Not-for-Profit is a Tax Status, Not Your Strategy

In our consulting careers, we have worked mainly with for profit organizations – businesses varying from start-ups to fortune 500 firms.  In fact, most of you reading this probably work primarily in the for-profit sector, although many of you may serve on boards or otherwise volunteer for nonprofit organizations outside of work.

It is in this context that we are asked from time to time if our ‘Grassroots Strategy’ framework applies in the nonprofit world.  After some reflection and a couple of attempts to make it work, we are convinced that it does work.  However, we have come to realize that nonprofits frequently need to add an additional step at the beginning of their strategy discussions.

In retrospect maybe it should have been obvious, but we take it for granted that the ultimate goal of most of our clients it to make more money – a goal usually measured as return to shareholders.  Therefore, strategy is about understanding customer needs and differentiation in order to choose the right initiatives to achieve that objective.  For nonprofits, where the goal is explicitly NOT to make a profit, the goal is rarely as clear.  Consequently, we have come to realize that the first step in effective strategy for not-for-profit organizations is agreeing on the metric you will use to determine success.

Before we come back to this important difference, let’s review some of our ‘universal truths about strategy’ and how they still apply at nonprofits:

  1. Strategy is about choice, particularly choices where reasonable people can disagree – just like in the for-profit world, articulating what you will NOT do is one of the tests of whether or not you have a strategy.  Further, setting quantified goals too early (we want to raise $3 million more than last year), while it may motivate fundraisers or members, can actually hinder a real discussion of strategic choices
  2. Strategy is about the allocation of resources – it should be obvious for nonprofits that you can’t do everything – you have limited resources.  And, exactly like for profit companies, spreading your resources too thin will just make you mediocre at lots of things, generally not a winning strategy for either achieving your mission or fund-raising
  3. Strategy requires an honest look at the momentum of the business – This means asking the tough questions about how did we get here and why.  Are we growing as fast as similar agencies? Why is our membership declining?  Without a good understanding of the forces that got us here, we are unlikely to figure out how to change the path
  4. Strategy must change the decisions that people make – As a nonprofit, you most likely have a vision or mission statement, but is that really driving the decisions that people make?  We would argue that this aspect of strategy may even be harder for non-profits. Especially for those organizations dependent on volunteers, deciding to stop funding someone’s pet project can be an unnatural act
  5. Done well, strategy is hard work – While we firmly believe that strategic thinking is a teachable skill, part of our success with corporations is that our audience shares a common language to describe their business and at least some have heard many of our terms before in business school or prior training.  This may not be the case at a nonprofit where many of the key decision-makers work directly in the field and have limited backgrounds in business

As if wrestling with these challenges is not difficult enough, as we’ve already hinted, there is an additional question that non-profits have to answer before they can even begin: how will we measure success?  You probably have some sense of what you want the organization to achieve, but is your view the same as other leaders/board members?  Further, have you boiled it down to a metric that can be tracked, or are you forced to settle for an ‘I’ll know it when I see it’ definition of success?

The importance of this was driven home the first time we tried to engage a non-profit in a strategic discussion as a board member of a regional child services organization.  The management presented a strategic plan that was a thorough and insightful examination of the environment coupled with some financial projections by major service.  It reflected a great working knowledge of the areas in which they practiced and was generally well-received by fellow board members.

When we started to ask a few questions, however, things quickly unraveled.  In particular, management had only partial answers to questions about why the agency was investing in some areas and not others.  We came to realize that the problem was not management, rather it was inconsistent direction from the board.  Specifically, the stated mission of the agency was to ‘get every child into a safe and permanent home’ (paraphrasing).  However, many of the board members were operating as if the goal was simply to have a bigger budget than the previous year.

This turned out to be a critical distinction – while private, and with a foundation built by some very generous and involved donors, the agency received most of its operating income as reimbursements from the state and county welfare authorities (through Medicaid and a handful of other programs).  The reimbursement rates varied depending on the type of service with the very highest ‘per child’ rates being for children with severe behavioral issues that needed full-time, 24-hour supervision and could not be safely introduced into an adoptive home. 

Maximizing revenue would have meant housing as many of these children as possible and keeping them on-site for as long as possible.  In contrast, if the goal was ‘permancy’ as the mission implied, the agency should focus on investing in early intervention, refining techniques for working with parents and children so they never got to the point where they needed institutional care.  Said differently, the agency would be most successful by working itself out of existence in an admittedly unrealistic world where every child was born to parents with the desire and capability to raise them.

In another case, we worked with a membership organization for business leaders facing high turnover in their member base.  When we first asked about measures of success, the immediate response was ‘number of members.’  But after some discussion we helped them realize that it was not that simple.  Advancing the organization required engaged members, not just members on paper, and the members had to have the right background and be at the right level at the right companies to have an impact.  In the end, we agreed that something like ‘companies with engaged members as a percentage of the total target market’ was a more complete description of what we were really after.

These examples highlight the particular challenge for nonprofits, as often there is no easy answer for a single metric.  But if all you have is a list of lots of things that are good, it is not helpful when making trade-offs among multiple ‘goods’ or competing attractive-sounding options. While there is no universal formula, a few guidelines have begun to emerge:

  1. Engage the organization (and probably the board) in this discussion – even if the it takes a while to get to a consensus, there is value in the struggle; and especially if there are opposing views, huge value in just starting the dialogue
  2. Be creative in developing a measure, even if it is not perfect, and even if does not exist – in our example above, the children’s services agency might have begun to look at number of days until permancy or something similar, even though that would be influenced by changes in the condition of children at intake and may not have been previously measured
  3. Don’t be afraid to ‘think like a business’ – while many in the nonprofit world may shy away from managing ‘by the numbers,’ in the end you have limited funds and can only do so much good.  Don’t you owe it to your constituents to understand what is most effective?
  4. Ideally, agree on a metric that will help allocate resources – for example, these two initiatives required the same budget, but which will be better for the agency?  Without a metric of success, this question is entirely subjective, and the temptation to do a little bit of both may be overpowering.  But, if we can develop the equivalent of ‘return on investment’ it can be quite helpful in making these tough calls

We wanted to leave you with one final thought.  Many in the nonprofit world may be suspicious of the profit motive and generally distrusting of ‘shareholder value’ as a measure of success.  In a sense they are right, not-for-profit enterprises are serving a higher mission.  Their ‘stakeholders’ voluntarily parted with their money and/or their time because they believed in the cause.  They are not some distant Wall Street speculators, but rather the very communities in which you operate. Therefore, it is imperative that nonprofit leadership sees to it that their stakeholders’ resources are put to the best possible use.  Defining how you measure success seems like pretty good starting point.

Leave a Reply