From NGO to social business : why and how

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How does one go from being a traditionally funded development organization to a sustainable social enterprise?

Leaders of development and aid organizations talk a lot about changing donor models, value for money, operational efficiency, new technology and changing business models. And many believe that being aware of them mitigates the need for serious changes.

It doesn’t.

The international development and aid sector is undergoing major changes and many organizations need to update or adapt the way they work. Many leaders I speak with are considering moving the business model from that of a donor-funded, traditional nongovernmental organization, toward a sustainable social enterprise.

But what exactly are the reasons and how does one get such a major change process right? Through my work at MzN International, I have the privilege of working with many midsize and large NGOs and social enterprises, some of which went through the transformation process recently. So what have I learned?

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Why change?

It is impossible to be all things to all people. To reach a clear plan for change, it is important to address what changes in the organization’s environment management wants to react to. This also includes identifying the areas that the NGO no longer wants to work in — an even harder decision.

Most organizations I speak to list three key reasons for change:

1. A high dependency on only a few large donors makes NGOs financially vulnerable as well as less of a charity, changing its culture and the way the NGO works. As Henri van Eeghen, chief operations officer of Cordaid, the largest NGO in the Netherlands, puts it, “When the majority of funding comes solely from a few government donors, organizations take the colors of a civil service authority — slow, bureaucratic and unresponsive.” A broader funding base makes an organization not only more secure, but usually nimbler and more responsive too.

2. The overall reduction in foreign aid and development funds drives a need for diversity and additions to the existing funding base. The increased competition from non-NGOs for government funds makes shrinking government pockets seem even smaller. This means a funding strategy reliant on government donors is less likely to render financial sustainability.

3. There is an increasing awareness that the old grand model of investing tax money from the “global north” into programs in the “global south” via NGOs is simply not working; organizations need to move from being foreign aid implementers to true international development organizations.

All these changes point to one thing: There is great need to change from a traditional NGO that secures and implements government development and aid projects toward a development organization that can think creatively, act independently and account for its actions openly.

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How to change

But that is easier said than done. Most change projects fail. Yet most organizations are constantly involved in one change process or another. This results in problems such as change fatigue, skepticism and a lack of clear directions or resources to realize change plans.

However, good change processes can be implemented cost-efficiently and within a reasonable time span. Looking back at the organizational change processes I’ve worked with over the past few years, the following points seem critical for the success of any change process:

1. Cut down to (bare) essentials

Decide what you are good at and cut down everything else. For example, at the beginning of 2012, Cordaid was running well over 2,000 projects. By the end of the same year, just under 1,000 of these had been put on hold and transferred to a specially created unit to wind them down.

Mr Van Eeghen thinks this was key to implementing the change process from NGO to social enterprise. “It cut down complexity, clarified priorities and committed everyone in the organization to make the project a success,” he said. “Everyone was certain that this is not tinkering with processes or systems anymore: we meant business!”

2. Get help — but not too much

Hordes of consultants, change managers and external focus groups may be popular, but are not the answer. Instead, hire one or two good consultants to provide perspective. Consultants do not have a career ambition within the organization and that can be very useful when using them to defend and promote difficult decisions. But don’t hire too many, as otherwise the change process becomes “the thing the consultants do.”

Make sure these consultants are there to help with the development of business plans for each business unit, working with — not just for — the board and managers. This will require longer involvement from consultants, typically 12 to 18 months, with alternating full- and part-time periods. Any good advisory organization should accommodate this.

3. Build a business plan — a real one

Setting out our values and ambitions, and spelling out the external forces influencing the organizations do not count. And yet, the business plans of many NGOs are just that.

A real business plan answers real questions:

A real business plan addresses the six operational areas of any organization: activities, structure, communication, HR, finance and support infrastructure.

▪ What activities will be continued, which ones will be not?
▪ Where does the funding come from now, where will it come from next year?
▪ What operational policies will be changed?
▪ Which business units will be created, changed or dissolved?
▪ What do we expect from each grade of employee?
▪ How will divisional business plans be developed? By when?
▪ What IT requirements have been identified and how much investment will be made?

One of the most successful change processes I have witnessed has given priority to answering these questions, resulting in the setting up of new business units within the organization — each one with clear tasks and responsibilities and each one with its own distinct business plan.

4. Accept the casualties

Change can be hard and uncomfortable and it often feels like some colleagues do not really support the initiative. Be clear in your communication and expectations from each staff member. Ask them if they really understand the need for and the path of the change. Ask them if they think they have the skills, tenacity and motivation to see it though.

One major NGO in the United States entered into formal agreements with its employees, asking them if they could deliver this change and adding this to the employment contract. It worked for the most part, and where it didn’t, the agreement offered a clear path toward exiting the employee from the organization.

In Cordaid’s case, its move from NGO to social enterprise eventually led to a radically new employee mix, where half the senior staff now running its 11 business units were hired from outside and half were promoted from within.

5. Give profit-and-loss skill and responsibility

Recently, the CEO of a top five development NGO in the United Kingdom said to me, “Giving people the skills and responsibility to run their own profit and loss creates better results and increases satisfaction of most managers.”

Indeed, giving people the power to understand finance and the tools to manage it, coupled with the sole responsibility for the profit and loss they create, is one of the most effective ways to action change. Profit is not a dirty word in the development and aid sector, and once everyone understands that a reasonable surplus actually ensures sustainability and independence from donors, most managers support it enthusiastically.

However, a fear of finance needs to be overcome. Managing budgets and financial information is often seen as “something the accountants do” rather than a useful management tool for program professionals. Skilling people up through innovative training is crucial. This does not cost the earth either (on average less than $1,250 per staff member) and can be done in a matter of weeks with the right training provider.

6. Move toward ‘open development’

Transparency and accountability are buzzwords, but they can be so much more. Open development means all project data is made fully public, certified by the International Aid Transparency Initiative and presented online. Cordaid’s move toward full open development made staff, suppliers and partners act more responsibly and professionally. Moreover, open data has helped Cordaid cut its administrative burden, as certain donors can access all necessary information online and therefore don’t need time-intensive reports on a regular basis.

My own organization has moved toward open development earlier this year and we have seen an immediate positive change in the way people behave. In short, open development makes sense! I would expect it to become a requirement for many donors in the near future anyway.

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A word about the costs

Large-scale, far-reaching change processes are often seen to be unaffordable by organizations. But, looking at the costs, I found that successful change processes from NGO to social enterprise cost less than 5 percent of a year’s turnover. On top of this, such change typically results in a significant increase in funding shortly after, meaning major returns of investment.

The reality is that the old NGO model simply cannot be sustained in a time of shrinking government funding and increased call for efficiency and impact in international development. It is time to realize that NGOs need to become more independent from governments, financially resilient and accountable for their activities. All this calls for a movement from the traditional NGO business model to that of a social enterprise. This change, much easier than it is often perceived, has started, and has the potential of seeing the development sector become more effective and efficient in delivering aid around the world.

Want to know more? Contact me here.