strategies to strengthen ngo capacity in resource...

STRATEGIES TO STRENGTHEN

NGO CAPACITY IN RESOURCE MOBILIZATION

THROUGH BUSINESS ACTIVITIES

This document was co-authored byMechai Viravaidya and Jonathan Hayssen

PDA and UNAIDS Joint Publication

UNAIDS Best Practice Collection

2001

PDA

The work of non-governmental organizations (NGOs) � protecting the environment,helping the sick and needy, preserving arts and culture � is by nature �unprofitable.�Traditionally, NGOs rely on the goodwill and generosity of others to cover the costs oftheir activities through grants and donations. Today, unfortunately, NGOs find that suchtraditional funding sources are often insufficient to meet growing needs and rising costs.In addition, restrictions imposed on many grants and donations, along with the uncertaintyof these funds over time, make it difficult for NGOs to do long-term planning, improvetheir services or reach their full potential.

When the costs of an NGO�s core activities exceed the inflow of grants and donations, it isforced to either reduce the quantity and/or quality of its work, or to find new sources offunds to cover the difference. Reaching out to new donors with innovative fund-raisingapproaches is usually the first step. Redesigning program activities to include cost-recovery components, whereby the beneficiaries or clients of the NGO pay part of programcosts, is a second approach. A third alternative is for the NGO to �make money� throughcommercial ventures.

This UNAIDS Best Practice key material is directed at managers of national andinternational NGOs working on HIV/AIDS and other health and development issues. It isintended to increase their awareness of the opportunities, and possible problems,associated with alternative resource mobilization strategies, with a special focus oncommercial activities. It is hoped that this will motivate NGO managers to determine andbegin implementing the most appropriate resource-generating strategies to enable theirorganizations to continue and expand their important work.

Policy makers, donor agencies and other supporters of NGOs also have a vested interest inseeing NGOs achieve financial sustainability. It is therefore hoped that this paper willencourage such readers to increase their efforts to promote such institutional developmentfor NGOs. Non-government organizations make our world a better place. Together wecan ensure that they continue to grow and prosper.

F o r e w o r d

T a b l e o f

C o n t e n t s

Chapter I. The Funding Challenge Facing NGO Managers...............................1

Chapter II. The Response to Date........................................................................3

Chapter III. Achieving Financial Security through Diversification......................5

Chapter IV. Strategies for NGO Commercial Ventures: An Overview...............12

Chapter V. The NGO as Business Owner: Special Considerations..............14

Chapter VI. Getting an Idea and Planning the Business......................16

Chapter VII. Conclusion: The Question of Timing..............................................22

C h a p t e r 1.The Funding Challenge FacingNGO ManagersDespite the vast differences among theworld�s non-governmental organizations(NGOs), most share a common dilemma:Lack of funds limits the quantity and/or quality of the important work theydo. Unlimited needs chasing limitedresources is a fundamental fact ofeconomic life in rich countries andin poor countries. It affects largeinternational organizations, such asthe United Nations, down to thesmallest local NGOs. From ruraldevelopment agencies to museums, andfrom health care providers to educationand training institutes, managers ofNGOs must often pay as much (if notmore) attention to finding funds as theydo to using those funds.

NGOs increasingly find that grants anddonations are inadequate to meet currentprogram needs, much less to expandprogram activities. With so manyworthy causes that address genuineneeds competing for the attentionand generosity of the public, evenwealthy donors lack the resourcesneeded to fund every worthwhileeffort. Furthermore, as populationsgrow, so do the numbers of vulnerablegroups needing assistance fromNGOs. New problems can appear, suchas HIV/AIDS, which demand urgentattention and require substantial

funding. Meanwhile, NGOs facerising costs for staff and other programinputs, further straining their limitedbudgets.

Dependence on grants and donationscan also inhibit the autonomy ofNGOs to choose which programactivities to undertake and to selectthe most effective interventionstrategies to achieve program goals.To a certain extent, all donors havetheir own agenda, i.e., their own viewsas to which problems are importantand the best intervention strategiesto address these problems. NGOmanagers may be compelled to�follow the money� and allow donorsto dictate the scope and direction oftheir activities, or else receive nofunds at all. As the old saying goes,�beggars can�t be choosers.�

Another problem is that many grantsand donations carry restrictions onthe types of expenses that they maycover. The most common restrictionis to cover only direct programcosts, but not the cost of supportservices or other overhead costsincurred by the NGO. The NGOsmust �contribute� these costs ontheir own, or at least cover anincreasing share of these costs overtime. But how?

1

Strategies to Strengthen NGOCapacity in Resource Mobilization

through Business Activities

Even those NGOs fortunate enoughto be fully funded in their currentoperations may face uncertainty overfuture funding. If the problems theyaddress are still around in five, ten,twenty years, will donors keep payingprogram costs ad infinitum? Or willdonors� generosity shift to other moreneedy or more popular causes? As onecountry develops economically, willdonations be diverted to other, poorercountries? Could local political orsocial problems lead to a cut-off ofdonor support? What if a key donoritself goes out of business? Theuncertain continuity of donor funding,be it short term or long term, makesit extremely difficult for NGOmanagers to plan and implement theirorganization�s core activities. It alsomay force an NGO to live a project-to-project existence, being unable tomake long term plans to expand coreactivities or to improve the qualityof program services.

Thus we see that today�s NGOmanagers face an increasing need fortheir organizations� services, increasingcosts for providing those services, andan increasingly competitive andrestrictive environment for obtainingfunds through grants and donations.At best, these problems prevent

NGOs � and those they serve � fromreaching their full potential; at worst,the very survival of many NGOs isat stake. The challenge facing NGOmanagers is to find ways to increasetheir financial security withoutsacrificing the mission of theirorganizations.

There is no standard, proven methodto meet this challenge. All NGOs aredifferent in terms of their missions,philosophies, client bases, skills andexperience. But increasing financialsecurity is an important part ofplanning for all NGOs. Becomingcompletely independent of donorsmay be a realistic goal for someNGOs, while trying to self-generatefunds just to cover overhead costsmay be more suitable to others. Stillothers may legitimately determinethat relying on grants and donations,at least for now, is the best approach.There is no right answer. It is up toeach NGO and its managers toconsider all the funding optionsavailable and to choose the mostappropriate mix, just as they mustdetermine which core activitiesand implementation strategies aremost appropriate to their missionand goals.

2

Strategies to Strengthen NGOCapacity in Resource Mobilizationthrough Business Activities

C h a p t e r II.The Response to Date

The funding challenge described earlieris already well understood by mostNGOs, and many have responded withthe same entrepreneurial spirit, goodplanning and hard work that broughtthem success in their core activities.They have expanded fund-raisingactivities directed at the generalpublic, tapped new corporate donorsfor monetary and in-kind support,and held one-time events such asthe LIVE/AIDS concert. They haveredesigned program implementationstrategies to include cost-recoverycomponents whereby the beneficiariesof the program pay part, and sometimesall, program costs. And today we evensee NGOs owning and managingrestaurants, tour companies, banks,clinics and other businesses.

Consider the case of museums. Ageneration ago, most covered theircosts through wealthy patrons, civicgrants, and minimal admission fees.Now, museums commonly haverestaurants to feed their visitors,operate shops that sell reproductionsof their unique artworks along withother products that appeal to the tastesof museum goers, and rent out theirexhibition halls for private receptionsand events.

Likewise, Goodwill and Oxfamhave long operated retail storesto subsidize their developmentactivities, and T-shirts and otherpromotional items sold throughshops, catalogs and the internet arenet sources of cash for CARE, Savethe Children, the World Wide Fundfor Nature and many other NGOs.Cards and calendars from UNICEFare popular worldwide, while theUN also operates shops at its majoroffices, implements programs inpartnership with private companies tooffset costs, and seeks donationsoutside its traditional source ofpayments by governments.

Large, broadly based NGOs aregenerally better equipped to diversifytheir funding sources than smallerNGOs. They can take advantageof their recognizable name andlogo. They have more technicalskills on which to build commercialactivities. They have more contactsand connections with outside groupswith which to form partnerships.And internally they have moreexperience adopting new programsand adapting to organizational change.These NGOs also often have a greaterneed to seek outside fundingbecause of their higher costs for

3



support services and overhead. On theother hand, smaller NGOs havethe advantage that relatively smallamounts of self-generated funds canmake a big difference in ensuringtheir financial viability. For example,Green Line, a small environmentalNGO in Slovakia, covers approximatelythree-fourths of its operating budgetthrough membership fees, trainingcharges, and the sale of books, gamesand promotional items.

Among outside supporters of NGOsthere is the beginnings of a movementto help NGOs become morefinancially secure, but much moreneeds to be done. National andlocal governments increasingly areproviding program grants for NGOsto undertake activities that thegovernments support but can�tprovide as effectively by themselves.Some also give general supportgrants to cover NGO overhead costs,reasoning that these funds will beleveraged many times over by thegrants the NGOs receive from outsidedonor agencies. And more and moregovernments have begun changing tax

laws and other regulations thatrestrict the ability of non-profitorganizations to charge fees or engagein profit-making ventures.

The large international donor agencieshave long encouraged NGOs tobecome self-reliant, while onlyrecently starting to fund projects thatinclude commercial components. Butmany donors still have restrictiverules and political or philosophicalconcerns about financing businessventures, and none have majorprograms directed specificallyat empowering NGOs throughprofit-making enterprises. Smallerdonor agencies such as German AgroAction, Enterprise Works Worldwide,the Roberts Enterprise DevelopmentFund, NESsT, the Aspen Institute andother private foundations have beenmore active in helping individualNGOs establish businesses, and intrying to upgrade the commercialskills of the NGO community asa whole. Unfortunately, these effortsare still small and largelyuncoordinated.

4


C h a p t e r III.Achieving Financial Security through Diversification

Any smart private investor will saythat the key to financial security isdiversification, i.e., holding a mixedportfolio of investments rather thandepending on a single investment tomeet current and future income needs.If you �put all your eggs in one basket�you � and your family � run the risk ofhardship, or even ruin, if the basketdrops. This cardinal rule of investingalso holds true for NGOs that needa secure flow of income to meetcurrent and future program needs.

In choosing the optimal mix ofinvestment holdings to providefinancial security, private investorsmatch their portfolio to their individualsituation, i.e., their current livingexpenses, planned future expensesfor children�s education, a bigger home,retirement needs, etc., with theirpersonal philosophy or attitude towardrisk. In selecting specific investments,they focus on areas where they havespecial knowledge, experience orinterest, and weigh the expected returnon the investment with the time andeffort required to oversee it. And inoverseeing their portfolio, they keepabreast of developments affectingtheir investments and change the mixas circumstances dictate. This processparallels how successful NGOsmanage their portfolio of funding

sources to meet their particularfinancial security needs.

NGOs can obtain funds to run theirprograms from three sources:

1) Interested third parties, whogive to the NGO in return,primarily, for the personalsatisfaction derived fromdoing good (grants anddonations);

2) Beneficiaries of the NGOsprograms, who value theirparticipation more thanthe cost of participating(cost recovery);

3) Unrelated third parties, whowill pay the NGO in returnfor something of value thatthe NGO can make or do forthem (commercial ventures).

Problems and opportunities relatedto each of these funding sources arediscussed in turn below. How theyfit with each NGO�s particularneeds, abilities and philosophy,however, can only be determined bythe management of the NGO itself.

Grants and Donations

Grants and donations have traditionallybeen the mainstay of NGO funding,



and much has been written on how toorganize fund-raising campaigns.Clearly, the more an NGO can tap thegoodwill of the public for support,the more it can devote its timeand energy directly on its mission.After considering their fundingoptions, many NGOs might determinethat relying fully on philanthropicsupport is the best fit with theirorganization�s needs, abilities andvalues. But even in these cases, NGOsare wise to diversify their base ofphilanthropic support rather thanbeing dependent on a single source.

The �market� of potential donors toNGOs doing good work in an area ofgenuine public concern is very large.It is also a very diverse market thatcan be broken down into �marketsegments.� Possible ways an NGOfighting HIV/AIDS might segment itspotential donor market are given below.The list is far from exhaustive ordetailed. Rather, it is intended toillustrate the �market-driven� approachthat successful NGOs use to tapdonor support.

• The market for cash donationsfrom individuals might requiredifferent approaches for:1) Wealthy individuals who can

donate large sums,2) Middle income earners who

can give regular, moderateamounts, such as throughmembership fees,

3) The general public who mightgive to collection boxes placedat local businesses, and

4) People with internet access.

• The market for volunteers mightinclude:1) Medical students to care for

AIDS patients in return forexperience or school credit.

2) Retirees with professionalskills to be pro bono consultants.

3) Other concerned individualsto help with administrationand fund-raising.

• Corporate donors can besegmented into potential sourcesof in-kind donations of neededequipment and supplies, or sourcesof cash. Companies whosebusinesses somehow relate tothe NGO�s work could beapproached differently fromcompanies with totally unrelatedbusinesses. Businesses locatedin the NGO�s neighborhood areanother possible segment.

• Community clubs and associationscan give donations or organizeone-time charity events with theproceeds going to the NGO.Another segment could be thesocial clubs of the expatriatecommunities.

Goodwill is not the only reasonpeople give to worthy causes. Toappeal for donations, NGOs mustunderstand the motivation of theirpotential donors, just as commercialmarketing executives must understandthe different �tastes and preferences�of their varied customers. Some donorsmay wish to support only one aspectof the NGO�s work. Corporationsare often especially interested inthe public relations benefits ofsupporting NGOs, while individualsmay also want some form ofrecognition of their support. Somedonors may want the chance tointeract with the end recipients oftheir donation or to otherwise

6


participate in the NGO�s efforts.Others may require direct feedbackon how their donations were used.And even donors with purely altruisticmotives may increase support if theyare kept abreast of the organization�sactivities. Sometimes a donor�s motivesmay actually be detrimental to theorganization, e.g., to obtain politicalsupport or to impose his or her will onthe direction of the NGO�s work. NGOsthat recognize and respond to themotivations of potential donors will bemore succesful at competing fortheir support.

The concept of segmenting marketsand designing different approaches foreach segment is really not all thatnew to most NGOs. An NGO fightingHIV/AIDS, for example, segmentsthe market of potential programparticipants into intravenous drug users,the homosexual community, commercialsex workers, students, etc., and designsdifferent intervention strategies foreach. NGOs that have been successfulat applying for grants have learned tosegment the market of potential donoragencies by the types of projects theysupport (training, women�s issues, theenvironment, etc.), the interventionstrategies they prefer and the amount offunds they can provide. These NGOstailor their grant proposals to match the�tastes and preferences� of differentdonors.

Cost Recovery

When an NGO�s programs bring realvalue to its beneficiaries, manybeneficiaries (but perhaps not thepoorest of the poor) will gladly paysomething to participate in theprograms. By �selling� rather than

giving away their services, NGOs canrecover part or all of their costs, betterallocate their services to those whotruly value them, and enhance theself-esteem and commitment ofparticipants. More and more NGOsare thus designing interventionstrategies that incorporate costrecovery components through�fees-for-services� or various loan andcredit arrangements.

For example, Les Centres pourle Developpement et la Sante (CDS)in Haiti received a grant to installa drinking water system in a slumarea of the capital Port-au-Prince.Residents pay a per bucket fee forthe water, which covers all operatingand maintenance costs of the systemand also generates a surplus thatis used to improve solid wastecollection in the neighborhood. Inanother example, social marketingprograms for contraceptivestypically charge for condoms andoral contraceptives, albeit atbelow-market prices. Requiringparticipants to contribute labor isanother form of fee-for-service. Forexample, food aid recipients may beasked to donate labor to sort, packageand deliver food supplies.

In Sri Lanka, the rural developmentphilosophy of the SarvodayaShramadana Movement is centeredon the principle of the �gift of labor�and hundreds of thousands ofindividuals have taken part. The valueof that labor is immeasurable.Loan and credit arrangementsrequire recipients to pay back costsover time. The loans may be interestfree, or with interest rates belowwhat participants could get from



private banks and money lenders. TheGrameen Bank of Bangladeshpioneered in this area through itsmicro-credit programs, and othergroups such as KREP in Kenya andBancoSol in Bolivia have also beenable to establish profitable bankingoperations that directly serve the poor.

All such cost recovery activities adda commercial component to the workof NGOs. The staff must startthinking in business terms, and have tolearn specific business skills andconcepts such as pricing, distributionchannels, and cost accounting. Theymust also learn the ins and outs ofthe businesses of their borrowers ifthey are to administer loan programseffectively. The skills and experiencegained may be the first step in enablingthese NGOs to start their owncommercial ventures.

Cost recovery activities also bringNGOs face to face with the harshrealities of the marketplace, whichcan fundamentally conflict with anNGO�s compassionate mission andvalues. In the commercial world,businesses that don�t make enoughmoney have to cease operating. For thatreason, people who cannot pay must dowithout, risky loan applicants areturned down, and defaulters lose theircollateral. Sadly, NGO programs thatdepend on cost recovery componentsto sustain themselves may have toexclude from participation some ofthe people that the NGO most wishesto help.

Consider the social marketing ofcontraceptives. These programs needto bring in sales revenue to helpcover their costs, while most of their

potential customers recognize thevalue of the products and will happilypay something for them. But the lawof supply and demand says that asthe price of contraceptives goes up,demand for contraceptives goes down.Charging higher prices can improvethe bottom line of these programs,but at the expense of hurting theirultimate goal to increase familyplanning practice rates. Furthermore,no matter how little the NGO chargefor their products, some people maystill be unable to pay.

Cost recovery programs demand thatNGO managers make a trade-offbetween their programs� social goalsand financing needs. They musttry to serve the greatest numbersof beneficiaries while generatingsufficient funds to meet whateverpercentage of program costs are notcovered by donations or subsidiesfrom other activities of the NGO.There is no optimal balance, andsome may have to be left out. Butbeing able to help some people ona sustainable basis is better thanhelping no one at all. Hopefully, eachNGO can find alternative ways tosubsidize or otherwise assist thoseunable to participate.

This dilemma demonstrates why it isso much more difficult to manage anNGO compared to a strictly for-profitbusiness. The predominant goal ofbusiness managers, even in the mostsocially responsible companies, is tomaximize the return to shareholders.If a price increase is expected toreduce sales but increases profits,the price increase is approved. Ifa product line or service loses money,it usually is dropped. NGO managers,

8


on the other hand, must try to maximizethe use of their services, while being asconcerned about the bottom line astheir for-profit counterparts. NGOsvalue the continuation of their�money-losing� core activities andmust earn resources from otheractivities specifically to help pay for,or �cross-subsidize� those activitiesthat are not financially viable.

Commercial Ventures

Millions of farmers, street vendors,artisans and tradesmen managesuccessful businesses around theworld. And the success and rapidexpansions of micro-credit programshave shown that even the least educatedand poorest of the poor can run profitablebusiness enterprises. Despite this, manypeople still believe that NGOs areinherently unequipped to compete incommercial markets.

Actually, successful NGOs already havemost of the skills required for business,and their managers think in businessterms more than we realize. The bestNGOs are clearly as entrepreneurial asthe best private companies, being ableto make things happen and createsomething out of nothing. Likecommercial marketers, these NGOsfind under-served segments of thepopulation and design products andservices to meet the needs of thosemarkets. Good NGOs are effective inhiring and training staff, planningand budgeting, strategic planning,purchasing, public relations and otherareas of management. Finally, theseNGOs have a proven ability to acquirespecialized knowledge and technicalexpertise related to their fields

of operations and the businesses oftheir beneficiaries. The level ofsophistication may vary, but the basicskills are there.

Two NGOs from the developingworld that have been particularlysuccessful at diversifying theirsources of funding and expandinginto business ventures are theBangladesh Rural AdvancementCommittee (BRAC) and thePopulation and CommunityDevelopment Association (PDA)of Thailand. BRAC was foundedin 1972 to aid refugees returninghome after the country�s war forindependence. It has since grown tobecome one of the largest and mostbroadly based NGOs in the world, witha staff exceeding 25,000 and anannual operating budget over US$ 100million, of which less than fortypercent now comes from grants anddonations. BRAC�s core activities aretargeted at the destitute, the illiterateand the landless, encompassing ruraldevelopment, education and training,health and population, and urbanprograms.

Managers at BRAC recognized earlyon that self-reliance for its targetgroups and self-reliance for theorganization went hand in hand. Allof its programs �from animal raisingto credit programs to the productionof low-cost education materials � aredesigned to optimize cost recoverywhile serving those in need. Programsthat generate surpluses above theirongoing costs are used to cross-subsidize other valued programs. Sixtypercent of BRAC�s budget comesfrom these surpluses.



BRAC has also been very successfulat expanding into commercialventures that are consistent with theorganization�s mission and generatesubstantial profits. BRAC Printersbegan in 1977 to meet BRAC�s ownprinting needs, and has since beenspun-off as a separate entity thatprovides high quality printing servicesto private sector clients. The Aarongcraft shops owned by BRAC bringincome to thousands of rural craftproducers and profits to theorganization. BRAC�s Cold StorageFacility helps potato farmers to storetheir output until prices rise, benefitingboth the farmers and BRAC, while itsDairy and Food Project generates asurplus by linking rural milk producerswith urban markets. Recently, BRAChas joined with other non-profitand for-profit organizations inestablishing the Delta BRAC HousingFinance Corporation to promoteaffordable housing, and its new BRACInformation Technology Institute(BITI) aims to become one of thelargest such institutes in South Asia.

Thailand�s PDA is most well knowninternationally for its early pioneeringwork in family planning and morerecently for its success in tacklingThailand�s AIDS problem. Theorganization began in 1974 byestablishing one of the world�s firstrural-based social marketing programsfor contraceptives, supported byinternational grants, a network of over16,000 volunteer distributors and feescharged for its products. Once thisprogram was well established, PDAexpanded its efforts to improve ruralliving standards with projectsin primary health care, waterresources, agricultural marketingand small-scale industries.

Mechai Viravaidya, the founder ofPDA, has been one of the earliest andmost vocal proponents of NGO self-reliance. Today, PDA covers overseventy percent of its annual budgetfrom its own resources and it aims tobe 100% self-sufficient by theend of the decade. Most of the incomegenerating activities are managedby PDA�s affiliate, the PopulationDevelopment Company Limited(PDC), which is incorporated as abusiness entity but with by-lawsrequiring that all profits be donated toPDA. PDC operates for-profit medicalclinics in Bangkok and majorprovincial cities, owns restaurants(�Cabbages and Condoms�), mini-marts and a handicraft shop, andmarkets a creative line of promotionalitems (key chains, t-shirts, coffee mugs,etc.) using condom and other familyplanning motifs. Other income earnersfor PDA include contracting out itsresearch and training divisions toprivate clients and the rental of officespace and conference facilities.

The growth of PDA�s Cabbages andCondoms restaurants illustrates how a�mini-venture� can grow into a highlyprofitable enterprise. It all beganwhen PDA staff and their friendsused to gather informally after workfor snacks, drinks and conversationin the small garden attached to PDA�sheadquarters. As its popularity grew,menu items were added and therestaurant expanded several times.It now operates out of a separatebuilding next to PDA, has become oneof Bangkok�s most popular Thairestaurants with gross revenuesapproaching US$ 75,000 per month,and has expanded with branches inother cities.

10


In 1988, PDA began one of its mostinnovative and potentially far-reachingprograms ever, the Thai BusinessInitiative in Rural Development, orTBIRD. The TBIRD concept is tomatch rural needs for better businessskills and marketing opportunitieswith the money � and especially thetalents � of private companies. Whobetter to show the way, argues PDA,than the business community? TBIRDtakes advantage of the increasinginterest of corporations to contributeto their country�s development andfoster their public image. Theprivate companies provide the fundsand business-specific knowledgeand experience. PDA acts as theintermediary, supplying the skills,lacking in the private companies,to plan and organize village-levelactivities.

Linking private companies to ruraldevelopment can take several forms.Some TBIRD companies provideresources to meet the basic needs ofvillagers in water, sanitation or otherinfrastructure. Other companiesprovide funds and technical expertiseto improve income-generating activitiesof villagers in agriculture and cottageindustries. Several TBIRD participantshave even set up factories in the villages,producing shoes, textiles and jewelryfor domestic and export markets, withPDA (through its business affiliate PDC)holding an equity stake in some of theseventures. To date, TBIRD has involvedover 150 companies in 280 projects,bringing over US$50 million inresources to otherwise neglectedareas of rural Thailand.

An exemplary TBIRD initiative hasbeen the Nike Village DevelopmentProject in rural Chakkarat district ofNortheastern Thailand. PDA hasworked in Chakkarat for manyyears, and Nike joined TBIRD aspart of its newly developed socialagenda. The project began with theestablishment of a shoe factory inthe remote district; its successhas led to other Nike-supportedinitiatives benefiting almost 3,500families who previously struggledwith lack of resources, employmentopportunities and frequent drought.The relocation of factories outsideBangkok�s industrial zone hasstrengthened local communities anddramatically reduced poverty.PDA calls this the privatization ofpoverty alleviation.

The achievements of PDA and BRACoffer lessons to all NGOs seeking toreduce their dependence on donors.First, both groups view self-reliance asa key organizational goal, but also as along-term goal that cannot be reachedovernight. Second, they focus onventures that match their skills andexperience and are consistent withtheir mission. Third, in their businessventures, as in their developmentwork, they show flexibility and awillingness to experiment, whilestarting small and expanding onlywhen they are confident of theirtechnical, marketing and other skills.Finally, they look for partners whoshare their goals and can provideexpertise that the NGO lacks.


through Business Activities12

C h a p t e r 1V.Strategies for NGO Commercial Ventures : An Over-view

Strategic planning theory for businessteaches that companies which expandface less risk if they focus on newbusinesses that take advantage of, or� leverage off � the existing corecompetencies of the company. Thustravel companies tend to expand intoother travel-related businesses, whilecompanies with strong marketingand distribution networks try tosell new product lines through thoseexisting channels. NGOs take a similarapproach when making strategicdecisions to expand into new coreactivities; not all NGOs have the corecompetencies to work in HIV/AIDS,and many NGOs working in HIV/AIDSrightly choose not to be active in allaspects of the AIDS problem.

NGOs that want to start commercialventures, while avoiding undue risk,should also focus on businesses thatrelate to their core mission and takeadvantage of their existing skills, staffand facilities. Such ventures are lessrisky because they can start out small,require little capital investment orother start-up costs, and cause the leastdisruption to the NGO�s coreoperations. They can also be exitedquickly if they fail to meet expectations.

A break down of commercial strate-g i e sbeing used by NGOs, large and small,is given below. Note that somecommercial ventures may combineelements of more than one strategy.All the strategies require NGOs todivert some of their time and energyaway from their core mission. NGOmanagers must strike a balance thatoptimizes resource generationwithout compromising the quality andquantity of the services they provideto their core beneficiaries.

• Conduct core activities for paying clientsYayasan Kusuma Buana (YKB) ofIndonesia provides primary healthcare services in poor neighborhoodsof Jakarta. It helps subsidize theseservices by operating a for-profitclinic in middle-income district of thecity. The Thailand Business Coalitionon AIDS provides AIDS educationand counseling services charging feeson a sliding scale based on their clients�ability to pay. SIQL of Croatiapromotes environmental awarenessamong the general public supported inpart by fees for training programs itprovides to government and privategroups.


• Contract out support services tothe private sector

FUNREDES in the DominicanRepublic capitalizes on its informationtechnology expertise to offer websitedesign, internet courses and networkconsulting to private companies. TheLotus Foundation in the CzechRepublic uses a similar strategy.BRAC�s ability to produce and publishhigh quality printed materials led tothe formation of BRAC Printing. PDAand other NGOs with field researchskills charge private clients to conductfield surveys and focus groups.

• Market products made by theirbeneficiaries

The Organizaçao de Ajuda Fraterna inBrazil assists street children to builda better life and sells furniture made bythe young people to cover all its costs.Other organizations from NyumbaYa Sanaa in Tanzania to Oxfam sellcrafts and folk arts through shops,catalogs and internet sales. Many ruraldevelopment NGOs benefit theirbeneficiaries and themselves bymarketing agricultural products.

• Tie-ins to public relations activitiesEnvironmental NGOs such asNACOBTA in Namibia, the Sierra Club,and country affiliates of the World WideFund for Nature run tourism businesses,publish nature books and own other�eco-enterprises� that generateprofits and promote environmentalawareness. Numerous other NGOs sellpromotional items to earn funds whilespreading the word about their missionand goals.

• Maximize utilization of assetsand

facilitiesAsklepyos in Romania brings mobilehealth services to the poor, and rentsits vehicles to outsiders when not inuse. Several NGOs rent office space,training and conference facilities,audio-visual and other equipment.Others leverage off their convenientlocations to open restaurants andmini-marts serving neighborhoodresidents. PSI/Zimbabwe tookadvantage of its distribution networkfor condoms to sell feminine hygieneand baby products produced byJohnson & Johnson on commission.

There is no reason why an NGO can�tbe involved in businesses totallyunrelated to its core activities, so longas that business is not antithetical tothe NGO�s mission. (Imagine an NGOowning a liquor store or gamblingcasino!) However, the impetus forsuch a business is likely to come froman outside supporter of the NGO.For example, an in-kind donation ofbuildings would enable an NGO tobecome a landlord while a donationof computers might lead to an internetor e-mail service. PDA would nothave invested resources in a shoe orjewelry factory were it not for itsTBIRD project. Finally, those fewNGOs fortunate enough to haveendowments invest in a variety ofbusinesses.



When an NGO gets into business itencounters opportunities � and problems -not faced by other business owners. Forexample, the �do-good� image of an NGOmay help it find donors to fund start upcosts, hire professional staff at �below-market� salaries, obtain supplies andservices at discount prices, use its networkof supporters to promote the business,and get free publicity from local media.In addition, many potential customersare positively inclined to patronizebusinesses that use their profits forsocial betterment, and to give thosebusinesses a second chance when minorproblems occur. On the other hand, otherpotential customers may assume thatNGO-owned businesses are inherentlyless professional and efficient than theircompetitors, while private banks may bebiased against lending to untested NGOs.

Legal and Taxation Issues

Laws governing NGOs vary from countryto country. Some countries allow tax-exempt organizations to own for-profitenterprises; Other countries require thatthe for-profit enterprise be �directlyrelated� to the principle work of theNGO; And in many developing countries,laws concerning commercial earningsof NGOs may be unclear. Before starting

any business venture, NGOs must firstbe clear about the legal ramifications ofthe business on their tax-exempt status.

Cost allocation is another issue. The for-profit activities of an NGO will shareoverhead and other costs with its non-profit activities. It is in the best interestof the NGO to allocate as much of thesecosts to its for-profit activities, so as toreduce the for-profit�s tax liability. Butallocating costs to the for-profitoperations, however justified and incompliance with the law, may invite theunwanted scrutiny of tax authorities. Inaddition, when an NGO undertakesfor-profit ventures, the financial recordsof the entire organization may be subjectto public disclosure laws pertaining tobusiness entities.

Internal Conflicts

Much of the success of NGOs can beattributed to the shared vision of theirdedicated employees and volunteers.Bringing commercial enterprises intoan NGO will disrupt internal cohesion ifstaff view �profit� and �business� asinherently unethical. To prevent thisconflict, managers must communicateto their staff the vital importance offinancial security to the organization�s

C h a p t e r V.The NGO as Business Owner :Special Considerations


social goals, demonstrate that the NGOwill operate its businesses withoutexploiting others, and remind staff thatall donations ultimately originated fromsomeone�s profit, either freely givenor paid in taxes.

The staff of the NGO may also argue thatthe organization�s core mission willsuffer if scarce resources are divertedto profit-making ventures. This is alegitimate concern, especially in theshort run. (In the long run, the wholepoint of the profit-making ventures is toincrease resources to the core mission.)Similar concerns can also arise wheneverNGOs expand their core activities intonew areas to the possible neglect of theirexisting work. Good management alwaysrequires effective allocation of scarceresources throughout an organization.

When non-profit and for-profit activitiesoperate side-by-side, some �culture clash�is inevitable. For-profit staff are usuallycompensated differently, evaluateddifferently, and have different skills andeducational backgrounds than non-profitstaff. The non-profit staff may resent thehigher salaries and other perks of theirfor-profit counterparts who, in turn, mayfeel like �hired hands� unappreciatedfor their contribution to the NGO�smission. Good leadership may reconcilethese conflicts: If not, separating the twoarms may be the best solution.

The Dangers of Success

When an NGO�s business ventures,individually or collectively, grow tosignificant size, the above-mentionedissues may be exacerbated and newproblems may arise. Staff may feel thatbusiness activities have overshadowedthe organization�s mission. Other localNGOs may resent its success.

Government tax authorities mayreconsider the NGO�s tax status. Inaddition, traditional donors may disagreewith the direction the NGO is taking,or decide that the NGO no longer needstheir donations to support its good work.

As an NGO�s businesses becomesuccessful, private competitors mayalso start complaining that the NGO hasan unfair advantage due to its lower coststructure and exemption from incomeand value added taxes. The case of theYMCA, one of America�s oldestNGOs, illustrates this point. The YMCAhas long provided athletic facilities atlow rates as part of its mission topromote the physical and mentaldevelopment of young men. In recentyears, the organization has upgradedthese facilities into full-service fitnesscenters profitably serving the middleclass. As a result, private health clubowners are asking local governments toreview the YMCA�s tax exemptions, andsome of its traditional donors arequestioning why its resources are notserving those most in need.

Social Responsibility

All private companies face pressureto be good corporate citizens. For NGOsthis pressure is particularly strong, andrightly so. NGOs must make specialefforts to be socially responsible intheir business affairs. They must offergood wages and benefits, ensure workersafety, protect the environment, etc.,even when this puts them at a costdisadvantage vis-à-vis their lessresponsible private competitors. Ideally,NGO businesses can show thatprofitability and social responsibilityare indeed compatible, and thus serveas a model for the rest of the corporateworld to follow.



16

When a business fails (and most newbusinesses do fail) it is due to one ofthree reasons:

1) An ill-conceived idea � theentrepreneur misjudged theextent to which potentialcustomers wanted or werewilling to pay for the productor service;

2) Inadequate research andplanning � the entrepreneurfailed to consider importantfactors affecting the business,and/or failed to havecontingency plans to addressproblems that might occur;

3) Poor implementation � theentrepreneur overestimatedthe organization�s ability toprovide the product or serviceand to operate the business asplanned.

Even the most sophisticatedcorporations with MBAs from thebest business schools, high-pricedconsultants and the latest computerforecasting models often startbusinesses that fail spectacularly.This is because business is part artand part science, with the art, i.e.,creativity and judgment, the moreimportant of the two. A good idea

that is well implemented will succeedregardless whether the owner is alarge NGO, small NGO, privatecorporation of individual entrepreneur.

The process of getting a business ideabegins with assessing the skills andstrengths of an organization (its corecompetencies) and coming up with abroad list of things that it couldpossibly make or do. The next step isa preliminary look at the currentmarket for these products or services,paying particular attention to whatmotivates each segment of the marketto choose among alternative suppliers(price, quality, location, etc.). Thenone analyzes current suppliers(the potential competitors), looking attheir strengths and weaknesses to seehow one might have a competitiveadvantage over them, or a competitivedisadvantage that must be overcometo compete against them. Thesesteps are repeated in a series ofbrainstorming sessions among topmanagement, staff who will operateor provide support services to theventures, and perhaps trusted outsiderswho can contribute valuable insights,adding more detail and refining thebusiness concept(s) at each stage.Only then can one select the mostattractive concept(s) and begin

C h a p t e r VI.Getting an Ideaand Planning the Business


preparing the business plan(s).

An NGO�s strengths, whatever its size,may include, but not be limited to, thefollowing:

• Skills and technical expertise inits core activities;

• Skills and technical expertise inits support services such astraining, research, publishing,and computer technology;

• Network of local supports aspotential customers, providersof skills lacking in the NGO andpromoters of the NGO�s business;

• International donors as potentialproviders of funds, technicalexpertise and links withinternational markets;

• Convenient location;• Physical assets such as vehicles,

conference facilities, officespace and equipment;

• Distribution channels;• Understanding and ability to

organize its beneficiary group(s);• Name recognition;• Dynamic or charismatic leadership.

Information about the total market andmarket segments for an NGO�s productsor services, along with the strengths andweaknesses of existing suppliers, cancome from numerous sources:

• Published materials (governmentstatistics, trade association,publications, local business media,brochures and promotionalliterature of existing suppliers,etc.);

• Discussions with potentialcustomers, individually orthrough focus groups and surveys,to determine their buying

habits, the factors that mostinfluence their purchasingdecisions, and reasons for theirsatisfaction or dissatisfactionwith existing suppliers;

• Visits to potential competitorsto see how they operate, oractually purchasing theirproducts or services to learntheir prices, policies andprocedures, and to test theirstrengths and weaknesses.

A note on hiring consultants. Thereare three reasons why an organizationmay benefit from hiring consultants:management doesn�t have the timeto do the work, managementlacks particular knowledge orskills required to do the work, ormanagement feels that it lacks theobjectivity than an outsider canbring. But good consultants areexpensive. As they say, �If youpay peanuts, you get monkeys.�Hopefully, an NGO�s donors can beconvinced to pay the costs of outsideconsultants if required.

The Business Plan

Business plans are very similar to theproject proposals that NGOs use toapply for grant funds from donoragencies. Both tell the story ofan underserved segment of thepopulation, and the strategy andimplementation plan whereby theNGO will meet the needs of the targetgroup(s) more effectively thanother organizations. Both are intendedto communicate the story within theorganization and to obtain fundingfrom outside sources. And there isno standard format or optimal level of



detail for either a grant proposal or abusiness plan.

In some cases, NGOs expand into newprogram or start business venturesusing only their own funds. The planbecomes strictly for internal use andthere is a temptation to forego the timeand trouble of writing the document.This is usually a mistake. Puttingit all on paper certainly isn�t fun,but it does force careful, thoroughconsideration of all factors thatmay bring success or failure, oftenuncovering inconsistencies or potentialproblems that must be reconciled.Furthermore, verbal communicationalone may be inadequate to ensurethat all staff members understandthe purpose and strategy of thebusiness and their roles andresponsibilities in its implementation.

What follows below is a brief summaryof the key components that shouldbe included in a business plan. Thesummary is particularly relevant tobusinesses that provide services ratherthan manufacturing businesses. Thisis because most NGOs are already inthe �business� of providing services,and their core competencies are mostdirectly transferable to service-basedbusiness ventures. More detailedguides to writing business plans areavailable at most bookstores andlibraries.

1. Executive SummaryA brief (usually less than one page)overview of the entire businessplan intended to help readersunderstand the big picture beforethey begin reading the details ofsubsequent sections.

2. Description of the BusinessThis section is also generally quitebrief (usually two to three pages).It begins with backgroundinformation on the NGO � itsmission, goals, activities and theskills and expertise it has developedover time. This is followed bya description of the services theproposed business will offer, themarket segments on which itwill focus, its strategy fordifferentiating its services fromthose of its competitors, and thegoals and objectives of thebusiness. The purpose is to showhow the business matches the corecompetencies of the NGO and fitswith the NGO�s overall mission.

3. Market AnalysisThis section describes the existingmarketplace in which the NGOwill conduct its business. It beginswith an overview of the totalmarket for the services to beprovided by the NGO � the size ofthe market, growth trends andeconomic, social, technological orother factors that affect demand.Then the market is broken-downinto market segments, with ananalysis of the size of each segmentand their different �tastes andpreferences� i.e., the factors thatinfluence their buying habits anddetermine how they choose amongalternative suppliers. The marketsegment(s) whose tastes andpreferences most closely match theservices to be provided by theNGO thus become the targetmarket(s) it will pursue.

There are many possible ways tosegment markets. The goal is to


divide all potential customers intogroups that share similar buyinghabits and thus can be approachedusing a similar strategy. Forexample, consumer marketsdiffer from corporate markets;individuals can be segmented byage, occupation, gender, income,geographic location and ethnicity;corporate markets can besegmented by size, location,industry sector and the types ofcustomers they serve.

Most private companies assumethat their potential customers haveno moral or ethical reason forpreferring one supplier over another.NGOs are different. They cansegment their market by �attitude.�Thus many NGOs specificallytarget their businesses to customerswho support their core mission.Their competitive advantage is thatthey provide services as good astheir competitors while alsohelping society.

4. Analysis of CompetitionThis section begins with a broadoverview of other companies thatcompete in the market for theservices to be provided by theNGO. It includes who they are,their geographic coverage, marketshare, pricing and other policies,etc. It is followed by a morein-depth analysis of companiesthat directly compete for themarket segment(s) targeted by theNGO, emphasizing the strategiesthey use and their strengths andweaknesses in serving those marketsegment(s).

5. Marketing PlanA marketing plan consists of twoparts. First is the marketingstrategy, a detailed description of themarket segment(s) on which thebusiness will concentrate followedby an explanation of how thebusiness will match the strengthsof its competitors and capitalizeon their weaknesses, thus capturingmarket share from them. The focusof the strategy is what marketerscall your �unique sellingadvantage� which is the specialbenefit or benefits you will offercustomers such as lower prices,higher quality, greater convenience,more personalized service orcontribution to society.

The second part of a marketingplan describes how you willpromote your product, i.e., howyou will make potential customersaware of the services and benefitsyou offer. Options available tomost businesses include direct mail,sales forces, advertising in printmedia, radio and television andpersonal contacts. NGOs can alsouse their volunteers, members andother supporters to promote theirbusinesses via word of mouth, andtry to get free publicity from localmedia to spread the word abouttheir services.

6. Implementation PlanThe implementation plan, alsocalled the operating plan,delineates the day-to-day activitiesthat will be undertaken to set upand operate the business, startingfrom the day the business plan isapproved. Implementation plansvary considerably depending on



for the business (vehicles,equipment, legal and professionalfees, etc.). This is followed bya breakdown of the monthlyoperating expenses to run thebusiness (salaries and wages,rent, utilities, etc.).

The next step is to determine your�Break-even Point� i.e., thevolume of sales that is required tocover the direct costs of providingthe service plus other operatingexpenses. For example, assumethat you sell a service for $100and the direct cost of providingthe service is $60. You then havea �gross profit� of $40 for each$100 in sales. If monthly operatingexpenses are $400, you must sell$1,000 in services each month toearn $400 gross profit and justbreak even. If you increase yourprices so that each $100 in salesbrings a gross profit of $50, thenyou only need sales of $800 eachmonth to break even.

Unfortunately, it is impossibleto accurately forecast the volumeof sales that can be achieved atdifferent prices. You have to makeyour best judgment based on yourunderstanding of the market andyour target customers. If youdetermine that the break-even pointis unattainable, the businesscannot be viable. The next stepis to prepare �profit and lossstatements� for the business givenyour best judgment (best case,worst case and expected case) ofsales volumes you can achieve.

20

the type of business, but are likelyto include the following:

• Obtaining the site for thebusiness and making any neededphysical improvements;

• Purchase or rental of equipment,furniture and other assets;

• Hiring and training of personnel;• Supply of support services

(information technology,maintenance, security, etc.);

• Supply of raw materials andother inputs;

• Production and distribution ofsales promotion materials;

• Development of monitoringand evaluation systems;

• Public relations activities;• Incorporating the business.

For each of these areas, theimplementation plan breaks downthe activity into its sub-components,specifies what is to be accomplished,assigns who will be responsible andsets a timeframe for completion.It is difficult to prepare becausethere are often direct linkagesbetween activities and becausemany staff may have to split theirtime between the new businessand their existing responsibilitiesto the NGO�s core activities.Until you start preparing theimplementation plan you may notrealize how much time and effortwill be required to actually startand run the business.

7. Financial AnalysisThe financial analysis quantifiesthe NGO�s business plan inmonetary terms. It begins with adetailed list of all the start-up costs


In its most simplified form the formula is:

Total salesLess : Cost of SalesEquals : Gross profitLess : Operating expensesEquals : Net profit (loss) before taxLess : TaxesEquals : Net profit (loss) after tax

The profit and loss projections are yourbest estimates of the amount of profitthe business is likely to bring to yourNGO. You might have to decide that thebusiness, although profitable, simplywill not bring in enough profit to justifythe time and effort required.

One of the most common reasons whymany businesses go under is that theplanners underestimated the time itwould take for sales volumes to reachprofitable levels. Each month thebusiness has �negative cash flow�meaning that it spends more moneyeach month than it takes in. If theowners don�t have enough money tokeep supporting the business until itbecomes more popular they are forcedto go out of business. In planning theamount of funds needed for thebusiness it is ,therefore, important toinclude sufficient funds to cover suchpossible negative cash flow.

21



Many entrepreneurs spend yearsthinking about and planning a businessbefore they actually start operations.For NGOs, starting a business is onlyone possible route to achievinggreater financial security, which initself is a long-term goal that cannotbe reached overnight. It is counter-productive to rush into businessbefore your NGO is ready. But it isnever too early to start laying thefoundation for your entry into thebusiness world. Start by doing thefollowing:

• Learn more about business ingeneral and about the specificbusinesses your NGO couldundertake. Read business journals,visit trade shows, surf theinternet, collect brochures andadvertisements from potentialcompetitors, site out locations, takemanagement courses and so on.

• Analyze your own consumerbehavior. Why does your NGOpatronize certain suppliers andnot others? What influence doesprice, quality, convenience andother factors have in determiningwhere you eat, shop and hireprofessional services? Learn to

think about yourself and yourNGO as members of marketsegments.

• Develop your contacts, especiallyin the business and academicworld. Let them know of yourplans to eventually get into businessand encourage them to think ofways they might support you.Perhaps an MBA student couldwork as an intern or a privatecompany could hire yourresearch staff to do a field survey.Remember that you must findopportunities because they rarelyfind you.

• Finally, talk up your plans with yourdonors. Lobby them to establishprograms to promote commercialventures for NGOs through grantfunds for management training,hiring business consultants, andproviding investment capital forNGOs to start their own businesses.Ultimately the most effective wayfor donors to use their own limitedresources to help the world�s 1.2billion people who live in povertyis by actively promoting financialsecurity for the world�s NGOs.

C h a p t e r VII.Conclusion :The Question of Timing

22

strategies to strengthen ngo capacity in resource...

Documents