Should NGOs Embrace A More Business-Like Approach?

CSI financial management resource mobilisation NGOs sustainability
Monday, 6 February, 2012 - 16:22

In this article, the authors explore some actions that can assist with the transition to a more businesslike approach, and take a closer look at income generation and its viability in the nonprofit context

This is Part 2 of a two-part series of articles to assist NGOs in the transition towards greater autonomy. We explore some actions that can assist with transition to a more businesslike approach, and also take a closer look at income generation and its viability in the non-profit context.

Think Like a Business

Let’s start by looking at four important ‘re-thinking’ strategies that help an NGO make the transformation to greater success:

1. What is the trade? Understanding the ‘fair value exchange’

A key ‘aha moment’ in the transformation of an NGO is the recognition of the value that NGOs offer to funders.

In a traditional business environment, the value exchange is easy to spot as goods and services are exchanged for money. Key to this successful relationship is a win-win for both parties in the form of a balanced or fair value exchange. In a nonprofit context, it can be more difficult to recognise what is being exchanged and to know when this is equal or fair.

The starting point therefore is to recognise what we are exchanging. What exactly is the trade?

Generally NGOs provide a service making a difference and uplifting communities in areas of need. Funders want the same end results, but can’t achieve this without NGOs and effectively pay them to deliver the results they wish to see. The NGO becomes the service-provider of social change.

As an example, an NGO providing HIV counselling in impoverished areas is delivering on their mandate to develop healthy communities. For a corporate social investment (CSI) manager whose mandate is to make a difference in communities in this way, you are a Godsend! You are the implementing agent of their vision, and your service delivers the outcomes that they seek. In this case the fair value exchange is community empowerment in exchange for money (funding) – and remember that the more visible, tangible and measurable this outcome is, the more readily it can be valued by the funder.

2. Who is the client? Using client-centred thinking

Most NGOs view their beneficiaries as their client and are totally focussed on providing added-value goods and services (usually for free) to the people, community or cause that they serve. The business-like approach sees things differently.

In business terms, a client is someone who pays for goods and services. As radical as it may seem to some, this means that the NGOs’ client is actually the funder, not the beneficiary, and it is this paying client that enables the services of the NGO to be delivered. Of course a sincere commitment to the servicing of this beneficiary community is at the authentic core of any reputable NGO, so we are not suggesting a diluting of this commitment, but rather recognition of the role of the primary funder client, without whom the NGO will simply cease to exist.

Recognise who your real clients are, and look after them like gold!

3. Costing and pricing – who pays the overheads?

A common challenge in the nonprofit sector is that many funders shy away from covering running costs and overheads, and are especially prickly about salaries. This is understandable from the funder perspective, as they are reluctant to fund a lavish, lax or unproductive organisation and because it is nearly impossible to quantify impact from supporting the running costs and salaries of a service-provider organisation, nonprofit or otherwise.

Now we are in no way suggesting that all NGOs are lavish, lax or unproductive, but it is the responsibility of the NGO to prove this and to motivate these costs as part of an effective, productive unit.

The reality is that any organisation must recoup its running costs to survive. In costing terminology this is known as overhead contribution or overhead recovery, and it is generally added to the price as a percentage of direct costs (raw materials and direct labour). Typical overhead contributions can range from 15 – 40 percent, depending on the size of the organisation and the overhead structure. What this means is that to be sustainable, your organisation should be building into the budget a contribution towards overheads; it can be in the form of project managers’ fees, administrative costs etc, all perfectly legitimate and justified as long as they are project-specific and not inflated or unreasonable.

Know that overheads exist and are a legitimate part of the operational costs of all organisations, and find ways to make them palatable to your funding client!

4. Return on investment – understanding the terminology

We spoke in the first instalment about Return on Investment. In business terms, this simply means getting something back for what you put in, usually in the form of profits or other strategic advantage. In the CSI and development context, this includes the beneficial outcomes that result from investment in a project, community or social initiative. Sometimes called ‘Return on Social Investment’ this return can be measured in social terminology such as people supported, CO2 reduced, children educated, rather than in pure monetary measures.

Secondary returns can also be very important, and benefits such as positive media and public relations opportunities, the chance to form strategic partnerships with government and other stakeholders and the generation of goodwill and brand loyalty can be a very valuable return on investment for funding clients.

The nonprofit that understands the concept of return on investment and its importance to corporate clients especially, will have a better chance of developing long-term funder relationships.

If You Do It, Do it Properly

While many nonprofit and related organisations run income-generating initiatives, success stories are few and often use outside expertise (advisory Board, mentors, consultants etc) to guide growth. The reasons for this are varied but a common denominator is a lack of singular purpose – many non-profits start income generation programmes as an add-on to their core activities (whether HIV support, social services, advocacy, feeding schemes etc) and thus find it difficult to commit the full and necessary resources that the initiative needs to be self-sustainable. This is in contrast to a typical business, where sharp focus is needed if one is to succeed.

We recently received an e-mail from an NGO colleague asking for assistance with the product development of handbags made from recycled newspaper. The intention was to capacitate a group of unemployed women to make the handbags to generate income for themselves, and some commission for the NGO itself. Their plan was to build up some stock and then look for potential markets.

This is sadly a very typical scenario in NGOs across South Africa – whereby an income generation project is started with excellent intentions but little planning. Our response to her was as follows:

  1. The starting point for any income generation initiative (like any business) is finding a viable market. Who, where, when, how and at what price would be typical questions to ask. (the market-led strategy);
  2. Once the market is better defined the next step is finding or developing a suitable product for that market, bearing in mind the competition, variances in taste, quality, design and trends (market-led product development);
  3. This should be followed by developing the appropriate business infrastructure, and the necessary basic systems and methods to run the business operation, including HR, sales, marketing, admin, financial etc;
  4. Only after these steps are complete should we venture into training producers to produce, refining the product to ensure that it is manufactured and supplied at a sustainable margin, and making up some samples or stock.

90 percent of nonprofits make the mistake of starting at point four.

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- Catherine Wijnberg is director and Anton Ressel development practitioner at Fetola & Associates.

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