One of the challenges non-profit organizations have to face is generating income streams able to prosecute their mission. Traditionally the social sector has mainly relied on its ability to collect donations but, in Italy as abroad, models connecting a more entrepreneurial spirit to the social mission are spreading. These approaches aim, for example, at increasing organizational sustainability, by diversifying income revenues and reducing dependency from a major donor, empowering the ability to allocate resources to support and scale core projects, and investing in internal capacity.
To this end, NPOs must implement strategic processes able to transform their impact model (Theory of Change) in an actionable and sustainable plan.
I talked with Nancy Osgood, founding member of the Leap Ambassadors Community and expert in revenue planning for social sector organizations.
What are the necessary steps a social sector organization needs to implement after developing a Theory of Change?
A fundamental point in the life of a nonprofit organization and its ability to produce impact over the long term is the quality of its strategic planning, and specifically, how it plans for revenue to support growth and impact. The problem is that too often NPOs miss a fundamental driver in their thinking: how to implement the impact plan in a sustainable way. For a planning consultant, this means not only helping an organization identify the best short term revenue opportunities but also teaching the organization to do that autonomously in the long term, that is, building its internal capacity.
A strategic planning process may start with defining or re-defining a Theory of Change. That is clearly at the top of the hierarchy in terms of what the organization needs to consider first. Once that is defined, the question is: “how do we make that impact plan actionable?” Effectively planning for the future requires two key things: 1) At a high level, determining the three-five most critical things to be done in the next three years to advance the mission, and the specific actions to support those, and 2) determining the amount of funding needed to accomplish those things, and specifically how to identify and secure those revenue streams.
NPOs achieve success with revenue growth when they follow a disciplined and thoughtful process. Such a process turns a long list of revenue ideas into a short list of strong, achievable revenue opportunities. This is accomplished by evaluating revenue ideas against each other, using a set of criteria that includes financial impact, mission achievement, organizational skills and other factors that address an organization’s specific situation and strategic goals. This is an important part of revenue planning, critical to an organization’s long-term sustainability. In the end, it delivers results by aligning resources with those opportunities most likely to deliver the best return (financial and mission) for the organization.
Do you see a growing demand by social sector organizations for this kind of capacity building services?
Yes, on the NPO side, our team is hired to lead the organization in a process that connects strategic planning and revenue planning. But funders have also supporter our work. They do that by funding our team to do intensive workshops with their grantees, specifically with their senior management teams where they learn how to identify additional revenue sources and then evaluate them to determing which have the best chance of producing sustainable revenue streams. The foundations realize that they are helping organizations not only with needed, short term revenue challenges but also by building their capacity to build their own revenue streams into the future. This is real capacity building, but done in a way that is much less expensive than funding individual organizations.
Could you explain why in your experience nonprofit organization may risk missing revenue-generating opportunities and what the main challenges are?
Organizations tent to focus on a very specific strategy for generating revenue. This can result from the perceived need to follow up on a Board’s idea, or because they heard about the “new cool thing” at a conference, which they feel will be the answer for them, too. They can invest so much time and energy to make that specific thing happen without first taking a step back to look at all the opportunities, and really assess those opportunities within the context of their culture, values, and core competences. With one big caveat: in the non profit sector revenues stream must be consistent with the social mission. In fact, organizations often jump into executing a new idea without ever quantifying the impact. Both risks result in missed opportunity and misallocated organizational resources.
Here are a few examples:
One of our clients was a University-based NPO. It’s work was highly dependent on two foundation funders that, decided not to support it anymore due to changing funding guidelines. Diversified funding streams did not exist, and this sudden gap presented serious issues for the organization’s sustainability.
This NPO’s work revolved around the collection of data from all over the US that were made available to for public use. The opportunity being explored when we started working with the organizations has been suggested and preliminarily funded by the foundations: developing and delivering workshops on data usage to organizations in the community. However, once the model was applied, the organization was able to see that this solution was far to small to solve the revenue problem. On top of that, the organization (staffed by PhD researchers and faculty members) did not have the selling skills required to execute the idea.
However, the model we use was able to help them identify 15 other revenue opportunities. Two in particular provided significant revenue and better matched the skill set and mission of the NPO. One opportunity was to create a philanthropic board of directors that would make significant indivual contributions. The second came from an analysis of users. As it turned out, significant use was occurring in other parts of the university. The case was made to the University that a portion of its budget should be funding this community-side asset.
Another powerful example involves a nonprofit client that serves children in high poverty communites. The mission of the organization, its prior success and stakeholder interpretation, created a ” mandate” of sorts to make these programs available through public schools in high poverty communities. While the outcomes were strong and recognized by the foundations as being high impact, the foundations had other funding priorities in the community, which capped the amount of revenue they could provide to the NPO. And, as a result, the number of programs that could be run by the NPO.
The NPO had been generating low levels of earned income by providing programs to wealthy suburban schools and libraries; but this business was not considered to be mission critical and was not proactively pursued. However, after working through the revenue opportunity identificantion and evaluation process, we learned that revenue generated in this way far exceeded the expenses necessary to deliver the programs. By actively pursuing programs for which there was already demonstrated demand, the NPO would be able to generate significant unrestricted revenue that would serve as a funding source for their mission critical work in high poverty schools. So, without introducing any new programs, and merely focusing on a business plan for growing this unrestricted revenue, the NPO was able to identify a revenue source that could serve as needed growth capital for the organization.
But “gem” and common thread throughout our was application of the model is this: Organizations often leave money on the table, and worse, expend scare resources pursuing revenue streams that are insignfication and do not align with the organization’s mission, culture and skill set. By applying the revenue opportunity identification and evaluation model, organizations have a much better chance of linking theory of change with strategies and tactics that will allow it to grow its revenue and its impact.
Nancy Osgood is a founding member of the Leap Ambassador Community. She is founder and president of The Osgood Group a management consulting firm that helps nonprofit organizations and socially focused businesses improve their performance, effectiveness, and sustainability. She is also on the faculty of Case Western Reserve University.