Importance of Nonprofit R&D
Photo by Tima Miroshnichenko
I am amazed at how many nonprofit board members coming from large corporations who understand the importance of Research and Development (R&D) ignore the concept when it comes to the nonprofit that they serve. For example, the big players in the shoe industry might invest $500 million in R&D costs annually with a product cycle of 18 to 24 months. But when someone from such an industry sits on a nonprofit board, R&D becomes a luxury that nonprofit organizations should not even consider. The arguments against investing in R&D for a nonprofit are the big three risks involved 1) the uncertainty that comes with R& D because the effort might fail, 2) the investment in R&D is a front-loaded expenses that will not pencil out in a short-term return on investment, 3) the time it takes going from concept to market can take months if not years. Yet, without the R&D innovation, nonprofits remain not just static but will slip in its relevancy.
I believe that now, more than ever, nonprofits in the financial position to do so, need to invest in R&D even as they navigate the uncertainty of this moment in time. However, let me underscore that R&D is about the impact that can be created when the investment is carefully planned and measured to reduce the risk.
But let's back up because the first barrier to overcome when investing in R&D is introduced as a potential strategy is the knee-jerk question “with what money?” It is a valid question but too many nonprofit boards fail to understand the nuance of the finances that they are tasked with managing. At the risk of insulting some folks, let’s review. Most nonprofits need to have 2-3 buckets of money, each with a clear purpose. The first bucket is the liquid savings bucket that is used to moderate cash flow fluctuations. The amount of cash flow savings should be based on historical cash flow data as well as realistic projections of future revenues. The second bucket is for reserve savings. Reserves are rainy day funds that nonprofits hold in savings or other liquid savings accounts and are meant to help a nonprofit navigate a crisis (like the sudden loss of a revenue stream or an unexpected large capital expense). The third bucket of money is an endowment. An endowment is a purpose driven savings (often held in perpetuity) where the principal remains intact and a small percentage is used annually for operations or specific programs. But let’s be real, if you tie up a million dollars in an endowment and pull 4-5% annually, it amounts to $40-50K of annual revenue. Most nonprofits do not have the luxury of an endowment. So back to the original question. with what money? For those rare nonprofits with an endowment, the interest income could be a source of funding. For most organizations, however, the answer is likely found by right-sizing reserves.
Unfortunately, there are two things that stand in the way of right-sizing reserves. First, most board of directors treat reserves like an endowment and believe that the funds can’t be touched, and/or second, reserves are defined as an arbitrary set aside, often the equivalent of 3-6 months of operational expenses. If an agency is managing cash flow properly, a board must ask itself why do they need a 3-6 month operating reserves? That is a critical conversation the board must have and there is no one right answer but my experience suggests that many nonprofits could free up R&D capital from reserves by understanding the true purpose of the set aside resources for their organization.
So assuming we identify capital, the next question is what does R&D look like in a nonprofit organization at this point in time? Let me be clear that I do not think R&D addresses the immediate and compelling crisis but positions nonprofits to succeed over the long-term. With that framework, I would suggest there are at least three compelling R&D investments needed at this time that prepare for the future rather than solve immediate needs.
Changing Revenue Streams: Too many nonprofit board members think that increasing revenue is simply a matter of adding staff and, for every new development position added, there is the expectation that the new hire raises 2-3 times their salary from day one. Unfortunately, changing revenue streams is less operational and more research and development. Changing revenue streams takes time to build systems, relationships and expertise with no guarantee of success. That is research and development.
Leveraging Interagency Collaboration: In our current political chaos, there are a lot of people talking about interagency collaboration and presenting flow diagrams to demonstrate how it is done. I am one of those voices advocating for collaboration but without the flow diagram. The shotgun wedding of a merger might be sequential but, in my experience, the deliberate pursuit of collaboration does not fit a flow chart nor does it guarantee success. Again, if interagency collaboration were as easy as a step-by-step progression, many nonprofits would have done it already. Interagency collaboration is building a common knowledge base, testing models, piloting ideas and stress testing scenarios. This is the work of R&D and while investing in collaboration might have a high probability of success, that success requires investing capital for the long term.
Documenting Your Impact: As resources become more scarce because of the dismantling of federal infrastructure and the economic ripple effect, the nonprofits that will survive are those who can clearly demonstrate the impact of their programs and services. A third strategic R&D investment is in developing robust impact data. For too long, nonprofits have underinvested in evaluating and reporting impact. Building evaluation systems, collecting data, investing in data analysis and reporting are no longer luxuries that can be put off until your operational revenues improve. Future funding depends on R&D investments made in evaluation today.
The point of this article is not to frame with rigor the concept of Nonprofit R&D but to give your nonprofit a tool that allows you to think differently about deploying your savings. At this time of crisis it is easy to pull reserves to offset operational shortfalls, and in some cases, that action might postpone the inevitable program cuts as you hope a new lifeline appears for your organization. Conversely, pulling reserves to create an intentional long term solution and naming it as R&D helps you segregate that investment, match it to a specific plan and milestones, and track progress accordingly. This approach may require you to scale back your operational programs and services even as you are pursuing long-term strength. Helping boards understand that nonprofits must think in terms of operations and R&D as separate but equally important investments to make at this time of crisis is critical. A nonprofit R&D lens is a tool that not enough nonprofit leaders, consultants, and nonprofit support organizations are thinking or talking about. Without thinking about the future and myopically scrambling to preserve today, I believe, will accelerate a weaker nonprofit infrastructure two or three years from now.
As always your thoughts are welcome. Also, if your nonprofit needs help facilitating such conversations, feel free to reach out.
~ Mark
I have spent my career building connections and supporting collaborative work. I was fortunate enough to be introduced to systems thinking as part of my graduate work in public health and have used community development skills in virtually every position I have held. If you need a meeting facilitator, trainer or someone to help design a process, the reach out and connect.
