Expanding Nonprofit Revenue Opportunities
In the last article of this series, I argued that the most successful nonprofits organize their revenue development based on their organizational strengths. If 70% or 80% of your nonprofit budget comes from government contracts, your nonprofit needs to invest in the ongoing development, management, and expansion of your grant writing capacity and competencies. Conversely, if 60% of your nonprofit revenues come from earned income, your revenue development task starts with building and refining a highly efficient value chain that maximizes profit. As profoundly simple as this concept is, I am often trying to convince nonprofit leaders (and more often boards of directors) to stop perseverating over mythical revenue diversity that “could be built” and, instead, focus on strengthening the reliability of existing revenue streams.
With the exception of start-up and emerging nonprofit agencies, diversity of revenues matters less than the reliability of revenues. Most start-up nonprofit organizations are constantly experimenting and exploring in search of revenues. For these agencies seeking diverse revenues is a means of survival. Overtime time, however, one or two revenue streams become more viable than others and revenues from the stream or streams start to produce reliability and stability for the organization. It is at this point that many nonprofit revenue strategies falter. It is when the agency has achieved stability in revenues from one or two funding streams that they falsely believe adding additional revenue streams will make them more stable. Often, the results are the opposite. With limited time, money, and staff resources that can be dedicated to revenue development adding funding areas can actually dilute rather than diversity revenues.
This then begs the question, how does a nonprofit organization capitalize on new revenue opportunities? The short answer is the old software development adage of “cheap, fast, done correctly – chose two.” If done correctly is the non-negotiable then a nonprofit organization either needs a long view or they need an infusion of capital. Visually, moving from core competencies to capitalizing on opportunities is built upon a core set of drivers (see figure 1). Once a nonprofit agency has established core competencies for their primary revenue stream(s), can they begin to invest in opportunities and innovation. I believe that six drivers need to be developed in order to exploit new opportunities.
Alignment: The first drive of opportunity is alignment between your agency and the potential revenue stream. For example, a tiny sewing and quilting nonprofit with the mission of sewing baby clothes and bedding for families in need with newborn babies is well aligned to seek heart-felt donations from individuals and fabric stores. Conversely, that same organization would not be aligned with a grant writing strategy that seeks federal dollars. The point is that alignment matters.
Small Innovations & Continuous Learning: Developing a substantial revenue stream takes time and is most often build through continuous innovation and learning loop using a methodology like “Plan Do Study Act.” Building a new revenue stream takes investing the building the knowledge and skills that are often gained by a research and development approach. With each turn of the innovation cycle momentum is created. A classic example of this principle is the nonprofit building an effective annual gala. It takes work, discipline, investing, learning, and typically three of four years before a successful return is built.
Connections: Another driver of new revenues is building connections and competencies. During my career before consulting, I remember well, stepping into a director position overseeing a number of large projects with Program Managers leading each initiative. One service delivery area was completely new to me. I will never forget that in my first meeting with the Program Manager, of that area, who said, “In six months I will take you out in public and in ten or twelve months, I will let you speak.” I immediately saw the wisdom of her statement. The continuous learning curve is about acquiring practical knowledge and skills. The connections curve is about developing the nuanced and tacit knowledge and skills that is the DNA of intuition. Such connections are essential to the “business sense” required for success.
Capacity: As a driver of capacity involves building an infrastructure to support expanded revenue streams. For example if you are moving into grant writing, there are a number of tools, databases, and structures that need to be designed, integrated, and put into systems that are above and beyond the task of grant writing. The challenge faced by resource-constrained nonprofits is to build new capacity without cannibalizing the core revenue competencies of the agency.
Time, Money and Staffing: Ultimately, expanding your nonprofit revenues boils down to investing time, money and staffing. All three are often a scarce commodity as most nonprofits channel resources into delivering quality programs and services that meet the needs of the communities served. The driver of time, money and staffing should compel nonprofits to weigh carefully investments made in expanding revenues. Over-invest and you risk your core revenue competencies. Under-invest and the new revenue stream will more likely underperform or fail to mature.
For most nonprofit agencies, and many for profit businesses, the starting place for strategic conversations about revenues is to get very clear about the strength of your existing revenue model and the challenges of resourcing the development of new revenue streams. By balancing what you do well, with what you aspire to develop, will set up a useful conversation about allocating scarce resources. In the next (third) article of this series, I will outline a practical approach to creating a revenue strategy that is designed to strengthen and expand your nonprofit revenue streams.
In the meantime, your thoughts are welcome.
Further Study: I recently came across this excellent article series: An Atlas of Strategy Traps that compliments this article from a for profit perspective.