Three Big Moves NFPs are Taking Toward Financial Sustainability

NFPs of all sizes are doing their best to survive and thrive in this new permanent funding landscape. For some, it’s about taking new risks, for others it’s about fundamental change. For both it might feel like a bit of a gamble.

Keeping a seat at the table is forcing NFP leaders to play a new type of game – with much higher odds. The question now is not one of ‘should we be taking risks?’ but rather, ‘when is it right to bet small on a pair of twos versus going all in for a flush?’

Setting up a café or small social enterprise to subsidise the cause is a viable way to achieve sustainability on a small scale – and these moves should be encouraged and supported. In this series of articles, however, we’re talking changes to an NFP that can shake the very foundations of its mission, structure and culture. From setting up for large commercial scale, to investing in strategic ventures with other organisations, to executing mergers and acquisitions. These are the growing trend, here and overseas, in the social sector’s uncomfortable journey to financial sustainability (our Whitepaper dives deep into this topic).

In this article I’ll give an overview of the three larger scale moves that we are witnessing with our clients in this space. Subsequent pieces will explore each in detail, working through examples and lessons learned.

  1. The Spin-off

This strategy involves developing a new business and separating it as a commercial, revenue generating entity. Why separate it from the parent organisation? We have witnessed that spinning new ventures off in the NFP spaces allows for a risk appetite (aka the ability to fail) that many NFP Boards will not support. These more commercial initiatives are also often at odds with the culture of the parent NFP and can cause anxiety and animosity among staff if they are established as simply a new function within the organisation.

There are many ways to skin the cat and we can learn much from our for-profit cousins. Cast your memory back to 2003. Three years prior Virgin Blue took off in Australia and, due to the collapse of Ansett, was catapulted to Australia’s second largest carrier. It directed a sizable chunk of Qantas passengers to Virgin seats. Rather than assuming the brace position, Qantas reacted. Cue Jetstar. This business went through many forms before taking the shape it is today and dozens of approaches were considered. Do we keep this cheaper alternative within the Qantas business? Maintain it as a division of Qantas? Make it completely independent? How can we ensure Jetstar doesn’t cannibalise our own market and leave Qantas high and dry?

By creating a separate entity and laser-focusing on its target market, Jetstar was able to establish a separate, no-frills battleground and compete directly with Virgin – not Qantas. Interestingly, look where Virgin is today…

Creating a spin-off as an NFP is no small feat. But there are a couple of options at your disposal. Keep it inside the tent, outside the tent or a combination of both.

  • Inside the tent: We worked with a leading youth mental health organisation to create a revenue generating entity to subsidise the rest of their research endeavours without having to rely on government funding. The successful spin off was borne out of the recognition of the potential in the commercialisation of their intellectual property, which was a significant underutilised asset.
  • Outside the tent: A less common, but arguably more effective way to spin off an enterprise is to engage a social entrepreneur jockey to drive the ship, incentivising them with equity. While ownership seems to be a taboo topic in the social sector, it’s worth considering. Is it better to have a slice of a big pie than the whole of nothing? The SROI may be front of mind for you but the jockey needs to know the endeavour makes business sense.
  • A solid tactic some NFPs use is getting the best of both worlds: keeping the business within the organisation until certain KPIs or goals are met. This can reduce the risk of a large upfront investment into a business that may not resonate within its market. Develop a framework around what marks need to be hit and by when.

To discover what is right for your organisation consider some key factors: Is your team culturally ready for the transition? Is your board compiled of skills-based individuals? Can your current funding model support it? The key consideration is eventual scale… if this new business has the chance to go large, then it probably is best sitting outside your structure.

Perspectives on Partnerships Spark Strategy

2. Partnerships

This second approach to sustainability relates to one of the key building blocks of the business model that is often overlooked. A partnership with a complimentary NFP is often a shortcut to social impact but there are dozens of forms a partnership can take. We dive deep into NFP partnerships in this whitepaper  (and uncover the four different typologies of NFP partnerships: One Night Stands, Honey Mooners, The Love-In and Soul Mates).  Think about what kind of relationship you want. Throw your hat into a project-based agreement with equal accountability, form a strategic alliance or even a joint venture where you both invest in a separate entity.

As mentioned in one of our previous articles “How to Date a For Profit” partnering with a for-profit can prove advantageous. Look to the growing B Corp movement for a catalogue of private companies with a social drive.

This option is a less risky path than the first, but often takes longer to realise ROI and is generally a non-permanent step on a longer journey.

3. M&A

Mergers & Acquisitions – previously only existing in the vocabulary of the Jordan Belfort’s and Gordon Gecko’s of the world. Today this is almost the norm overseas and our local work is seeing this as an emerging trend here.

Whilst much of the local talk is between players responding to the NDIS (and circling international private sector providers), it’s not the only engine for dialogue.

Lets look to a local example. Recently we’ve seen Save the Children and Good Beginnings Australia merge.

“Both Save the Children and Good Beginnings have recognised there are insufficient resources to achieve a good beginning for every child, without doing things differently,” Save the Children CEO, Paul Ronalds, said.

Whitelion has merged with not one, but two, smaller NFPs to better provide services to vulnerable youth and A few months ago we saw two of Victoria’s largest Homelessness NFPs HomeGround Services and Hanover combining powers to become “Launch Housing”.

With policy and demand shifts, M&As are inevitable for the survival of many NFPs. This activity is intimidating and requires a lot of commitment. Due diligence and aligning interests are paramount. The power balance is tricky but worth the effort to nut out to avoid hostile takeovers. There is much to gain from these bold moves, however, from economies of scale, extended reach and multiplied impact.

It is becoming clearer that Australia’s climate is demanding a business-savvy social sector. With the right mix of skills and strategy, such as the three outlined above, NFPs can survive, sustain, scale and flourish.

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