From time to time I see progress in the fight to fix the way we fund social programs. Real progress that leads to lower costs and expanded services. And to less burnout and better results.
Too often, however, I see people falling for financial myths. Among them: the idea that every nonprofit group needs to diversify its revenue sources, and the more diversified they are, the better.
But diversification is subject to the laws of diminishing returns. When I talk to nonprofit leaders, I sometimes tell a story that encapsulates the many stories I have heard from social-service leaders. These voices rarely get the hearing they deserve, so I like to represent them through a character I call Sister Rose. Countless times, people have come up to me, grabbed my arm, looked me in the eye, and said, “I am Sister Rose.”
Here’s her story:
A young program officer welcomed Sister Rose to her office, thrilled to be meeting one of her heroes. Sister Rose, the CEO of a leading national antipoverty organization, was inspiring. She spoke passionately about her work, outlining progress made over 30 years, highlighting the ironies and triumphs of fighting poverty in the midst of plenty.
The program officer was sold. “We’d love to help,” she said and turned the conversation to financial due diligence. “I know your annual revenue is $30-million. How does that break down?”
Sister Rose intoned a practiced response: “We have a total of 50 government contracts, from four levels of government—40 entities in 12 states and 34 municipalities. Most are renegotiated annually, but it’s unpredictable. Almost always contract rules from one unit of government don’t match up with others, so we have to manage around that. It’s a lot of work.”
“And that makes up about 70 percent of your revenue?”
“Yes, along with some earned income from developer’s fees and loans receivable.”
“And 15 percent of your revenue is in foundation and corporate grants?
“Yes, we get about 100 grants a year, mostly restricted, typically for a specific project or purpose. Some, like bricks and mortar, some fund one program or project, some restrict to a neighborhood or geography. Some want to give blankets. Nobody funds maintenance or depreciation on our shelters.”
“What about the other 15 percent?”
Well, it’s other charitable giving: the dinner dance, the golf outing, bingo receipts, the car wash, and our biannual direct-mail campaign.”
The program officer was delighted, “That’s great—your revenue is very diverse—we love to see that.”
But Sister Rose didn’t respond. Even in the face of seeming victory, she appeared to have fainted from exhaustion, murmuring in a half-sleep almost as if in prayer, “I don’t know if I can do diverse revenue anymore. Please, no more rubber-chicken dinners, no more negotiations about contract conflicts, no more truckloads of donated crew socks, no more ramshackle “free” buildings, no more long conversations about small grants, no more “loaned” executives with no housing experience, no more tap dancing around use of funds and overhead restrictions, and no more bingo. Please, no more bingo.”
The program officer stared, astounded. The last thing she wanted was to drive Sister Rose over the brink. She wanted to help.
She had been mentored in the foundation and trained in the housing division of a major city. She had an MPA, and had spent time in the management consulting world, learning “nonprofit best practices” at a leading firm. She knew diversification was a “best practice,” but maybe it didn’t help? Could this, like other “best practices,” be burning out the best nonprofit leaders?
The answer is yes.
Sister Rose is popular with my listeners because every nonprofit leader has been pushed by at least one grant maker to diversify revenue—sometimes through new business ventures, programs, or entirely new funding sources. Yet a study the Nonprofit Finance Fund conducted of youth-services organizations showed that’s not always true. Organizations with two sources of revenue were more financially stable than those with either one or three.
One reason that revenue diversification is tricky is that it means different things.
For example, nonprofits could add more paying customers for the same services. Let’s say a tutoring group offers services to school districts, as well as Y’s and to individual students at home. The tutoring approach remains essentially the same, but the students are somewhat different and the number of those who pay grows substantially.
Other groups might diversify product lines while serving the same market. That is usually more complex and expensive than diversifying markets and takes more capital investment.
Sister Rose’s operation might have gone through lines-of-business diversification as it grew: First it was advocating for better housing, then demonstrating that decent housing for low-income people could be built by organizing volunteers and private donations, then expanding into a small-scale housing-development business; then getting into the large-scale development business; and finally getting into property management and even financing
Whatever the nature of the revenue, both kinds of diversification are challenging tasks that can take years to accomplish. Maintaining multiple, highly diverse revenue streams can be problematic when each requires, in essence, a separate business. Each calls for specific skills, market connections, capital investment, and management capacity. Only then will each product attract reliable operating revenue, pay the full cost of operations, and deliver results.
Sister Rose’s organization was dutifully diversifying its operations, creating a level of internal costs and complexity that was taking a toll.
One small step on the way to reducing burnout for the Sister Roses our society needs: Let’s start by getting everyone to recognize that revenue diversification is not a “best practice.”