Business Model Thinking for Nonprofit Boards
By Jack Murray, CPA and HoganTaylor Assurance Partner
One of the sessions I attended at the AICPA National Not-for-Profit Industry Conference was conducted by Jeff de Cagna, founder of Principled Innovation LLC. Jeff is an author, speaker, and advisor to associations across North America and around the world. He founded Principled Innovation to challenge association boards, CEOs, and executives to build their organizations to thrive in an uncertain future. Jeff also delivered the best sound bite I heard at the conference, “Nonprofit is a tax status, not a business model”. A variation of this phrase has been discussed with a number of nonprofit CEOs and board members for several years but emphasizes the need for nonprofits to operate with a business mentality for sustainability over the long-term.
Jeff led his session off with the following challenge. To create truly 21st century associations in a time of deep, accelerating and relentless societal transformation, boards, CEOs and other senior decision-makers must develop compelling answers to three core questions:
- What will it take for your association to thrive over the next decade and beyond?
- What will your stakeholders need to thrive over the next decade and beyond?
- Why should your stakeholders want a relationship with your association over the next decade and beyond?
With so many associations struggling to find their footing in a world experiencing relentless transformation, senior leaders – and boards in particular – face the daunting task of building their organizations to thrive over the next decade and beyond. Over the next few years, the business model conversation may be the most important dialogue you and your board will have. Having the right conversations will help identify compelling opportunities to create and deliver new value to your association’s stakeholders. To get there, however, you’ll need to remove unnecessary obstacles to business model stewardship and innovation by challenging your board to shift its conventional mindset.
A business model describes the rationale of how an organization creates, delivers and captures value. Many existing business models have not changed significantly for a variety of reasons, while the markets and constituents have. In order to identify what’s next, boards must work to free themselves from the following five thinking traps.
- Boards operate with a narrow interpretation of fiduciary responsibility. Most boards pursue their fiduciary responsibilities through the regular review of historical information, including budgets, financial statements, and income tax filings. Although necessary, this type of oversight is insufficient by itself to drive future success.
- Boards have been slow to embrace the shifting dynamics of new value creation. In recent years, future stakeholders have come to exert greater influence over how organizations create and deliver value. Many boards believe their organizations already are doing the right things, and staff members simply need to execute those activities with greater efficiency and communicate about them with greater frequency to make them more attractive to stakeholders.
- Boards choose investment risk over innovation risk. The work of business model stewardship and innovation requires meaningful financial investment. Boards and management have become comfortable with the inherent uncertainty of investing their reserves or endowments in markets they may not fully understand and certainly cannot influence. But they remain hesitant to provide financial support to test inventive ideas for new value creation. Both forms of investment involve risk, yet despite the urgent need to design new business models, investment risk remains more acceptable than innovation risk.
- Boards adhere to a membership ideology. A fervent commitment to membership can lead to willful blindness to even the obvious shortcomings of membership-centric business models, as well as resistance to exploring alternatives. To counteract this mindset, CEOs and other senior executives must help their boards develop a more holistic and honest view of membership’s impact on current and future business models.
- Boards prefer politics to profitability. In some associations, it is about business models that feature advocacy, lobbying, or public policy efforts as the primary form of value. In other associations, competitive elections and political representation harm boards collaborative potential. For most associations, the most serious problem is when boards engage in their own internal politics and jockeying for power instead of fully embracing their stewardship responsibilities. Association boards should view the business model as the framework that integrates the organization’s commitment to purposeful action with the equally necessary pursuit of a responsible level of profitability.
How can boards break free of old ways of thinking and help create new business models that will lead their organizations toward a more profitable, sustainable future? Consider these five “next practices.”
- Refocus fiduciary responsibility on revenue growth and profitability. Instead of operating from a defensive posture, the board can establish a more proactive collaboration with management to build the association to thrive in the years ahead.
- Build technology capacity through actual use. A board that can interact effectively using social, mobile, and related technologies, as opposed to a three-ring binder, will be able to have richer and more meaningful conversations about applying those same platforms to the association’s broader value creation efforts.
- Crowdsource strategy. Instead of functioning as the primary creators of strategy, the board and executive team can play equally critical roles in orchestrating collaboration, championing new ideas, and investing in opportunities for game-changing business model innovation.
- Develop an innovation agenda. An innovation agenda offers the board the chance to codify and share its specific areas of strategic and financial commitment to the ongoing work of new value creation.
- Institute “20 percent time” for the board. One of Google’s most widely reported innovation practices is allowing its employees to use 20 percent of their time to work on creative projects. If the board commits to spending 20 percent of its time discussing the association’s current business model and emerging opportunities for business model innovation, it will be able to engage more deeply with the challenges facing the association and the sector it serves, as well as its current and future stakeholders.
Many association board and staff leaders will ask how they can be certain these approaches will work for their organizations. Jeff proposes a different question: What can they do to effectively adapt these practices to meet their organization’s needs? The first inquiry is about the comfort of knowing, while the second is about openness to learning.