NCNE’s inaugural conference was a stimulating affair in which many different ideas and points of view about the economic challenges and business methods of nonprofit organizations were expressed and explored. The conference, and the task forces that contributed to it, featured a healthy mix of participants from nonprofit management practice, the academic and consulting worlds, the business community and institutional funders. The conference explored, through intensive dialogue among these participants, a wide range of issues, including pricing, investments, outsourcing, new ventures, and institutional collaborations. So it is interesting, and perhaps even surprising, that a number of common themes seemed to run throughout the discussions, providing a sense of coherence and unity of perspective across a vast terrain of nonprofit resource-related concerns. For example, the importance of organizational size on strategic options and choices, the centrality of mission to all nonprofit economic decisions, and the critical role that trust plays in successful nonprofit economic transactions, were ideas that came up again and again.
Perhaps I’ll return to these three themes in future essays. For now, I want to focus on a fourth theme which seemed to pervade many of the conference discussions - the concept of diversification. Diversification is a well-known way of reducing risk. Avoiding putting all of one’s eggs in one basket reduces the chance of disaster because it is more likely that one choice will turn out very badly than a whole basket of alternatives. At the same time, diversification reduces the upside potential. A singular choice could produce spectacular results, but it is less likely that a diversified set of alternatives will do the same.
Portfolio diversification is an accepted principle of investing, so it is no surprise that this idea was prominent in the deliberations of Marion Fremont-Smith’s panel on Investment and Expenditure. Her task force pointed out that the laws governing nonprofit fund investment have generally become more flexible and allow trustees to prudently diversify their portfolios with a variety of securities and other investments. Yet, many nonprofits still suffer from constraints that limit their ability to diversify, e.g., because of donor specifications applying to their endowments. For example, many foundations are confined to investments in the stock of the companies that endowed them. Sometimes this leads to spectacular results, when the stock of a donating company rises. But it also leads to inordinate difficulties in carrying out nonprofit missions, maintaining stability and carrying out plans, when that same stock plunges. Much of this situation may be beyond the control of particular nonprofit organizations. However, all nonprofits can benefit from the underlying lesson. Within legal constraints, diversification of investments to reflect an organization’s tolerance of risk, is a good idea.
Diversification also came up in the panel on Outsourcing led by Avner Ben-Ner. There are risks associated with relying on one supplier of a particular service or resource, whether that be a software designer or provider of payroll services. Single source relationships can hold nonprofits captive and make them vulnerable to exploitation. On the other hand, diversification is also expensive because it requires monitoring of multiple relationships. The Outsourcing task force suggested that nonprofits try to maintain some in-house capacity, if not multiple sources, to hedge against the risks of single external suppliers.
A similar conclusion emerged from the panel on Internet Commerce and Fund Raising led by Dov Te’eni. This panel pointed out that nonprofits can become too dependent on particular technologies for their Information and Communication Technology (ICT) needs. Putting all of the organization’s fund-raising investment into Internet strategies is not a good idea, for example. Maintaining a portfolio of fund-raising channels, conventional and new, is a wiser policy, especially given the uncertainties associated with developmental technological approaches.
The panel on New Ventures and Venture Philanthropy led by Howard Tuckman also recognized that new nonprofit ventures are associated with risk. New businesses, profit or nonprofit, have high failure rates. For corporate or foundation funders, it thus seems wise to hold a portfolio new ventures, if they are to assure a reasonable level of success in their investments overall. For an individual nonprofit considering a new venture, it is wise to put this decision into the context of a regime of diversified programming and diversified sources of income, in order not to become unreasonably dependent on a single venture to assure either mission-related results, revenue support, or both.
A similar logic enters the thinking about Institutional Collaborations as considered by Jim Austin’s panel. While this panel emphasized the value of developing long term relationships with institutional partners, in order to develop the necessary trust to go forward safely with joint initiatives, exclusive relationships with particular partners raise the same issue of risk as undiversified portfolios in other areas. Even long term relationships go sour and can leave an organizational partner in the lurch, and close association with an institutional partner that goes awry can quickly undermine a nonprofit organization’s carefully built reputation. That is why, for example, nonprofits which have entered close relationships with corporations, wisely keep their options open. Heads rolled some years ago at the American Medical Association when its leadership entered an exclusive relationship with Sunbeam that constituted a blank check endorsement of future medical devices. Even where major nonprofits put their seals or logos on particular products, they try to steer clear of exclusive endorsements.
For the panel on Pricing of Nonprofit Services, led by Sharon Oster, diversification entered the picture in some other ways than pure risk reduction. Nonprofits face multiple pricing choices: charging or not charging for services; charging a single price for a package of services versus an a la carte pricing arrangement for each component service; charging everyone the same price for a given service versus different prices to different people for the same service; and so on. A variety of considerations enter these decisions - including transactional efficiencies associated with collecting fees in different ways, and mission-related implications of using prices as rationing devices. But risk factors are also involved, especially as nonprofits attempt to change their pricing arrangements in order to respond to pressures to increase revenues or serve new markets. Often nonprofits may be wise to use a portfolio of strategies to avoid extreme reactions and maintain the good faith of alternative constituent groups. For example, the pricing panel found wisdom in voluntary approaches that allow consumers to choose their own levels of payment. For example, imposing a differential pricing scheme, e.g., for college tuitions or museum entry fees, can be accompanied by suggested guidelines to help consumers decide for themselves what it is appropriate for them to pay. There is a cost to such schemes, and perhaps some free-riding, but there is also the promise of greater stability that stems from accommodating a diversity of views.
A similar logic applies to the issue of employee compensation. As the panel on Compensation of Nonprofit Staff led by Anne Preston pointed out, nonprofits need to decide not only how much to pay and what kinds of benefits to provide their staffs, but also the appropriate mix of paid and unpaid workers. This again is a portfolio problem, with the appropriate solution usually lying well within the extremes of fully volunteer or fully paid workforces. Risks are associated with either pole. A mix of the two allows volunteers to infuse their charitable values and ideals into the culture and energy of nonprofit operations, while paid staff allow the nonprofit to carry out its work with greater stability and professional competence. Similarly, diversifying the benefits of nonprofit employment, to include a healthy mix of material and nonmaterial rewards, appears to be a sensible for all classes of employees.
Even the panel on Spending on Fund Raising, led by Joe Cordes and Patrick Rooney, touched on issues of risk and diversification. It asked, for example, what should be the mix between internal development officers and use of external fund-raisers, and whether to invest in internal fund raising capacity versus contracting fund raising out to professionals (the outsourcing issues). Moreover, they asked about the degree to which a nonprofit should invest in capacity to raise charitable donations versus seeking other forms of revenue (the investment question).
Frequently, in these complex economic decisions that nonprofit organizations face every day, we look for “magic bullets” or singular solutions that are framed as simple panaceas. Commonly promoted ideas include pursuing commercial ventures as the solution to nonprofit revenue problems, creating endowments to ensure nonprofit longevity and stability, maintaining low average fund raising cost ratios to appease donors, or converting to the latest software for accounting or fund raising solicitation efficiency, and outsourcing all but core activities. The world of nonprofits is more complex and riskier than such single-minded solutions recognize. Framing such economic decisions in the language of appropriate “mixes” of choices and strategies seems to be one lesson that we can tease out of the many productive discussions at NCNE’s inaugural conference. So don’t forget to ask about the next conference - after all, we don’t want to rely solely on this one event to get our message across!