Challenges to Nonprofits - Case Study Example

Challenges to Nonprofits For several nonprofit organizations, the art of making tradeoffs is a condition of continued existence as well as a key component of success. With inadequate means to address considerable social challenges, nonprofit leaders continually make choices about the most efficient way to allocate available resources among contending priorities. The results of these tradeoffs are noticeable daily: in the activities a nonprofit offers, the programs it supports, and the initiatives it follows. Collectively, these activities, programs and initiatives form the engine that either takes forward the organization's strategy or renders it impertinent. That is why resource-allocation decisions present nonprofit executives with their best opportunity to focus resources on activities that will efficiently achieve their organizations’ objectives. (Swords, n.d, online) Considering the significance of these choices, it is worrying that the financial systems in many nonprofit organizations aren't designed to support either short-term or long-term strategic decision making. Particularly, most financial systems do not add to organizational knowledge about the true, total costs of providing services, running programs and otherwise running the organization. Working without this information, nonprofit executives frequently have to make vital resource-related decisions on the basis of instinct, the skills and knowledge of the program staff, or the priorities of the organization's funders. (Swords, 2002, pp 113-114) Consequently, they run the risk of weakening their organizations’ missions by failing to assign resources to the programs and services that have the highest impact. True Costs Inform Individual Resource-Allocation Decisions To make resource-related decisions in a way that enhances an organization's effectiveness and promotes its mission, nonprofit leaders need to have a clear picture of the full costs of operating their programs and services. While most nonprofit organizations have a good comprehension of the direct costs incurred by their programs, many don't account for indirect costs. Full cost data can provide valuable input to decisions about how to assign resources among programs, whether to expand into a new setting, and what level of funding is required to sustain the organization's operations (Lang, 2000, pp 57-58). That Programs to Support? The most essential resource-allocation decisions concern dividing funds among numerous programs in a single department. For example, one of Bridgespan's clients provided a range of counseling, adult-education, youth, and economic development services to its clients to help them become more self-reliant. An investigation of this organization's costs revealed that within the economic-development department, the employment-services program and the resume-services program were incurring the same cost. To put it other way, it was costing the organization the same amount of money to put a client in a job as it was to help her prepare a resume. Because having a job provides a client with better economic self-reliance than simply having a resume on hand, the organization decided to center its resources on the employment-services program instead of mounting the resume-services program as it had initially planned. Full and precise cost data can be uniformly enlightening when an organization's leaders are wrestling with the best way to divide resources among numerous sites. This was the situation facing a countrywide educational organization with seven regional affiliates. (Lang, 2000, pp 67-69) Because the organization's current accounting system stated that all its financial information on a line-item basis, area cost data had never been collected. When these data were collected and examined, the organization learned that the cost of training teachers differed significantly by locality. These findings encouraged a reassessment of the regional offices that led to a reallocation of resources, giving more to competent regions. The organization then helped the other offices learn from their peers and become more cost-effective. Should We Expand To A New Location? Opening a new site brings the possible benefit of better efficiency because some of the organization's costs (such as fundraising, marketing, and human resources) can be shared between locations, minimizing the cost for each by creating economies of scale. On the contrary, many costs cannot be shared: the unique start-up costs required to set up a program in a new region, for example, as well as site-specific costs such as rent, direct workers, and materials. Appreciating the mix of costs at the new location and enduring costs at the original site is important in evaluating the full cost of replication. Appreciating that of its costs could be shared between sites, and that could not was precious for the leaders of one West Coast organization that runs a winning workforce-development program. Year after year, this program has had success stories that have earned it national attention as well as local admiration. Needless to say, many voices were exhorting the organization to expand, including one funder that was particularly fervent about seeing the training program recognized in a new geographic region. (Oleck, 1994) The offer of guaranteed funding seemed attractive, and the organization was induced by the proposal. Following careful evaluation, nevertheless, the staff decided against the expansion. The decision was learned partly by an examination of the organization's cost structure that revealed that site-specific overhead formed a considerable portion of its total operating costs. So long as these costs were divided among several programs at hand, the organization could absorb them without compromising its feasibility. But if one program was to carry them alone, as the training program would have to do if it were simulated in the new location, the burden was not likely to be sustainable. Combined with an understanding of the risk of starting a long-term program with only its short-term funding assured and a resolve that the economic ambiance wasn't right for expansion, this analysis persuaded the organization that expansion would not be a sensible decision. In addition to learning how costs are distributed among programs, organizations also need to recognize their “cost per outcome.” This measure connects the unit-level economics of a program or activity with the result that the organization wishes to have. (Lang, 2000, p-70) To take a plain example, a nonprofit that delivers meals to the elderly might gauge its influence by the number of meals served. Finding unit-level costs requires an organization to determine the outcomes it seeks to achieve as well as the full costs of its programs. But both can be demanding to establish, especially if the organization's preferred impact is something that has an indirect effect or is hard to quantify, such as educating a child or providing a support structure for underprivileged people. Actually, when defining efficiency measures it helps to keep in mind Peter Drucker's well-known warning: “There surely is nothing so useless as doing with greater efficiency that that should not be done at all.” (Ruderman, 2001) Having said that, effectiveness measures are significant for any organization's future success, and particularly so for those looking to grow to new sites. How Much Should We Charge For Products Or Services? A rising number of organizations provide products or services that serve as sources of earned revenue. Considering nonprofit organizations’ natural proclivity to charge as little as possible for these products and services, the prices are often set at levels that fail to cover the full costs. This was the case for a nonprofit that offers reasonable classes to independent artists and employees of nonprofit organizations on technology-related subjects ranging from basic video production to advanced HTML programming. The organization charges fees for the classes, and its management had always considered them to be a cause of earned income, not just supplementary revenue. Nevertheless, a close assessment of the organization's cost structure revealed that the classes were in fact a net drain on resources. Equipped with this new information, the organization's management enforced operational initiatives to boost the classes’ financial contribution. (Oleck, 1994) Precise cost data (along with market data and program knowledge) allowed the staff to ask – and answer – tangible questions about class size, cancellation policies, and the types of classes to offer. Costs from a Strategic Perspective Striking as the effects of understanding true costs are on distinct decisions, the effect on an organization's strategy can be even stronger. Precise cost data make it possible to look at program finances from a strategic standpoint, to evaluate the flow of funds within the organization as a whole. With a full comprehension of all their program costs, decision makers gain a clear view of how the organization's scant resources are being allocated. They can identify that programs are covering their own costs (through earned revenue or targeted grants) or even generating surplus funds, and that ones require subsidies from contributions to the organization. As a result, they can determine in that ways scarce resources are being used most effectively to advance the organization's mission. (Ruderman, 2001) The calculations themselves are relatively straightforward. Since nonprofit organizations generally have fairly accurate data about their programs’ earned and addd revenues, once they have a comparably strong understanding of their full program costs, they can match program revenues to costs in order to determine each program's net contribution. This approach makes the economics of the organization evident; it also represents a considerable departure from the way in that nonprofit organizations historically have considered their program finances. The value of these computations lies exclusively in their capability to highlight situations in that program economics are out of line with mission-driven priorities. Knowing that programs add positively to the organization and that represent a net drain on its resources, decision makers can examine the flow of funds within their portfolio of services to make sure that their allocations are supporting, not undermining, the organization's desired impact and focus. But nonprofit organizations have varying motivations for the activities they undertake. While many programs may be intended to further the mission and add to financial sustainability, in practice each will favor one over the other. Recognizing and being explicit about that programs serve that purpose allows organizations to ensure that their activities strike the balance they desire. A matrix that incorporates both mission alignment and financial contribution makes this concept concrete. The framework comprises two components: “mission match,” that seems along the y-axis of the matrix, and “financial contribution,” that is plotted along the x-axis. Determining each program's mission alignment presents a qualitative challenge, because it requires the organization to consider how closely the program's objectives, beneficiaries, and activities match its central mission and to make corresponding value judgments. Getting clear about what is “high” or “low” mission is a challenging activity that often raises questions that go to the core of what an organization is about. (Ruderman, 2001) Positioning each program within the mission-match/financial-contribution framework forces organizations to be clear about the purpose of each of their activities. Once all of an organization's programs have been assessed on both aspects, its leadership will be better able to make strategic decisions. Returning to the matrix, the organization can categorize programs as per the quadrant with that they match up and then recognize that ones symbolize opportunities to support the future strategic direction of the organization The propositions are less obvious for programs that fall into the top left and bottom right quadrants. For programs that necessitate funding (high mission match but negative contributors), it makes sense to try to recognize revenue-generating opportunities, even if eventually the answer is that none exist. It is also worth taking the time to assess overtly the tradeoffs between the programs’ importance to mission and the costs of running them. Programs that fall into this quadrant may always “cost” the organization money and necessitate it to earn income elsewhere or increase more in add funds; that's suitable as long as their impact on mission merits it. On the contrary, for the programs that produce funds (low mission match but positive financial contributors), the organization can discover ways to align them more intimately with the mission as well as assess the tradeoffs between their financial benefits and the costs of mission divergence. Making Full Cost Data Routine Nonprofit financial and reporting systems, the culture of many nonprofit organizations, and the funding environment in that nonprofit organizations function all work to ambiguous information about true costs or make it gratuitously difficult to obtain. As a first impediment, most nonprofit organizations have only basic financial systems, and the standard accounting packages on that they depend are hardly ever conducive to tracking and understanding the true costs of operation. To this end, bigger NPOs are hiring or training chief financial officers and chief operating officers.( Ruderman, pp 18-19) The culture of nonprofit organizations also moves in opposition to true cost measurement. For many, considering more than an unpretentious amount of money and attention on understanding such traditionally commercial matters as costs represents a diversion of valuable resources from activities that further the organization's mission. Moreover, even though staff workers costs (people's time) represent many nonprofit organizations’ single biggest cost, the culture in most of these organizations isn't conducive to tracking how employees spend their time so that those costs can be allocated to the relevant activities and programs. As opposed to law or consulting, where employees are used to documenting their time in order to allocate it to clients, nonprofit employees are not only improbable to be familiar with such recording systems but also may oppose any efforts to measure the cost of their activities. Lastly, the capital market in that nonprofit organizations operate adds to the problem. Most funders prefer to support programs and projects rather than overhead expenses like activity-based accounting. They also have a leaning to prefer providing seed money to support new programs rather than supporting existing ones. Looking ahead Aggressive forces of several kinds shape the world that nonprofit organizations inhabit. Within the sector itself, more organizations are vying for scant resources such as funding and staff. Nonprofit start-ups emerge with astounding regularity. For-profit businesses carry on making inroads into the marketplace in growing numbers in industries such as health care and education. (Johnson, 1999, pp 41-43) To partake successfully in this new milieu, nonprofit organizations must be able to design sound, well-structured strategies that will allow them to deliver on their chosen assignment. (Swords, 2002, pp 121-123) References Johnson, P.J., Morth, M. (1999), Foundation Fundamentals: A Guide to Grant-seekers, 6th ed., Foundation Center, Washington, DC. Lang, A.S., Rocha, L.A. (2000), How to Read Non-profit Financial Statements, American Society of Association Executives, Washington, DC. Oleck, H.L., Stewart, M.E. (1994), Non-profit Corporations, Organizations and Associations, 6th ed., Prentice-Hall, Englewood Cliffs, NJ. Ruderman, S.C. (2001), "The mysteries of the 990PF explained", Contributions Magazine, Vol. November/December pp.18-19. Swords, P., Bjorklund, V., Small, J. (n.d.), "How to read the Form 990 and find out what it means", available at: www.npccny.org/Form_990/990.htm (accessed March 29, 2006). (2002), in Weitzman, M.S., Jalandoni, N.T., Lampkin, L.M., Pollak, T.H. (Eds), The New Non-profit Almanac and Desk Reference, Jossey-Bass, San Francisco, CA. Read More