Capacity Risks are Real and Need Attention

Nonprofit organizations need to wake up to the fact that capacity challenges are real and can lead to increased risk exposure. Capacity risks come from many different sources and affect organizations in different ways and at times that are not predictable. Growth and unexpected disruption are the two biggest factors impacting capacity. Expanding risk management practices to include assessments related to capacity will help your organization to meet these twin challenges safely and effectively.

Capacity-related risk exposure needs to be considered in the same manner and with equal importance as more common threats, for example cyber security, system integrity, and safeguarding assets. At first glance, capacity risks might appear to be minor short-term problems, but these risks could have significant long-term consequences.

Risk exposure increases when organizations react to change brought on by growth and unexpected disruption. Nonprofits experiencing the adrenaline rush of growth often get caught up in the urgency to secure funding while conveniently disregarding their ability to fulfill on donor promises, adequately expand programs, or provide increased services. These thoughts are often relegated to the back burner for later consideration. This is the problem. Raising awareness about the impact of capacity risks and expanding capacity planning are the answers.

Capacity problems during periods of growth can lead to reputational risks resulting from inadequate program fulfillment, promises not being met, stress on compliance, and generally not meeting expectations. There must be a heightened sense of awareness to these poor performance factors. Reputational impairments are hard to reverse and are often long-lasting, resulting in potentially significant financial risk exposure.

Incomplete planning is the other key growth risk. So often securing funding is assigned a higher priority than program/project fulfillment. Organizations should not use funding to drive growth until adequate planning for use of that funding and assessment of capacity to meet program/project objectives is complete and the plans are determined to be achievable. As part of this process, organizations must assess whether they have staff with the right skills and time available to achieve success. In summary, nonprofits need to address capacity matters with the same vigor and importance as pursuing expanded funding.

Capacity can also take hits from unexpected disruption, leading to similar risk exposures as those caused by growth. For example, sudden cancellation of a program, staff reductions caused by the “Great Resignation,” and supply chain disruptions will all directly impair capacity.

In addition, long-term harm to reputation and trust could be a bigger risk exposure then short-term loss from the disruption itself. For example, program attendees could find other ways to fulfill their needs rather than return when the program is resumed. Returning unused grant funds to a funder could impact the awarding of future grants. And donors could become worried that the organization might not be able to perform as it has in the past and curtail future gifts.

Unexpected disruption can also lead to long-term impact on capacity due to changing sentiments both internal (staffing shortages, remote work, cost of health safety) and external (service delivery challenges, program curtailments, changing community needs). Partial or even whole infrastructures might need to be retooled to meet evolving new conditions.

Planning Tip – When completing periodic risk assessments, add a section to your enterprise risk management (ERM) checklist that covers these three capacity risk assessment areas: (1) capacity weaknesses (staff resignations, supply chain challenges, etc.); (2) capacity elasticity (the ability to adjust capacity up or down quickly); and (3) capacity alternatives (outsourcing, partnering with another organization, joint ventures, etc.).

Finally, make sure to check that your strategic plan does not take the organization in a direction that is beyond a level of capacity that can be reached or sustained. This is true for both growth (can the organization sustainably support expanded operations?) and downsizing (can the organization efficiently operate at a lower level of operations without recurring deficits?).