Non‐profit vulnerability: An exploratory study

• Published date: 01 November 2017
• Author: John Watson,Rong Linda Zhai,Rick Newby,David Gilchrist
• Date: 01 November 2017
• DOI: http://doi.org/10.1111/faam.12129

Received: 5 March 2015 Revised: 21 December 2015 Accepted: 8 February2016

DOI: 10.1111/faam.12129

ORIGINAL ARTICLE

Non-profit vulnerability: An exploratory study

Rong Linda Zhai1John Watson2David Gilchrist1Rick Newby2

1CurtinUniversity, Perth, Australia

2TheUniversity of Western Australia, Perth,

Australia

Correspondence

JohnWatson, Retired.

Email:Prof.John.Watson@gmail.com

Abstract

This mixed-method study explores the symptoms and potential

causes of non-profit vulnerability within the Australian context.Fol-

lowing two focus groups with CEOs and Chairs of non-profit organi-

zations, an online survey was developed,pilot tested and distributed

to non-profit CEOs. Our findings suggest three symptoms that might

be particularly useful in identifying non-profit vulnerability: a sub-

stantialincrease in unit costs/delivery hours; a substantial increase in

theproportion of administration to program expenses; and a reduced

ability to pursue the organization's mission. The results also sug-

gestvarious potential causes of non-profit vulnerability; in particular,

Board inadequacies; External environmental threats; Project man-

agement issues; and Funding constraints.

KEYWORDS

causes, intervene, non-profit organizations, symptoms, vulnerability

1INTRODUCTION

Non-profit organizations1provide an array of social and community services touching almost everyonein some shape

or form. Indeed, government bodies in Australia (both Federal and State) rely heavilyon non-profit organizations to

deliver welfare services (Rainnie, Fitzgerald, Gilchrist, & Morris, 2012). These services include health, aged care, men-

tal health, housing and legal advice (Knight & Gilchrist, 2014). Often, the people most in need of the services non-

profits provide are among the most vulnerable in society (Gilchrist & Knight, 2014). As such, the ongoing viability of

non-profit organizations should be of concern to all because, amongst other things, a vulnerable non-profit might not

be able to continue to meet its service obligations (Gilchrist, 2014).2Therefore, the identification of keysymptoms and

underlying causes associated with non-profit vulnerability should be of considerable assistance in helping to prevent

the collapse of non-profits through the timely application of appropriate interventions. While the distinction between

‘symptom’ and ‘cause’ is not always clear, we consider a symptom to be an element, or feature, that is an overt indi-

cator of vulnerability,while a cause is a condition that generates that symptom and which might be overt or covert in

nature. While there has been much research undertaken with respect to predicting organizational vulnerability in the

for-profit sector,there has been far less research undertaken in the non-profit sector and very limited research in Aus-

tralia (Booth, 2012). Further,much of the research that has been undertaken (particularly with respect to vulnerability

symptoms) has been of a quantitative nature and has focussed on the financial data of US non-profit organizations. In

this exploratory study,we have adopted a mixed-method approach to provide a more in-depth understanding of both

Financial Acc & Man. 2017;33:373–390. wileyonlinelibrary.com/journal/faam c

2017 John Wiley & Sons Ltd 373

374 ZHAI ET AL.

the symptoms and causes of non-profit vulnerability.Given the significant variation in services provided by non-profits,

the aim of this study was to investigate both the symptoms and likelycauses of vulnerability with respect to social ser-

vices organizations. Followingtwo focus groups with non-profit CEOs and Chairs an online survey was developed, pilot

tested and distributed to the CEOs of Australian social services organizations. The remainder of this article comprises

of a brief summary of the literature relating to organizational survival, a discussion of the methodology adopted, the

results of both the focus group discussions and subsequent survey of non-profit CEOs and our conclusions (including

the implications for non-profit practitioners, the study's limitations and suggestions for future research).

2LITERATURE REVIEW

Twotheoretical bases have underpinned much of the prior research concerned with organization survival, namely,Pop-

ulation Ecology Theory (PET) and Resource Dependence Theory (RDT) (Pfeffer & Salancik, 1978). The focus of PET is

on whole populations of organizations rather than on individual organizations. Underpinning PET is the assumption

that organizations are rarely adaptive and, therefore, those that survive ‘fit the environment’(Singh, House, & Tucker,

1986, p. 587); that is, organizations rarely transform themselves to accommodate environmental changes. By way of

contrast, the basic assumption in RDTis that organizations survive by adapting to, and acquiring resources from, their

environment (Aldrich & Pfeffer, 1976; Sheppard, 1995); that is, to survive, an organization needs to have‘the ability

to formulate and successfully carry out resource-acquisition strategies’ (Bielefeld, 1994, p. 20). As will be seen in the

following subsections, most of the prior research into the symptoms and causes of non-profit vulnerability appears to

be underpinned (often implicitly) bya combination of PET (in particular, ‘liability of newness’ and ‘liability of smallness’)

and RDT;with the focus of these studies typically being the individual non-profit organization.

2.1 Symptoms of organizational vulnerability

We commence our literature review with an examination of the symptoms found to be potentially associated with

organizational vulnerability in both the for-profit and non-profit sectors. Beaver (1966) undertook one of the earli-

est studies examining how the financial ratio structures of failing companies differed from those of non-failing com-

panies. He employed univariate analyses to examine the predictive ability of various ratios and concluded that the

cash flow–to-total debt ratio had excellentdiscriminatory power five years before failure; that is, it was a very useful

symptom that could be monitored to provide an early warning sign of potential corporate failure. Following Altman

(1968), Beaver (1966) developed his now famous Z-score model to predictcorporate failure. The model was found to

be‘extremely accurate in predicting bankruptcy correctly in 94 per cent of the initial sample with 95 per cent of all firms

in the bankrupt and non-bankrupt groups assigned to their actual group classification’(Altman, 1968, p. 609). Altman's

(1968) Z-score is still used widely today by both academics and practitioners.Subsequently, Ohlson (1980) used logis-

tic regression analysis to predict corporate failure and found the following four (firm-based) factors to be statistically

significant in assessing the probability of bankruptcy: size, leverage,performance and liquidity.

Tuckman and Chang (1991) were the first to use financial ratiosto assess the vulnerability of organizations in the

US non-profit sector. Their US study investigated the likelihoodthat a non-profit would be unable to absorb a finan-

cial shock (such as a financial downturn or the loss of a major donor) without the need to cut back on the services it

provided. As part of their conceptual framework for determining non-profit vulnerability,Tuckman and Chang (1991)

adopted four criteria, namely: the equity ratio,revenue concentration, the administrative cost ratio and operating mar-

gins. They assumed that non-profits falling into the bottom quintile for all four criteria were the ones least likely to be

able to withstand a financial shock, and they were classified as severely at risk (highly vulnerable). Those non-profits

that fell into the bottom quintile for one to three of the criteria were classified as at-risk (vulnerable). Based on the

pioneering work of Greenlee and Trussel (2000), Tuckman and Chang (1991) derived a model to predict vulnerable

non-profits. They defined a vulnerable non-profit as one that reduced its program expenditures (as a proportion of

total revenues) in each of three consecutive years. Their findings suggest that three of the four variables identified by