Business models for NGOs

by David Week on 23 July 2010

Share

Print This Post Print This Post

NGOs are businesses

Many people starting NGOs think that NGOs are not businesses, and therefore they don’t have to be run like a business. But every organisation has the same basic challenge: in order to do things, it needs resources. Those resources can take different forms. In NGOs, they are commonly: volunteer time; in-kind contributions; cash contributions.

The organisation has to be designed so as to be able to raise substantial resources as inputs, process them efficiently, and deliver them as outcomes to a target set of beneficiaries.

This process can be collaborative. It can be stakeholder-driven. But resources still have to flow.

How do resources flow?

Graphically, a private sector business model looks like this:

The brackets below “Technical Inputs” means that that those inputs take three principal forms:

  • resources: the raw materials for doing things
  • capabilities: the capacity to do things
  • innovation: new ways of doing things.

But even capacity-building and innovation within the organisation still need resources, so the bottom line is: every organisation has to access resources as its input, just as every animal has to eat.

They typical NGO model, is slightly different, though. It typically looks like this:

The very important difference here is that the customer (now called the beneficiary) is now no longer the payer (now called the donor). In fact, not only are the recipient and funder now separate, but they may be vastly different people or institutions, from different cultures, living thousands of kilometres away from each other.

In short, whereas private sector enterprises look like a loop, NGOs look like a chain.

This separation causes many problems, which will be the subject of a separate post.

There is also now emerging a third, hybrid business, called the “social enterprise” or “social business”, which has NGO aims but a private sector funding cycle. This too is a big topic—for a separate post.

Why are business models important?

Very simply:

If you have the wrong business model, you can spend years running in place. Nothing wrong with market demand or beneficiary demand. Nothing wrong with your service or product. Nothing wrong with your skills or effort.

Just the wrong business model.

What is a business model?

Two researchers, Chesbrough and Rosenbloom, analysed the literature on business models, and synthesised from that analysis the following six components of a business model:

  1. to articulate the value proposition
  2. to identify a market segment
  3. to define the structure of the firm’s value chain
  4. to specific the revenue generation mechanisms
  5. to describe the position of the firm within the value network 1

Okay, that’s nice biz-speak. What does that mean for an NGO?

For an NGO, it’s actually more complicated than for a private sector business. This is because an NGO has to face two ways, to sets of customers: the donors, and the beneficiaries. In sum, though:

1Value proposition What is the beneficiary's problem? What is the product or service that addresses the problem? What is the value of that product or service from the beneficiary's perspective.

An NGO must also provide a value proposition to the donor.
2Market segmentWhat group of beneficiaries do you target, recognizing that different populations have different needs.

Sometimes the potential of a product or service is unlocked only when a different population is targeted.

An NGO must also identify a target group of donors.
3Value chain structureWhat is the process of helping the poor in which you are involved.

How do you help that process?
4Revenue generation and marginsHow are funds raised?

In particular, how do you pay for expensive but unpopular items like marketing and proposal-writing?
5Position in value networkCompetitors: Who else is doing what you plan to do?

Complementors: What other agencies and institutions do you have work closely with, in order to succeed in delivering your value.
6Competitive strategyWhat is your sustainable difference from what else is out there? What is your "unique selling proposition" or USP?

In a classic pair of business questions:

Is there a gap in the market? (Is there a real need for what you offer, unmet by others?)

Is there a market in the gap? (Is that need big enough to justify and sustain an NGO?)
Source: Adapted in part from a table at Quick MBA Business Model.

Case studies

I haven’t had time to do a complete analysis of any particular NGO. The following are some quick sketches of how they operate:

CASE 1: Médecins Sans Frontières

Henry Mintzberg and Ludo Van der Heyden wrote an HBR article called “Organigraphs: Drawing How Companies Really Work”—available from the HBR website for about $6.

One of their examples is MSF, which they diagram like this:

Though not a complete business model, this diagram does tell us:

  • what value MSF delivers to beneficiaries: disaster site hospitals
  • what inputs it requires: cash and volunteers
  • that it has national offices, in order to raise the resources it requires
  • where it gets them: the public
  • how it delivers them: through a complex supply-chain

CASE 2: Architecture for Humanity

Judging from the literature I’ve received from them, my understanding of the Architecture for Humanity model is something like this:

1Value proposition For the beneficiary: free design services which might not otherwise be available. For the donors, who seem largely to be the architectural profession: a chance to see architecture in action helping people, and feel part of that.
2Market segmentOn the beneficiary side: AFH seems to have started with a focus on post-disaster, and be gradually shifting to development, but is largely constrained by where it can find partners.
3Value chain structureAFH's position seems to be to raise funds to fund designers into the fields, to support the projects of their partners.
4Revenue generation and marginsRevenue seems to be generated primarily through fundraising aimed at architects working in firms in the US, through a chapter structure.
5Position in value networkPossible competitors would be Architects Without Frontiers, who seem to share similar aims. It seems that AFH is dependent on project partners to provide the construction funds for projects for its volunteers to design.
6Competitive strategyIt's not clear how AFH has a sustainable niche, though no others are aiming particularly at its funding community. Sustainability probably depends on its ability to avoid chapter-level burnout or loss of interest.

CASE 3: Kiva.org

1Value proposition For beneficiaries: access to a greater pool of microfinance.

For donors: the opportunity have a direct relationship with beneficiaries, to choose what to fund, and to get their money back to reinvest.
2Market segmentBeneficiaries: poor micro-entrepreneurs anywhere in the world.

Donors: online individual small donors anywhere in the world.
3Value chain structureKiva has set up an online electronic marketplace where micro-borrowers can post their loan needs and micro-lenders can select and fund them.
4Revenue generation and marginsKiva makes no margin on transactions, and so is dependent on some large institutional and corporate donors to pay its overhead costs.
5Position in value networkKiva has no significant competitors at the moment. It depends on in-country micro-finance partners to vet borrowers and post their information on the Web. In once case, a partner has withdrawn because of the labour involved in doing so exceeds the labour they usually spend on a borrower.
6Competitive strategyKiva's main challenge in the future may be that the success of its marketplace may outstrip its large funders capacity or willingness to increase their investment.

A diagram of Kiva’s business model suggests how unusual it is. It basically plays the role of a broker between individual donors and and individual beneficiaries:

Is a business model the same as a business strategy?

Short answer: no.

Long answer: the two differ as follows…

  1. Creating value vs. capturing value – the business model focus is on value creation. While the business model also addresses how that value will be captured by the firm, strategy goes further by focusing on building a sustainable competitive advantage.
  2. Business value vs. shareholder value – the business model is an architecture for converting innovation to economic value for the business. However, the business model does not focus on delivering that business value to the shareholder. For example, financing methods are not considered by the business model but nonetheless impact shareholder value.
  3. Assumed knowledge levels – the business model assumes a limited environmental knowledge, whereas strategy depends on a more complex analysis that requires more certainty in the knowledge of the environment. 2

Further reading

These are interesting (to me) pages that focus on business models for NGOs:

Nonprofit Business Model Statements

Although every nonprofit has a mission statement that defines the organization’s core purpose and work, many are unaware of its useful companion, the business model statement: a brief summary that spells out the organization’s economic drivers. Like a mission statement, a business model statement acts as a touchstone: a reminder and a guide for the organization’s focus and strategies.

Ten Nonprofit Funding Models

For-profit executives use business models—such as “low-cost provider” or “the razor and the razor blade”—as a shorthand way to describe and understand the way companies are built and sustained. Nonprofit executives, to their detriment, are not as explicit about their funding models and have not had an equivalent lexicon—until now.

The Hard Work of Measuring Social Impact

Today, many nonprofit organizations also find themselves on the hot seat—not with stockholders but with donors who expect similar levels of accountability to show how their money was spent and what that spending achieved. Yet there has been little agreement on a set of hard-and-fast metrics to measure social performance.

The Future of Social Enterprise

The Future of Social Enterprise considers the confluence of forces that is shaping the field of social enterprise, changing the way that funders, practitioners, scholars, and organizations measure performance.

The last paper contains this interesting diagram, showing the relationship between growth, funding, and the ability to demonstrate results (which is different from the ability to get results.)

Coming soon: Part II of Business models for NGOs

  • freestyle

    Hi the link to the full working paper doesn’t seem to be working. Thanks! Great blog!

    • Hi freestyle. Thanks!

      The link was to the full paper of “The Hard Work of Measuring Social Impact”, which the authors have now, unfortunately, removed. It was an extension of the article linked to in that title.

      I have added another link, however, on “The Future of Social Enterprise”, which has some interesting stuff. And a promise to write Part II of this post RSN.

  • Shilpa Mudiganti

    Very clear and informative thanks!!

    When is the part 2 coming up??

    • Hi Shilpa: thanks for the prompt. Part II will be about “hybrid models”. I’m just waiting for the opportunity when it’s front and centre of my working mind. I’d be happy to form a LinkedIn group with you and Gerry–the other poster on this page who was interested in Part II. Perhaps some discussion will focus me on writing that second Part.

  • GerryK

    Best decription I’ve read so far of how a business model can be applied to an NGO. Is Part II still in the works?

    • Hi Gerry: thanks for the prompt. Part II will be about “hybrid models”. I’m just waiting for the opportunity when it’s front and centre of my working mind. I’d be happy to form a LinkedIn group with you and Shilpa–the other poster on this page who was interested in Part II. Perhaps some discussion will focus me on writing that second Part.

  • Would love to follow more of your thinking on this, David. It’s top of mind for me right now and the focus of an upcoming White Paper I’ll be writing. I’d love to be added to your LinkedIn group!

  • Pingback: GCP @ Enseña Chile()

  • Anu

    Thanx a lot David, Clear information , waiting for Part 2. Hope to see it soon.
    Regards

  • Alfredo

    Hi David, great post!!! I’m looking for someone who can help me to develop a business model for a youth anti-corruption network… if you happen to know anyone, please let me know. Thanks!

  • Pingback: 关于慈善机构商业模型的一些文章 | 庇护工厂项目协作站()

  • Prasanti Widyasih Sarli

    This explanation is really good! Thank you! Will be re-reading and following the links you’ve included in here for my upcoming project. Thank you so much!

  • Cindy Paradise

    Thank you so much David. Nice post 🙂

Previous post:

Next post: