Why Nonprofit Business Plans Fail

Understanding who the customer is and why the customer should buy a product or service represents the core of an effective business plan.  In three earlier posts, we explored how a variety of authors define and approach the customer in nonprofit strategy.  Most strategists concede some distinction between the client (who receives the service) and the customer (who pays for it), but there are a range of perspectives on who should drive strategy. 

I agree with Robert Kaplan's view that the answer is all of the above—[Effective plans] develop objectives for both donors and recipients and then identify the internal processes that will deliver the desired value propositions for both groups of 'customers.'  To put it another way, nonprofit business plans have two proof points:

• Program Model: Does the organization's service or product effectively address the need defined in the mission and case statement?  Is the organization delivering the promised value to the client?  Can the results be sustained over time or replicated at expansion sites with comparable results to the original site?
• Financial Model: Can the organization identify the classes of customers (government, foundations, individuals, etc.) who will pay for the service initially and over time?  Can the organization articulate a value proposition that captures and retains those customers over time?  Can the organization replicate a sustainable financial model in new sites?

For the past decade, an extraordinary amount of government and philanthropic capital has been invested in nonprofits to help them scale models that have been proven to effectively address a need (or have at least shown some promise in doing so). The Obama Administration's Social Innovation Fund aspires to take these sorts of investments further by making grants to "organizations with strong track records of successfully identifying and growing high-performing nonprofits."  
As several large funders and intermediaries embark on what for many will be a high-stakes gambit, I would suggest that it is worth taking some time to ask what we have learned from the past decade of growth investments. The sector has been quick to celebrate success stories like Nurse Family Partnership, Year Up, and Youth Villages, all of which offer compelling cases of how to take strong program models and grow them dramatically. 

While I agree that we have much to learn from successful efforts to scale evidence-based models, I wonder why we as a sector have not publicly examined or analyzed cases of failure with the frequency and intensity with which we analyze success.  As the great social science philosopher Woody Allen put it, "If you’re not failing every now and again, it’s a sign you’re not doing anything very innovative."

Given the money and careers at stake, perhaps this reluctance is not so surprising. While a variety of groups have tried to capture and measure the Social Return on Investment, the idea of an investor culture in philanthropy—and the accountability that comes with it—is more aspiration than reality.  

So why do plans fail?  To be sure, there are countless examples of failures in execution and leadership, of organizations that have struggled to consistently deliver value to their clients because they did not identify the elements of the model that could be compromised and those that could not.  But generally speaking, organizations are not gaining entry into the portfolios of funders who make capital-intensive investments without demonstrating the capacity to consistently produce meaningful client outcomes.

I would ague that many of the failures of nonprofit business plans lie in the unbalanced approach that they take to the two core proof points.  They have concentrated on the programmatic model, while largely neglecting the financial model.  To put it another way, they have focused their strategy on the client, while neglecting to precisely identify the customer and measure the plan's performance in winning the customer's support over time.

In the next posting, I will share details of a nonprofit growth case with which I had some association, largely after the fact. While the case may represent an extreme neglect of the financial model, I believe it is representative of the shortcomings that must be addressed in the field if we are to grow high-impact models that can be sustained over time.