Creating a Nonprofit Revenue Model: The Importance of Autonomy and Reliability
Last week, I presented a webinar on developing a nonprofit revenue model. The presentation was based upon a workshop that I presented at the last Nonprofit Network of Southwest Washington conference (See here for summary). In the workshop and webinar, I discussed the concept of autonomy and reliability as a framework for thinking about nonprofit revenues and the implications for organizations. (see Pratt reference below). The premise of the autonomy and reliability discussion is that for a nonprofit organization to achieve a sustainable revenue strategy, it must balance two goals. The first goal is to create reliable revenues to cover operating costs and bring stability to the agency. The second goal is to ensure some level of autonomy connected to revenues so that the organization can innovate and adapt to its changing environment. When reliability and autonomy are placed as crossing dimensions, they create a two-by-two matrix (see figure 1). As an organization considers each cell of the matrix specific revenue profiles begin to emerge.
Low Reliability and Low Autonomy: This is the weakest quadrant for a nonprofit organization. Neither sure of where revenues are coming from nor having autonomy to direct funds it does have, such an organization is in a crisis operation with little resiliency to adapt, change, or grow. Unfortunately many nonprofit start-up organizations start in this box and have the challenge of “fighting” their way to gain relevancy. Often such a nonprofit is based on program or an idea that may (or may not) be entirely unique but has found a sponsor or two. Many arts, youth development or environmental organizations might start that way. Armed with a foundation or government grant, or even “seed capital” from a founder, such organizations often find raising the capital to support and expand its programs and services and concurrently building an organizational infrastructure is a difficult challenge. The revenue raising burden of this quadrant is daunting and many small nonprofits in this box are at risk for failure.
Low Reliability and High Autonomy: This quadrant is a classical description of many grassroots organizations that spring up in collective response to an issue. Small donations and perhaps small events generate enough revenue to launch the nonprofit venture. The “sweat equity” of a working board propels the grassroots organization forward. In this quadrant, the challenge, over time, is to move towards more reliable revenues. What makes this quadrant different from nonprofits with low reliability and low autonomy is that organizations in this quadrant have autonomy to be innovative in both attracting revenues and in the mix of programs and services that it pursues to meets the organizational mission. Without reliability, agencies in this quadrant are still at a disadvantage but they have flexibility to adapt and change programs and services to attract mission-related revenues.
Low Autonomy and High Reliability: This is the quadrant where the nonprofit agency has crossed the line of stability and the organization is capable of reliably delivering a set of programs or services. Examples of organizations falling into this quadrant might include a nonprofit health center that is reimbursed for services or an organization with longer-term government grants and contacts. According to some research, firms with concentrated revenues might actually scale the amount of services provided and become quite large (see here). The vulnerability of this revenue box is that reimbursement and contracts often come with few degrees of freedom that, in turn, may limit an agency’s ability to adapt and innovate. The lack of autonomy can lead to a myopic lens about “what works.” For example, a hypothetical agency that is reimbursed to provide mentoring services for youth may not have the autonomy to experiment with youth development interventions that do not include youth mentoring. The same agency might also be less inclined to advocate seriously for public policies that strengthen family cohesion, support parenting education, or other community approaches that could potentially redirect or fragment the resources currently allocated for youth mentoring.
High Autonomy and High Reliability: The final quadrant is a position of strength where a nonprofit has reliable revenues coupled with autonomy within those revenues. Organizations with this profile might be a membership or donor driven organization with a dedicated and growing constituency. It could also be an organization with reliable government grants that are augmented with fee-for-service income. From a program or service perspective, an organization in this box can ideally provide stability and quality in addition to having the flexibility to innovate and expand its organizational and community impact.
This intent of this post is not to fully explore the implications of autonomy and reliability but to overview a framework or heuristic that can be used to help an organization think about its revenue model. When an organization thinks about revenue from the perspective of autonomy and reliability, the conversation about revenue growth becomes much more sophisticated than the desperate perspective of “where is the money and how do we get it?” Thinking about reliability and diversity also changes the nature of the conversation about revenue diversity. Rather than the revenue diversity debate becoming the proverbial “tail that wags the dog,” as in “we need to be diverse for diversity sake,” the conversation becomes “diversity for what purpose?”
So how does an agency use reliability and diversity in practice? I would like to suggest that there are thee steps in using these concepts.
1. Assess where you are today. Map you your current revenues: where do they come from, how autonomous, and how reliable are they? Defining autonomy and reliability is admittedly a little subjective so it will be important to create a common definition that fits your organization.
2. Decide on what dimension is most important to your organization to help you achieve your mission. Remember there is no right or wrong answer. One organization might simply need reliability to keep their programs and services strong, while another organization might need to innovate with new strategies to further its mission. The answer regarding which dimension is more important can only be driven by your agency’s strategic plan and operational thinking.
3. Think about the challenges and opportunities associated with changing your revenue mix. Remember that adding funding streams will likely require new investments in staff or organizational capacity. Additionally, some funding streams may grow quickly, while others might take time to realize revenue gains. So the questions relate to whether you have the capacity, the planning and execution acumen, and ability to wait for the return on your investment.
4. Create and implement an operational plan that serves as an organizational roadmap. Success, however, does not happen by accident. Implementation monitored with rigor, data and discipline and guided by strong leadership, increases chances for success.
In my consulting practice, I have more than once seen nonprofit agencies with a myopic focus on revenues as a frenetic activity design to help the agency end the year in the black. As important and this is, budget management is not the same as developing a strategic revenue model. Nonprofits that are most successful are those that recognize the twin drivers of a clear organizational strategy and a strategic approach to developing revenues. Thinking about autonomy and reliability are two dimensions that can help in thinking through the strategic choices that your nonprofit must make.
As always, your thoughts are welcome.
Reference: This article builds on the seminal work of Jon Pratt in his 2007 article Analyzing the Dynamics of Funding: Reliability and Autonomy
Photo Credit Jan den Ouden