Built to Stagnate

By Aaron Hurst on June 18, 2008 1:47 PM | Permalink | Comments (0)

My corporate training was in product management.  I was trained to build and grow product lines.
 

There were three questions I was taught to ask to uncover major growth opportunities:

1) What additional services or products can we sell to our existing customers? If you have a store, you can increase revenues by getting each customer to buy two items rather than one.

2) Can we sell our existing product to a new type of customer?  I recently learned that Diet Coke can be used to remove graffiti.  They could change the packaging and sell it at Home Depot.

3) Are there core parts of the product or the supply chain used to create the product that could be leveraged to create an additional product at low cost and give us a competitive advantage?  You see this done a lot with auto manufacturers that use the same engine or chassis for multiple lines of cars.  For example, the Passat and several Audis are built on the same chassis.

Working now as a nonprofit manager in an organization poised to introduce a new product line, I tried to use these same three questions to identify and prioritize our best options for growth.

What I am discovering is yet another impediment to nonprofit growth (and therefore cost effectiveness and efficacy).  It is tied to the challenge of having two customers - the client served and the public or private funding that covers the cost of serving clients who by definition can't pay themselves.

It is relatively easy to identify new services to provide clients.  There is an almost endless source of unmet need.

The challenge is that the funding sources are built to support single program organizations that are relatively similar in size. Foundations, specifically, do not proportion their investments based on relative market share or the cost per outcome achieved.  Rather, they cap the size of a potential investment (typically between $25k and $100k), and no matter how big or cost effective you are, you hit that ceiling.

So, if two organizations are providing the same service in a market, a foundation might give them each $25k per year (total of $50k for both organizations).  If those same organizations merged and were able to collectively serve 25 percent more clients on the same budget (assumes economies of scale), the foundation would reward them by cutting their grant in half to $25k, as that is their ceiling per organization.

Flip that around and you can see our challenge.  If we have a foundation funding the Taproot Foundation at their ceiling amount, the only way to get them to support a new program without cannibalizing our revenue for existing efforts is to start a new entity for the new program.  Taproot Foundation would do our current programs and get the $25k grant and the Turnip Foundation (spin off) could get a second grant.  This, of course, would double our overhead expenses, as we would need two HR, accounting, and IT departments, among others.

If Foundations are serious about outcomes and efficacy, they could address this in a couple of ways:

- create some grant programs based on market share (the more services you deliver, the larger the grant)

- allocate grants to providers who maintain quality while operating at the lowest cost until the grant budget is drawn down. So, if the best provider can use 80% of the grant budget to serve clients, they would get 80% of the funding.  the next best provider would get the remaining 20%.

- create a policy that if two organizations merge, they will be eligible for 200 percent of the ceiling of a single nonprofit going forward (or better yet, bump it to 250 percent to create incentives)

This is directly tied to one of the biggest criticisms of foundations.  The current common foundation model is based on the assumption that foundations exist to keep nonprofits in business.  It should instead be focused on partnering with nonprofits to achieve the maximum public benefit. 

All that said, if I had a ton of money and started a foundation, I wouldn't want people lecturing me about how to give it away.