Reflections on Diversifying Revenue . . .
Karen A. Froelich’s 2009 article Diversification of Revenue Strategies analyzes three major revenue strategies employed by nonprofit organizations. She establishes profiles of each method to determine the potential advantages and disadvantages that each presents for achieving organizational sustainability and combat resource dependence. “The key to organizational survival is the ability to acquire and maintain resources (Pfeffer & Sancik, 1978). In order for NPO’s to acquire those resources, they must effectively interact with the people that control them. If an organization becomes too dependent on a small number of resource providers, therefore it is necessary to establish a position within the organization that manages and mitigate those dependencies. There are two primary constraints that NPO’s must deal with (to varying degrees) with each type of donor contributions: revenue volatility & goal displacement.
Previous studies have found that NPO directors have difficulty planning a stable operation, but when an organization is dependent on donors, they have very little control over the amount of funds that will be raised, when they will be raised, when they will be paid, as well as taking into consideration and “strings” that may come attached to the donation. As revenue diversification becomes increasingly complicated, it is necessary to have someone managing the funding situations; too often there is more attention paid to fundraising than the efficient allocation of the funds raised.
Private Contributions (Individuals, Corporations, Foundations)
The “pure” nonprofit organization as one dependent entirely on donations, ideally without strings attached so that the organization can use the funds totally at its own discretion ( Weisbrod, 1998.) This utopian funding situation is rarely found in the real world. Whether an NPO is receiving funding from an individual, a foundation, or a large corporation, there is inevitably going to be pressure for the NPO to be aligned with donor. Individual contributions are usually more volatile than corporations, though year-to-year variations are common for both.
Both individual and corporate contributions tend to favor mainstream organizations that “will produce a highly visible program of broad appeal.” Foundations also tend to support traditional arts programs and provide little support for new forms of artistic expression; these tendencies can lead organizations to goal displacement. Goal Displacement occurs when goals and activities are modified to satisfy the wishes of the contributors. Today, many funding campaigns are supported by a small group of primary donors that often impose strings upon their donations, enabling them an “unhealthy level of influence” over the recipient organization.
Government Funding
NPO’s can become very dependent on government support; while this can lead to goal displacement, it seems that revenue volatility is less of an issue. NPO’s can feel (slightly) more secure in predicting their revenue stream from year to year. Government funding can solicit profound effects, however, generally pertaining to internal structure and processes. There is a tendency for NPO’s to lose some administrative autonomy when the government requires standardized procedures and criteria for obtaining federal funds. “The internal structure and process transformations eventually impinge on mission and goals, mainly through changing the character of service delivery. (Froelich, p. 257)
Commercial Activity
The commercial revenue stream is both the largest and fastest growing source of income in the nonprofit sector – even though it is accompanied by substantial controversy. At the time this article was written (1999), there had been few formal studies corroborating the author’s assumptions, though I have found them to be relatively concurrent with more recently researched theories. Froelich’s research suggests that revenue volatility is moderate for commercial revenue streams (though the potential is amplified by the possibility of failed ventures). She had not found any evidence that commercial activity was linked to goal displacement, as funding is much less restricted than when an NPO is answering to a donor. Froelich determined that “commercial revenues enable greater flexibility and autonomy for nonprofit organizations than traditional forms of support.”
Key Points
- All revenue strategies have advantages and disadvantages
- The ideal scenario with continuous flows of funds for unencumbered mission pursuit
- An organization must manage rather than be controlled by its resource dependencies
- An organization must continually adapts its strategies to the resource environment
- Revenue diversification has generally been viewed positively in nonprofit organizations b/c of its dependence-reducing properties.
- Revenue diversification brings new concerns and greater complexity to NPO’s
- As it becomes more difficult to distinguish a nonprofit organization from a government unit or a business firm, the rationale for nonprofit status and accompanying privileges may dissipate
- Commercial activity is a highly controversial method; A primary concern is the potential impact of commercial activities on organizational and sector legitimacy.
- NPO’s must dedicate substantial resources and attention toward revenue acquisition
- As NPOs strive to reduce their vulnerability to income uncertainties and the influence of resource providers, they have moved away from concentrated dependence on a single revenue strategy