Early in to my eight and a half year tenure as CEO of the non-profit Rural Health Education Foundation, I realised that I had one primary responsibility – to ensure financial health and sustainability for the organisation. Everything else was secondary.
With financial health, I could hire and keep good staff, and they – bless them – could get on with their work, without fear of budget cuts, or worse – losing their jobs. It also meant that we would have the money for the necessary publicity, promotion, marketing, branding and – most importantly (and all too often ignored) – investing in corporate governance, with a high quality and informed Board of Directors that focussed on strategy, an up-to-date constitution, a CFO (in our case, a great Operations Manager), a good auditor, a good lawyer and impressed partners and other stakeholders.
When I arrived, I inherited a simple funding model that had lasted for some years: the majority of the funds came from the Australian Government Department of Health and Ageing (as it was then called) – some 80%. We also received some money – including important institutional support – from the pharmaceutical sector through unrestricted educational grants, particularly through the foresight and commitment of Merck Sharpe and Dohme Australia (now MSD Australia), which had originally set up the Foundation.
But as good – and as benevolent – as the Department and Merck were, it was not a long term financial strategy, leaving the organisation at risk of relying on only a couple of sources. So we worked hard over many years to develop a new strategy, one that included a diverse range of sources, few of them dependent on each other. These included other national and state professional and peak health and medical organisations, state and territory departments of health, other pharmaceutical companies, foundations and trusts, program sales (we actively sold our DVDs, supplying up to 10% of our income at times) and even license fees when we started to broadcast our educational television programs on SBS TV and National Indigenous Television (NITV, then separate from SBS). We even had plans to commence seeking individual donations (the “Deductible Gift Recipient” status here in Australia is essential for any non-profit).
While we were unable to engage other Commonwealth Government departments, we worked hard to broaden our sources within that Department, ultimately creating funding sources from four branches and some seven different sections. (There’s an interesting guideline here: try to diversify within your funding sources, engaging different sections of a large organisation. It may not guarantee long-term sustainability with that funder, but it certainly can help.)
These thoughts came back to me as I read a valuable article in the Stanford Innovation Review (Spring 2009), entitled “Ten Nonprofit Funding Models”, by William Landes Foster, Peter Kim, & Barbara Christiansen. Although their perspective is American (and thus needs some careful interpretation for an Australian context), their clear writing and analysis is essential reading for any Australian non-profit senior executive, financial strategist or board member.
One of the best insights from this article is that in the non-profit space, “beneficiaries are not customers”. They summarise it thus:
One reason why the nonprofit sector has not developed its own lexicon of funding models is that running a nonprofit is generally more complicated than running a comparable size for-profit business. When a for-profit business finds a way to create value for a customer, it has generally found its source of revenue; the customer pays for the value. With rare exceptions, that is not true in the nonprofit sector. When a nonprofit finds a way to create value for a beneficiary (for example, integrating a prisoner back into society or saving an endangered species), it has not identified its economic engine. That is a separate step.
Clara Miller, CEO of the Nonprofit Finance Fund … talks about all nonprofits being in two “businesses” — one related to their program activities and the other related to raising charitable “subsidies.”
As a result of this distinction between beneficiary and funder, the critical aspects (and accompanying vocabulary) of nonprofit funding models need to be understood separately from those of the for-profit world. It is also why we use the term funding model rather than business model to describe the framework. A business model incorporates choices about the cost structure and value proposition to the beneficiary. A funding model, however, focuses only on the funding, not on the programs and services offered to the beneficiary.
Their ten funding models:
1. “Heartfelt Connector” – donors and volunteers.
2. “Beneficiary Builder” – donations from people who have been helped in the past (i.e., hospitals and universities).
3. “Member Motivator” – the issue is integral to the members’ lives or beliefs, such as religion, environment, arts and culture.
4. “Big Bettor” – relying on major grants from a few individuals or foundations.
5. “Public Provider” – provide essential social services, reimbursed by or paid for by governments.
6. “Policy Innovator” – creating innovative ways to tackle problems (i.e., homelessness) and thus obtain government grants – and presumably foundation funding as well.
7. “Beneficiary Broker” – providing government services with a fee charged to government.
8. “Resource Recycler” – obtaining in-kind donations and providing them to people in need (a classic Australian example is “Oz Harvest” and food).
9. “Market Maker” – usually in health or the environment, straddling altruistic donors and market forces.
10. “Local Nationalizer” (American spelling used to maintain consistency) – consolidating a large number of local, issue-based community activities with limited funding into a national representative organisation. We sometimes do this in Australia through the state and territory organisations.
I am indebted to my former Matrix on Board colleague Nonie Wales – now at Accounting for Good – for linking to the Stanford article, in her recent (28 October 2015) article “Identifying Revenue Streams for Your Organisation”.