Sustainable finances crucial for Institution’s future success

By Richard Judge Trustee, Vice Chair Finance Board and Chair, PEP Ltd and Clive Hickman, Deputy President and Chair, Finance Board

25 March 2024

Our Institution has been living beyond its means for many years. The origins of our financial issues stem back at least a decade, with additional pressures from the recent impacts of Covid. It has led to reduced member services, underinvestment in our HQ building and erosion of our free reserves.

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Many people across IMechE have made huge efforts to tackle this — notably through the 2019 Finance Review. There has since been considerable progress as Finance Board (FB) progressively implemented the Review recommendations. There is yet more to do. In late 2022, Trustees and FB called for an urgent “re-think” of expenditure and budget policies, together with another look at how IMechE operates, taking account of our new strategy. We recognised the need to resolve long standing questions about our HQ building and our trading subsidiaries (PEP).

We also wanted to be much clearer and more transparent in how finance information is shared, and open to debate – even (perhaps especially) when it feels uncomfortable. To this end, we have welcomed the advice and inputs made by Council representatives to our discussions. In addition, a Council Member and Young Member sit on Finance Board as observers.

This note updates you on three related areas of activity by FB during 2023: IMechE budgets; PEP futures; HQ plans. Our work draws on a breadth of experience from Trustees and Council, as well as IMechE’s own finance and operational teams.  Thank you to everyone involved!

IMechE budgets: one of the big shifts we introduced was moving from a purely annual budget cycle, to taking a 3-year view (in due course 5 years). The budget is detailed in Year 1 and gives direction over multiple years. That longer term outlook better supports delivery of our strategy.

Finance Board took a more active role in setting overall budget parameters. These were approved by Trustees in September 2023. The basic framework that we set was:

  • Living within our means. In any given year IMechE generates around £15m of income, 95% of which comes from membership fees. We should manage our budgets to achieve a £0.5m surplus to put into free reserves (funds we can access at short notice).

    These free reserves give us resilience to risks crystallising and bringing significant unexpected costs, which may happen once or twice over a 5-year period.  Our free reserves reached an all-time low of £2.7m in 2018. They have since coped with the pressures of Covid while slowly building back towards our goal of £11.6m (of which £7m mitigates risks of major building or infrastructure failure, although this feels too low). At the end of 2023 our free reserves were £7.9m.

  • Grants to member groups. £760k is currently allocated to member groups (plus £440k of related staff costs). FB has prioritised 10% year on year increases on these grants. We see this growth as really important: our local groups (whether linked to industries, engineering disciplines or regions) are the life-blood of our institution.

    We hear feedback from groups that they cannot afford the activities they’d ideally like, but also routinely we see underspends. That’s something we need to understand better.

  • Investing in our infrastructure: by increasing and designating funds specifically for building maintenance/ projects (see below) and IT refresh/ digital enablers. In 2023 we spent £2.5m on our IT systems and support, which increases to £3.2m by 2026.
  • Balancing the budget: The above is being made affordable by reducing overheads costs (much of this through digital investments), coupled with reductions in use of external consultants/ outsourcing. We will be looking in further detail at overheads and costs during the 2024 budget round, with a view to identifying possible savings. We also continue to explore options for income growth that can directly leverage our charitable activities (such as sponsorship or other forms of fundraising, venue hire, and so on).

PEP Subsidiaries: A refreshed strategic direction for PEP has been agreed by the Trustee Board, giving a focus on those commercial activities where IMechE is well placed to add value as an owner and where we can align commercial and charity ambitions. This refreshed direction takes us beyond seeing our trading activities purely as a source of income, instead recognising the valuable contribution they can make to advancing IMechE’s strategic goals.

We are keen to see the collective experience and expertise of our members, our employees and our trading businesses harnessed in ways that add direct value for our membership and that can advance knowledge, innovation and impact across the engineering communities we form part of. As a result, for example, the Learning and Development business is being more closely integrated into the activities of IMechE, while retaining its commercial ethos, to support and enable a more cohesive IMechE learning offer to engineers and engineering businesses. We are already seeing the practical value of such mutual support.

As we stated last year, we are also actively testing whether different owners could give our IMechE Argyll Ruane and Sonaspection businesses and their people greatest scope to take advantage of their strong market position and the many opportunities that exist. That work is on-going.

HQ plans: Heritage buildings, such as our Birdcage Walk HQ, require significant continuing investment. Industry rules of thumb suggest that we should be budgeting around £2.5–3m each year (for the entire HQ building) to cover a combination of on-going maintenance and designated funds put aside to cover future renovations. In practice, and for varied reasons that include uncertainties about the future of our HQ and a desire to prioritise member services, the actual budgets are far too low (£0.30m in 2023). Making up the historic shortfall in investment in our heritage HQ will involve significant sums.

That’s why reaching a decision on plans for our HQ is so important. It’s a decision that needs taking soon — to put ourselves back onto a sustainable financial footing for building repairs and future refurbishments, as well as to avoid the higher risk exposures of key facilities failing and amenities that are not fit for purpose. The decision itself will call for considered trade-offs between financial realities, the practical needs of our Institution and the value we place on factors such as our heritage.

In summary: we are making good progress, but there’s still a lot to do. We hope this note will take us towards reaching a shared, collective understanding of IMechE’s financial position. Having that as a starting point will allow us all to think more critically about priorities. Ultimately, it will help us to make better informed decisions about how to return to financial sustainability while delivering on our exciting ambitions.