Guidestar: Better Understanding Business Models in the Nonprofit Sector
Published on Common Good Vermont, September 7, 2017 -
In talking with the leaders of nonprofit organizations across the sector, there is a single truism that undergirds all of our conversations: limits on overhead create a pressure that deeply impacts the choices and tradeoffs leaders wrestle with every day. At Bridgespan, we have spent the last decade hearing this story from nonprofit leaders, and in turn, working with funders to counter the “overhead myth.”
2016 research from Bridgespan sought to understand: what really are the true indirect costs (or “overhead”) of nonprofit organizations? We examined the financials of 20 well-known, well-funded nonprofits to understand their true overhead costs, and we came to what should have been an unsurprising conclusion. Indirect costs varied significantly across organizations (between 21 percent and 89 percent of direct costs), and much of that variation in cost structures seems to be driven by the organizations’ business models. Advocacy organizations, for example, had very different overhead requirements than direct service providers.
This type of insight is intuitive, when you reflect on it. We don’t expect companies in the private sector to behave similarly or have similar cost structures. We don’t expect pharmaceutical companies to invest in their capabilities in the same way that retail businesses do. So, why do we treat nonprofit organizations as if they are all the same?
It’s time, as a nonprofit sector, to recognize the complexity that makes us unique. All nonprofits are not the same; the sector is actually a set of many unique business models, each of which offers different strategic choices and opportunities for organizations to differentially achieve the impact they seek.
That’s why we are asking you to help us with this survey on the core business models and key capabilities for your organization.
Recognizing the different business models in the sector can provide powerful insights. Nonprofit leaders, once recognizing the business models their organization uses, can begin to answer critical strategic questions like: Which business models drive the most value for my organization and best help us to achieve our goals? Which capabilities are most critical for us to invest in? What peers and benchmarks can I look to in order to inform my understanding of what drives success?
In collaboration with thought leaders, practitioners, and partners like GuideStar, Bridgespan is spearheading an ambitious endeavor to identify the common business models across the nonprofit sector, and the core capabilities of each. We seek to not just provide a taxonomy, but to bring powerful insights to bear, to help nonprofit leaders make more informed strategic choices, and to enable and embolden conversations with funders around investment in critical capabilities. Truly, we see this less as a Bridgespan project and more as work in service of and in partnership with the social sector as a whole.
To ensure our analysis represents the needs, voices, and diversity of the nonprofit sector, we are asking you to participate in a field-wide survey of nonprofit leaders. We hope to capture as many voices as possible. The more color and nuance we can bring to light about different types of business models within the sector, the better we can achieve our goals of breaking the norm of treating all nonprofits the same and equipping leaders with tools to build more impactful and financially resilient organizations.
Better Understanding Business Models in the Nonprofit Sector
Brian Burwell is a partner at The Bridgespan Group.