Time to rethink the business model of some NGO brands?

Buy Deltasone Brands like Toms with their “one for one” shoes programme have proven that companies can be both profitable and philanthropic. So why do so many NGO brands stick with a funding model that relies on, well, charity?

http://oceanadesigns.net/envira/white-carrara/ Peter Salmon, MD at social innovation company NextPlays, certainly has his doubts about models based on grants and donations as opposed to “financed” business practices. Here are some of his thoughts on why “cause” brands need to stop begging for money and start putting up business cases for financing social change.

The current models of financing social organisations are through philanthropic grants, equity investment, or conventional debt financing, he says, but the dominance of foundation and philanthropic grants creates an ineffectual social innovation sector that delivers poorer outcomes.

1. Both financing and grant approaches require well researched documentation but a grant application requires a proposal, whereas financing requires a business plan. These may seem like subtle differences, but one is far more open to innovation than the other. Grant applications are often judged to fit within already pre-determined social development agendas, such as child poverty, or education. So organisations looking for grants end up tailoring their submissions to fit within the scope of the funding rather than focusing on how to get to the real outcomes. Financing has no such agenda. It judges the business plan on the quality of the value proposition, character of the entrepreneur and the likelihood of enterprise success. Financing doesn’t pre-select approaches, it determines likelihood of success.

2. Grant based social development agendas can also foster duplication of effort. This results in the funding of a number of proposals all loosely working in the same area of development, with each striving to achieve at times similar goals with similar structured organisations, resource and funding requirements. Finance applications by contrast are judged on the likelihood that the business plan will succeed. This requires the plan to clearly articulate the unique characteristics of the venture compared to its competitors aiming to serve the same customers or beneficiaries. Proving an enterprise worthy of financing is tough, but toughness requires innovation.

3. Grant based applications place emphasis on well researched understanding of the problem and likely solution, that if successful, leads to operational design of that solution. The process looks like this:

Problem ➔ Solution ➔ Grant ➔ Business model

This is counter to modern approaches to innovation. Larry Keely of Doblin Group has statistically measured that ‘98% of all innovations continuously improve known solutions’. That is, they don’t try to create new solutions outright, but improve on what we already have. He goes on to state that some of the greatest innovation breakthroughs have come from using networks in new ways, and rethinking business models.

If this is the modern reality then Salmon says we need to take new approaches to social innovation and funding. More like this:

Problem ➔ Solution & Social Enterprise Model ➔ Financing

Organisations can’t leap directly to solutions without considering how that solution or enterprise will function. More time needs to be spent considering the social enterprise model prior to any form of funding application and what role the community plays within the business.

4. Finally there is the issue of financial sustainability. Grant funded not-for-profit brands can only keep working as long as the grant itself, so they spend a good deal of resources on continually seeking new grants and other fund-raising activities at the expense of focussing on the outcome they seek. A recent survey by Grant Thornton on ‘Financing Non-for-Profits’, stated that financing was one of the three greatest challenges facing the Charitable sector, and achieving their stated social goal ranked on average at seven.

Successful social enterprises, Salmon says, have the ability to generate income alongside achieving their social mission or outcomes, and profits generated beyond that can be reinvested into expansion or future development.

So why aren’t more brands interested? After all, this approach makes the business case for change that more and more sponsoring brands are asking for in their dealings with community organisations.

I suspect it’s because social innovation falls between the cracks.

For the more traditional NGO sector, who are often motivated by their cause, money is the means to what they perceive as the realistic goal, which is progress. This is also a sector that struggles at times to put commercial metrics around their work – so the social enterprise model looks suspisciously like commercialisation (read perhaps exploitation) of a situation. Such a model is highly disruptive to the philanthropic approach they are used to and geared for, and could therefore be seen as unnecessarily distracting in terms of its priorities.

For the for-profit sector, social enterprises aren’t created with commercial profit in mind, but rather for social outcomes – so that means returns don’t fit a conventional risk/reward curve, putting them at odds with the expectations of most investors. Many brands in this space believe their CSR work is commitment enough.

It will be interesting to see who starts building the bridges between these traditionally-different approaches first: NGOs looking to put their organisations on a more reliable business footing; or profit-motivated brands looking for new ways to engage with politicised consumers?

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0 Comments

  1. Mark,

    I realize this is an older post, but I’d love to learn more – including your research and any newer thoughts you have on this. Have you published on this issue recently?

    Thanks!

    Rebecca

    • Hi Rebecca – thanks for your interest.

      I think there are two key points here – both of which I am still looking to explore further:

      1. The levels of energy required to write (and to keep writing) grant applications compared with those required to write a business plan are not dissimilar, but the scope and accountabilities for the two exercises are very different. The key discrepancy is that grants focus on criteria and this in turn to some extent drives the approach, whereas a business plan focuses on outcomes and therefore, potentially, can adopt more flexible, innovative pathways. My own experience in working with NGOs is that organisations find it very hard to break out of the ‘grant mentality’, but that once they do, mainly through the provision of outcome-focused, paid-for services, they ironically free themselves up to do a lot more good.

      I remember one CEO saying to me one day, “All this talk of not-for-profit is ridiculous. Of course it’s about profit. The difference is where that profit goes.” His view, and it was a very successful one I must say, was for his organisation to generate as much money as possible in order to do as much good as possible. Therefore financial and business plans were a critical part of his approach – but the money generated was tied to specific goals and these were measured and reported on very thoroughly.

      So that’s about a broader business model tied to more disciplined business outcomes.

      2. One of the key obstacles I encounter in the NGO space is an unwillingness to recognise the wider competitiveness of the environment and therefore the requirement to innovate. The competition it seems to me is currently misplaced – it centres on the relative “goodness” of causes and comparisons between NGOs rather than the requirement for effective new models to achieve breakthrough change both socially and attitudinally involving a broader range of parties.

      Money goes where money gets a return. Philanthropy tends to go where it feels warmest.

      The opportunity it seems to me is to bridge those statements rather than to see them as a dichotomy. I think there is huge hope for this to happen – but more clarity is needed in terms of how models might work, how success will be judged and to what extent policy is required to bring parties together.

      So where might these developments lead us?

      To me, they suggest:
      1. An enhanced mixed-model revenue framework
      2. More focus on the “social dividend” – i.e. where the money generated goes and how effectively it is used
      3. More innovative modelling based on achieving specific outcomes to attract broader investment.
      4. More honest dialogue between governments, social agencies and NGOs on who is best to commission and oversee the work and who is best to undertake some or all of the projects.
      5. More discussion of NGO-public partnerships and NGO-private-public partnerships to tackle specific social goals.

      Hope this helps. Happy to discuss further, either here or offline.

  2. Pingback: Sustainability: Being good, not just doing good « Upheavals: Mark Di Somma's blog

  3. Akash Ghai says

    Mark this is a really well prepared argument. I am writing about the pursuit of new funding models sought by Youth-Development International NGOs (YD-INGOs) and would like to further discuss the points you’ve raised.

    Best Regards

    Akash

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