report - Partnership for Young London

report - Partnership for Young London

the role of the voluntaryand community sector inimproving the fundingrelationship with governmentby Mubeen Bhutta

the role of the voluntaryand community sector inimproving the fundingrelationship with governmentby Mubeen Bhutta

AcknowledgementsNCVO undertook a programme of research on behalf of the National Audit Office (NAC) toinform their review of the progress that government has made in implementing the fundingrecommendations emerging from the Treasury’s 2002 cross-cutting review of the role of thevoluntary and community sector in public service delivery. We would like to thank Joe Cavanaghand Grace Williams at the NAO for their support throughout this project.Our research was carried out by Silvie Dresselhaus and Tilly Forster. This report, based on thatresearch, was written by Mubeen Bhutta and edited by Ann Blackmore.2

ForewordThis report comes out of a unique collaboration between NCVO and the National Audit Office(NAO). In 2004, the NAO began a review of the progress central government departments andtheir agencies have made in implementing the recommendations relating to funding practice in theTreasury’s 2002 cross-cutting review of the role of the sector in public service delivery. We werecommissioned by the NAO to research the experience of the voluntary and community sector(VCS) to help inform their review.NCVO welcomes the NAO’s commitment to including the experiences of the VCS in this project.It is only by listening to both sides of the story that we can properly understand what progress hasbeen made, and what more needs to be done. The focus of the NAO work, and their reportpublished at the same time as this one, was quite rightly on central government. But the challengesthat the research exposed require urgent action from both funders and funded organisations.Thatis why NCVO has produced this parallel report, which endorses the recommendations the NAOhas made to government, but also makes separate recommendations for voluntary and communityorganisations.Government and the VCS must commit to moving forward together if we are to achieve the sharedaspirations to which the title of this report refers: namely, better public services. Securing betteroutcomes for individuals and communities should be the guiding principle for those on either sideof the funding relationship.The funding relationship between government and the VCS is no different to any other relationship;both sides need to put in as much as they hope to get out. I am hopeful that action from the sectoron the recommendations in this report, in tandem with action from government on therecommendations that the NAO has made, will mean the ambitions of the cross-cutting review arerealised.Stuart EtheringtonJune 20053

Executive SummaryThis report is based on research undertaken by NCVO, on behalf of the National Audit Office, toassess how far the funding recommendations from the Treasury’s 2002 cross-cutting review havebeen implemented.NCVO welcomes the robust recommendations to government that the NAO has made in theirreport, Working with the Third Sector. However, there needs to be action on the part of the voluntaryand community sector (VCS) as well as government funders if the cross-cutting reviewrecommendations are to be fully implemented. This report therefore makes recommendations forvoluntary and community organisations (VCOs) to take forward.Understanding and valuing the sectorThere has been increased emphasis on the role that the VCS can play in delivering public servicesin recent years.This can pose challenges. VCOs need to be clear whether delivering a particular publicservice will help them to achieve their organisational mission and meet the needs of the communitiesthey work with.The value that VCOs can bring to public services is still poorly understood by funders. More workneeds to be done by the VCS, possibly through the Performance Improvement Hub, to enable VCOs todemonstrate the true contribution they can make to public services.The funding processOne of the major outcomes from the cross-cutting review was the Government’s commitment tothe principle of full cost recovery. However, there is still a long way to go to achieve this.Full cost recovery is not important because it is in the interests of the VCS, nor because it is in thebest interests of the public sector or the public purse. If a service is not costed and funded properly,then it will not be possible to deliver a service that meets the needs of users.VCOs need to use the resources available to them, including the ACEVO full cost recovery template, tounderstand the true costs of their work, and then to negotiate their price for delivering a particularservice. This will also enable a VCO to make an informed decision when offered funding below fullcost. VCOs may choose to subsidise an underfunded contract, they may offer a lower level ofservice or they may choose to walk away.VCOs should consider the benefits of partnership or collaborative working, either as a means of winninga particular contract, or in response to poor practice from a particular funder.4

VCOs need to improve their skills base in making applications. Where organisations do choose tomake an application, they should draw on their internal expertise from previous applications andconsider drawing on the experience of other organisations. In addition, VCOs should always requestfeedback from funders. This can improve their expertise in making applications, as well as ensuringthat funders have robust reasons for their decisions.The sector should help funders to reduce the administrative burden where possible. VCOs shouldexamine the scope for improving uniform information on charities, and for presenting their own internalinformation systems to funders when making applications.Relationships with fundersEffective monitoring and reporting requirements are necessary to ensure that public money is spentwisely and that services are delivered effectively and efficiently. However, there is a danger thatprocesses can be set up that place an undue burden on VCOs.Where this appears to be the case,VCOs should seek clarification from funders about why the information is being collected and how it willbe used.In order to ensure that meeting monitoring and reporting requirements does not reduce the abilityto deliver the agreed desired service, VCOs should ensure that the costs of meeting these requirementsare included in funding bids.The sector also has a role to play in ensuring that monitoring mechanisms are proportionate andflexible, while remaining robust.The distinctive value that VCOs bring to public services must notbe lost in measures of success. VCOs should work with funders to help agree targets and outcomes,and design appropriate mechanisms for monitoring and evaluation.In addition,VCOs should consider whether their internal performance measures could be presented tofunders, or adapted to meet the criteria of funders.The most effective outcomes are achieved where the VCO and funder have developed a goodrelationship, recognising that they share the same desire to deliver better services and outcomesfor local communities and service users.6

Delivery through tiers of governmentOur research shows that, at the national level, implementation of the cross-cutting review’srecommendations is variable.This is primarily a challenge for central government, but VCOs can playa role by trying to ensure that their funders are aware of best practice.Local authorities are still the most significant funder for the VCS, but there remain fundamentalshortfalls in the funding relationship at this level.There needs to be more detailed analysis of the localfunding relationship, with mechanisms to promote uniform adherence to good practice rather thanreliance on individual relationships.While local authorities are subject to a number of pressures, including Comprehensive PerformanceAssessment and competing demands on limited resources, this should not be at odds with themdeveloping effective working relationships with the VCS. VCOs should demonstrate to local fundershow they can contribute to delivering better outcomes for local communities, helping to make moreeffective use of limited resources.A significant problem for many local statutory funders is that they have not been given extraresources to implement the recommendations of the cross-cutting review. Local funders and localVCOs should explore ways that they could work together to ensure that public services are adequatelyresourced.ConclusionBoth government and the sector need to act to improve the funding relationship. We look togovernment for progress in the coming months on the recommendations that the NAO has made.However VCOs also have a role in driving change. In taking forward the recommendations in thisreport VCOs should make use of the knowledge that they already have and the tools and supportthat is already available to them. In the coming months the new sector Hubs will provide animportant source of advice, information and support, and the Finance Hub will be particularlyimportant in relation to these recommendations.We share the same aspirations – to achieve better public services, with improved outcomes forusers and beneficiaries.There is no reason why, in three years time we should not have an effectivefunding relationship, where both sides understand the contribution that VCOs can make to publicservice delivery, know the true costs of delivering those services, and negotiate and managecontracts in a mature way.The tools to achieve this are already in place. It now simply requires thecommitment, on both sides, to deliver this.7

Introduction1'I think one of the positive things … is where the public sector is being encouragedto work with the voluntary sector to deliver services in the community. I think that'sa positive thing because obviously the voluntary sector, they know the client andthey know what the need is of the community and they know how to meet it well.'Interview respondentThe voluntary and community sector (VCS) has been at the heart of the public services debate forseveral years now. The Government has made it clear that it sees the VCS as a key partner inhelping it to achieve reforms to public services.This commitment was evidenced in particular in aTreasury cross-cutting review in 2002 1 . The aim of that review was to enable voluntary andcommunity organisations (VCOs) to play a greater role in the delivery of public services.The reviewidentified a number of barriers that might prevent VCOs from taking on these roles, and maderecommendations to help address or remove these barriers. Government set itself a target ofmeeting the review’s recommendations by April 2006.Several of the recommendations emerging from the cross-cutting review were concernedspecifically with the funding relationship between government and VCOs (these are listed at Annex 1).There was widespread agreement that progress was needed on these recommendations inparticular, if the sector was to play a full role in public service delivery.And, more to the point, therehas been widespread recognition that progress towards such a goal can only be in the interests ofservice users, which, in turn, can only be in the interests of better public services. All too often, thisoverriding aim can be lost in the pursuit of changes to particular aspects of the funding relationship.It was therefore a very welcome move when, in summer 2004, the National Audit Office (NAO)announced that it was to undertake an assessment of the progress made with respect to thefunding recommendations. Furthermore, in order to ensure that they gained as full a picture aspossible, the NAO realised that its work needed to be informed not just by governmentdepartments, but also by the experience of VCOs on the ground.To this end NCVO was asked towork with the NAO to research and provide evidence of the experiences of VCOs deliveringpublic services since 2002 (see Annex 2 for a summary of our research methodology).NCVO welcomes the robust recommendations to government that the NAO has made in itsreport 2 . However, we recognise that there needs to be action on the part of the VCS as well asgovernment funders if the cross-cutting review proposals are to be fully implemented.The NAO’sremit extends only to central government: but local government and the VCS are also crucialpartners, and there are things that they too can do to improve the funding relationship.This reporttherefore broadly endorses the recommendations of the NAO to central government, but isfocused on the role that the VCS can play and the relationship with local government.1. The Role of the Voluntary and Community Sector in Service Delivery, HM Treasury, HMSO 20022. Working with the Third Sector, NAO 20059

This report should also be treated as complementary to our recently-published policy report onpublic service reform 3 .That report considered the various roles that VCOs play in the public servicereform agenda, not just as a service deliverer, but also as an advocate, campaigner or the providerof advice and information to local communities. It also discussed the reasons why VCOs mightchoose to deliver public services and the opportunities and risks that doing so can present.In this report, we have highlighted a handful of the key issues that emerged from our research.Firstly, the report examines what impact engaging in public service delivery has on theGovernment’s understanding of the sector. It then considers how far the principle of full costrecovery has been put into practice, before going on to look at mechanisms for creating asustainable funding environment for VCOs. The report also examines application processes andmonitoring and evaluation once contracts have been awarded.Finally, this report looks at implementation of the cross-cutting review recommendations throughtiers of government, particularly in terms of implementation at a local level.While the cross-cuttingreview, and the NAO’s review of implementation, necessarily focussed on central government, theimpact should be felt across all statutory funders. Many of the participants in our research said thatlocal statutory funders were more important to them than central government funders, in termsof both securing income and developing effective relationships.‘It’s still the local authorities that we’re having the banter with.’BME focus groupAlthough the local funding relationship is outside the remit of the NAO 4 , it did come up time andagain as we did our research. Therefore, this report takes the opportunity to suggest the wayforward for local funders.We also support the NAO recommendation that dedicated research andanalysis of these specific issues should be undertaken at the earliest opportunity 5 .3. The reform of public services: the role of the voluntary sector, Ann Blackmore, NCVO May 2005104. The role of the National Audit Office is to audit the accounts of all central government departments and agencies, as well as awide range of other public bodies, and report to Parliament on the economy, efficiency and effectiveness with which they haveused public money.5. Working with the Third Sector, NAO 2005

Understanding and valuing the sector2'I hope they don't think they're going to change us into sub public sector dollieswho go out and do the economic delivery.'BME focus groupThere has been some debate in recent years about whether the Government’s interest in the VCSdelivering public services has resulted in a weakened understanding of the wider roles of the sectorand the contribution it can make. There are also concerns about whether an increased publicservice delivery role by the sector may potentially threaten its independence. These issues havebeen discussed in detail in recent NCVO reports 6 and it is not the intention to repeat thatdiscussion here. However, several themes from those debates were reflected in the concerns ofthose who contributed to this study and are addressed in this chapter.Mission driftTaking on a role in public service delivery does not automatically undermine the independence ofvoluntary and community organisations. However, problems can emerge if the funder does not fullyappreciate that the VCO with which it has a contractual relationship is an independent organisation.And if the VCO taking on the contract fails to recognise its responsibility to ensure that whilstdelivering the contract it remains true to its organisational mission and culture.Whilst there is a sense amongst some VCOs that they have become engaged in public servicedelivery without necessarily considering the culture change that this could bring to theirorganisation, others have been much more prepared to ask themselves what they consider to betheir role and what they think should be the role of the state:‘I think that one of the major barriers, as an organisation, would be thediscussion we have within us about whether we are there to provide serviceswhich we would perhaps regard as should be being provided by the statutorysector…we don’t want to be sucked into that sort of being seen solely as anorganisation that provides work, becomes just another arm of the service.’Interview respondentAlthough the Government is actively encouraging the sector’s participation in service delivery,whether or not to take on this role must be a decision for an individual VCO to make.There aremany reasons why they may want to do so, including where they believe that they have particularrelevant expertise or knowledge, where they believe that they can deliver the service better thanother sectors, or where this would provide a useful means of income generation. And, of course,6. Standing Apart, Working Together, Ann Blackmore, NCVO 2004 discusses the issue of voluntary sector independence in greater detail;The reform of public services: the role of the voluntary sector, Ann Blackmore, NCVO 2005 considers the role of the VCS in publicservice delivery and the opportunities and risks that it poses.11

the reason many organisations engage in public service delivery in the first place is because theywant to fill gaps in existing provision, or to develop new services to meet new or emerging needs, ineffect to demonstrate a need to the public sector or encourage it to engage in a particular activity.‘It seems to be in this sector that we are prepared to take the risk and we’reprepared to set up services, which seem to be meeting or could potentiallymeet an emerging need and it doesn’t matter where that is … one of ourroles traditionally is about moving the world forward.’Interview respondentWhat is important is that VCOs ensure that they are engaged in public service delivery in the rightcircumstances. It is not a question of whether taking on public service delivery is right or wrong inprinciple, but rather it is for a VCO to be clear whether delivering a particular public service willhelp them to achieve their organisational mission and meet the needs of the communities andservice users they work with.One reason why VCOs can find that they may be drifting away from their mission is that they havetailored their activities to the funding that is available.‘We have increasingly been steered into funding for tangible outputs ratherthan strategic development and support/advice functions.’Online questionnaireThere has been a considerable increase in statutory income to the sector in the form of contracts 7 ,and the Government will rightly direct the bulk of its funding to achieving its own priorities anddesired outcomes.VCOs have a responsibility to ensure that they do not get caught up in the ‘dashfor cash’ but remain focused on their mission.The nature of some VCOs’ main purposes may meanthat they are unlikely to ever take on public service delivery contracts, whereas for others suchcontracts may be critical to fulfilling their remit. It is not the obligation of VCOs to take on statutoryservices; this should be a choice that is made in terms of the obligation of the sector to individualsand communities.Added valueAn important aspect of the 2002 cross-cutting review was the recognition of the distinctive oradded value that VCOs could bring to public service delivery. However, it also recognised thatadded value can be difficult to define or demonstrate 8 .The concept of some form of added valuewas recognised by many participants in the research.7. The UK Voluntary Sector Almanac 2004 (published by NCVO) confirmed that statutory income is the only form of funding that isincreasing, and that this is largely in the form of earned income or service delivery.128. NCVO has undertaken a significant programme of work on added value in recent years – more information is available, and HM Treasury also made measuring and defining added value a key strand of the cross-cuttingreview they undertook at the time of the 2004 spending review. More information is available at

‘If you provide this service, clients don’t just come in for a one-off, you workwith them for weeks, months, years …’Interview respondentHowever, participants identified a contradiction in the approach of many government funders: onthe one hand they valued a VCO because of the distinctive or added value it gave to a particularservice; and on the other hand they were not prepared to trust the VCS to take forward a project:‘If government wants the professional expertise of the voluntary sector, thenit needs to give that the scope to take initiatives that get through theseemingly intractable difficulties that are faced by those in the statutory field.’Online questionnaireNor were they willing to learn from partners in other sectors and adapt their own behaviour andapproaches:‘Unfortunately, the Government’s ability to define, understand and properlyenact partnership is what upsets all these processes, because what happensis although they see the very real outputs from our sector, they seemabsolutely stoically refusing to begin to educate themselves in the culture of it.’Interview respondentThe heart of this disjuncture appears to be that whilst statutory funders recognise that VCOs canbring added value and benefits for service users, they do not credit them with the ability to run aprofessional service:‘The common perception is that if you’re part of the voluntary sector youmust be a bunch of volunteers and of course, we aren’t, we’re a bunch ofexperienced, qualified solicitors and experienced case workers, and that’s anextremely difficult perception to change.’Interview respondentGovernment funders often justify poorer funding because they perceive the sector as unskilledamateurs and under-rate their professional skills. But this directly contradicts any recognition thatthe different ways in which the sector works and the different knowledge and skills it brings topublic services are desirable and as such should be paid for. It is also rarely true: the VCS employsstaff with high levels of skills and qualifications. These skills are being further developed throughbodies such as the VCS’ new Workforce Development Hub. VCOs need to develop greaterconfidence in the value they provide when delivering public services. And they also need to be ableto demonstrate that value.The new Performance Improvement Hub will help VCOs to be able todo this better. By being able to demonstrate the level of skills that their organisation can provide, andthe value that it contributes to local communities,VCOs will be in a stronger position to counteraccusations of amateurism and to negotiate contracts based on the true costs of what they provide.13

GovernanceNCVO’s previous reports on the independence of the sector and on public service delivery 9identified the crucial role that trustees play in ensuring that a VCO remains focused on its mission.The independent trustee board is the means to ensure that a VCO remains independent ofexternal pressures, including pressure from funders.Comments from participants in our research demonstrated the importance of the role of thetrustee board and the pressure that an organisation could find placed on it by funders:‘Their view is that they can get a service cheap and get it from the voluntarysector, because they can bully us and generally they can do that because mystaff, really love the work they do and they’re more concerned about the workthan they are the money.’Interview respondentAt the heart of this issue is the perceived power imbalance between VCOs and governmentfunders. Some VCOs did not feel able to challenge the actions of funders and some felt that theresponsibility they feel for their beneficiaries could be exploited. Clarity about why and when a VCOhas engaged in public service delivery, from the outset, will empower trustees and staff to defendtheir position.But there was also a concern among those who took part in the research that some funders wereextending their reach beyond those activities that they directly support:‘We get people saying, “we think you ought to get rid of your housing stockand concentrate on your support service”, so they’re trying to get involved inthe strategy of the organisation when they know a fraction of it.They see youa fraction of the time and yet they pronounce on the strategy of theorganisation, it is extraordinary.’London focus groupIt is imperative that trustees are not unduly influenced by the wishes of funders, although this canbe difficult to resist when relying on a sole or particularly dominant funder. Funders need tounderstand that a contractual relationship with a VCO does not give them a legitimate interest inthe wider role and operations of that organisation. It is entirely inappropriate for any funder to seekto influence the internal structure of voluntary organisations or activities that they do not fund.Effective governance is fundamental to preserve the independence and integrity of VCOs.Organisations, and the trustees and staff of those organisations, must ensure that they direct thestrategy in line with the organisational mission and their own priorities.14 9. See footnote 6 on page 11.

The need for government to respect the independence of VCOs is a fundamental principle of theCompact.There has been considerable focus on the fact that the 1998 agreement makes explicitthat the sector has the right to campaign, comment on and challenge policy irrespective of anyfunding relationship that might exist, but the more important point here is that it also makes explicitthe right of VCOs to determine and manage their own affairs 10 .Beyond public service deliveryThe 2002 cross-cutting review, and the subsequent NAO report, were both concerned solely withthe role of the VCS in public service delivery. However, the contribution of the VCS to society ismuch wider than this. One of the messages that came out strongly from our research is the need forgreater involvement in service delivery to be balanced against the broader civil society role of VCOs.‘One of our roles traditionally is about moving the world forward, movingservices on, well you’re not going to get funding for that from localgovernment who are there doing their targets and that sort of thing, so if theywant us to keep demonstrating and fulfilling our role in the sector, I think theyneed to be thinking about big time funding.’Interview respondentThis reinforces views that have been expressed elsewhere.The distinctiveness and importance ofthe UK voluntary sector resides in the contribution it has made to social change, to engaging withcommunities and to representing those who may have been marginalised by mainstream services.10. Compact on Relations between Government and the Voluntary and Community Sector in England, Compact Working Group and HomeOffice, Home Office, 199815

The funding process3'I notice a change in Government's policy and rhetoric. I am yet to see it pullthrough into fact and reality.'Interview respondentThe unequivocal commitment from the Treasury to the principle of full cost recovery was one ofthe most widely welcomed aspects of the 2002 cross-cutting review. This confirmed that it islegitimate for voluntary organisations to factor the relevant element of their overhead costs intobids for services delivered under contract.‘There is no reason why service providers should not include the relevantportion of overhead costs within their bids for service contracts.These areparts of the total costs of delivering a service.To do this, the VCS needs tobe able to apportion overhead costs effectively. But there is no reason whyservice funders should be opposed in principle to the inclusion of relevantoverhead costs in bids.’HM Treasury 11The cross-cutting review recognised the importance of paying for services properly. This recognitionshould have destroyed the myth that voluntary organisations are not entitled to recover overheador ‘core’ costs from statutory funders. But our research suggests that there is still much to be doneto achieve the necessary shift in understanding and practice amongst both funders and VCOs.The experience of full cost recoveryThere has been considerable focus on achieving full cost recovery in the years since the crosscuttingreview. ACEVO has developed templates for VCOs to enable them to work out the fullcosts of any piece of work that they are seeking funding for 12 . HM Treasury revised their Guidanceto Funders document in 2003 and are planning to revise it again in 2005 to make the commitmentto full cost recovery more explicit 13 . Most recently, the revised Compact funding code 14 hasreiterated the fact that no activity can be carried out without incurring indirect or support costs,which should be properly funded. These developments should enhance the confidence of thesector in obtaining the full costs of their work.11. The Role of the Voluntary and Community Sector in Service Delivery, HM Treasury, HMSO 200212. Funding Our Future I, ACEVO 2003; Funding Our Future II, ACEVO 20041613. HM Treasury confirmed their intention to revise guidance in the 2005 Budget statement, following the Third Sector Summit heldin February 200514. Funding and Procurement: Compact Code of Good Practice, Home Office & Compact Working Group, Home Office 2005

However, the experience of respondents to this research indicates that funders have notimplemented the principle of full cost recovery:‘I think there’s an awful lot of communication regarding full cost recovery, it’s bigon the agenda from both the funder and applicant’s perspective, it’s in lots ofapplications you read, it’s quite a buzz word so I don’t think awareness is theproblem, it’s what guidance and what consistent guidance is being implementedin order for us to seek full cost recovery.’Interview respondentSome participants suggested that this was because funders had not heard of full cost recovery, orwere unaware of the specific cross-cutting review recommendations in this area, but other VCOsfelt that funders were actually disputing the case for full cost recovery:‘I had a really quite frightening experience recently where within the space ofone month, I saw the Chief Executive of our local authority being very pleasedwith himself with the launch of the Local Compact … and then severalweeks later I was sitting opposite him at a table discussing … the terms ofa contract for my charity to deliver a service, when I pointed out to him thatthere were no management costs within it, he said, “no, you don’t need any”.I said, “I’m sorry, did you actually say that we don’t need any?” ’Interview respondentMany VCOs reported that they were still viewed as a cheap option:‘I’ve heard it said, voluntary sector – soft touch, if there ain’t enough moneyin your budget give the charity a ring.’Interview respondentAlthough the cross-cutting review commitment represented a breakthrough in terms of enablingVCOs to deliver sustainable services, the statement is ultimately meaningless if the principle has notbeen accepted and implemented across government and across the sector. Enough time has nowelapsed since the review for the principle of full cost recovery, of covering core costs inprocurement, to have permeated across funders and the sector, but our research shows that thishas not happened:‘It is still difficult to get across to some funders that core costs are valid.They’re wanting a person behind the desk who is just solely focused on thatproject, they’re still not taking into account the fact that somebody needs todo the payroll, somebody needs to do the general paperwork, themaintenance of the office, and that is still a struggle.’Infrastructure focus group17

And participants in the research said that they are often meeting the costs of service delivery:‘We’re still funding the services ourselves by about £25-35,000 each year.Wecouldn’t run a service at the level that we are funded.’Interview respondentFull cost recovery is not important because it is in the interests of the voluntary and communitysector, nor because it is in the best interests of the public sector or the public purse. Properly costedand funded services are important because they are in the best interests of the people who usepublic services. If a service is not costed and funded properly, then it will not be possible for anorganisation, from any sector, to deliver that service to an acceptable standard:‘If we don’t achieve full cost recovery for those services then those clients aregetting a poor service.’Interview respondent‘The deal is its either sustainable or it goes, because if it’s not sustainablesooner or later the quality drops and our name’s above the door, we’ve gotto protect those clients at the end of the day.’Interview respondentAnd an organisation that tries to deliver a poorly funded service, by cutting on its costs, orsubsidising the service, may well find that the service is not sustainable in the long term – andtherefore cannot be relied upon by the communities and people that need it:‘There’s a tension heading up because if we’re being pushed into more andmore contract delivery, and we’re not able to recover our full costs, at whatpoint do we finally creak and fall over because we haven’t got the necessaryresources there to pay for what we have … At what point does the core partof the organisation actually start to crumble?’Infrastructure focus groupCompetition for contractsA second problem was identified in relation to the funding process: that whilst the amount ofmoney flowing to the sector through public service delivery contracts is increasing, a considerableproportion of this income is going to ‘household name’ charities. The situation of large nationalcharities is very different to that of small local or community-based groups. Large organisations withan annual income exceeding £1m have managed to maintain income growth but small and mediumsized organisations have seen their income shrink 15 .18 15. The UK Voluntary Sector Almanac 2004, Wilding et al, NCVO 2004

This trend was reflected by participants in this research, who voiced concern that contracts willincreasingly go to ‘the usual suspects’:‘It seems like they always talk about wanting to get more money intocharities and community groups, but when you come down to it, it stillseems like the same people get the money and it’s much harder.’Interview respondentThis concern has been exacerbated by Sir Peter Gershon’s review of efficiency savings that couldbe achieved by government 16 . The recommendations require each government department andlocal authority to make savings of at least 2.5 per cent a year. Whilst officials talk of the reviewfocusing on effectiveness, there is a concern that with savings targets attached, the reality is that thereview will lead to an ever greater emphasis on economy.This in turn is likely to mean a search forefficiency savings and economies of scale, at the expense of local diversity. It may become evenharder for smaller VCOs to bid for and win public service contracts. However, to suggest thateconomies of scale are all that is needed to deliver efficiency is misunderstanding what is requiredfor good public services. Contracts should be awarded on the basis of which organisation is bestplacedto meet the needs of service users.This principle is not at odds with the efficiency agenda.Respondents reflected these concerns, and in particular the concern that smaller or less-establishedVCOs could be ‘crowded out’ of the market:‘A particular problem is that funding privileges certain organisations of acertain size and the question of power is never addressed with the fundingand outcomes or anything.’BME focus groupThey also suggested that such competition for contracts could damage relationships betweenVCOs, or undermine the wider ethos of the sector:‘You end up with times where there is such fighting within certainorganisations within the sector. Because of the way funding is set up that isbound to happen. It is set up so that we have to work in competition witheach other rather than in collaboration.’BME focus groupThe procurement of public service contracts takes place in a competitive environment and capacitywill prevent some organisations from applying for some contracts. VCOs must appreciate thatfunders will be looking for the best provider at the best price in determining who delivers publicservices. But in some circumstances, collaborative bids might be the best way forward. Collaborativeworking may increase the likelihood of securing public service contracts and the capacity of VCOsto deliver services on a large scale:16.The Gershon review was published at the time of the 2004 spending review. More details are available

‘The partnerships that have worked for our organisation have been the onesthat we’ve made with national agencies, doing local work. Because we’re alocal infrastructure body, we’ve managed to work with national agencies,develop partnerships and access government funding that allows us todevelop up and coming initiatives.’BME focus groupVCOs may need to consider whether it is appropriate to work in partnership with each other orwith organisations from other sectors, if this is in the best interests of service users. NCVO’sCollaborative Working Unit provides support and advice for VCOs that are interested in goingdown this route 17 .Responses to poor funding practiceWe welcome the robust recommendations that the National Audit Office has made on full costrecovery in its report 18 . However, the sector can also play an important part in making full costrecovery the usual way of funding.VCOs must develop the skills to cost their activities properly.VCOs need to understand the truecosts of its work and use that understanding to negotiate a price for delivering a particular service.That price may be at full cost, it may include an element of surplus to reinvest back in charitable orcommunity activities, or it may be subsidised. The important point is that if organisations are fullyaware of their costs, then they can make an informed and conscious decision in the event that theyare offered a contract below full cost:‘I think the sector’s got to enhance its own understanding and then it’s got todo the usual thing about collaboration and making the case across.’Interview respondentFormer charities minister Fiona Mactaggart called on voluntary and community organisations towalk away from poor contracting processes, particularly contracts that are funded below full cost. 19While this is not always an option, and may not be the most appropriate course of action, it makesan important point about the power that VCOs have.The decision to accept a contract below cost,or to provide additional services, must be made by the VCO itself, not because it is expected ofthem, or forced upon them, by a statutory funder.VCOs need to recognise the power that they have in a contract negotiation. It is the obligation ofstatutory organisations to deliver public services, not the VCS. Whilst it is true that in some casesVCOs may lose out on delivering services if they walk away from contracts, in many cases it maymean that there is no-one else who can deliver that service and the funder is forced tore-negotiate.VCOs need to appreciate that they are sought-after providers of public services:17. For more information see Working with the third sector, NAO 200519. Fiona Mactaggart made this statement during her keynote address at the Funding Our Future conference in London on 17November 2004

‘We were in crisis two years ago and we said “either we get extra funding orwe close” and we meant it, because we weren’t going to struggle on anylonger subsidising our own services, the gap between the funding we got andwhat we needed was too wide.’Interview respondent‘I very much work to what my targets are, I don’t care if there’s someonecrying outside the door, if we’ve had our quota I can’t afford to see them, Ican’t be a sponge.The concept is that the voluntary sector, because of thatphilanthropic background that we grew up from is very much ‘they’ll just doit’, but … I have grave concerns.’Interview respondentIn most cases a VCO will decide the position it is prepared to take and negotiate on its own. Butwe need to also consider whether this is an issue on which the sector needs to act collectively tosend out a clear and powerful message. If the sector is prepared, collectively, to accept nothing lessthan full cost recovery, this will bring about the root and branch change in practice that is needed.‘The sector’s got to stand together and say we will not be split on this, eitheryou, the major funders, sort this out or we’ll be withdrawing our labour.’Interview respondentWalking away from contracts that are not funded on a full cost basis is one option, but there are anumber of actions that VCOs could undertake in this situation. Once an organisation is confidentin costing bids fully, it is able to determine whether it is willing and viable to accept a contract fundedbelow such full costs.VCOs can choose to cut services in line with the shortfall in funding that theyhave received, or they can choose to subsidise services if this is felt to be in the best interests ofbeneficiaries. Crucially, this must be a decision for VCOs to make on a case-by-case basis, if they failto secure funding for the full costs of their activities. It should not be an assumption from funders.Understanding the procurement process and negotiating a contract is not easy, particularly for smallVCOs. However tools and support are being developed within the VCS to enable VCOs to workmore effectively in a contract environment.The Government’s ChangeUp programme is providingfunding to enable the VCS to develop its capacity in particular skills areas.The new Finance Hub willbe an important source of advice and information for VCOs that want to improve theirunderstanding of and skills in procurement.VCOs should also champion good practice. Since 2002, the case for full cost recovery has beenirrefutably made. Funding the full costs of public services, whether they are delivered by voluntaryand community organisations or any other sector, should no longer be up for debate.We need tomove from a culture where the sector and others are arguing for full cost recovery to a culturewhere those who do not adhere to this universally sound principle must argue against it.Furthermore, we need to move away from the language of project and core costs, towards thelanguage of a price for delivering services.21

Creating a sustainable funding environment4'The benefit of longer term relationships and sustainability is that you're able todevelop your projects, not necessarily grow bigger, but develop the work that youdo and make more of an impact on the overall community.'Interview respondentStability and certainty in funding relationships are of paramount importance to the VCS. Participantsin our research highlighted a number of concerns about the short-termism and uncertainty incurrent contracting processes.Length of fundingThe need for more long-term funding was a dominant issue in the research.There was a concernthat some funders are only funding on a short-term basis because this is what has historically beendone, or because they perceive this as the least risky strategy, not because it is the best way ofproceeding. VCOs do not have faith that there are robust reasons for short-term fundingarrangements.Participants noted that a disproportionate amount of time is spent on securing income undercurrent arrangements, which in turn impacts on service users and their beneficiaries:‘If our sector was funded on a three-year cycle, there would be hugedifferences.The energy that goes into finding money year on year to write theapplication forms could be put somewhere else.’London focus groupShort term funding tends to carry with it higher levels of risk for the funded organisation.This riskshould be costed into the contract, but rarely is: 20‘Economically, it doesn’t make sense to fund us on a short term basis, it’s afalse economy, how can you invest money in an organisation … then thefunding is cut off in two years’ time?’BME focus groupParticipants were also concerned that funders do not recognise the impact that short-term fundingcan have on the running of an organisation:22 20. See Surer Funding: the acevo Commission of Inquiry Report, acevo 2004

‘We’ve now had four members of staff in four years, each of them leavingwhile waiting for a decision on funding. It’s absolutely ridiculous.’Health focus groupUncertainty in terms of future income has serious repercussions for those who work in the sector.VCOs and the public sector aim to be good employers and yet public sector funding practices oftencreate a very difficult environment for VCS staff:‘The concept is because you’re a charity, the organisation is a charity, but thepeople that work with you are not a charity, they’ve got mortgages, they’vegot car loans, and if they can get more elsewhere, they’ll go there.’Interview respondentOf course, longer term funding is not appropriate for all projects; there may be some instanceswhere shorter-term funding allows for more innovation or for the best use of available resources.VCOs, as well as funders, need to have a clear understanding of which projects are only short termand which depend on sustainable longer term funding to be effective:‘There are more grounds for thinking about a different balance between longterm and short term, but if what is being funded in our case is a long termrequirement, that long term promise to young people in communities thenthat should be reflected in the funding regime.’Interview respondentThe sector should seek more transparency from funders.There needs to be greater disclosure ofthe reasons why particular funding periods have been applied because this would increaseconfidence in funding mechanisms on both sides. In addition, there needs to be greater transparencyfrom funders about the size of their overall budget and the aims of their funding.Greater transparency will also enable VCOs to judge whether it is in the interests of their users andtheir organisation to pursue particular sources of funding:‘What we do, because we could be running after all sorts of things, is to lookat a source of funding and we say how long is it going to last for, is itsomething within what we want to do, our priorities as opposed to us bendingaround something else?’Interview respondentAny changes to the length of funding periods are in the hands of government. We welcome therecommendations of the NAO report to address these problems. However, there are steps thesector can take to drive this forward.VCOs need to ask funders the reasons for short term funding.This will enable them, where appropriate, to either challenge the funder and to make the case forlonger term funding, or to make decisions about whether to bid for a project with short termfunding and, if so, how to cost it.23

Continuation funding or innovation funding?As well as concerns about short-term funding, participants said that they often could not obtaincontinuation funding for the work that they are already doing.They perceived a constant desire forinnovation:‘The simple idea that if a need is there and a service quite clearly isefficacious in meeting that need, is successful, is delivering, then it should besustained rather than consistently being either thrown in the dustbin ashistory or forced to twist itself into some sort of yogic position and pretendit’s something different just so it can meet the needs of new projects.’Southern focus groupParticipants said that such pressure for new projects is time consuming, because it requires anentirely new funding proposal, and unhelpful, because it does not support the continuation of goodwork that is currently going on:‘I think it’s a little worrying that each time we have to go back for renewalfunding, we have to reinvent the wheel, but our project is working well and itsgot good results, why change it, why can’t you just go back for more moneyto do the same thing?’Interview respondentPerversely, this means that that there is often no financial incentive in the current system to deliverservices well. While VCOs will seek to ensure the best possible outcomes for their users andbeneficiaries, there is no guarantee that a good performance will mean that a service receivescontinued support. It also exacerbates the problem that funding processes can end up rewardingthose who are good at making applications, rather than those who are good at delivering aneffective service:‘If you’re particularly good at writing funding applications you can sometimesreinvent the wheel and call it something else …’Northern focus groupThere was also a view among participants that funding priorities are determined by political andexternal factors, rather than the needs of service users, and that there is no will to ensure longertermobjectives are met:24

‘It seems to me that it’s a political short termism that dictates that we startlots of nice new initiatives and say we’re approaching this problem, we’recutting this figure, getting to this target and this outcome, but actually wenever get there because what we do is replace each target and outcome witha new target and outcome, and the whole washing machine keeps tumblingaround.’South West Focus GroupFor successful public service delivery, there needs to be ongoing support for service users, and formeeting overarching government targets on reducing disadvantage. A long-term, strategic approachshould be applied to funding processes as well as policy objectives.Funding mechanismsThe NAO report identifies some confusion amongst government funders on the distinctionbetween grants and contracts 21 , how to make the best use of different funding mechanisms, andhow to identify which mechanism is the most appropriate for particular activities. Our researchindicates that this uncertainty around different funding mechanisms also permeates the sector:‘It’s becoming less clear-cut because grants are often now tied around somany requirements that they’re almost like contracts.There used to be grantsto do an activity, now you’re given grants to achieve certain outputs.’Northern Focus GroupThere is a need for VCOs themselves to be more attuned to which funding mechanism would bebest suited to the activity for which they are seeking support. Public sector income to the sector inthe form of contracts is increasing 22 , but this does not mean VCOs should look only to contracts insecuring future funding. On the other hand, many VCOs tend to assume that grants are preferableto contracts. However this is not necessarily the case: a contract very clearly defines what thefunder can and cannot expect in return for their funding. It can be a very useful tool to help ensurethe independence of a VCO. Organisations should identify and pursue the most appropriate formof funding for the work they want to undertake.Julia Unwin 23 has identified three distinct approaches that funders should consider when decidingthe purpose of funding – ‘giving’, which seeks to support a worthy cause,‘investing’, which seeks tobuild the capacity of the VCS, and ‘shopping’, which seeks to procure services.The first two tend tobe grant funded and the latter contract funded. This may also be a useful way for VCOs to thinkabout the type of funding that they need to secure for their activities.21. Working with the Third Sector, NAO 200522.The UK Voluntary Sector Almanac 2004 (published by NCVO) shows that public sector fees and contracts accounted for 18 percent of the income to the VCS in 2001/02, and were the only form of income that are increasing.23. The Grantmaking Tango: Issues for Funders, Julia Unwin, Baring Foundation 200425

Securing sustainable fundingThere is also a need for VCOs to think about sustainable funding in the round, beyond securingsupport from statutory funders.The cross-cutting review focused on increasing the role of the VCSin public service delivery, but there is no obligation on government to invest in the sector morebroadly. VCOs are responsible for supporting their own existence, and many of our respondentsrecognised this:‘I think there’s a genuine lack of funding available but that’s not really thepoint. I think its fair enough if an organisation wants to deliver something thatsits outside the Government’s remit that they should raise the moneyindependently and deliver it, because no-one in the voluntary sector expectsthe Government to pay for everything that they do.’Interview respondentIf the cycle of reliance on short-term funding is to be broken,VCOs must consider diversifying theirincome streams and becoming self-supporting over the long term. It is therefore important fororganisations to consider the breadth of the funding spectrum, from more traditional incomestreams such as support from private charitable foundations to more recent innovations such astaking on loan finance.NCVO has been taking forward a programme of work to support VCOs in becoming moreindependently sustainable through the Sustainable Funding Project 24 . Diversifying sources of incomewill give organisations more security for the future, and more independence from any one funder.This can only strengthen the hand of a VCO when negotiating with a potential funder and improveoutcomes for beneficiaries.2624. NCVO’s sustainable funding project encourages and enables VCOs to explore and exploit a full range of funding options todevelop a sustainable funding mix. More information is available at

Application Processes5'Even if you find the course of funding, the actual application system is a minefield… it's not a question of whether the service you want to offer is needed and so on,it’s about how you complete that application form.'Interview respondentApplication processes should be structured to ensure that clear decisions can be made and thatcontracts are awarded appropriately.The requirements they place on applicant organisations shouldbe proportionate and should not advantage those who know the system over those who candeliver the service.The cross-cutting review recognised that application processes could be a barrier to VCOs takingon a greater role in public service delivery. Its recommendations therefore sought to streamlineprocesses across government and to increase uniformity, thereby reducing the requirementson VCOs.ProportionalityThe burden that application processes can place on VCOs was a recurrent theme in the researchwe conducted. In particular, there was a concern that the level of labour required to completeapplications is not in proportion to the funding on offer:‘In the end you sit there and think I’ve got to fill in 15 pages worth of stuffto get £30,000.’Interview respondentIt is important that funding applications are proportionate, both to the amount of funding beingsought and to the nature of the organisation that is making the application. For example, if there isa funding stream or contracting process that is aimed specifically at community groups, it may beworth considering whether the application process or the language could deter less well-resourcedorganisations:27

‘Small organisations that are able to go for the money are put off becausethey see the application and think ‘oh God’, it’s very time consuming andsometimes the language is mind boggling, and [funders] actually come nowto organisations and say, “what’s up here, no-one’s applying for it?”, it’smadness … the money doesn’t get used because people are put off bythe application process.’Interview respondentThere is a danger that applications can become a closed circle, making contracts available only tothose organisations that are able to decipher the requirements, and that have the capacity to meetthem and excluding VCOs that could deliver the service but have less contracting experience, oftensmall or new organisations.However, participants in the research perceived improvements in the application processes of somefunders.There was particular praise for two-stage application processes, which a number of fundershave begun using since the cross-cutting review:‘We’ve never managed to get through any of the stage ones that we’ve putin anywhere but at least it means you’re only wasting two or three dayscompleting that form rather than however many weeks it is to complete afull funding application.’Health focus groupWhile improvements to application processes are largely the responsibility of funders, the sectoralso has a role to play in making the case for greater proportionality in application processes,particularly in those instances where it can demonstrate that the burden is preventing organisationsfrom bidding.There may also be a role for both funders and larger VCOs to support smaller VCOs to makeapplications, for example by sharing information on what works well in application processes.VCOsshould tell funders which processes they have found helpful or a hindrance.There is a reservoir ofexperience among VCOs that should be shared, both across the sector and with funders.InformationA key element of the application process is when and how information on available contracts isprovided. If VCOs are not aware of the funding on offer, they are not able to apply for it.Participants in this research perceived that there have been some improvements in terms of howreadily information is available:28

‘There is more information on central government funding that’s available, asI said before, and the process is simpler … the process is simpler so that youhave to spend less time doing it.’Health focus groupSome of the participants also identified the central government funding website – 25 as a useful innovation. However, there remained some concernabout the timescales and level of administration required to complete funding bids:‘In order to be able to get a good application in, really people start having towork 24 hours a day because the timescales can be sometimes as little astwo or three weeks, which is absurd really.’London focus groupParticipants argued that funders do not allow sufficient time for organisations to make good qualitybids.While there may be a case for extending timescales in some cases, it is for VCOs to determinewhere they are going to concentrate capacity in terms of making a bid. Access to good and timelyinformation is key to this.A second point relating to information on application processes is the feedback available to thoseVCOs whose bids were unsuccessful. Participants reported a variable approach to feedback, witha number of instances where VCOs had to pursue funders:‘You don’t automatically get it back and you won’t get detailed feedbackunless you create a fuss.’Interview respondentOrganisations should always seek feedback, even if it is not automatically offered, for both successfuland unsuccessful bids. This increases organisational learning and the skills of the sector in makingapplications, as well as ensuring that funders have robust reasons for their decisions.Lead FunderThe cross-cutting review proposed the ‘Lead Funder’ initiative, which allows VCOs to be ‘passported’between government funders, minimising bureaucracy and duplication.‘I don’t know whether or not I think this will improve our chances of gettingbids … because we’re quite clever at applying but I suspect it would help alot of other people.’Interview respondent25.The site was set up in response to the recommendations from the cross-cutting review, and currently carries information onfunding available from the Department for Education and Skills, the Department of Health, the Home Office, the Office of theDeputy Prime Minister and Government Offices for the Regions.29

The Department for Work and Pensions has been piloting this approach with four VCOs – Nacro,Project Fullemploy,The Prince’s Trust and Future Prospects 26 .There was very little awareness of theLead Funder Pilot. However, participants supported the aim of the initiative:‘Clearly, there must be scope for reducing the amount of times we telldifferent people the basic factors about who we are.’Interview respondentFunders now need to consider which information could usefully be passported across governmentand the sector needs to explore these issues too. One important development in this regard isGuidestar UK, which seeks to bring together key organisational and financial information aboutcharities in a single, accessible portal 27 .The sector needs to engage with this initiative as it developsand explore the opportunities for providing more detailed information through Guidestar.VCOs should also look at their own internal processes and consider whether there is scope tosimplify or standardise their own approach to applications:‘If you’re filling in one application, it’s not dissimilar to another one, so someof the information can be transferred on.’Interview respondentThe research demonstrated that there is still a long way to go in the important area of simplifyingapplication processes. The onus remains on funders to make progress on this issue. They canremove the barriers that may prevent VCOs from applying at all, by considering the impact thattheir processes may have and whether these processes are necessary. But the sector can also takesteps to work with funders, to explain which processes work, which create unnecessary burdens,and by demonstrating how existing sources of information could be better used. And ultimately itis for individual VCOs to weigh up the bureaucratic burden with the chances of receiving fundingin determining which applications to make.3026. More information is available at More information is available at

Relationships with funders6'I completely accept that it’s public money and therefore there needs to betransparency, we need to be able to justify the funding spent but some of themonitoring arrangements that we're required to adhere to are just ludicrous.'Interview respondentOnce organisations have been awarded a contract, they are required to adhere to a set ofmonitoring and reporting requirements. While funders have to ensure that public money is spentefficiently and appropriately, and that services are being delivered, this can have unintendedconsequences for VCOs.The cross-cutting review recognised that there could be scope for streamlining monitoringprocesses as well as application processes. This is a particularly important issue for thoseorganisations that have a number of different funding streams, which is increasingly commonplacein the current funding environment.The monitoring burdenAgain, participants in this research felt that monitoring and reporting requirements were notproportionate to the funding being provided:‘We have just under £1m from Neighbourhood Renewal Fund, the monitoringwill take me a couple of days. We have £18,000 a year from the localregeneration fund, monitoring will take me two or three weeks, they wantevery single invoice broken down: is it all ours, is it all this, we have to writereams of what we did and who we did it with.’London focus groupParticipants accepted that such reporting requirements are a necessary component of the fundingprocess. However, they raised concerns about whether the information collected is meaningful andwhether it will be used:‘A great deal of time, resources and effort is spent collecting information thatallows for public accountability but does not enhance the serviceeffectiveness.There has to be a better way.’Online questionnaire31

The sector is not always clear about why there are certain requirements in place, particularly whenmonitoring processes are more labour-intensive.There was a perception that heavy requirementswere only being placed on VCOs to protect the position of funders:‘I think its almost a mindset, “this is public money, therefore the only way Ican be accountable that I’m handling public money, is to make the processso rigorous that nobody can ever hold me to account, and I’m not the personwho’s going to fill in those forms.” ’Interview respondentThis is part of a wider concern about the ‘risk aversion’ of statutory funders, which has beenrecognised by a number of commentators as well as the participants in this research.There are anumber of potential training and support needs, which the NAO has also identified in its report 28 ,to ensure that contractors and procurement practitioners use accountable but proportionatemethods of monitoring. But VCOs also need to be clear about why they are being asked to providecertain information, particularly if it seems repetitious:‘I think the most irritating thing is that they’re so mistrustful of the informationyou’re giving that they ask you the same question further down in anothersection, but worded slightly differently.’Interview respondentThe sector needs to have more confidence in challenging the reporting burden where monitoringrequirements seem disproportionate. VCOs should seek clarification from funders to ensure thatthere are purposes for the information being collected, and that it will be used:‘Each year … more and more information is asked for and the moreinformation that is asked for, that’s costing us, we have to spend more of ourcontract on working out that information than doing the work that they wantus to do, so every annual service review we have a discussion about thatbalance.Actually, what do you do with this information, what do you use it for,I can just see it stacking up on a shelf and not being used for anything.’Interview respondentHowever there was also a recognition that these processes could also be valuable to the VCO.Meeting monitoring and reporting requirements may help the sector to improve its ownperformance measures and give VCOs more demonstrable confidence that they are delivering, andto improve the accountability of the VCO more generally.This issue is increasingly important in thecurrent climate 29 :3228. Working with the Third Sector, NAO 200529. Accountability and Transparency, Belinda Pratten, NCVO 2004

‘One of the changes I think that I’ve noticed is more emphasis on outputs …I don’t think that’s a bad thing, certainly for my organisation I’ve welcomedthat because it’s meant that staff have to become more focused on ensuringthat what they’re delivering is effective, and so I don’t think that’s necessarily abad change.’London focus groupThere needs to be clarity about the monitoring and engagement processes that are used byfunders, on both sides of the relationship.This ensures that funders are clear about why they areplacing particular requirements on the organisations they fund and it gives VCOs confidence thatsuch requirements are meaningful. VCOs must also ensure that funders are aware of the impactthat heavy monitoring and reporting requirements can place on them, and they should include thisburden in their costing for funding bids. As well as ensuring that organisations have the capacity tomeet such requirements, this may also cause funders to assess whether their processes areproportionate and necessary.Methods of evaluationAs well as concerns about the volume of monitoring and reporting that is placed on VCOs,participants were worried about what was being monitored. They said that there was a lack offlexibility in the measures used, allowing no room for innovation in terms of demonstrating results:‘It’s the prescriptive nature within which those targets are to be achieved, it’sokay having the targets but our strength is finding ways to meet them, ratherthan telling people how they should.’Northern focus groupVCOs felt that there was too much focus on quantitative measurements, rather than the broaderoutcomes for service users that the sector seeks to deliver:‘Figures matter … if they came down and spoke to us, they’d get anotheranswer altogether, but if you can just reel all the figures off then that’s whatthey want to hear.’Interview respondentThere was a perception amongst organisations involved in the research that current monitoringprocesses are determined by funders without consultation with the VCOs who are delivering theservices. At times there can be clear differences between what the sector is trying to achieve andwhat the funders monitoring and reporting requirements seek to measure.This may be a problemof poor monitoring, or it may suggest a lack of agreed and shared objectives between the funderand the VCO delivering the service.33

‘If you’re dealing with, say, a group of very excluded people who have hadvery bad experiences with, say, the education system, and you’re trying to getthem back into learning, that’s a long slow process and the progress can bemeasured in a social way, you can see that that person is now able to get upevery morning and turn up – you know that’s progress, they know that’sprogress, that doesn’t count as an outcome, therefore you won’t get yourfunding because you haven’t completed that box.’BME focus groupThere is a danger that where objectives are not properly understood and shared, and a process formonitoring those objectives is not agreed, the reporting processes may lead to perverse outcomes.VCOs feel that they are demonstrating what funders want to hear, rather than what they need todemonstrate to secure the best outcomes for service users. Such a narrow view does not allowthe sector to demonstrate the value it adds to public services. While it is true that funders wouldonly measure evidence of added value if this were a specific outcome they were seeking, thereis scope for both funders and the sector to think more innovatively about how they candemonstrate success.VCOs need to consider the scope for developing alternative measures of success with funders. Itmay be that they are able to offer internal performance measures as an alternative to the specificprocesses of funders, or that they can provide evidence in a different form, such as CD-ROMs,pictures or events, rather than filling in forms. Crucially, there should be a discussion betweenfunders and VCOs on the best way to proceed, rather than an arbitrary adherence to the processesthat have historically been used:‘I would like to see much more joint negotiation of appropriate outcomes andoutputs, rather than have a funder decide. I think the best way to do it is adialogue between the organisation proposing to provide a particular service,and the funder’s desire to do what it’s trying to do, there ought to be somenegotiation and flexibility to local circumstances and that kind of thing.’Northern focus groupEngagementThe need for funders to work with the sector in determining monitoring, auditing and reportingrequirements is part of a wider issue about how funders engage with the VCOs that they support.There was a concern among participants in the research that they were being subjected to onerousreporting requirements because of a lack of trust or respect on the part of funders:34

‘One of our government funders pays me in arrears, wants me to account forevery envelope posted and every stamp stuck, holds up grant payment untilI have justified every penny spent, changes her mind routinely about whataspects of the project she wants covered in the eight pages of detailed reportI send her every 13 weeks.’Online questionnaireEfforts led by VCOs to improve processes can only be successful where there is already a goodrelationship in place and where both sides feel that they are equally respected:‘We feel equal partners, valued in the process, that the contract is a realcontract in as much as there’s a sum of money, there are outcomes andprovided we reach those outcomes, that’s it, there’s a certain amount ofmonitoring by the local authority but they don’t hassle you for every invoice,every under-spend, every over-spend, and with those authorities, some ofwhich are very large contracts, the relationship is superb.’London focus groupWhile funders must take care not to undermine the independence of VCOs, this does not meanthat they should not take an interest in the success and sustainability of the organisationsthey support:‘With two of our funders, they’re actively involved in the projects so I alwaysfind that helpful, because they’re aware of what’s going on all the time andthey have some ownership of the project, it’s not for everyone but it works forus as a small organisation.’Infrastructure focus groupFunders will necessarily be driven by the desire to achieve good public services, but they shouldalso consider the impact that they have on the VCS. Where the two parties have an effectiveworking relationship, then it will nearly always lead to better use of public resources and betteroutcomes for local communities and service users.35

Delivery through tiers of government7'If by government funding, you are speaking across all levels, I think the situationnow is worse.'Online questionnaireThe final issue to be considered in this report differs from the previous sections because it cutsacross all the other issues. Participants in the research indicated that there remain fundamentalshortfalls in terms of translating messages both across government – in terms of between centraldepartments – and through government – in terms of different tiers of administration.Implementation at a national levelThe cross-cutting nature of the 2002 review meant that it was intended to effect broad change: itsrecommendations applied to all central government departments and their agencies. However, theresearch that we undertook shows that progress has been patchy.The research indicated that where processes have improved, this is often due to the individualsinvolved rather than a broader cultural shift. Arguably, this means that improvements might havehappened anyway, among those individuals and organisations that are keen to make them happen,irrespective of the cross-cutting review:‘Perhaps some of the processes have changed but I think that’s more to dowith building personal relationships with individuals within governmentdepartments.’Interview respondentAny relationship, including between funder and voluntary organisation, will come down to theindividuals involved to a certain extent. However, participants in this research raised concerns thatfunders have not been supported to implement the cross-cutting review and that therecommendations have not been given the weight they should have been:‘Greater promotion of the Treasury commitment is needed, we are constantlyhaving to tote the documents around to statutory funders, give them thelinks, quote from the documents. We haven’t met any staff who know aboutthe new arrangements except civil servants who have been involved in thereview at a departmental level.’Online questionnaire36

They also suggested that without proper delivery across government, funding relationships remainunfairly skewed:‘I’m not sure that I’m happy with a system that depends on the personalrelationship, because it may mean that there are very good voluntaryorganisations that don’t have those relationships and don’t get the funding.’South west focus groupThere is a need to institutionalise good funding processes if improvements are to survive whenindividuals move on and when new VCOs take on public service delivery.This is largely a challengefor government to take forward, but the sector can play a role in ensuring those in government areaware of best practice.In taking forward negotiations, VCOs should consider their position in terms of national policydevelopments as well as the particular funding stream that they are engaged in. In this way, thesector can play a part in cementing consistency across different government funders by emphasisingthe cross-cutting nature of Treasury recommendations.The local relationshipFor many VCOs the really important relationship is with local government, which has always beena significant funder for the sector. Although the cross-cutting review did not apply directly to localgovernment, it did recognise that changes need to happen at this level too.Whilst local government does not fall within the remit of the NAO’s review, it came up time andagain in our research. Participants confirmed the primacy of relationships at the local level and thatthis is where most of the issues in implementation remain to be resolved:‘We don’t work with national funders. It would be very rare that we actuallyapproached national funders and they wouldn’t be interested in the smallthings we do.’Interview respondentThere was a general acceptance that while some progress at a central level can be identified, thereis a long way to go in translating these changes to the local level:‘There was a really helpful guide to funders that the Treasury wrote … but Idon’t think anybody in local government has read it because they certainlydon’t seem to apply it.’London focus group37

Indeed, some go further and argue that there is no knowledge or understanding of these issues atthe local level:‘There’s a huge gap in what happens in terms of the finance directors of localauthorities, NHS social services and government policy, what they do in thosecontracts hasn’t changed for 20 years, it’s like they’ve never read theCompact and they have no idea what this is about … I’ll ask them ‘have youheard of the Compact?”,“What Compact?”,“Full cost recovery? What’s that?’’.’Interview respondentAppreciation of the progress made by central government funders, such as achieving buy-in toconcepts such as full cost recovery and sustainable funding, can be undermined by the lack ofapplication at a local level:‘It’s like parallel worlds going on, so at a macro level since the cross-cuttingreview there’s been huge debate … and out of that has come Futurebuildersand the capacity building infrastructure work, so there’s huge sums of moneygoing into all that … but in terms of my organisation and my world, I don’tthink it’s made a blind bit of difference.’London focus groupMany argued that central government has a responsibility to address the fundamental mismatch thatappears to exist between central government policy and practice at a local level:‘For me the burning issue is what levers central government has over localgovernment, in order to ensure what’s recommended or decided at centralgovernment is then implemented locally.That for me is where the big gap isand I see government putting its money where its mouth is, but actually itdoesn’t translate at local government level.’London focus groupThere is a danger that it could be nothing more than a paper exercise if high-level commitment isnot reflected in practice.The additional resources for improving the funding relationship that havecome out of the cross-cutting review, such as detailed guidance for funders, must be fullydisseminated amongst local funders.There has been much focus on communicating these resourcesacross central government, but such support must also be directed towards local funders. Theinspection and auditing regimes for local government may also have a role to play and there maybe room for a parallel assessment that is equivalent to the review undertaken by the NAO.While different tiers of government must ensure that policies do actually translate into reality, theVCS can contribute to this process by making the case for better funding practices to secure betteroutcomes for service users. Better public services also increase efficiency and effectiveness, thusrepresenting a better use of public money. Couching funding negotiations in terms of improvedoutcomes for local communities can help to give VCOs an added weight and legitimacy.38

Local resourcesThere was also a concern among participants in this research that local statutory funders are notfulfilling the good funding practice identified in the cross-cutting review because they have not beenresourced to do so:‘It’s very hard for the voluntary sector to do any negotiation with localauthorities because they’re so strapped for cash themselves.’Interview respondent‘It’s terribly frustrating because Government and Treasury for a number ofyears now have accepted that voluntary organisations should get full costrecovery, but it’s quite obvious that local authorities say – that’s fine but wehaven’t got the money.’London focus groupThere is a resource implication for local authorities in carrying out the recommendations of thecross-cutting review, for example in achieving full cost recovery.This does not seem to have beenrecognised fully by central government. If there is a political will to improve the funding relationship,then this must be backed up with sufficient resources for implementation:‘It’s all very well everybody in London pushing stuff out but they’re not pushingthe money down to do it.’Interview respondentIt is also worth pointing out that the main driver for local government is the system ofComprehensive Performance Assessment. With limited resources it is inevitable that at times theobjectives of the sector, to achieve better public services that are properly funded and focused onlong term outcomes, will conflict with the need of a local authority to meet the more detailed orshort term performance targets that have been set by central government. Although there areoften difficulties in the relationship between VCOs and local funders, there is perhaps greater scopethan both sides realise to stand together and negotiate with central government for adequateresources to deliver good public services:‘We recognise that this is something that is national, it’s not the fault of thelocal structures and it’s no good lobbying them because they can’t doanything about it, and they would wish it to be different anyway.’Interview respondent39

Conclusion8'I think if we're being charitable there probably is beginning to be a recognition ofsome of the problems that we face, but that's very different from actual assistancein processes reflecting those. There is now an understanding, particularly over thelast few years, about some of the problems, but it’s not trickled down into change.'Southern focus groupAs this report has sought to show, Government and the VCS both have a role to play in improvingpublic service delivery. Overcoming the challenges that remain in the funding environment should be ashared aspiration: the aim is to improve outcomes for service users and beneficiaries of public services.There has, rightly, been much focus on the steps that central government has yet to take intranslating the messages from the 2002 cross-cutting review into practice. These challenges havebeen succinctly identified by the NAO in its report and we look forward to action in the comingmonths. However, the VCS also has a responsibility to improve the funding environment andrelationships with funders.One of the central tenets of the recently published Compact Code of Good Practice on Fundingand Procurement is that there are obligations for both government and the VCS in making thefunding relationship work:‘a commitment to getting it right together for mutual advantage’ 30 .Whilstthis principle is arguably nothing new, it demonstrates that there are two sides that need to act and,indeed, two sides that stand to gain from better funding practices. In many cases, the greatest impactwill come from changes in government practice, but there are also steps the VCS can take. Indeed,for some of the recommendations made in the review, the sector must be the driver that nowmakes the necessary changes happen.There are a number of measures that VCOs can take on their own and collectively to improveprocesses. Indeed, we have already made progress in this area. A number of useful tools alreadyexist, including the ACEVO full cost recovery templates, and the new Compact Code on Fundingand Procurement.The Finance Hub will soon be able to provide support, advice and informationto VCOs. It is important that VCOs are aware of and make use of the support that is available tothem. Arguably, the rapid expansion of VCS involvement in public service delivery in recent yearshas not allowed organisations to fully consider the implications of taking on such a role. But, it isonly if the sector is fulfilling its own obligations in the funding relationship that it can have theconfidence to challenge funders when they do not do the same.There is no reason why, in three years time we should not have an effective funding relationship, whereboth sides understand the contribution that VCOs can make to public service delivery, know the truecosts of delivering those services, and negotiate and manage contracts in a mature way.The tools toachieve this are already in place. It now simply requires the commitment, on both sides, to deliver this.40 30. Funding and Procurement: Compact Code of Good Practice, Home Office & Compact Working Group, Home Office 2005

Annex 1:The cross-cutting review recommendationsReproduced below are the key funding recommendations from HM Treasury’s cross-cutting reviewof the role of the voluntary and community sector in service delivery, conducted in 2002. It is theprogress on implementing these recommendations that this report and the report produced bythe National Audit Office seek to ascertain.RecommendationResponsibility and timingIssue:Weaknesses in the data on government funding of the VCS12. 31 Government should establisha unified information system fordata collection and analysis ongovernment funding for the VCS.Issue: Full cost recovery13. Funders should recognise thatit is legitimate for providers toinclude the relevant element ofoverheads in their cost estimatesfor providing a given service underservice agreement or contract.14. Central government shouldlearn from the experience ofprogrammes that have alreadysought to tackle this issue in a fairand transparent way.15.The VCS should developaccounting guidelines for allocatingoverhead costs.16.The VCS should considerbuilding on the experience oflarger voluntary organisations toestablish whether there is a usefulrole for benchmarking unit costs inclient specific service areas.The ACU will lead cross-departmental work toput in place a unified information system.This willinvolve: (i) scooping and piloting; (ii) phasedintroduction according to defined milestones; and(iii) the development of individual strands tosupport implementation of the review, includingdata on the Compact, on capacity building andinfrastructure, and on funding going to the sector.By: April 2006All departments will incorporate the review’s fundingrecommendations fully into their procurementpolicies by ensuring that the price for contractsreflects the full cost of the service, including thelegitimate portion of overhead costs.By: April 2006DfES, working with OGC and ACU, building onexperience to date and on work being undertaken byDfES as part of ‘Getting the Best from Each Other’, willdevelop guidance for good practice in the procurementof services.This work will contribute to a supplementto the Compact Code of Good Practice on Fundingfor service contracts and agreements. All departmentsand agencies will agree a common approach in linewith this guidance and Treasury guidance in preparationfor implementation from April 2004.By: October 2003DCMS will consider amending the rules and workingpractices of the lottery distributors in order to reflectthe key recommendations of the review.By: April 2003The VCS will produce guidance for the sector, building onthe work currently being undertaken by ACEVO, andto consider (in consultation with the Charity Commission),the scope for linking to SORP guidance.By: April 200331.The numbers in this table refer to the order in which the cross-cutting review recommendations appeared in the 2002 HMTreasury document.41

Issue: Streamlining access and performance management requirements for multiple,often small, funding streams17. Government should develop acommon point of access and acommon application process forcentral government grant aid andstrategic funding.18. Government should takeforward the ‘passporting’ offinancial information about VCSservice providers between differentdepartments, including developingthe “lead funder” concept.The ACU will lead cross-departmental work toput in place a unified information system.This willinvolve: (i) scooping and piloting; (ii) phasedintroduction according to defined milestones; and(iii) the development of individual strands tosupport implementation of the review, includingdata on the Compact, on capacity building andinfrastructure, and on funding going to the sector.By: April 2006Over the medium term, the portal may also beused to passport information about VCOs.‘Passporting’ is the transfer of basic details oforganisations between funders, reducing the burdenof providing the same information more than once.By: April 2004On ‘lead funder’, the RCU, working with DfES andthe ACU, will develop examples of how the ‘leadfunder’ approach could be applied in practice acrossgovernment departments.The RCU, ACU and NRUwill consider piloting the approach withregeneration funds and with the DWP.From: April 2004Issue: End loading of payments – with sector bearing all the upfront cost and risk19. HM Treasury should issue clearguidance to funders: (i) on thescope for making payments inadvance of expenditure; (ii)ensuring the right balance of riskbetween service providers andfunders; and (iii) the potential useof profile funding.20. Umbrella groups within theVCS should raise awareness withinthe sector and government of theprinciples set out in the guidance.HM Treasury will publish guidance to funders.By: December 2002The dissemination programme will begin fromApril 2003.By: April 2006Issue: Achieving a more stable funding relationship21. HM Treasury guidance to fundersshould underline the opportunitiesfor moving to more stable fundingrelationships and to include examplesof where, subject to performance,this has been done.22. At the local level, best practiceexamples should be highlighted andwidespread use incentivised.HM Treasury will include in its guidance to funders.By: December 2002See recommendation 35 (which makesrecommendations about local government).42

Issue: Implementation of the Compact27. All Government departmentsshould appoint a senior official tooversee full implementation of theCompact and Codes.28.The ACU should conduct areview of the role of the VoluntarySector Liaison Officer anddetermine the scope of the roleto support and maintainmainstreaming of the Compactand Codes.29.The ‘Champion’ shouldestablish a baseline on awarenessand implementation in theirdepartment and develop astrategy for mainstreamingthe Compact.Senior officials will be appointed by all departments.By: October 2002The review will be completed and the findings willfeed in to departmental strategies formainstreaming of the Compact and Codes.By: January 2003Departmental ‘Champions’ will produce a strategyand project plan for delivering the strategy.By: April 2003Given the major role of the Government offices inallocating central resources, the ACU working withthe RCU will ensure that staff in the regional officesare made fully aware of the implications of theCompact for their dealings with the sector.Starting in: April 200343

Annex 2: Research methodologyDuring 2004, the NAO reviewed how far the funding recommendations from HM Treasury’s 2002cross-cutting review have been implemented (listed in Annex 1). While they researchedGovernment departments, they commissioned NCVO to research the experience of the voluntaryand community sector.Our research focused on investigating the sector’s perception and experience of progress made bygovernment departments in implementing the funding recommendations of the Treasury’s crosscuttingreview. It also identified barriers to progress and explored potential solutions.The research was carried out from May to November 2004 and included an online consultation,focus groups, interviews and workshops. A review of relevant, international literature was alsoundertaken.Online consultationAn online consultation took place from 19 May to 26 October 2004 to enable an initial explorationof the sector’s perception of progress being made with regard to the funding recommendations ofthe cross-cutting review. 172 VCOs responded, of which 145 were receiving government fundingfor providing services and 27 were not.Focus groups and interviews were conducted to enable a more detailed analysis of the issuesidentified in the online consultation and to gather examples of good and bad practice.Focus GroupsSeven focus groups were carried out, each with 5-10 participants. Four regional groups were held,comprised of organisations based in the Northern, Southern, London, and South West areas of theUK.Three groups were theme-based covering health, infrastructure and BME organisations.InterviewsNine in-depth interviews were carried out with chief executives of a range of VCOs includingestablished service providers, organisations not currently receiving funding for services and smallorganisations receiving a range of government funding.Consultation workshopsThe online consultation, focus groups and interviews were followed by two workshops. Theseevents involved feedback from the NAO and NCVO on the emerging themes followed by adiscussion on the policy implications amongst the participants.Literature ReviewA review of current literature was undertaken. The aim was to identify case examples of goodpractice from other developed countries relating to government funding for public services.NCVO has also produced a series of thematic research reports that cover the findings from thiswork in more detail.Further information is available on our website at

Annex 3: References and further readingIt is important that this report and its recommendations are not viewed in isolation.As this researchsought to chart the progress that has been made in improving the funding relationship since 2002,it must be situated in the context of the wider discussion and alongside the tools that have beendeveloped for funders and the sector to enable this change to happen.Listed below are some of the key documents that have informed implementation of the crosscuttingreview, and some further reading around the issues raised in this report.• ACEVO (2004) Surer Funding: the acevo Commission of Inquiry Report, ACEVO and NewPhilanthropy Capital, London• Blackmore,A (2004) Standing Apart,Working Together:A study of the myths and realities of voluntaryand community sector independence, NCVO, London• Blackmore, A et al (2005) The reform of public services: the role of the voluntary sector,NCVO, London• Fiennes, C et al (2004) Full cost recovery: A guide and toolkit on cost allocation, ACEVO and NewPhilanthropy Capital, London• Forster,T (2005) Funding Practice: Payments, timescales and renewals, NCVO, London• Forster,T (2005) Full Cost Recovery, NCVO, London• Forster,T (2005) Relationships with Local Funders, NCVO, London• Forster,T (2005) Monitoring and Evaluation Process, NCVO, London• HM Treasury (2002) The Role of the Voluntary and Community Sector in Service Delivery, A CrossCutting Review, HMSO, London• HM Treasury (2003) Guidance to Funders: Improving Funding Relationships for Voluntary andCommunity Organisations, HMSO, London• Home Office (2004) Think Smart…Think Voluntary Sector!, Home Office, London• Home Office and the Compact Working Group (1998) Compact on Relations betweenGovernment and the Voluntary and Community Sector in England, Home Office, London• Home Office and the Compact Working Group (2005) Funding and Procurement: Compact Codeof Good Practice, Home Office, London• National Audit Office (2005) Working with The Third Sector, NAO, London• Pratten, B (2004) Accountability and Transparency, NCVO, London• Unwin, J (2004) The Grantmaking Tango: Issues for Funders, Baring Foundation, London• Wilding, K et al (2004) The UK Voluntary Sector Almanac 2004, NCVO, London• Wilding, K et al (2004) Voluntary Sector Strategic Analysis 2004/05, NCVO, London45

This publication canbe made available inlarge print and alternativeformats on request.Please contact NCVOon 020 7713 6161for more information.National Council forVoluntary OrganisationsRegent’s Wharf8 All Saints StreetLondon N1 9RLTel: 020 7713 6161Fax: 020 7713 6300Textphone: 0800 01 88 111Email: to know? 0800 2 798 798or Registration: 225922The paper used for this publicationis sourced from sustainable forests.

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