October 05, 2011

10 Traits Nonprofits Need to Make Successful Financial Changes

Today’s economic realities have prompted many nonprofits to consider new business models so they can better serve their constituents while ensuring their own financial solvency.

These adjustments are taking many forms. Some organizations are investing in new ways to deliver programs and services, while others are making their current activities more effective and efficient. Change can mean restructuring operations, collaborating more formally with similar nonprofits or, as now happens with greater frequency, trimming the size of the group's staff as well as its programs and activities.

Regardless of what form it takes, change isn’t easy for many nonprofits. It’s time-intensive and expensive, and it involves risk.

What makes some organizations more likely than others to adopt change effectively? A history of surpluses? A board that is willing to step out of its comfort zone? An entrepreneurial management culture?

Those traits are important, but they are hardly all that matters.

Based on the Nonprofit Finance Fund’s work with hundreds of nonprofits, here are 10 characteristics we see again and again in organizations that succeed in making strategic changes:

  • Leaders who see the whole of the organization and who understand that long-term success in carrying out a group's mission is much more than just the sum of its programs or projects.
  • An entrepreneurial mind-set: an openness to exploring and investing in new services, technologies, and ways to do business that have the potential to create meaningful new revenue.
  • Top executives and board members who have a firm grasp on the link between financial performance and the ability of a group to carry out its mission effectively. They rely on data (quantitative and qualitative, programmatic and financial) to inform decision making.
  • A commitment to planning and self-reflection, including a management team that knows how and when to seek the advice of outside advisers for strategic planning, producing financial models, and measuring results.
  • Adaptive capacity: a culture that values nimbleness, a willingness to test new ideas and make course corrections in the face of errors, obstacles, and new information.
  • Board members who understand that social returns require taking risks, risks often involve losses, and experimentation can be costly.
  • A track record of strong financial performance, characterized by operating surpluses year after year, sufficient levels of working capital, and the gradual accumulation of one or more reserve funds.
  • Access to sufficiently large amounts of flexible and "patient" capital in relation to the proposed plan for transformation and the size of the organization. Such capital, which must usually be available over a stretch of years, is meant to support the errors, risk-taking, and temporary deficits that may occur as the organization pursues a desired change. In that sense, what the organization spends the money on matters less than what it ultimately achieves. We call that kind of investment change capital; it is intended to cover costs until the business model can support itself with reliable revenue.
  • A strategy for generating reliable and regular streams of revenue and a commitment to hiring talented people and making other operational adjustments that will be needed to make sure the organization can sustain new approaches to generating revenue over the long term.
  • A continuous focus on results among board members, top leaders, middle managers, and all other staff members and a universal understanding of the changes the organization is making and how it will know if it is succeeding.

While not every organization that thrives in a transition to a new way of operating exhibits all 10 of those characteristics, it is impossible to make big changes without those features.

Tell us about your experiences. Which of these characteristics do you think are most important in preparing an organization to make a big change? What would you add?