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Strategic Planning: What’s the Point?

John Bauer April 13, 2016 blog, News

I see it all the time. A charitable nonprofit organization spends a lot of money on a consultant to shepherd them through a traditional strategic planning process, only to end up watching the organization continue on the same trajectory of mediocrity or slow decline. Or perhaps conditions change that significantly alter the operating environment and the once hoped-for vision of the future is jettisoned in order to address more immediate concerns. Or worst of all, a beautifully crafted, four-color strategic plan dies on the shelf because the organization lacks the tools, leadership, or resources needed to turn the plan into action.

One could rightly ask, why even bother? If you can’t expect demonstrable improvement in either mission impact or financial sustainability, why go through the rigors of strategic planning? All too often, strategic planning is nothing more than an academic exercise, consuming human and financial resources, with little to show for it at the end of three or five years. It’s no wonder that some CEOs hate having to go through it.

The last thing I will tell you is to give up on strategic planning. But I will also quickly add that the process, as it has been developed and practiced in recent decades, is inherently flawed and limited. I say it is flawed because it often is based on either false or untested assumptions about the future. And I say that it is limited or incomplete because strategic planning as a discipline is not dynamic enough or conceptually robust enough to respond to changing conditions. Finally, most strategic plans fail to articulate and measure strategic actions that can substantially “bend the curve” of performance to achieve the overall vision.

Every organization should have a vision for the future. It should be bold and challenging. It should have the capacity to direct action. The exercise many organizations go through, however, once a vision or strategic position has been identified, is to “back-cast” from the vision to articulate the intermediate actions that are required to move the organization toward that vision. Sounds logical. But every one of those intermediate steps is based on the assumption that the vision will be as relevant five years from now as it is today. All I need to do to dispel that notion is to say the date: “September 2008!” Who could have anticipated the far-reaching impact of our country’s economic recession? And how many of us (and I include myself) were guilty of having constructed strategic plans in the months prior based on assumptions of continued growth? So at the outset, let’s agree that setting a vision or strategic position that describes with a high degree of accuracy (or arrogance) what the organization will look like in three to five years is imprudent to say the least.

Let me share what I have learned about strategic planning over the years and suggest that there might be a better way of doing things. At the heart of this approach is the word continuous. The days of crafting a strategic plan with a three or five-year horizon that is going to serve as the “bible” for action over that time period have to be over. To think that such a plan is sufficient to direct strategic decision-making over such a long time period in today’s fluid environment is ludicrous. Having said that, I do still believe in writing strategic plans that have a three to five-year horizon. Hypocritical? Self-contradictory? Not at all. Let me explain.

Because the strategic planning process, when done well, engages a broad spectrum of stakeholders, repeating this strenuous activity more frequently than every three years would be exhausting. I am a strong advocate of tearing the plan down to the ground and starting over every three to five years. The larger the organization, the farther the horizon. Small organizations have fewer moving parts and usually more narrow missions and are more capable of managing the planning process without disruption of services. Regardless of the size of organization, how that plan, once completed, is used to guide the organization on a day-to-day basis and to actually effect change and achieve the preferred future described therein – ah, there’s the rub! And therein lie the keys to effective planning as well.

So what’s missing in how strategic planning is typically conducted that leads to failure? What additional processes or functions need to be integrated into strategic planning to ensure continued relevance and success? What is the real purpose behind strategic planning and how can that goal be achieved without falling victim to the pitfalls described above? Following are a few of my thoughts in this regard about how to construct a strategic plan that can keep the organization focused on its vision, remain true to its mission, and still function in a strategically nimble manner as the operating environment undergoes change.

Process Determines Product. Many CEOs assign responsibility for leading the strategic planning effort to either a designated strategy officer if the organization is large enough (I was one of those!) or to a consultant who purports to know how to facilitate this process (I am now one of those, too!). Unfortunately, my experience has shown that many if not most consultants apply traditional processes extracted from the business world without really understanding the dynamics at work in the organization and its environment, nor do they equip the organization with the tools needed to operationalize the plan once it is completed. All too often they engage organizations in activities such as SWOT analysis or the aforementioned “visioning” exercise without questioning the rationale or the value of that activity. Likewise, I have found that just because a consultant is an excellent facilitator does not mean that he or she is current in the literature around strategic planning. The fact is that not all traditional strategic planning processes are appropriate for nonprofit charitable organizations and do not provide a template for nimble decision-making in a rapidly changing environment. More appropriate processes must be utilized if the desired result is a more relevant and effective strategic plan. Excellent alternatives to traditional models of strategic planning have been developed by McLaughlin and Allison and Kaye.

The Plan Lives. Make the Strategic Plan the principal reporting and evaluation document of the organization. This can be accomplished in a number of ways. With respect to the Board of Directors, I would suggest dispensing with all customary operating reports and placing them into a consent agenda. I would structure the agenda of Board meetings around the Strategic Plan with progress reports focused only on the accomplishment of strategic objectives, and/or reports on alterations due to changing conditions. If you meet regularly with your leadership team (I used to hold weekly “huddles”), devote one longer meeting per month to review the strategic plan, performance data, and assignments related to accountability measures. Tactical challenges to achieving strategic goals and objectives might result in alterations to the plan. Such regularized formal executive review also holds individual leaders accountable for progress.

Mission vs. Sustainability. Too often, organizations engage stakeholders in ethereal discussions about mission and vision without testing the financial viability of that mission. A good mission statement should describe the what, where, why, how and with whom questions. But mission statements are effective only if they can be translated into sustainable programs and services. Here is where many organizations go off the rails. Let’s face it. There are many wonderful things that need to be done in the world to serve and support others. That’s what charitable nonprofit organizations exist to do. But not all of those wonderful services can be supported. In other words, they are not sustainable. I would argue that an organization’s mission must be continuously balanced against the concern for sustainability and that the time to do this is at the beginning of the strategic planning process. In a methodology developed by Bell, Masaoke and Zimmerman, the programs and activities that flow out of an organization’s mission should be rated with respect to two key factors: impact and profitability. As part of a thorough evaluation of mission, every nonprofit organization should ask itself whether or not each of its various programs and services are critical to the mission by having a large impact on the largest possible number of people, and whether or not those programs and services can be supported, either on their own, or with subsidy from other profitable areas of the organization. Allison and Kaye provide an excellent example of how such an analysis of the business model can be integrated into strategic planning.

Rolling Plans. Promote continuous and rolling adjustments to the plan to reflect changing realities. While I believe a three to five-year horizon is appropriate, I also believe that the staff should provide formal updates of the plan on an annual basis. In other words, the strategic plan should be a “rolling” three to five-year plan with the board of directors adopting each new annual iteration. In some smaller organizations, a new and updated “version” of the strategic plan could be presented at each quarterly board meeting. The point is that thinking in shorter time periods promotes continuous evaluation of progress, continuous scanning of the operating environment, continuous accountability by persons responsible for executing aspects of the plan, and continuous reporting to stakeholders. At the same time, I am not an advocate of having a perpetually rolling strategic plan. There is great value to periodically tearing the plan down to the ground and starting over, if for no other reason than to engage a broad spectrum of stakeholders in this critical “ownership” activity and to test the validity and viability of the vision, mission and core values statements.

Business Intelligence. One of the biggest limitations I have observed is the lack of meaningful data which actually measures the performance of the organization in those variables which define the stated goals and objectives. Too often, a goal for growth is stated with no connection to the actual activities that will determine success or failure in achieving the goal. For example, a strategic goal might call for an increase of 20% in the number of people supported, but no data points are identified with respect to who that population might be, where they would come from, and which measurable tactical steps would be required to recruit and engage those possible clients. Having up-to-date information that informs the organization of its performance is absolutely critical to success. Increasingly, nonprofit organizations are realizing the need for robust business intelligence systems. In the past, only a very few nonprofit organizations could afford to build such data base management systems. Fortunately, new tools are available which have the potential to significantly improve an organization’s ability to access, manage, and effectively utilize data from multiple sources within the organization. One excellent example is the Microsoft product called “Power BI.” This tool is well supported, easy to use, and has a great deal of capacity for data analysis and reporting.

Resource the Plan. Smart organizations will build their annual budgets around their strategic plan and will work with a planning/budgeting cycle that integrates the two processes. However, another shortcoming of many strategic planning efforts is the failure to consider the cost of executing the plan. While budgets may reflect anticipated revenue and expense from a new program, it is pretty rare to see an organization put a dollar figure to the human hours required to manage and execute the strategic plan. There seems to be an unspoken assumption that the current staff will absorb the responsibility for executing the planning initiatives within the framework of their existing hours and manpower. This “do more with the same or less” approach is destined to fail. The truth is that executing a strategic plan requires more attention, more review, more monitoring, more reporting, more planning, more leadership – in short, more of everything. Therefore, in addition to the added revenue and expense associated with new or expanded programs and services, the administrative costs to the organization should be incorporated into the planning process and included in operating budgets.

Bias Toward Strategy. From the foregoing, it should be pretty evident that I am an advocate of continuous planning and evaluation. The episodic strategic plan can serve as the platform for such a dynamic approach, but only if it is viewed as a framework for continuous strategic decision-making. Leaders of charitable nonprofit organizations need to employ tools that promote strategizing, as opposed to strategic planning. Strategic thinking should be the stuff of every executive’s daily intellectual diet. How is it going? What’s changing? Where are we vulnerable? How effective are we? Who needs to be engaged? And a thousand more questions all focused on the current position of the organization in its current environment, moving on a trajectory toward achieving a vision requiring constant testing and refinement. Tools and resources which promote such thinking are not traditionally integrated into strategic planning processes. I think part of the reason for that lies in the fact that consultants are engaged to produce a product within a fixed number of billable hours. The “deliverable” is a nice looking, inspiring document that can be shared with donors, but which is usually devoid of any means for actually accomplishing the stated goals. Fortunately, some very good thought into this shortcoming is finding its way into the nonprofit world. An example would be David LaPiana’s very good book The Nonprofit Strategy Revolution. With an emphasis on strategy and execution, he provides methods and tools for leaders to turn away from planning as an end and toward strategy development and action.

Concomitant Risk Management. Finally, the best strategic plan in the world cannot prepare an organization to deal with the devastating effects of a national economic meltdown, a natural disaster, criminal activity by employees, loss of a donor-database, or any of a hundred other catastrophes that can and do befall nonprofit organizations. In the wake of Enron and Sarbanes-Oxley, many nonprofit organizations have beefed up their board audit committees to include ethics and risk assessment. A few have even developed tools for monitoring key risk factors and assigning key staff to lead risk mitigation teams in an effort to minimize both the likelihood and negative impact of various types of risk. I would strongly encourage every nonprofit to seriously attend to this issue, and if lacking in knowledge or expertise in this regard, hire someone to facilitate that process. The point I wish to make here is that I have not seen any nonprofit organization integrate risk assessment into its strategic planning process. And by this I do not mean conducting a SWOT analysis. I do not consider weaknesses and threats, per se, to necessarily be risks to the organization. They are factors to be managed, certainly, but they do not by their nature represent an unpredictable event that could do harm to the organization. What I am referring to are those risks which could significantly alter the direction of the organization, especially in pursuit of its strategic vision. One example in the nonprofit social service area would be the attempt by a labor union to organize direct support professionals. Another might be the damage caused to the reputation of the organization by the sexual abuse of a client. Trust me, there are a hundred and one ways in which a nonprofit organization can be damaged by an unforeseen event. Understanding the nature of risk, planning scenarios to address various risks, developing plans to mitigate those risks – these are all critical activities that are directly related to the organization’s ability to achieve its strategic vision. Integrating risk assessment and management into the strategic planning process will help the organization become and remain adaptable in the face of uncertainty.

Well, that’s my laundry list of some things to consider when undertaking the next comprehensive strategic planning process. I am currently writing a longer-length article which lays out in more detail what a model might look like which incorporates these factors. I’ll keep you posted when it is available.

In the meantime, if you would like to discuss the strategic planning process in your organization, please give me a call. I’d love to chat about how some of my thinking in this regard might help you and your organization plan for a preferred future.

Recommended Sources on Strategic Planning, Sustainability, and Strategy:

Allison, Michael and Jude Kaye. (2015). Strategic Planning for Nonprofit Organizations. 3^rd edition. Hoboken, NJ: John Wiley & Sons.

Bell, Jeanne, Jan Masaoka and Steve Zimmerman. (2010). Nonprofit Sustainability. San Francisco, CA: Jossey-Bass.

LaPiana, David. (2008). Nonprofit Strategy Revolution. New York, NY: Fieldstone Alliance.

McLaughlin. Thomas (2006). Nonprofit Strategic Positioning. Hoboken, NJ: John Wiley & Sons.

Sins of Omission

John Bauer February 19, 2016 blog, News

Theologians distinguish between “sins of commission” and “sins of omission.” Ethicists devise systems for deciding what makes a right act right and a wrong act wrong. Most religious people feel guilt over breaking of the Ten Commandments as opposed to those things they could have done but didn’t. I guess that’s natural. People aren’t generally held accountable for things they fail to do, especially if there is no rule or command that obligates them to do something. For example, driving past the motorist who is broken down on the side of the road and donating to charity are generally believed to be good actions, but nobody gets punished if they choose to withhold such mercy.

At the same time, we know that most people do feel regret over things that they didn’t do in their lives more than they do for overt mistakes. These are often in the form of missed opportunities or failure to spend more time with family or friends. Some sins of omission can cause significant harm, though. For example, parents who withhold love and acceptance from their children can do damage to their children’s long-term psychological health. Failing to study in school can lead to severe career limitations.

I find it interesting that in Jesus’ story of the sheep and the goats found in Matthew 25, the goats were condemned, not for their evil deeds (sins of commission), but for what they failed to do (sins of omission):

(41) Then he will say to those on his left, “Depart from me, you who are cursed, into the eternal fire prepared for the devil and his angels. (42) For I was hungry and you gave me nothing to eat, I was thirsty and you gave me nothing to drink, (43) I was a stranger and you did not invite me in, I needed clothes and you did not clothe me, I was sick and in prison and you did not look after me.”

(44) They also will answer, “Lord, when did we see you hungry or thirsty or a stranger or needing clothes or sick or in prison, and did not help you?”

(45) He will reply, “I tell you the truth, whatever you did not do for one of the least of these, you did not do for me.” (NIV)

So what does this have to do with executive leadership and board governance?

I have been writing about the responsibility of chief executive officers to cultivate a culture of engagement in their boards of directors. I have even suggested some practical ways in which such engagement can be enhanced. I would further argue that this responsibility of the CEO to “feed and clothe” a positive environment extends to the entire organization.

What I find interesting in most organizations is that you won’t find this critical responsibility listed in the CEO’s job description. In most organizations I am familiar with, the CEO could perform his duties as described in his position description perfectly, and the board could still be highly disconnected and the staff culture remain largely dysfunctional. This may be due in part to the highly subjective nature of interpersonal relations and group dynamics. But it is also because organizations are very reticent about legalizing acts which would most often fall into the affective domain. It is just assumed that an effective CEO is going to be a good person to work for and one who cares about employees, clients, board members, donors, etc., and will do what is necessary to cultivate positive relations. On the flip side, I don’t know of many boards that would fire their CEO for not being loving enough!

Notice, however, that Jesus did not suggest that those on the left violated any kind of commandment such as “Thou shalt feed the hungry.” Nope. The only commandment Jesus ever gave in the realm of human relations was “Love your neighbor as your self.” And therein lies the nub of the matter. Those on the left were not guilty because they withheld food or clothing. They were condemned because they did not show love to their fellow man.

I am writing this primarily to the leaders of mission-driven nonprofit organizations, but the principle is applicable across the entire spectrum of human organizations. If leaders truly believe their role is to serve (be it people, clients, shareholders, board members, investors or whomever) rather than to be served, then there is only one rule to follow: love the people you lead. Examine your heart and test your motives in all your corporate relationships:

Do your employees know that you care for them and appreciate their work to the point that you have their interests above your own, or are you perceived as indifferent and more concerned with your status or control?
Does your board feel that you “feed, clothe, visit” them so their service on your board is not only professionally enhanced, but their engagement is received by you with gratitude?
Does the organization’s culture of service delivery demonstrate love, care and compassion to the people who are supported, or are they viewed as commodities to be managed?
Does the community in which you operate associate your organization with care, love, concern, justice and compassion, or are you viewed more as a business or just another employer?
If your leadership team is not functioning up to its potential, is it “hungry, naked, sick or in prison” and in need of the support, encouragement, coaching, training and leadership that only you can give?
Do you and your organization bring value to the world by enhancing lives, or are you more concerned with monitoring key performance indicators to make sure it is operationally efficient?
Where do you spend your time? With people, or on tasks? And what do you really care about? Getting the job done, or helping people fulfill their potential?

I doubt if these acts will be found in a job description. Active engagement in these activities won’t necessarily lead to big pay increases or a positive bottom line. Nor does failing to address them necessarily represent dereliction of duty – however that may be defined. But failing to do these things can cause harm. Your work will be less fulfilling. Your organization will be emptier. Your board and staff will be less engaged. Your quality of services, support by donors, and loyalty of employees will be diminished.

Sins of omission do have negative consequences. In your leadership role, try to be mindful of how you have been shown love by people who care for you and for whom you care, and then try to reflect that love through your leadership. It is, after all, the most fundamental and universal human need.

If you would like to talk more about what this might mean for you and your organization, please give me a call or drop me an email. I’d love to talk more about this important dimension of leadership.

Photo Source: http://www.philoptochos.org/outreach/projects/feeding-the-hungry-250000-meals

Board Engagement: Creating a Conducive Culture

John Bauer January 26, 2016 blog, News

One of the most common complaints I hear from nonprofit CEOs is that the members of their boards of directors are not ‘engaged.’ What this means can vary, but in general the complaint seems to be about a lack of interest and involvement between board meetings, lack of preparation and participation in board meetings, and minimal support for fund raising efforts.

There are numerous reasons often cited for this apparent malaise. Some suggest that the recruitment process is flawed, or that the CEO has minimal input to board nominations. The notion here seems to be that if more rigor was applied to identifying high-quality board members, the quality of engagement would improve. Better board members would lead to better board engagement. As I have previously written, I was among those who thought that using sophisticated evaluation tools to generate asset matrixes would help identify those individuals who could really supercharge our board and elevate board engagement. And even though I had plenty to say about nominations, usually by feeding candidates to the governance committee, the results were often less than expected.

Others have suggested that ambiguous policies about roles and responsibilities for board membership might be the root cause. The thinking goes that when expectations are clearly articulated, board members would have no choice but to step up their involvement, especially if accompanied by periodic evaluation of director performance. There was a time when I held to this view also, especially as it related to expectations for board members to contribute financially to the organization. Strangely, getting such policies adopted by the board which laid out those expectations in crystal clear language didn’t do all that much to improve board member giving or participation in board meetings. And incumbent director evaluations tended to be ineffective, owing mostly to the reluctance of board members to hold their colleagues accountable.

Still others suggest that the model of governance is to blame, pointing to the need for greater emphasis on policy-based board governance. The thinking is that the use of such a method can lift boards above the traditional milieu of passively listening to staff reports or approving routine recommendations with little discussion. Keeping the focus on policy issues would seem to engage directors intellectually around things that really mattered and away from management issues. With all due respect to John Carver and the good work he did to elevate the quality of board work, in my experience the form or structure of governance, though important, has little to do with board engagement.

Finally, some like Richard Chait have looked at board governance as a critical form of leadership that is best expressed through generative discussion, in contrast to the traditional functional or strategic forms of board leadership. This view considers the intellectual capital provided by board members as the greatest asset to the organization. Generative discussions are those which are focused on the essential challenges facing the organization and are stimulated at board meetings by introducing a critical question and allowing prime time for debate. Background knowledge is provided either before the meeting or as a preface to the discussion. In my experience, such meetings can be incredibly stimulating and valuable to the board and the organization’s leadership. But they can also be painfully awkward periods of silence during which few directors care to engage in debate.

From these experiences, I have come to conclude that board engagement has little to do with any of the foregoing. Don’t get me wrong, they are all important contributors to effective engagement. Getting the right board members is important. Having clear policies around roles and responsibilities is a essential. Using a governance model that works well for the organization is a good thing. Engagement in generative discussion is a good use of board member gifts and abilities. But whether any of these leads to effective board engagement is debatable. I have concluded, instead, that board engagement is a function of something else entirely.

And what might that be? I believe effective board engagement is the result of the “culture” that exists in the board. From a sociological or anthropological perspective, culture consists of the language, interpersonal relations, values, rites, rituals, tools and behaviors of the group. If one thinks about the board in tribal terms, one can begin to see how the board has an identity of its own that is influenced by leaders and followers as they demonstrate the behaviors which are judged to be essential to group survival or functioning.

To illustrate my point, think about any type of human association or organization such as congregations in a particular denomination, or Rotary clubs, or even athletic teams. They all may follow the same liturgy, rules of the game, or agenda. They may all adhere to the same principles (e.g., creeds, 4-Way Test, playbook). They may have within the category the same membership qualifications and a shared vocabulary. But I think you’d agree, if you have been a member of more than one of the aforementioned, that even within a narrow category you will find wide variations among the individual organization’s cultures. Some congregations are dying and worship is boring. Others are bursting at the seams. Some Rotary clubs are adding enthusiastic younger members while others are shrinking or dying out. Some athletic teams find ways to win while others of apparent equal talent can never seem to work together. All within the same narrow categories of type.

Why do some thrive and others fail? In my opinion, it is ALWAYS about leadership. Whether it is the pastor or the club president or the coach, quality leadership is the principal driver of the organization’s culture. The leader shapes the tone, the vocabulary, the values and models of behavior. The leader makes participants feel that their belonging is valuable to him/her and to other members. The leader makes sure that every member of the organization has a critical role to play. The leader creates the environment (service, meeting, game) in which members can express their value and contribute to the benefit of the whole. And no matter what the membership looks like, or the rules of participation consist of, effective leaders find ways to keep members engaged in supporting the raison d’être of the group.

In most nonprofit organizations, this responsibility falls to the chief executive officer. Of course, the board of directors is technically his/her employer and has a chairman who represents the board in its dealings with the CEO. But I would argue that the CEO who is an effective culture leader is one who works in close harmony with the board’s chair to ensure the success of the chair and the board in achieving mutually agreed upon goals. Isn’t that, after all, the very definition of leadership?

My good friend, Byron Tweeten, describes it this way: “In my experience, the most successful nonprofit organizations have developed a partnership between the board and senior management that engages leadership more strongly in a relationship that ensures a smooth transformation and sufficient resources during a time of change.” This means frequent conversations around direction, ownership, vision, engagement, big issues, and how to effectively engage every board member in the process of leading the organization through its governing practice.

Here is a short list of ideas that CEOs might consider if they wish to create a culture that nurtures and supports board member engagement in the manner I have just described:

Use the board meeting’s agenda as the canvas on which to paint the picture of engagement. Is every agenda item crafted to maximize the value of the board?
Dump all non-essential reporting items into a consent agenda and send the reports out ahead of time. That way, if there are any questions, it is up to the board member to actively remove the item from the consent agenda for discussion. Otherwise, all routine reports are approved or accepted en masse. Make sure every item on the agenda is engaging.
Structure the board’s meeting agenda around the strategic plan in order to keep the focus of the organization on mission and vision. Report only on key performance indicators and debate progress.
Allocate a significant amount of time for generative discussion on critical issues.
Task the Executive Committee of the Board with conducting the annual fund solicitation of board members, setting a goal and working collegially to achieve it. In other words, engage board leadership in engaging all board members in reaching a shared goal.
Promote free discussion by resisting the temptation to provide answers to every question. Accept criticism and don’t get defensive. No one expects the CEO to know everything or to be perfect. Getting defensive is a sure way to lose board commitment.
Make sure that board members are having their needs met through meetings. (See my previous post: Board Engagement: What’s In It For Them?
Is shared leadership truly valued? Or does the CEO view the board as a necessary nuisance? That attitude will be evident to perceptive board members and will kill engagement in a hurry. Boards are valued partners and should be treated as such. Do an attitude check.
Set aside sufficient time to educate the board on important issues or challenges facing the organization. Help them in their roles by providing the knowledge tools they need to be more effective.
Hold an occasional board meeting at a location where services are provided so the board can see first hand the good work being done by the organization. Give board members opportunities to interact with people supported, to live out part of the mission.
Conduct an annual board development retreat which focuses on them, their needs, and what they think are ways in which they could be more effective.

So, when CEOs complain to me that their boards just don’t seem to be engaged, I’d suggest they look at themselves and examine their effectiveness in shaping and leading the board’s culture to embody and express the values they wish to see. The fact is that the attitude, disposition and behavior of the CEO as they combine to shape a corporate and governance culture have more to do with effective board engagement than any do any models, policies, tools, or agendas.

Want to comment? Feel free to add to the discussion, disagree, or offer your own theory.

Works Referenced:

Carver, John and Miriam. (Rev. ed. 2006). Reinventing Your Board: A Step-by-Step Guide to Implementing Policy Governance. Jossey-Bass Publishing, San Francisco.

Chait, Richard. (2004) Governance as Leadership: Reframing the Work of Nonprofit Boards. Wiley and Sons, New York.

Tweeten, Byron. (2002). Transformational Boards: A Practical Guide to Engaging Your Board and Embracing Change. Jossey-Bass Publishing, San Francisco.

Sustainability: Alternative Sources of Revenue

John Bauer January 14, 2016 blog, News

Aside from cutting expenses and ramping up the traditional forms of fund raising, what alternatives are there for nonprofit organizations to improve their financial position for the long term? Assuming you are willing to step outside the box regarding fund raising and explore other options with an open, growth-oriented mindset, there are a variety of options available to consider. Here is my short list of a half dozen strategies you might wish to explore. Some of these may seem obvious while others would require expertise above the usual intellectual and professional assets available internally to most nonprofit organizations. Nevertheless, some leaders have found ways to exploit these strategies to their benefit, so I’m not suggesting anything that hasn’t already been tried.

Monetizing Existing Fixed Assets. If your organization is property rich and cash poor, you may wish to explore ways of monetizing your real estate. This is particularly true of organizations that have fully depreciated properties that are paid for. Even if you have no desire to relocate, selling such property to an investment firm with the intent of leasing it back from them might be an effective strategy. Firms that manage large pension funds are especially interested in buying property that has cash flowing through it. Group homes, nursing homes, clinics, office buildings, etc. are good investment vehicles for such firms. The advantage to the nonprofit is that it infuses immediate capital into the organization that can be invested, used for needed capital projects, or placed in a fund to subsidize operating losses. It may even be feasible for groups of nonprofit organizations in the same state to pool their real estate assets and form a real estate investment trust (REIT) or a single purpose vehicle (SPV) to buy the properties, manage their upkeep, and return a portion of the revenue stream back to the organization. Senior services organizations have utilized this strategy effectively.

Renewable Energy. This may not be a viable option for organizations that are situated in urban areas, but I know of nonprofit organizations located in rural parts of the country which own land that could be used to support energy production. Whether wind, solar, waste processing, or biomass, there are companies ready to build and manage turn-key operations to produce electricity and/or natural gas. What they don’t have are the tax credits, renewable energy credits (green tags), bond financing, land, permits, suppliers, buyers, licenses and subsidies that are available to nonprofit organizations. So, being able to lease land to developers in exchange for energy and/or a percentage of the net revenues that are obtained from selling power to the grid may be a possible source of revenue. It may be worth having a conversation with an energy consultant. And if access to the energy that is produced is possible, reduced dependency on a large power grid is seen by many as important in times of crisis.

If you are interested, I can put you in touch with an outstanding renewable energy consultant who is a knowledge pioneer in this field.

Supporting Foundation or Endowment. Of course, it would be great to have a supporting foundation which would kick off earnings every year to offset operating losses, pay for improvements, or enhance services. Who wouldn’t want that? But most nonprofit leaders would say that the first priority has to be making sure salaries are paid and that the lights still go on. I get that. But we are talking about long term sustainability here so what I’m suggesting is that you ask yourself what it will take to ensure the future ten, twenty or fifty years from now. Assuming your organization has an active development function that is working with donors, one strategy might be to impose the discipline needed to create such a supporting foundation through a policy that requires all undesignated legacy gifts to be placed into the foundation or endowment fund.

A foundation is a separate legal entity with an independent board of directors. An endowment fund can be governed by the organization’s board but is restricted by policy. Depending on the size of the organization, either option can work. I’ve had experience working with both models. The key is in developing policies that achieve the objective and meet the requirements of the law.

In my humble opinion, every organization without regard to size of budget, should have a fund set aside to support long term viability.

Social Enterprise. Many nonprofit organizations have supported enterprise activities which generate non-operating revenue. For example, who hasn’t considered starting a thrift store or holding an annual garage sale as a way to raise money? However, through personal experience at an organization that had a network of 22 thrift stores around the Midwest, I can tell you that the days of huge profit margins built on free volunteer hours and low overhead costs are going away. Volunteers are aging and the costs of leasing and utilities are shrinking profit margins. Requirements for paid managers, police background checks for volunteers, and the diminution of qualified employees add stress and expense. Unless you have the capacity to go “large scale” like Goodwill, your return may not be at an acceptable level.

What nonprofit organizations might consider as an alternative, is investing in a for-profit enterprise that addresses a particular supply need within the service area and which could channel some of its earnings to the nonprofit as operating revenue. One example comes to mind in which a large, national service provider acquired a manufacturer of adult diapers. Not only was the business profitable, but the agency had a huge on-going need for its product, which it could now obtain at cost. And if employment opportunities are made available for people supported by the organization, well, that’s gravy on the mashed potatoes!

Another form of social enterprise builds on the in-house expertise of the organization. Sharing that knowledge with others through online webinars, videos, and subscriptions to resources has emerged as a very cost-effective way to generate additional non-operating income. Nonprofit human care organizations are required to conduct a significant amount of employee training. Capturing such training in the form of audio, video and print materials that can be marketed and sold online may provide a return from activities that are already a part of doing business. For ideas on how to explore this form of enterprise, I recommend reading Jeff Walker’s book, Launch. (See the reference below.)

A Google search for “social enterprise” will yield a plethora of learning materials, models and resources. I encourage you to check them out for ideas.

Strategic Collaboration. Sometimes, the cost of operating a nonprofit charitable organization is too great for the agency to remain viable in the long term. Numerous factors may contribute to its vulnerability: competition from other agencies, lack of volunteers, increased overhead expenses, increased regulation, diminishing reimbursement rates for services, and geographic constraints. Still, the mission is noble and good work gets done. To contemplate the organization’s demise is almost immoral. If the mission is relevant and the services meet critical human needs at a high quality of service, then leaders must consider those aspects of the organization that are not “mission-centric.” And what are those? How about all the back office operations that keep the place running like finance, HR, communication, maintenance, technology and all the other things that together comprise “administrative expense?”

What if the mission could be sustained without having to support large administrative staffs? Such thinking opens the door to consideration of forming strategic partnerships with other nonprofit (or private or public) organizations. There are a multiplicity of models and options available that range from very informal cost sharing of utilities to creation of a holding company, and all the way to acquisition or merger. Nonprofit leaders have to at least be open to exploring such options when the very existence of their organizations is being threatened by administrative costs.

However, even if you are open to the prospect of a strategic partnership, don’t kid yourself. There are many forces of inertia that work against such consideration, not the least of which are the feelings of pride, ownership, belonging, identity, and control. Nevertheless, when demise is the other alternative, strategic collaboration must be considered. I would encourage you to at least think about the prospect by formulating a business case for collaboration. Then do a bit of exploring to locate possible organizations that might be approached. Do some initial due diligence to determine if they might be a good partner. Possible partners might be your strongest competitors or they may be private equity firms, insurance companies, or other associations or institutes. Let’s just say that, as we have already seen in the health care field, the possibilities are almost limitless. Only then should you approach “targeted” organizations for exploratory conversations. All this precedes any kind of negotiation.

I’ve negotiated and effectuated affiliations, acquisitions and mergers, both large and small. I also directed the integration of two very large social service organizations. I’d love to explore with you some possibilities that might benefit your organization. For those who are interested in learning more, I recommend David LaPiana’s book, The Nonprofit Mergers Workbook: The Leader’s Guide to Considering, Negotiating and Executing a Merger. For a much deeper dive into the tactics, techniques and tools for effecting and integrating a strategic partnership, I recommend Timothy Galpin and Mark Herndon’s book, The Complete Guide to Mergers and Acquisitions. (See references below.)

Self Insurance. A significant percentage of every nonprofit’s budget is comprised of various forms of insurance. Health insurance for employees it usually the biggest of these, although liability, workers’ compensation, unemployment, property and casualty insurances also eat up a lot of money. Most organizations look at these as costs. But what if insurance was considered an asset that the company owned instead of a product that it purchased? I know this sounds like a way to reduce expenses, and it certainly is, but if you think about your budgeted amount for insurance as a restricted fund that you need to manage in order to maximize a profit return, well, your mindset will change in many ways. For example, I have observed in companies that do go the self-insured route that they pay much more attention to employee health and well-being and work hard to improve safety in the work place. These are “investment” strategies aimed at growing the asset. They also recognize the fact that the organization now carries the investment risk. You can still use an insurance company to administer the program, but when you are carrying the risk for the growth of the asset, the mindset changes completely.

More and more medium to large sized-companies are self-insuring and are finding considerable savings. And there are an increasing number of options available through firms that specialize in constructing such vehicles without having to look at offshore investment firms to shelter funds from taxes. And you don’t have to be a big company. Smaller agencies can pool resources with other agencies to create their own insurance services. In my experience, however, self-insurance is a very viable method to improve financial sustainability.

It may be that none of these options is possible for you. Or you may be saying to yourself, “I don’t know enough to even begin to think about one or more of these alternatives.” That’s ok. That’s probably not why you were hired into your position. But I would say this, if you are interested in learning more about these or other strategies to promote sustainability, I’d love to have a conversation with you. I have experience in all of them and I have connections to professional resources that can give you answers to technical questions. Hopefully, I can point you in positive directions so you can at least gain a better understanding of what’s possible.

Give me a call. I’d love to help.

References

Galpin, Timothy and Herndon, Mark. (2000). The complete guide to mergers and acquisitions: Process tools to support M&A integration at every level. Jossey-Bass. San Francisco.

LaPiana, David, (2008). The nonprofit mergers workbook: The leader’s guide to considering, negotiating and executing a merger. Fieldstone Alliance.

Walker, Jeff (2014). Launch: An internet millionaire’s secret formula to sell almost anything online, build a business you love, and live the life of your dreams. Morgan James Publishing. New York, NY.