By Steve Zimmerman, Spectrum Nonprofit Services
Nonprofit organizations are operating in an environment of unprecedented economic ambiguity and volatility. Every revenue stream is under pressure, with constant threats to government contracts, delayed payments impacting already tight cash flow, and a fluctuating stock market and consumer sentiment potentially shifting foundation and individual giving.
To navigate potential budget shortfalls and understand the implications, many leaders are turning to – or being urged to turn to – scenario planning. But is scenario planning really the right fit for nonprofits in the current environment?
I would argue that for many nonprofits, scenario planning is a bad fit given the level of uncertainty and the multiplicity of external threats that nonprofits are experiencing. Rather, an approach is needed that more closely responds to the character of the threats being addressed.
This is not a new notion. As Kalle Heikkinen and others wrote in their April 21, 2023 Harvard Business Review article, scenario planning “works best for foreseen risks and stable uncertainties like inflation rate forecasts, the likelihood of a new competitor, or a substitute product entering the market. It often fails spectacularly when firms are hit by shocks outside of leaders’ field of vision. And today, leaders are increasingly confronted with significant, and sometimes existential, events that they would not have contemplated even six months earlier.”
This new approach should address the vulnerabilities organizations and their communities face while simultaneously revisiting and recentering the mission, providing a focus on purpose. This focus, with a dedication to agility, opens the “opportunity” doors that may otherwise be ignored amidst fears of loss – the very doors that provide new paths to success. It may resemble scenario planning but is more overarching and prepares leadership to act quickly when clarity arrives.
Let’s consider for a moment the case of the Episcopal Church which was recently faced with the Trump administration’s decision to privilege White South Africans over other refugees whom it was actively detaining and deporting without due process. The Church responded quickly by declaring itself not only unwilling to participate in the initiative, but unwilling to continue in its longstanding role as a partner to the federal government in its response to refugees.
There was little likelihood this specific situation would have come up in anyone’s scenario plan. But the organization knew its mission, financial context and role in the landscape well enough to have a response ready and shift to another approach. Knowing the details of these variables going into the situation may not make the decision easy, but it does allow for wise and informed decisions even under formerly unforeseeable circumstances.
Another organization might have other factors at play – dedicated staff that it does not want to lose, donor and stakeholder expectations, a dedicated building or other fixed costs that might be difficult to eliminate. Knowing when and how various management considerations come into play is the knowledge that each nonprofit needs and can gather in preparation for future decision making.
Rather than jumping straight to projections, this data collection and education, which we call scenario positioning, allows organizations to prepare to take action and make strategic decisions as challenges become clearer.
Scenario positioning involves four steps:
- Analyzing the organization’s current context,
- Understanding the community demand and supply of services,
- Identifying levers to activate, and
- Preparing a process.
Analyze Your Current Context
Maya Angelou said, “You can’t really know where you are going until you know where you have been.” Economic and political headlines draw our attention outward, but scenario positioning begins by affirming the organization’s mission and values and building a broad understanding of the organization’s financial position among board and staff. This includes:
- Affirming the Mission and Values: Organizations are able to move rapidly when there is broad consensus on the mission and values. While many organizations think there is consensus, taking a moment to reaffirm the mission and values and hold them front and center is essential. Does everyone understand the organization’s intended impact and the values it will uphold in enacting strategies? Is there alignment in what that specifically means?
- Revenue mix: Where is revenue coming from? Foundations? Individuals? Businesses? Government? With so much attention on public funding, leaders should know what percentage of funds come from federal, state and local governments, as well as other revenue streams.
- Reserves: Liquid reserves are the safety net that allows organizations to survive economic shocks. Knowing how many months the organization could operate if all revenue ceased today will indicate how urgently the organization will need to pivot.
- Three Year Trend: Fortunately, few organizations lose all their revenue at once. Unfortunately, it can be harder to spot gradual declines. Looking back three years at trends by revenue stream, as well as overall revenue and expense growth, offers a clearer picture of preexisting momentum before the latest headwinds.
- Program Profitability: To be sustainable, a nonprofit’s mission-specific and fund development programs must collectively generate a profit. A portfolio approach allows some programs to be subsidized by fund development or other activities that generate resources. Understanding how the current mix of programs work together to support financial viability is a key to assessing the severity of potential budget cuts.
Understand Community Supply and Demand
Nonprofit organizations operate in complex, bifurcated markets where those paying for services are often not the same as those receiving them. Donors, foundations and government contracts frequently subsidize social services, education or arts and culture programs. Nonprofits serve as a bridge between these audiences.
This means they must understand how constituent needs may change during economic disruption – and communicate these needs passionately to funders – while also grasping how the broader environment is shifting. Maintaining connection to constituents is a key strength nonprofits should not diminish now.
Additionally, understanding who else in the community is offering similar services – or serving the same populations – helps identify the unique value proposition that an organization brings to its constituents. The value proposition is essential to protecting the core of the organization if budget cuts become necessary as well as valuable information to communicate to funders. It also highlights opportunities for collaboration.
To enact this part of scenario positioning, organization leadership – both board and staff – should be reconnecting with key stakeholders. There is a tendency in times of uncertainty or crisis for organizations to become more insular. Even while operating internally, leadership should fight this urge and reach out, recognizing there are community-wide implications to the struggles of any nonprofit organization.
Identify Levers to Activate
All of this understanding provides the necessary context for action. Identifying levers available for management to use will allow them to move quickly. For many nonprofit organizations this includes:
- Contracts: Maintain a list of current contracts, including parties involved, terms, payment schedules and end dates. Review contracts for penalties or early termination clauses.
- Facilities: While leases should be included among contracts, it’s also important to assess how space is currently being used. Reduced programs may require less square footage, but programmatic implications and accessibility must also be considered.
- Fixed and Variable Costs: Earlier, we emphasized understanding program costs and profitability. Now focus on fixed versus variable costs. Knowing fixed costs for each program helps leadership determine the minimum revenue required to keep them operating.
- Personnel Costs: With approximately 80% of nonprofit budgets being personnel expenses, it’s almost impossible to avoid staff impacts if funding falls significantly. Review the organizational structure to identify critical roles as well as any regulatory or staffing requirements for programs. Consider delaying filling vacant positions until the funding picture becomes clearer.
- Find a Partner: Collaborations – from back-office support to programmatic partnerships – are worth exploring. Tight economic conditions often spark innovation, but partnerships take time to build. Start early. Identify organizational strengths and areas where partnering would be beneficial. Boards can be especially helpful in connecting with peers to explore options.
Finally, as leadership identifies the levers available to be used, they must also understand the implications of doing so. In any nonprofit organization there is a deep interconnectedness between an organization’s ability to accomplish its mission, remain financially viable and support the people that make up the organization. It is impossible to take any action without affecting the entire system. As leaders identify the levers, they should also discuss and be comfortable with the implications for other aspects of the system. This shouldn’t deter them from ultimately making hard decisions but rather allow them to do so fully conscious of what the decision may mean.
Understanding these aspects, the potential savings and costs, opportunities for collaboration and implications of decisions ahead of time empowers leadership to move quickly when the moment arrives.
Prepare a Process
The final – and arguably the most important – step in scenario positioning is knowing how to move forward when clarity comes. Take time now to:
- Educate: Board and staff may not have a deep understanding of the organization’s financial and competitive position. Use this moment to educate them and bring them along so they can meaningfully contribute to decisions. There is no “right” answer and multiple voices strengthen collective problem-solving. Consider holding special board and staff meetings focused on each of the steps of scenario positioning to strengthen the ability to act.
- Create a Rapid Response Team: Revenue shortfalls can arise suddenly – whether by Executive Order from the White House or an email from a foundation. A rapid response team – including finance, development and program staff along with representatives from the board – should be prepared to meet quickly and make recommendations to leadership.
- Communicate: Throughout any period of change, communication is essential. Prepare a communication plan to address staff, funders and partners that includes:
- Who will draft the messages,
- How decisions will be communicated (email, phone, meeting – or a combination), and
- Who will deliver the messages (Board chair, CEO, other).
Again, there is no “right” answer, but having a clear plan ahead of time will allow the organization to respond quickly, efficiently and thoughtfully.
Scenario Positioning in Action
A large social service organization is currently facing pressure on both federal and state contracts, along with the loss of key foundation support. They have made adjustments and tapped reserves while awaiting clarity on the severity of cuts as well as the outcome of some new hopeful opportunities. But rather than waiting passively, they have:
- Educated board members about the organizational context to prepare them for action,
- Reviewed every program with staff to identify opportunities for efficiency or improvement,
- Scanned the community to understand how their programs relate to other offerings and meet constituent needs,
- Developed a preliminary list of programs that might be closed or reduced depending on funding decisions, as well as a program that might grow with increased funding, and
- Formed a task force to respond rapidly once there is more certainty.
None of these decisions are easy. The CEO of this organization likened the process to “grieving”: acknowledging their deep belief in the current portfolio’s impact, while recognizing that the organization’s 150-year legacy must be preserved.
Organizations are experiencing unforeseen attacks from all sides. At these times it is tempting to rely on spreadsheets to create concrete answers, but without knowing where the hit will come from, these efforts can be fruitless. Instead, nonprofits should prepare to adapt by analyzing their current and historical context, understanding their place in the community through supply and demand, identifying levers they can activate if needed, and making a plan for action.
Nonprofit organizations provide essential services that strengthen our communities. This approach will ensure they remain viable – and continue their vital work – for the next generation.
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Photo by Jamie Street on Unsplash