Visit Financial Resource Associates, LLC at www.finresource.com
Hi. I’m Norm Orlowski and welcome to another Program Book Talk. Today’s topic sheds some light on the difference between profit and nonprofit organizations. On the surface, this seems to be pretty obvious, but I think you’ll be surprised by the similarities and challenges each face. Our guest today is Steve Hancox, a consultant with Financial Resource Associates from Cincinnati, Ohio. FRA specializes in under-performing organizations and crisis response. Steve brings over 30 years of general management, financial, sales, and operational skills to the table. Starting his management career at Proctor & Gamble, and transitioning to the turnaround and rapid growth of a privately held entrepreneurial company provides Steve with a unique perspective on all sizes of companies. His love for the arts provides a great foundation to give us insight and food for thought as we look at the difference between for-profit and nonprofit organizations.
NORM: Steve, your firm, Financial Resources, specializes in areas that any business dreads to even think about – under-performance, liquidity, crisis management. So I thought it would be valuable to our audience if you would shed some light on how a nonprofit organization can avoid the downward spiral that leads to having to call in a form like yourself. And, why don’t we start right from the beginning and let’s just ask one of the most basic questions: Should nonprofits earn a profit?
STEVE: Nonprofit is a very confusing term. Of course nonprofit organizations must earn a profit, defined as revenues in excess of expenses. The difference is to whom the accumulated profit or wealth accrues. In the for-profit world, the accumulated wealth and value benefit a company’s shareholders in the form of dividends or stock price appreciation. In a nonprofit world, the accumulated profits benefit the future recipients of the organization’s services. Sustainability is vital for every organization. We do a significant amount of consulting with for-profit companies helping them understand that there is a certain level of profitability they need to achieve. It’s a concept called sustainable profit, and it deals with complex issues such as the cost of capital. While that is not a topic for today’s discussion, the idea of sustainable profit defined as the minimum profit that needs to be earned also applies to nonprofits just in a different way. Nonprofits provide services to their community. Those services cost money and require an investment in infrastructure, including people, processes, and fixed assets. If an organization is providing a valuable service and wishes to grow and provide even more, it will depend upon there being enough accumulated profits to make those investments.
NORM: Well, Steve, if profit is not the differentiator, how should nonprofits differ from for-profit organizations?
STEVE: The revenue stream for a nonprofit often includes two components: the recipients of the services, also known as customers, generally pay a discounted or even subsidized price, and sometimes nothing at all for the service. Nonprofits depend on funders to support the organization to make it possible to offer that discounted price to its community, making its services more broadly available. This means that by their very nature, nonprofits face an additional management challenge. The organization needs to be able to speak clearly and effectively with both customers and funders. This is known as the value proposition. Nonprofits have two value value propositions to contend with for every service they offer, whereas, for-profit companies only have one.
This is really important to understand because the quality of the value proposition is fundamental to the success of any organization. Let’s look at this first from the perspective of the for-profit world.
STEVE: For every sale, the company is offering a product or a service to its customer in exchange for a certain amount of money. If the customer perceives the value of the product or service to be greater than the price, the transaction occurs. If not, the customer walks away. For a nonprofit to be successful, this has to happen twice. Funders need to be convinced that the service the organization is providing is needed, and that the total amount charged to both the customer and the funder is reasonable. The customer also has to feel that the service provided is worth the price charged to them. That might seem easy when the price is subsidized. However, behaviorists warn us that the price can influence perceived value, meaning that a price reduction can have the opposite effect versus what you might expect. Many organizations have been surprised to learn that a free service can be equated with having no value and have adjusted their free pricing to a nominal charge.
NORM: Wow. So the nonprofits have more of a challenge than the for-profit companies. What other challenges do nonprofits face?
STEVE: Many of the nonprofit organizations we’ve consulted for have not previously spent enough time developing their value propositions. Even if the service is fully subsidized and the client or customer is not asked to pay anything, it still takes skill to effectively reach the intended community. Effective marketing is vital to every organization. With a dual audience of funders and customers, marketing is twice as important to a nonprofit. Many organizations shy away from marketing, mistakenly believing that activity does not belong in the nonprofit world. For example, take the challenge that fine arts events face in the average of their audience. Orchestras in particular are seeing average ages upwards of the mid 50s. They have to find ways to get younger people interested, especially millennials – new, out-of-the-box thinking is needed. Professional marketing efforts are just as important to a nonprofit organization as they are to a company.
NORM: Well, Steve, is there a fundamental difference, then, in the messaging that needs to be communicated to these two groups – the customers versus the funders?
STEVE: Absolutely. In fact, it is getting even more difficult for organizations to attract the funding levels they need. People who are willing to give expect more for their money. It is no longer enough for an organization to appeal to a contributor’s desire to be benevolent. Donors expect more. They expect proof that the organization is making a difference in an area that is important to them, and that the organization is not wasting its resources. That can be a very unsettling concept to many nonprofit organizations, as it challenges them at their core. This type of thinking forces them to prove their existence is relevant. CEOs that step up to the challenge ensure that their organization will be continuing its good works for years to come. This leads to clear strategic thinking and planning. In particular, this exercise focuses on the organization’s OGSM — that’s the objectives, goals, strategies, and measurements.
NORM: You mentioned relevance. How do you measure that?
STEVE: That’s a great question, Norm. In my opinion, this is the most valuable part of strategic planning. Objectives such as relevance, artistic excellence, financial health, innovation, and growth for example are all concepts. And concepts cannot be directly measured. But, as I said, they need to be measured. And I like to call this measuring the unmeasurable. One way to accomplish this is to focus on each objective one at a time. With one objective clearly in mind, identify several quantifiable goals that if achieved would indicate that the objective has been advanced. Here is where the real challenge comes in. The organization will probably identify things they are not currently measuring and that are hard to measure. They cannot let that stop them. They must figure out a way to get close. And this is one area where an experienced consultant can help. The harder leadership works on this important step, the more effective the entire organization will become.
NORM: Well, you make it sound as though there is little difference between nonprofit organizations and for-profit companies.
STEVE: If I gave you that impression, I apologize. There is a big difference. It is much harder to manage a nonprofit than it is to lead a for-profit entity. Everything that is required of a company with the sole exception of dealing with its shareholders and the SEC, is equally required of a nonprofit of similar size. The part that makes it harder goes back to the value proposition concept I spoke of earlier. Companies have it much easier, as there are generally only two parties involved in the sale, the buyer and the seller. Whether or not a sale takes place comes down to how well the seller has convinced a willing and able buyer that the product or service fills a want or a need at an excellent value. There are three parties involved in this process for a nonprofit – the organization, customer, and funder. Adding a third party to the dialog increases the complexity geometrically. As if that is not enough, nonprofit organizations often find themselves working within very tight budgets. There is a mistaken belief in many nonprofit organizations that they are not a business. Changing that culture is vital.
There is a level of pride that comes from being affiliated with a nonprofit, due to believing in its mission. That underscores how important it is for the nonprofit to effectively and efficiently achieve its mission. I think it is safe to say that any CEO who successfully grows and achieves his or her organization’s objectives is a remarkable leader and savvy business person.
NORM: Well, Steve, thanks so much for shedding some light. You know, this has always been a point of discussion when you tell someone that a nonprofit should be run like a for-profit organization, and I think you have really make some great points, and hopefully this is going to allow some of our listeners to look at their nonprofit organizations a little bit differently.
STEVE: If it helps, I would be thrilled, if it helps any at all. So, I thank you so much for letting me be a part of this excellent outreach effort that you’re doing. I know you do a lot of work with the fine arts community, and I truly appreciate how they enrich the lives of myself and the nation.
NORM: Our guest today, Steve Hancox, can be reached through the website finresource.com or by calling Steve at 513-793-8004, or email at firstname.lastname@example.org.
Over the next few weeks we’ll be bringing you some great information, including how arts critics think, and some great tips on social networking in the arts, and an interview with an author on a new book called the Symphony of Profound Knowledge.
I’m Norm Orlowski. Good selling.