contracts provide more stability, they may not make allowance for such things as inflation, regulatory changes and increased staff costs.

3.26 Each therefore has its advantages and disadvantages, though the Scottish Executive has made a commitment to the voluntary sector to award contracts on a three year basis. Table 3.15 shows the duration of the contracts between the public and voluntary sectors. This shows that:-

• One year contracts were the most frequent, with 56% of all contracts identified being for this length of time;
• Three year contracts account for around 35% of all the contracts identified in the survey;
• Only 2% of the contracts identified were for more than three years; and
• There were also a small proportion of contracts that the sector expected to continue indefinitely, but for which no specific time scale had been set.

Table 3.15 Duration of Contracts between the Public and Voluntary Sectors

Note: Respondents gave more than one answer.

3.27 Most contracts are, therefore, likely to be with a local authority and for a duration of one year. However, there is a higher degree of difference in terms of the amount of money allocated to each of the contracts. Table 3.16 shows the breakdown of the size of the contracts. It can be seen that:-

• Almost half (43%) were for less than £50,000 per annum;
• Almost a fifth (20%) fall into the £100,001-£500,000 group; and
• Almost a fifth were worth over £500,000, with the largest contract identified being worth £4.8 million per annum

Table 3.16 Size of Annual Contracts Between the Public and Voluntary Sectors

Note: Respondents gave more than one answer.

3.28 The services being delivered covered a broad range of activities from the delivery of action research projects to youth and school based services. Some broad themes covered included:-

• Capacity building projects;
• Counselling services;
• Education and training services;
• Research;
• Health and social care services;
• Supported accommodation and supported people;
• Employability projects; and
• Services for young people.

Full Cost Recovery and the delivery of public sector contracts

3.29 The themes outlined above highlight the diversity of the contracts which voluntary organisations deliver for the public sector. This diversity covers the type of contract, its duration and value. The key issue for this study to address is the extent to which these were based on the recovery of full costs. To explore this, respondents were asked to give details of the four largest contracts with public agencies. Table 3.17 gives respondents' opinions as to whether or not these contracts were based on FCR. In total:-

• 71% of the contracts were not based explicitly on full costs; and
• 26% (44) were based on the recovery of the full costs involved in delivering the service.

However, this apparently clear cut picture is complicated, in that 12% of the contracts that were explicitly based on full costs were only based on this principle initially, but did not include scope for inflation or other later cost changes.

Table 3.17 Are Contracts with the Public Sector Based on FCR?

Note: Responses relate to the number of contracts.

3.30 Given that many of the contracts were not based on full costs it is important to assess the basis for the delivery of the contract. Table 3.18 shows that:-

• A third of contracts were based on historic costs;
• A further third were in the "Other" category which included "best guesses", core grants and part funding; and
• A quarter of the contracts were based on the direct costs of the project which excluded allocations for central functions (such as management and HR) as well as depreciation, regulatory and staff cost changes.

Table 3.18 Basis for the Contract between the Public and Voluntary Sectors

Note: Responses relate to the number of contracts.

3.31 The proportion of the contract costs covered by public funders indicates the extent to which they are practicing FCR. However, as there is no strict definition as to what full costs cover, a small differential may reflect differences of opinion rather than anything more major. A larger discrepancy would appear to highlight a more significant issue. Table 3.19 assesses the proportion of service costs that the sector estimates to be covered by public sector income. It can be seen that:-

• Just under half (46%) of the contracts covered between 81% and 100% of the full costs of the contract;
• Despite this there was still a sizeable proportion of contracts (32%) where just 61-80% of the full cost is actually covered;
• Furthermore, there was a small minority where just 1-20% of the actual cost is recovered. This result may however reflect a series of errors in the input of data into the survey as this level of funding would seem to be unsustainable; and
• Accepting these possible errors there are still some cases where less than half of the full cost is covered, giving a significant funding shortfall.

Table 3.19 Proportion of the Full Cost of the Contract Covered by the Public Sector

Note: Responses relate to the number of contracts.

3.32 These figures are relatively abstract as they deal with proportions and not "real" money. Table 3.20 looks at the actual estimates of voluntary sector subsidy ⁴. The responses show that there is a high degree of subsidy, with it being estimated that 20% of the contracts represent individual subsidies to the public sector of over £50,000 per annum. The overall picture is that:-

• The single biggest grouping (37% of contracts) falls within the lower subsidy range of £10,000 or less;
• 23% of contracts subsidise the public sector by between £10,001 and £20,000;
• 20% of contracts fall within the £20,001 to £50,000 band; and
• 20% claim to represent a subsidy in excess of £50,000.

There therefore seems to be a level of subsidy to public sector services that, in some instances, is quite significant.

Table 3.20 Estimated Subsidy of the Service by the Voluntary Sector

Note: Responses relate to the number of contracts.

3.33 The level of subsidy varies depending on a number of factors. The most obvious one is income. Table 3.21 outlines the level of subsidy by each of the main income bands. It can be seen that:-

• 42% of the subsidy is accounted for by organisations with gross annual incomes of between £1,000,000 and £10,000,000;
• Those with an annual income of between £100,001-£500,000 accounted for over one quarter of the total subsidy;
• The very largest organisations accounted for just 14% of the total subsidy by the voluntary sector; and
• Those in the lowest income bracket accounted for just 2% of the subsidy.

This would seem to vindicate the view expressed earlier (Paragraph 3.1) that FCR is relevant to all organisations within the sector, regardless of their size.

Table 3.21 Level of Subsidy by Income Band

3.34 Table 3.22 extends this analysis by looking at the level of subsidy by the main activity groups. It shows that:-

• Voluntary organisations in the disability sector account for the greatest proportion of subsidy (35%);
• Children and families account for over one fifth; and
• No other sector accounts for more than 10% of the subsidy, with older people and arts and sports accounting for less than 1% of the subsidy together.

Table 3.22 Level of Subsidy by Sector

3.35 Table 3.23 shows what voluntary organisations claim to do when the contracts they deliver are not based on full costs. This shows that:-

• Most subsidise the deficit from their reserves, with almost three quarters of organisations stating that this was their way of overcoming the issue;
• There was cross-subsidy from donations or investment income (56%);
• Over half of the respondents stated that they made efficiency savings to overcome the deficit; and

• Almost a half cross subsidise from other grant sources, that is some public agencies would seem to be subsidising services being provided for others.

Table 3.23 Action Taken by the Sector when it does not Receive Full Costs

Note:-
1. Respondents gave more than one answer.

3.36 Respondents were asked how important these issues were. Surprisingly only 24% felt that cross subsidising services from reserves was very important. Cross subsidising from other contracts was viewed as being more of an issue, with 36% of those answering the question stating that this was very important. It therefore seems that some organisations see this as a suitable use of their reserves, although this can realistically only be a short term solution.

3.37 Those who were not covering their full costs from public sector contracts were asked what the impact of this was (Table 3.24). What emerged was that:-

• 64% of the organisations stated that their reserves were being run down, making them more financially vulnerable;
• 59% claimed that their services were becoming overstretched, and were relying on staff goodwill to survive; and
• 57% felt that they provided fewer services than they would wish or that they were dependent upon other grant funding streams to pay overhead costs.

Table 3.24 What is the Impact of Covering Costs in this Way?

Note: Respondents gave more than one answer.

3.38 These impacts imply that the financial health of the organisations is suffering as a result of not receiving the full cost of service provision. Given that poor financial health could lead to some organisations being run down over time this raises a broader set of questions about the wider impact on vulnerable people and deprived communities, especially given that these are the target clients and areas for many voluntary sector organisations.

3.39 There were some differences in the impacts between organisations whose reserves had increased over the last five years compared to those where they had been declining. Just 59% of the former stated that reserves were being run down as opposed to 73% in the latter. Staff goodwill was also mentioned as a major issue for those organisations with declining reserves (73%), but was not mentioned as frequently (48%) by those whose reserves had increased.

Views on full cost recovery

3.40 Full cost recovery is dependent upon the ability of organisations to cost, not only the full costs of service provision, but also to be able to cost contracts in such a way that account is taken of inflation, depreciation, and of future costs arising through regulatory changes. The ability of the voluntary sector to do this will be central to the implementation of FCR. Table 3.25 looks at the sector's views on its ability to implement FCR. The Table shows that:-.

• There is a degree of polarity in how well the voluntary sector feels it can cost regulatory change, with 25% feeling that they are very good, while 28% feel there is a need for some improvement;
• Just under a quarter of the respondents felt that they were excellent at costing depreciation, whilst a further 27% feel that they need some improvement;
• This divergence was also apparent in the ability to take account of full costs, with similar proportions feeling that they were very good at this as believed that they needed to improve; and
• Generally, those surveyed felt that they were good at costing inflationary change, with few responses (18%) in the improvement category.

The implication is that the sector, both individually and collectively, needs to improve its capacity. This may not be a problem in that there are funds that can be accessed, such as Futurebuilders and the Lottery's Dynamic Inclusive Communities.

Table 3.25 Voluntary Sectors' Ability to Cost Key Areas related to FCR (Row Percentages)

3.41 Organisations who did not operate FCR when costing contracts were asked the reasons for this. Table 3.26 shows that:-

• 78% of those questioned believed that clients would not pay the true costs of service delivery. This was seen as far and away the main reason for not operating FCR; and
• Internal issues around "always costing things in that way" and "not wanting to ask for full costs as a voluntary organisation" were cited by around one fifth of respondents.

Table 3.26 Reasons for not Operating FCR

Note: Respondents gave more than one answer.

3.42 The experiences of voluntary organisations, however, were not homogenous. Those whose reserves had been increasing cited clients not paying the true costs of service delivery (73%) less frequently than those where reserves had gone down over time (85%). This might imply that FCR enables reserves to increase which in its turn enhances organisational sustainability.

3.43 The survey then asked about the potential impact of funders moving to FCR (Table 3.27). It can be seen that:-

• Over two thirds of the respondents stated that they would build up their reserves to allow them to be more sustainable if their funders adopted FCR;
• 66% felt that they could provide more services;
• 63% believed that the quality of services would improve; and
• There was also a belief that they could help more service users, suggesting that a move to FCR would bring substantial benefits to the services being delivered.

Table 3.27 What would be the Impact of a move to FCR by Funders?

Note: Respondents gave more than one answer.

3.44 Overall, the sector was clear that a move to FCR would be positive. Thus 94% of the organisations surveyed believed that a move to FCR would help their organisation to develop and/or maintain its financial reserves.

3.45 However, a move to FCR would be dependent on a range of conditions being met, by both the voluntary and public sectors. The crucial one would be for public agencies to practice FCR, in effect implementing the principle. Evidence from England suggests that this can be a slow and potentially problematic process (Chapter 2). The survey therefore asked the voluntary sector to assess the general attitude of public bodies to FCR (Table 3.28). It can be seen that:-

• The voluntary sector feel that public agencies do not fully value the voluntary sector and that public agencies think that they cannot afford to pay full costs, factors mentioned by 59% and 60% of respondents respectively;
• 54% of respondents stated that the public sector think that the voluntary sector should be willing to subsidise services; and
• Just 19% of the voluntary sector felt that all the public agencies they work with understand FCR.

Table 3.28 What is the General Attitude of Public Sector Bodies to FCR?

Note: Respondents gave more than one answer.

3.46 One of the possible impacts of the implementation of FCR is that the voluntary sector becomes more expensive and the distinctions between it and commercial providers become less evident. To avoid this, the sector may need to differentiate itself from other providers. Table 3.29 looks at those areas where the sector feels it is able to distinguish itself from others. This shows that:-

• 84% of respondents felt that stressing the sector's track record in service development and innovation was key to being seen as an effective service provider;
• 83% focused on the sector's non-profit making ethos; and
• There were also a high proportion of answers that focused on the benefits brought to service users (in terms of links and quality) as well as helping to build community capacity and cohesion.

Table 3.29 What does the Sector Need to do to Ensure that it is seen as an Effective Service Provider?

Note: Respondents gave more than one answer.

Full Cost Recovery guidance

3.47 Respondents were asked if they wanted FCR guidance. Eighty eight per cent stated that they would like guidance, even though there are already various forms of guidance produced on costings and FCR (Paragraph 2.20). Table 3.30 looks at what this should cover. It can be seen that guidance generally was wanted across all areas, although regulatory change and calculating and apportioning management costs accounted for the greatest responses.

Table 3.30 What FCR Guidance Should Cover

Note: Respondents gave more than one answer.

Conclusions

3.48 The survey shows that the voluntary sector delivers a wide range of public sector service across a broad spectrum of areas. These range from relatively small contracts of less than £50,000 a year to larger ones worth over £100,000 (and in some cases over £1 million). However, the majority of these contracts are delivered on a basis that is less than full cost. In just over one quarter of cases the contract covers between 91%-100% of costs, a further fifth cover 81-90%, but in a minority of cases the contract covered less than 60% of the full cost. All sizes of organisation claimed that they were not receiving the full costs of some contracts, although 42% of the absolute amount of under funding related to organisations with incomes in the £1 million to £10 million range.

3.49 This subsidy of public services was seen to be reducing the reserves of the voluntary sector. The main reason, as seen by the sector, for full costs not being covered was that the public sector thought that it could not afford to pay. This was allied to the fact that it did not fully value the sector. A move to FCR was seen as being a means of stopping the erosion of reserves as well as improving the quality and quantity of service delivery and developing a better appreciation of the sector's worth.

3.50 A further trend that came out from the survey was that organisations where reserves had increased over the last 5 years knew more about full cost recovery, used it more in practice and were less likely to state that the public sector was unwilling to pay full costs. This finding may reflect a number of factors:-

• They may be specialist providers with few or no competitors;
• Some budget headings might be more generous than others, even within the same public agency;
• If the voluntary sector presses for full costs they are likely to get them (and as such improve their financial health); and
• There are a series of public sector agencies that are willing to pay full costs and some voluntary organisations are fortunate enough to contract with them.

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