Resilience and relevance: the role of reserves in managing think-tanks

(This piece was first published in the Annual Review of On-Think Tanks, in April 2021)

You know that locked coffer you keep under your bed? The one whose key hangs round your neck? The one you have sworn never to touch? The one labelled ‘free reserves’?. There will have been some periods when, maybe, you have squirreled away a few gold coins, and have proudly added to the pile. There are likely to be many other periods, however, when you have stared glumly at the coffer, wishing it contained more. Probably, there have been some times, too, when you have reluctantly removed the key from your neck, opened the coffer, and removed some coins to pay the bills. Has the year of COVID been one of those?

No surprise if it has. A think-tank’s reserves exist precisely to cover expenditure in times of unforeseen crisis, either to deal with a shortfall in revenue, or to fund unexpected demands for additional work. COVID has subjected think-tanks to stresses on both dimensions: putting cash flow under pressure at just the time when policy-makers are crying out for new work. It is not the first crisis to have had this impact; and it will not be the last.

In this context, a think tank’s reserves are crucial to both resilience and relevance. And, for this reason, the reserves policy is not an arcane topic to be left to the accountants on the finance committee, but rather a key management tool. Several issues arise, however.

First, it is really hard to accumulate reserves. Very few donors are willing to give money that will sit unused in an investment account, waiting for a rainy day. Many demand such tight accounting of project expenditures and overheads that it becomes impossible to make a surplus and build reserves. In those circumstances, one of the only solutions is for reserves to grow themselves, via interest payments or capital gains. But trustees will usually insist that reserves are held in safe securities, and that they are relatively liquid, so returns are always likely to be low.

Donor policy needs to change in this respect. Think-tanks need reserves, and donors should encourage them to generate the surpluses that allow them to do so.

But how big should the surpluses be, and what reserves are needed? Historically, institutions have often used a rule of thumb, based on some proportion of operating expenditure: three months, or six months, or nine months. A more analytical approach is to carry out a careful risk analysis, and calculate the size of reserves needed according to the likelihood of shocks, and the success or otherwise of mitigation measures. That is certainly worth doing as a management exercise, and is likely to lead to a number somewhere in the 6 month range. It is hard to get to that point from a standing start, though, especially if the think tank is growing. A six month margin today can easily transform into a five month margin if revenues rise and reserves do not - then four, then three. The Board will need to watch this carefully.

And, then, what happens if the risk profile changes? That is the challenge thrown up by COVID. It is a familiar problem for households, businesses, and even Governments. The risk register is not a static document. New information and new events mean that the risks need to be re-analysed. Sometimes, the insurance premium or the amount needed in reserves will fall. Sometimes, probably quite often, it will rise. Few countries, for example, will think after COVID that they need fewer intensive care beds in their hospitals, or fewer doctors and nurses, or a smaller capacity to carry out health research: greater redundancy will be needed across the system. Similarly for think-tanks: COVID will be an unpleasant reminder of how serious shocks can be. Re-building reserves is likely to be a priority, even as the general financial situation needs to be strengthened.

So, don’t be tempted to raid the coffer for gold coins unless you really have to. Keep adding coins as you can. And, if you are leading a think-tank, keep the risk register on your bedside table.