September 14, 2010

cfinsights.org

SHARING KNOWLEDGE. GROWING IMPACT.

Business Model Innovation:Rethinking and Diversifying Revenue SourcesPrepared for the Council on Foundations Fall Conference

the IDEA BEHIND

IS SIMPLE

What if EACH community foundation could know what ALL community foundations collectively know?

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BUSINESS MODEL INNOVATION RESOURCE

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1. What is your role?

2. How old is your foundation?

3. What region of the county are you from?

WHO ARE YOU?

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I. “Fueling Impact”

II. Sharing Ideas and Experience

III. Taking the Next Steps

AGENDA

Volatile Economy

• 2008 market downturn led to budget shortfalls yet again

• Admin. fees covered only 66% of 2008 budgets

• 50% of foundations are intent on exploring new revenue sources

The Need for Change: Why Is It Important to Innovate?

A CHANGING PHILANTHROPIC LANDSCAPE, NEW OPPORTUNITIES FOR LEADERSHIP AND IMPACT, AND A GLOBAL ECONOMIC CRISIS, SPEAK TO AN URGENT NEED FOR CHANGE.

Competition & Technology

• Commercial and nonprofit providers continue to grow services for donors

• New technologies are leading to operating efficiencies, consolidation, new modes of communication and new service offerings

Increased Collaboration

• Collaboration across geographic and sector boundaries

• Networked ways of increasing impact

Evolving Donor Needs

• Donors are younger, more tech savvy, culturally diverse, independent and active community leaders

• More than half of CF grant dollars originate from DAFs

New Constituents

• New constituents include nonprofit organizations, corporations, public agencies, private foundations, and funder collaboratives

Changing Assets

• Assets are no longer permanently endowed

• Flexible, non-endowed resources further stretch the CF business model

“One of our lessons learned is that all of our efforts for community leadership will never be covered by our normal fees. We need to figure out how to get funding other than the natural fee income.” - Sarah Slaughter, San Diego Foundation

“Asset-based fees are enormously reliant on the economic cycle. When things are good, they’re good. When they’re bad, AUM, fees, endowment value and contributions, all go down.” - Steve Maislin, Greater Houston Community Foundation

For CFs that play many roles and have many types of funds, there is a disconnect between mission and the traditional business model.

A DIVERSIFIED REVENUE MIX THAT INCLUDES ASSET-BASED FEES ALONGSIDE OTHER REVENUE SOURCES IS THE IDEAL FOR WHICH MANY COMMUNITY FOUNDATIONS STRIVE.

Asset-based Fees

Asset-based Fee Limitations:

At a 1% administrative fee, community foundations must raise $1M in assets to generate $10,000 in fee income.

“A donor might ask, why should I add to funds if I am not going to increase my grantmaking? My fee goes up and I don’t get anything out of it.” - Jeff Rudd, The Seattle Foundation

Do not accurately communicate how foundations add value

Disincentive for large funds

Revenue compared to asset base, is low

Volatility based on market fluctuations

Do not cover several foundation activities

Revenue Diversification Is the Key to Sustainability

• How do revenue sources align with the different ways community foundations create, deliver, and capture value?

• How are community foundations diversifying in ways that simultaneously support differentiation and sustainability? How can we learn from this innovation to plan for a stronger future?

In observing the spectrum of revenue choices made by individual foundations, it is helpful to consider the following questions:

Concentration of Asset-Based Fees

100% 20%

Drawback: Volatility

Drawback: Lack of Recurring

Income

GOAL: Diversified

Revenue Mix

DIFFERENTIATION AND SUSTAINABILITY ARE THE TWO MUTUALLY REINFORCING PRINCIPLES BEHIND A STRONG BUSINESS MODEL

Guiding Principals for the CF Business Model

Offering a distinct value proposition tailored to constituents’ needs, community context, and unique strengths of the foundation

Enabling the foundation to achieve its mission today (through current income), while enhancing its ability to do so in the future (through future growth)

Differentiation Sustainability

Community Foundation Mission

Differentiation:

• constituents• community context• foundation’s internal strengths

Differentiation:

• constituents• community context• foundation’s internal strengths

Sustainability:

• current income • future growth

Sustainability:

• current income • future growth

ONE MAJOR ELEMENT OF DIFFERENTIATION IS DEVELOPING REVENUE SOURCES THAT SERVE THE NEEDS OF DIVERSE CONSTITUENTS

Differentiation

• Administrative fees structured based on contributions or grants

• Staff time billed directly to funds

• Gifts directed to pooled funds that charge distinct support fees

• Grants or fees for capacity building services to nonprofit organizations

• Standard or custom fiscal sponsorship fees

• Fees or proceeds from Mission Investments

• Private foundation funding for special initiatives

• Leadership funds

• Membership fees

Custom fees for:

• Philanthropic advising for private foundations, corporations and individuals

• Administrative services for private foundations, funder collaboratives, corporations, community foundations, or nonprofit projects

• Back office and investment management collaborations

Organizations That Require Philanthropic Services

Broader Community

NonprofitsFundholders

LEADERSHIP FUNDS ARE A GREAT EXAMPLE OF A SUSTAINABLE REVENUE SOURCE

Sustainability: Leadership Funds

Contributions Current income

Engaging community leaders & supporting leadership work Building visibility and strengthening relationships Future growth

Serving new constituents:

• Designed to attract funds from civic leaders, corporations, the Foundation’s own donors, and local private foundations.

• Has brought many new individual donors into the Foundation’s network, not only as members of the CLF, but as donors to the Foundation.

Increasing reach and accessibility:

• Focused on attracting small, recurring gifts from a large base of people.

• 66% of its contributors in 2009 were repeat contributors, and their average gift was $3,667.

Serving new constituents:

• Accepts contributions exclusively from individuals, with the objective of diversifying the Foundation’s donor base beyond its historic focus on corporate and high net worth individual relationships.

• To truly engage individuals in addressing community issues, the Center requires a 3 year commitment from its members.

Increasing reach and accessibility:

• The objective of the Center is to engage a broad base of people and give everyone an equal voice on community issues.

• The starting contribution for the Center is only $250, and the maximum contribution the Center will accept is $10,000.

EVERY FOUNDATION’S PATH TO BUILDING A STRONG BUSINESS MODEL WILL BE DIFFERENT DEPENDING ON ITS UNIQUE CIRCUMSTANCES

Case Study

• Community leaders helped shape the business model and growth trajectory, providing funds for PRIs and Community Impact Funds, which support both differentiation and sustainability

• Community Impact Funds allow donor funds to be pooled, leveraged and invested in key community issues

• Community Impact Funds allow the Foundation to direct where funds are invested

• Not afraid to “make the ask” when it comes to fees

• Inherited the fee-for-service model, which set the Foundation’s trajectory for growth.

• Scale and automation are other factors that allow the Foundation to cost-effectively manage large fee-for-service contracts with the government and for scholarships

• Due to its size, the Foundation plays a central role in convening stakeholders and developing the philanthropic landscape, outside of building its own assets

• Charges based on cost and does not believe in subsidizing products

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I. “Fueling Impact”

II. Sharing Ideas and Experience

III. Taking the Next Steps

AGENDA

Sharing Ideas

SHARE THE MOST COMPELLING IDEAS FROM YOUR TABLE

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1. How have you introduced new revenue sources at your community foundation?

What has worked and what hasn’t?

SMALL GROUP DISCUSSION

Sharing Ideas

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1. Which areas emerged as high potential?

2. What criteria do you use for evaluating the potential of a new revenue source?

3. Why might some opportunities make more sense in certain communities? Or for community foundations with particular strengths or values?

LARGER GROUP DISCUSSION

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I. “Fueling Impact”

II. Sharing Ideas and Experience

III. Taking the Next Steps

AGENDA

Taking the Next Steps

What if EACH community foundation could know what ALL community foundations collectively know?

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ATTEND THE LEARNING LAB – 2-3:15pm Room 208

Learn about existing resources provided by CF Insights

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• How should community foundations focus internally and externally in order to identify opportunities for business model innovation?

• How can we plan for our immediate needs and sustainable growth?

• What process steps can we take and what practical tools are available to support strategic thinking and problem solving within your own foundation?

Taking the Next Steps

“Fueling Impact”: Taking the Next StepsKEY QUESTIONS COMMUNITY FOUNDATIONS ARE ASKING ABOUT BUSINESS MODEL INNOVATION

Tools Available

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What Should We Do to Understand Our Existing Business Model?

Frame a Discussion

• Explore examples and stories in “Fueling Impact”

• Discuss current positioning and concepts of differentiation and sustainability

Analyze Product Economics

• Define current products and services

• Analyze costs and revenues to understand implicit allocation of resources and alignment with priorities

“Stress Test” Business Model

Connect with Constituents

• Understand how constituents’ perceive the CF’s greatest value – and the fit with their current and future needs

Reviewing Your Existing Business Model

• Gauge the sensitivity of your business model to changes beyond your control (e.g., investment performance, donor giving)

• Identify areas to mitigate risk

Understand What’s Unique about Your CF

• Get specific about your assets, revenues, and unique capabilities

• Quantify business model metrics relative to peers

Comparative Data and Reports

Activity-Based Costing Analysis

Economic Scenario Planning

Process Steps

“Fueling Impact”

Tools Available

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What Should We Do to Plan for the Future?

Determine Ideas to Test

• Identify factors to change going forward

• Define a set of new revenue ideas to test

• Explore operating efficiencies

Model Implications and

Scenarios

• Consider the viability of potential changes and economic impact under various scenarios

Make DecisionsDevelop

Communi-cations

• Engage your constituents in the changes you need to make to support your collective philanthropic goals

Planning for the Future

• Define the right choices that strike a balance between your mission-driven priorities and budget realities

Identify New Revenue Sources

• Screen ideas for fit with criteria: generate current income, support future growth, and fit constituents’ needs, the community context, and your unique strengths

Case Studies and Peer Learning

Economic Scenario Planning

Process Steps