One of the biggest questions in the development space these days is how to maintain the relevance of nonprofit organizations in an environment of economic stress and the expectations of stakeholders that nonprofits should operate as per principles more usually found in market-driven businesses.

These aspects are forcing nonprofits to rethink areas such as relationship building, portfolio management, return on investment, etc., in order to remain key players in their problem spaces. A key requirement is therefore to re-examine the operating model to see if alternate and more efficient ways can be found to address societal issues.

In general, nonprofits move through a relatively similar growth curve. Starting by addressing relatively local and infrastructure focused projects providing 'good works' - charity clinics, schools, etc., they might expand to programs made up of a number of such projects and carried out at a larger scale, including process improvements such as ethnic inclusion initiatives, health monitoring, etc. Those who decide to expand continue on a trajectory of successfully implementing larger and larger infrastructure and process-focused ventures. This is remarkably similar to how a tech firm might grow from a small startup to a large multi-service firm addressing problems in many industries, and has the same basis for growth - impeccable execution.

However, a key difference between the two is that the 'market' addressed by a nonprofit is usually so huge, complex and generational in nature, that howsoever good at execution it may be, an agency with an infrastructure-oriented mindset is unable to make more than a local and relatively short-lived impact. While providing infrastructure is critical, real and lasting benefits require changes at the level of the ecosystem itself. As a simple example, building schools in low-income districts (i.e. local infrastructure) is a foundation need, but ensuring those schools benefit children in the area requires additional interventions aimed at relevance, quality and non-discrimination/inclusion (i.e. addressing systemic factors).

Far fewer nonprofits make the jump to addressing systemic aspects, compared to those content to address infrastructural shortfalls. There are a number of reasons for this, the main one being that organizations trying to achieve systemic change find it difficult to raise funds, it being far easier to find donors for tangible assets such as clinics, medical camps, schools, computerized education aids, etc. Nonprofits with ambitions to influence systemic change have to therefore undertake 'normal' development work and are therefore always in dual-function mode, running normal programs and influencing initiatives at the same time, usually out of the same funding pool.

Influencing requires understanding and leveraging the lessons learnt, and trying to influence other stakeholders in the ecosystem to change the way the overall development process delivers results. It requires a high level of self-realization and introspection on the part of founders and leadership, and the acceptance that given the scale of the problem, even with the best of intentions they wouldn’t be able to make more than a small dent in the problem. Most nonprofits are therefore content to focus on those issues which they can address immediately and explicitly, such as in the example above, the number of schools built. They may or may not want to directly address the overall benefit, say, the number of children with access to education, or (ultimately) economically viable skills built in the population. As a result, a school-building program becomes an end in itself, and not improvements to the system to ensure sustainable benefits.

Rather than getting trapped into this evolutionary dead-end, if at the time of starting a program, the organization establishes what the program should achieve and by when, it will be possible to redefine the options to pursue when the program has either achieved its goals, or if it reaches the end of the planned duration. These options could be a responsible exit, a continuation, or divesting successful programs in the form of setting up the program as an independent entity, transferring it to another nonprofit either en-mass or in the form of a joint venture, or an outright sale of the program to other nonprofits.

This strategy of spinning off successful programs, though it seems counter-intuitive since in the short term it may shrink the organization, makes sense for a number of reasons, the key one being to maximize the development benefits that a single and relatively small organization can deliver. By churning through a number of initiatives, and transferring proven models to larger organizations for them to scale up, a nonprofit can multiply its impact footprint relatively quickly and increase its sphere of influence.

Some of the potential benefits and risks for the organization and the program are listed below.

  • Potential Benefits - increases the number of successful and impactful development programs, develops an innovative and agile culture, monetized programs generate additional and/or unrestricted funds, reputation enhanced, greater influence in development space from multiple divestments, access to larger opportunities, additional funds to grow, additional skills and expertise, cost savings through use of shared services
  • Possible Risks - Cultural mismatch with purchasing organization, reputational – need to ensure that the success story is communicated, profit orientation in divestment to be controlled, attrition of key personnel, partner churn

This approach is being implemented by this consultant with an international nonprofit in India, with a multi-year strategic planning and change transformation program that first aims to redefine its self-image and identity from that of 'doing good works' to 'having an impact', and then transform itself by adopting the incubation model for the maximization of impact.

The nonprofit plans a restructuring and spin-off of its largest programs across education, skills development and financial inclusion to allow the programs to grow independent of the current organization’s limitations. The ‘new’ independent programs will continue to effect change, at a larger scale than previously, while the nonprofit disseminates its hard-won lessons to other players in the development ecosystem (especially to the government) to be incorporated into development policy and development operations, and uses its newly earned and released funds to start new initiatives. This is obviously a difficult strategy and involves a number of strategic planning and change exercises, running across visioning, program portfolio planning and assessment, organization structuring, capabilities identification and capability development, and ownership restructuring.

The incubation model can be a force multiplier for the sector, and lead to the emergence of a slimmer and sharply impact-focused organizations with the capability to efficiently start, scale and then exit complex programs on an ongoing basis, resulting in the development sector constantly refreshing both itself and the entire development eco-system.

(This article was previously published on Linkedin.)

Nonprofits Should Be Incubators. Heres Why.

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