INDUSTRY INSIGHTS | FALL 2010 EFFECT

Nonprofits Must Apply Recession Lessons for Future Success

by John Langan

The economic decline of the past two years has left no individual or industry unscathed. For the nonprofit and government sectors, simply surviving may feel like success—but it’s not enough. For those that have made it to the other side, their future will look very different from their past, and they should be informed by the lessons learned over this tumultuous period.

Two keys to success: human capital and technology

The whole concept of “investment” has taken on a broader meaning. In fact, the success or failure of most nonprofits and governments was never really as dependent on the financial markets as we often emphasize. Instead it is dependent on their ability to invest in and deploy human capital and technology to reduce expenses and improve performance.

It is convenient to blame poor operating performance on the decline in contributions, revenue shortfall, and the value and return on reserves and endowments. But what the past two years have really demonstrated is how the organizations that made the necessary personnel and technology moves—and stuck to their strategic priorities and sound business models—have found opportunity and competitive advantage. For example, savvy nonprofits have expanded their virtual meetings and are seeing increased registrations because of a lower price per person. Yet they are maintaining profit margins (more participants at a reduced cost), thus mitigating possible losses, expanding the number of actual and potential members, and eliminating the need to increase member dues in a competitive market.

New level of accountability

In the last two years, we’ve learned that unrestrained spending by individuals, organizations, and governments, combined with cheap money, creates “bubbles” and an eventual need to re-price all commodities to true supply and demand (e.g., labor, real estate, energy, etc.). This lesson and the resulting layoffs, salary reductions, program eliminations, mergers, and bankruptcies, while painful in human terms, has been absolutely necessary to reset the dial. It has put the focus back on providing valuable outcomes to the consumer/stakeholder and forcing accountability on for-profit and nonprofit providers. Honestly, many of the actions taken in reaction to the economic downturn are just sound management decisions that should be taken in any economy.

For nonprofits and governments, this new level of accountability means:

1. Focusing on core services and insisting that non-core subsidized services are paid for—We’re seeing nonprofits shedding programs or partnering with other nonprofits and for-profits where the financial resources required are inversely related to their core mission and the value placed on those programs by key stakeholders. For example, a low-income housing nonprofit signed an affiliation agreement with another nonprofit to provide job training and placement services to residents at a fraction of the cost it was providing those services. The result was improved quality and less financial resources devoted to ancillary service.
2. Budgeting from the revenue side—There has been a complete paradigm shift in the way nonprofits budget. Gone are the days when organizations priced out a “wish list” of program initiatives and hoped actual revenue would meet or exceed their need. The focus now is on budgeting realistic, sustainable revenue based on historical trend analysis, tempered by the realities of an increasingly competitive landscape for fundraising and development. Expenses are then determined and scaled based on priorities and support of the stakeholders.
3. Defining and delivering outcome-based measures to stakeholders—The competition for private and public dollars to support nonprofit and government initiatives has never been greater. States are chasing federal Race to the Top education awards, and education-focused nonprofits are chasing those states getting the awards. The ability or inability of any organization to define and measure specific outcomes tied to core mission is simply the difference between success and failure. If you can quantify your successes (graduation rates, member satisfaction, increased life expectancy, etc.), you are a more competitive candidate for funders’ support.

Whether you are a professional society, a church, a foundation, a city council, a soup kitchen, or a state university, the lesson is the same. Aligning your mission to a sustainable business (revenue) model is what will resonate with your stakeholders and demonstrate you have invested the lessons of survival for a brighter day.