Now What? Three Essentials for Nonprofits

By Anthony Knerr

The future for nonprofits —for the next several years, the next decade and beyond —is extremely unclear. At minimum, it will surely bear little resemblance to the first decade of the 21st century, when on balance (except for the very beginning and very end) funding was relatively abundant, confidence high and life relatively easy. Or so it seemed….

But by the same token, there are remarkable new opportunities for those nonprofits that identify, understand and take hold of the possibilities and implications of this new world—and for them, times have never been better or more exciting.

Tectonic Shifts

The prospects for an increasingly demanding and uncertain operating environment arise from the tectonic confluence of several recent shifts, some already apparent, others less explicit.

  • The recent recession significantly shrank balance sheets, tightened liquidity, reduced credit, increased unemployment and damaged confidence, leaving the economy tattered and generally weak. Significant intervention by the federal government appears to have staunched even more serious damage, but all current indications suggest that it will take considerable time for the U.S. economy to right itself, let alone those in much of Europe.
  • This new economic context is made more complex by several additional factors —the disturbingly partisan environment in Congress, which renders cooperative action virtually impossible; recent shocks in the euro market; concerns about the federal deficit; serious budget shortfalls at state and local levels; and worries about America’s general place in the world — all of which contribute to a general nervousness about where the nation and world are headed.
  • Compounding these difficulties is a worrisome disregard for thoughtful analysis, clear thinking and civil discourse about radical differences in perception of such significant issues as climate change, industrial policy, terrorism and tax policy (to name only a few). A growing lack of confidence in government, commercial and, yes, nonprofit institutions in some quarters, adds to this witch’s brew of concerns.
  • New technologies will continue to bring disruptive change to media, communications, medicine and finance, among other fields —and will certainly affect all sectors of the nonprofit world. The disruption will be compounded by the impact of the ever-flattening world, with instantaneous information, rapid capital flows, global partnerships, interlocking sovereign economies and greater empowerment.

Some Predictions

The major issue is what to make of these shifts, recognizing how dangerous it is to make predictions about the future. But several observations:

Economic growth in the United States is likely to remain sluggish for the immediate future. While it is unlikely that serious deflation will occur in the U.S., the possibility cannot be completely ruled out, and there is some danger of further unexpected political, economic or social shocks that could prolong this current period of uncertainty and anxiety.

Scrutiny of all organizations, including nonprofits, will continue to grow.

  • A New Environment for NonprofitsOverall confidence about the future of the economy, the markets and the country will probably be tenuous for the immediate future. Perspectives about preferable approaches to solving the present economic dilemmas are likely to remain sharply different, divisive and quarrelsome, with frustration, concern and incivility widely present.
  • On the other hand, technological and scientific innovation will surely continue at an accelerating rate to change forms of communications, service delivery and impact while enabling greater outreach, connectedness and visibility. There will be an attendant increase in organizational risk as demands for transparency and participatory decision-making grow and communications become more interactive.
  • Globalization of all businesses and endeavors is bound to increase exponentially, opening up new markets and providing new forms of institutional cooperation and organization design, while creating greater competition for many nonprofits.
  • Scrutiny—sometimes thoughtful, often cynical or skeptical—of all organizations, including nonprofits, will continue to grow, particularly if and as there is further public evidence of poor institutional leadership, unethical or inappropriate organizational behavior and poor judgment. No organization—private, public or nonprofit—will be spared in a world that demands transparency, engagement and accountability.

All in all, we are entering a highly complex and difficult environment with major implications for the nonprofit world:

  • A more sober—and sobering —economic context is likely to prevail in the short term, which suggests that nonprofit balance sheets will remain under stress; philanthropic support more difficult to attract than five years ago; public funding tighter and declining in many nonprofit sectors; and operating budgets generally under significant pressure.
  • As a significant number of people are un- and underemployed, interest in and demand for many nonprofit programs and services are likely to increase in step with the growing needs for social services, increased interest in higher education and professional/vocational retraining and sustained attention to medical issues—providing both new opportunities for many nonprofits to fulfill their missions and new challenges for them to do so with constrained resources.
  • All nonprofits will need to be clear about their mission and identity, focus on their highest value programs and services and evaluate continuously their impact, program effectiveness and financial well-being.
  • Consolidation and/or retrenchment are likely among many smaller nonprofits, particularly those that are highly dependent upon single funding streams; have unclear missions, weak governance or inadequate infrastructures; and lack critical mass to weather adversity. On the other hand, it has never been easier to start a new nonprofit by using the power of the Internet to network, reaching thousands if not millions of individuals around the globe at astonishingly low cost.
  • Larger nonprofits, on the other hand, are more likely to be able to take strategic advantage of unexpected opportunities and possibilities through thoughtful affiliations and mergers, selective expansion and leverage of leading programs, well-planned investments with favorable rates of return and demonstration of program effectiveness and relevance.
  • All nonprofits—and the whole nonprofit sector— will be subject to greater media, public and government scrutiny. Many nonprofits may find themselves subjected to uncomfortable attention as the world continues to flatten, social media gain traction and greater accountability is expected. Funders, in particular, will become even more interested in clear effective governance, measurable program impact, sustainable funding plans and clear cost-benefit ratios.

Three Essentials for All Nonprofits

So what is the best course of action for nonprofits right now and over the next several years? Our experience with assisting leading nonprofits and our view of the current situation suggest that all nonprofits—irrespective of mission, size, program focusor location—should undertake bold strategic thinking, rigorous financial analysis and sophisticated communications.

1. Big, Bold and Compelling Strategic Ideas Pay Off

Though it may seem intuitive to hunker down in the face of uncertainty—dealing with the day-to-day immediacies and not making significant changes —nonprofits are best served when they clearly delineate bold ideas that embody their mission while envisioning a future five to ten years away. Thinking strategically about 2015 against a longer-term horizon of ten years or so helps nonprofit organizations—and their leaders and constituencies —decide what is really important, what they wish to achieve at least in broad strokes and marshal internal and external support.

Bold ideas need, of course, to be grounded in reality: they must be faithful to the core purposes of the organization; reflect its values and central principles; build imaginatively on its present situation and positioning; be measurable with respect to impact and outcomes; and be financially sound. These criteria make the difference between bold strategic thinking and fantasy.

That said, too often in our consulting experience many organizations settle for some variation of “today,” worried that they will be unable to overcome pressing financial challenges, unsettled by changing government policy and uncertain economic circumstances and convinced that they are bound by their current circumstances and conditions. They seemingly dare not envision their future(s) as anything different than a linear extrapolation of the present.

We believe doing so is unwise for a number of reasons: The rate of change in the world, in general, and the nonprofit segment, in particular, will surely continue to be rapid, unpredictable and unexpected. Bold but analytically well-anchored strategic thinking provides the surest means of hypothesizing the impact of events and trends and choosing wisely among alternative courses of action.

All nonprofits should undertake bold strategic thinking, rigorous financial analysis and sophisticated communications

Small thinking or simply continuing the present course of action is unlikely to constructively meet the impact of the disruptive changes in today’s world. Organizations should be wary of thinking they have no different future than a simple extrapolation of their current program focus, organization design, financial structure or institutional partnerships.

Even the most seaworthy vessel needs a chart with a clear destination and the route to get there. Without a chart in the form of a thoughtful strategic plan, the vessel will be buffeted by the winds and currents of the sea and not able to adjust its sails, rudder and speed appropriately. It is likely to be driven into reacting to changing conditions and unable to anticipate possible new circumstances.

Today’s funders —be they individuals, foundations, corporations or governments—are as confounded about the significance and relevance to them of tumultuous circumstances as are the nonprofits they support. They welcome the advice and counsel of their grantees and benefit from capacious thinking. Nonprofits should not fail to help all of their supporters, philanthropic and otherwise, make good sense of their institutional situation and contribute in appropriate ways to the achievement of their aspirations.

What is scarce today is compelling strategic thinking, not philanthropic resources.

In particular, today’s philanthropic funders are more interested in investing in efforts and initiatives that they believe are impactful, vigorous and measurable. Our considerable experience indicates that what is scarce is not philanthropic resources,but bold, sound ideas that will attract, inspire and interest funders in investing in the nonprofit to achieve them.

A recent client of ours had continuing financial problems, which in turn triggered a crisis of governance, rapid turnover in executive leadership and sagging morale. The chair of the board approached us and noted that, while the organization could not afford to prepare a strategic plan, it couldn’t afford not to —for he realized that without a new vision and a coherent set of strategic objectives, the organization would continue to flounder. He cobbled together the necessary resources and mobilized a skeptical board, staff and funders to think boldly and imaginatively about the future of the organization. Five years later the organization is on solid ground, with a strong board, excellent executive leadership and staff and remarkable funding. The chair recently remarked that preparing a strategic plan was the best investment the organization could have made.

2. Rigorous Financial Analysis and Planning are Crucial

Tight operating budgets mean that there is little, if any, room for mistakes. Too often institutional resource allocation and budgetary planning don’t take sufficient account of underlying financial dynamics.

Wise nonprofit organizations analyze all aspects of their programs and operations, determining income and expenses on a program-by-program basis and laying out the financial contributions of each program to the bottom line in order to reduce redundancy, maximize “profitability” and leverage competitive advantage—and thereby prepare truly sound longer-range programmatic plans and accompanying financial plans.

This kind of “bottom-up” analysis allows organizations to determine where to make reductions and where to invest. It can be helpful in posing—and answering— such questions as: What are the high-margin activities that are central to our mission and how can they be profitably expanded? Are there other activities that are low-margin or require subsidies that should be refocused, redesigned or even eliminated (even though they may be institutional “favorites”)? What financial repositioning will best allow us to build our asset base, generate additional revenue and strengthen our financial profile? What are the longer-term financial strategies that will best allow us to thrive in a variety of uncertain conditions?

Nonprofits also need to have rolling multi-year financial plans that are updated at least annually to support overall organizational strategic thinking and include all income and expense categories (including technology and facilities). Such plans provide a critical road map by which to build annual budgets; review financial performance against goals; identify opportunities and challenges; and ensure a longer-term perspective that is in concert with overall organizational goals and aspirations.

Further, thoughtful nonprofits will ensure that their boards, staff, supporters and funders fully understand their organization’s overall financial picture; have easy access to key financial data, benchmarks and multi-year financial plans; and feel real ownership of the organization’s financial health and prospects.

3. Serious, Active and Wide Engagement is Essential

Nonprofits cannot be—or be perceived as —disinterested, distant or dismissive of any of their constituencies. The world is seeking active engagement, transparency and accountability —sometimes with a vengeance—and older models of constituency communications, relationships and involvement are insufficient and inadequate.

Bringing clients, funders, students, alumni, patients, volunteers, faculty and external observers inside the organization pays great dividends. Some of the best ideas about institutional goals, operations and activities often come from the most unexpected sources. Real engagement typically leads to better understanding and support by individuals who can marshal resources, build consensus and generate positive momentum.

Today’s organizational narratives must be inclusive of external perspectives and actively incorporate widespread feedback and input. Organizations that don’t encourage and support community engagement in the broadest sense do so at their peril.

In addition, it’s wise to ensure that boards and staff are actively and meaningfully engaged in setting organizational priorities, objectives and goals and have ample, regular opportunities to help shape institutional perspectives and approaches. It’s prudent to strategically communicate organizational aspirations, achievements and news as widely as possible through vehicles appropriate to the constituency. It’s beneficial to make public all key strategic, programmatic, financial, organizational and management information; empower individuals to use and transmit that information; and allow the information and key messages to span the world.

While the recent recession is technically over, its impact will surely linger for some time and other tectonic forces are reshaping our world and our understanding of it. Vigorous attention to bold strategic thinking, rigorous financial analysis and sophisticated communications provide the best means for nonprofits to flourish in these extraordinary times.

STRATEGY MATTERS © No 5
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