From time to time I see progress in the fight to fix the way we fund social programs. Real progress that leads to lower costs and expanded services. And to less burnout and better results.
Too often, however, I see people falling for financial myths. Among them: the idea that every nonprofit group needs to diversify its revenue sources, and the more diversified they are, the better.
But diversification is subject to the laws of diminishing returns. When I talk to nonprofit leaders, I sometimes tell a story that encapsulates the many stories I have heard from social-service leaders. These voices rarely get the hearing they deserve, so I like to represent them through a character I call Sister Rose. Countless times, people have come up to me, grabbed my arm, looked me in the eye, and said, “I am Sister Rose.”
Here’s her story:
A young program officer welcomed Sister Rose to her office, thrilled to be meeting one of her heroes. Sister Rose, the CEO of a leading national antipoverty organization, was inspiring. She spoke passionately about her work, outlining progress made over 30 years, highlighting the ironies and triumphs of fighting poverty in the midst of plenty.
The program officer was sold. “We’d love to help,” she said and turned the conversation to financial due diligence. “I know your annual revenue is $30-million. How does that break down?”
Sister Rose intoned a practiced response: “We have a total of 50 government contracts, from four levels of government—40 entities in 12 states and 34 municipalities. Most are renegotiated annually, but it’s unpredictable. Almost always contract rules from one unit of government don’t match up with others, so we have to manage around that. It’s a lot of work.”
“And that makes up about 70 percent of your revenue?”
“Yes, along with some earned income from developer’s fees and loans receivable.”
“And 15 percent of your revenue is in foundation and corporate grants?
“Yes, we get about 100 grants a year, mostly restricted, typically for a specific project or purpose. Some, like bricks and mortar, some fund one program or project, some restrict to a neighborhood or geography. Some want to give blankets. Nobody funds maintenance or depreciation on our shelters.”
“What about the other 15 percent?”
Well, it’s other charitable giving: the dinner dance, the golf outing, bingo receipts, the car wash, and our biannual direct-mail campaign.”
The program officer was delighted, “That’s great—your revenue is very diverse—we love to see that.”
But Sister Rose didn’t respond. Even in the face of seeming victory, she appeared to have fainted from exhaustion, murmuring in a half-sleep almost as if in prayer, “I don’t know if I can do diverse revenue anymore. Please, no more rubber-chicken dinners, no more negotiations about contract conflicts, no more truckloads of donated crew socks, no more ramshackle “free” buildings, no more long conversations about small grants, no more “loaned” executives with no housing experience, no more tap dancing around use of funds and overhead restrictions, and no more bingo. Please, no more bingo.”
The program officer stared, astounded. The last thing she wanted was to drive Sister Rose over the brink. She wanted to help.
She had been mentored in the foundation and trained in the housing division of a major city. She had an MPA, and had spent time in the management consulting world, learning “nonprofit best practices” at a leading firm. She knew diversification was a “best practice,” but maybe it didn’t help? Could this, like other “best practices,” be burning out the best nonprofit leaders?
The answer is yes.
Sister Rose is popular with my listeners because every nonprofit leader has been pushed by at least one grant maker to diversify revenue—sometimes through new business ventures, programs, or entirely new funding sources. Yet a study the Nonprofit Finance Fund conducted of youth-services organizations showed that’s not always true. Organizations with two sources of revenue were more financially stable than those with either one or three.
One reason that revenue diversification is tricky is that it means different things.
For example, nonprofits could add more paying customers for the same services. Let’s say a tutoring group offers services to school districts, as well as Y’s and to individual students at home. The tutoring approach remains essentially the same, but the students are somewhat different and the number of those who pay grows substantially.
Other groups might diversify product lines while serving the same market. That is usually more complex and expensive than diversifying markets and takes more capital investment.
Sister Rose’s operation might have gone through lines-of-business diversification as it grew: First it was advocating for better housing, then demonstrating that decent housing for low-income people could be built by organizing volunteers and private donations, then expanding into a small-scale housing-development business; then getting into the large-scale development business; and finally getting into property management and even financing
Whatever the nature of the revenue, both kinds of diversification are challenging tasks that can take years to accomplish. Maintaining multiple, highly diverse revenue streams can be problematic when each requires, in essence, a separate business. Each calls for specific skills, market connections, capital investment, and management capacity. Only then will each product attract reliable operating revenue, pay the full cost of operations, and deliver results.
Sister Rose’s organization was dutifully diversifying its operations, creating a level of internal costs and complexity that was taking a toll.
One small step on the way to reducing burnout for the Sister Roses our society needs: Let’s start by getting everyone to recognize that revenue diversification is not a “best practice.”
0 Responses to Shattering the Myth About Diversified Revenue
mlwyland - September 2, 2010 at 3:58 pm
“Sister Rose” is probably right in bemoaning event-based fundraising as a sign of diversification of revenue. However, that’s no reason to sacrifice mission independence and surrender to a very few funders who she must satisfy to continue in operation. Diversification doesn’t have to lead to special event burnout!What Sister Rose needs is a development director who knows the cost to raise a dollar and designs a comprehensive devlopment plan based on that knowledge. [Based on her description of her agency’s programs & services, she can afford to — can’t afford *not to* — have a qualified, professional development function.The ultimate goal of fund diversification is to avoid having any single funder (or two) be able to jeopardize the agency’s sustainability by withdrawing funds. Why have this goal? To assure that the agency has the capacity to be true to its mission as defined by its board and responsive to its stakeholders and community. To give the agency the ability to say “no” to bad ideas and bad funding without having to fear going out of existence.This outcome is worth having a good development plan and function. It’s even worth the *occasional* rubber chicken banquet and bingo night. The only future worse to contemplate than an agency held hostage to sepcial event fundraising is one held hostage to a single funder’s whims, coercion, or changing priorities.
connieboyd - September 2, 2010 at 4:04 pm
After we finish shattering the myth about diversified revenue, we should work on shattering the myth that it’s impressive when nonprofits use corporate jargon, calling the people they serve “customers” and referring to aspects of their missions as “product lines.”
mpublow - September 2, 2010 at 4:16 pm
First, I’d like to thank Ms. Miller for sharing her experience.Secondly, I can’t say that I agree with the premise and assumptions of Ms. Miller’s argument. While I believe there is a point to be made here, I disagree with the author’s conclusion as to what that point should.The assumption in the article is that “revenue diversification” happens in one of two ways – either through diversifying program services or through diversifying categories of funding support. I think that two-part definition is one-part too many. Diversifying program services – which the author calls “line-of-business diversification – is a different strategic issue than is diversifying revenue. A decision to diversify program services may lead, I agree, to some new funding sources. However, that decision strategically is not based on or focused on diversifying revenue… or, if it is, I would submit it is being made for the wrong reasons. The appropriate reasons to diversify program services are most often based on unmet need among your service population, and/or on a natural extension of an organization’s existing program strengths and organizational core capacities. So, I would advocate that we not confuse the questions of diversifying program services with the questions of diversifying revenue streams. I would also advocate that as a general rule it is appropriate for many nonprofits – although I acknowledge not all – to consider whether revenue diversification is an appropriate strategy for them. While “national” nonprofits as a general rule might be assumed to have more diversification, “local” or community-based nonprofits often do not. It is not unusual to find a local or community-based nonprofit that relies primarily on one source of funding – special events or grants or individual major gifts, often from a relatively small pool of loyal donors, come to mind as common examples. In those scenarios, revenue diversification is highly recommended, at least based on my 25-years of experience in the nonprofit sector and work with well over 100 nonprofit organizations over the years.As for the author’s citation of the Nonprofit Finance Fund study, I would raise the question as to whether the broad extrapolation of that study on a specific sector of nonprofits is valid and reasonable. I would also raise the question about the broad interpretation of that study’s findings as it relates to revenue diversification. My suspicion is that there may be more nuance to interpreting those findings that Ms. Miller’s article suggests.I close by again thanking Ms. Miller for expressing her opinions that come out of her experience. I acknowledge that the work life of executive directors or CEOs of many nonprofits is often filled with stress, frustration, and being pulling in too many directions. I would simply submit that laying the “blame” for that condition on the issue of “revenue diversification” is misplaced.
sacharkj - September 2, 2010 at 4:27 pm
A great article from the Stanford Social Innovation Review a few years ago also suggested that diversification was not necessarily a best practice, particularly if you wanted to get ‘really big.’ The article: “How Nonprofits Get Really Big” http://www.ssireview.org/articles/entry/how_nonprofits_get_really_big/ studied nonprofits started since 1970 that had achieved more than $50 million in annual revenue. The major conclusion reached was that most of them did not diversify their funding streams across government, foundations, individuals, events, etc. Rather, they specialized within one stream, and occasionally diversified within the stream. For example, one organization got most money through government grants, but they applied for national, state, & local gov’t funding.I am currently a development director at an organization that prides itself on diverse fnding streams (with only a $1.5 million budget) and I am often at loose ends, keeping up with every donor, corporation, and new community event. However, we also don’t see ourselves trying to reach $50 million in revenue, so diversification is likely the way we will still go. One thing this article gets right is that “best practices” don’t really exist as one size fits all solutions. They are merely suggestions and descriptions of what works for some that are successful.
nancychapman - September 3, 2010 at 10:33 am
Interesting article. But we at The Curtis Group would argue there can be good and bad diversification of revenue. Sister Rose has two problems. One, 70 percent of her revenue comes from government grants, which probably are restricted to some degree, and therefore she needs to diversify in order to raise unrestricted dollars. Much of the 15% she gets from corporations and foundations is also restricted.Two, she’s raising the other 15 percent through a dinner dance, golf outing, bingo, a car wash, and a direct-mail campaign — nothing about major gifts. Why in the world is a $30 million organization doing a car wash, bingo, and a golf tournament? Frankly, why would a $300,000 organization be doing these instead of major gift fundraising? No wonder she is exhausted — special events do that to you.Why do nonprofits continue to think a development program comprises special events, bingo, in-kind donations that aren’t helpful, and other activities that typically generate a poor return on the dollars invested? It’s time for Sister Rose to invest in building capacity in her development program, and that means focusing on major and planned gifts.
katecochran - September 3, 2010 at 5:11 pm
I applaud the fact that nonprofit capital sources are finally getting serious attention. I question the attention-grabbing headline though. Diversifying revenue is a fundamental risk mitigation strategy in any business. No one wants only one or two customers–even if it massively improves efficiency in the short-run. As we are seeing in our own times, organizations that are heavily reliant on only public sector funding can go out of business overnight when state and local budgets get slashed. Similarly, if your nonprofit was heavily reliant on major gifts from individuals in 2008, year over year income could have easily dropped 50%. Hedging with appeals targeted at different segments does not need to fragment and disorganize an organization’s fundraising approach. The primary problem isn’t that Sister Rose has too many sources of revenue–it’s that the sources all have unique and conflicting conditions, draining her operation in their efforts to be responsive and compliant. If we could educate funders to provide more unrestricted grants and true growth capital, we could allow nonprofits to put their resources to being effective and efficient instead of jumping through hoops, demonstrating to others how effective and efficient they are.
susanfrice - September 5, 2010 at 6:20 pm
I agree with mlwyland and nancychapman; Why in the world doesn’t the organization have a mature development department that focuses on major gifts? And, why not an annual giving program that over time increase the number of donors who give 5 and 6 figure gifts every year? Yes, the dinners will increase their potential database — who might become major gift donors. It takes time. And it will require substantive investment in good board development.
clara_miller - September 7, 2010 at 4:01 pm
Wow–great posts, all…and let me just reiterate that I am equally unwilling to endorse the notion of a single source of revenue (which several respondents seemed to think was the opposite of knee-jerk overdiversification in the name of “best practice). Our studies at NFF (which were related to but different from including findings very similar to those cited by one reader published in SSIR by Bridgespan) as well as the youth services study, (not to mention numerous findings of similar patterns in the for-profit world) find that I do agree with what I believe to be a common theme of the fundraising partisans (susanfrice, nancychapman,and mlwyland)– that a professional development office
thefinite - September 8, 2010 at 2:12 pm
Based on the headline and introduction, I can’t blame any of the readers for assuming the argument here is that all diversification is bad. The beginning of the article unfortunately buries the valuable insight that many diverse revenue strategies have a lot of costly overhead.I also agree that the article’s definition of diversification is fuzzy. Can we agree though that the best nonprofit revenue strategies have *some* kind of diversity. After all, the best grant-seeking strategies won’t rely on a single grant. The best contribution-funded strategies won’t rely on a single contributor. The best earned income strategies won’t rely on a single customer.
pamelagrow - September 8, 2010 at 2:20 pm
I don’t know that an organization ever wants to rely on a single revenue stream. mlwyland is right in saying that this organization needs a “development director who knows the cost to raise a dollar.” It sounds as though *Sister Rose,* is playing the Pareto principle in reverse. Anyone who has ever spent time writing a government or a large, project-specific foundation grant knows that the time and effort involved is tremendous. Ditto on event planning.katecochran makes an excellent point as well. Foundation funders absolutely need to be educated to the need for unrestricted grantmaking – and organizations need to learn how to write a compelling case for general operating support.And, of course, major gifts program should play a role in every organization’s development plan. But I am surprised that no one has mentioned the benefits of monthly giving programs. There is no better way to dramatically increase annual income than implementing monthly giving. Donors enrolled in monthly giving programs give, on average, two to three times more money than annual donors. Too, donors will stay with your organization longer – in fact three times longer than your average donors.
clara_miller - September 8, 2010 at 6:23 pm
Wow–great posts, thank you all!! Let me just reiterate that I am equally unwilling to endorse the notion of a single source of revenue (which several respondents seemed to believe I was championing). I was objecting to what I have observed is a sector-wide embracing of revenue diversification as a “best practice,” and that the blind application of same frequently results in over-diversification, attended by mission creep, undercapitilization, expensive and mind-numbing internal complexity and burnout. The relevant study we did at NFF (which was related to but different from studies both Bridgespan-the SSIR citation–and we did on the relationship of diversity of revenue sources to enterprise size, with similar results, i.e., they are negatively correlated) focused on youth servers in several large states. We found that when organizations had either one or three main sources of revenue their basic financial health was worse than when they had only two. So there appears to be a “sweet spot” which is not always the same, but not all about increasing diversity. I didn’t explicitly make the point that program vibrancy must be the central consideration (clearly Sister Rose was right in the thick of that one) and that’s important to the central point: nonprofits have a highly diverse and completely valid program strategies, business models, markets and constituencies.Settlement Houses are different from immigrant’s rights advocates, and they’re different from Harvard. One size, or rule of thumb doesnt fit everyone (or possibly, anyone). We can’t escape the critical importance of-well–thinking! I would also like to give a personal shout out to the fundraising partisans (susanfrice, nancychapman, and mlywyland).Fundraising from individuals is a very different operation from raising occasional grants from corporations and foundations. We find that frequently the best use of “growth capital” is to invest in a professional fundraising operation, and we mean invest. It’s not just the assistant executive direction in her spare time along with an intern to do the mailing list, blow up balloons and call volunteers. We mean three to five years, with very specific targets for patron engagement and profitability. Our experience is that folks often undertake a plethora of highly diversified fundraising activities with no central strategy and little intentional investment in the skills and systems needed to make it a reliable source of NET income over time. Finally, I realize that many people find the use of business terminology (customer, marker, product, etc.) irritating, butI’m going to persist. I’m pretty sure that the irritation comes from the fact that many people-not-necessarily folks from the for-profit world alone, but the general public and the press–operate with the mistaken notion that leaders and managers in the nonprofit world aren’t “business-like” or skilled, while MBAs who use business terminology are. They frequently point to “good management” as derived from silly rules of thumb that would never get traction with great managers in the world of enterprise finance-rules that set absolute limits on overhead rate, profitability, and well, diversity of revenue to name just three. They cite these to lord it over the supposedly benighted managers in our world. I say “au contraire!” One of my colleagues from the for-profit world, a skier, calls it “triple black diamond management”, making an analogy to the most difficult ski slopes-for true experts only. What we need to do is to empower ourselves with with enterprise concepts (and terminology) that will allow us to support real program vibrancy, rather than to shrink from the conversation. It’s time for us to save our sector from managing around “pretty bas best practices,” and embrace and advocate for real enterprise finance principles, connecting them explicitly to program vibrancy up and down the sector.
bill__huddleston - September 9, 2010 at 8:17 am
Here’s my favorite quote about fundraising: “It takes oil to keep the lamp burning.” Mother TeresaIt encapsulates a great understanding of how important revenue generation is to the non-profit’s success at performing its mission. There is one type of non-profit fundraising that has unique characteristics which are not understood by many in the non-profit world, specifically workplace giving, such as the Combined Federal Campaign (CFC).Workplace giving is the only type of non-profit fundraising that is subsidized, low risk, and high leverage. It’s the “subsidized” part of the sentence that most NP commentators seem to ignore. The value of the time and facilities that are provided to the non-profit sector during a workplace campaign never show up in any non-profit’s financial statement — but they are still real!How much can a non-profit generate through the CFC? I know one local non-profit with a $100,000 budget that gets $50,000 through the CFC. American Red Cross gets about $6 million, many local non-profits get between $5000 to $20,000 annually.Regards,Bill HuddlestonThe CFC Coachbillhuddleston1 at gmail dot comcfcfundraising dot com703 -560- 1825