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Wednesday, November 4, 2009

Know It When You See It:
Evaluating Nonprofit Business Opportunities

The current economic environment is placing the nonprofit sector under an historical level of financial stress. In response to this stress, and in an attempt to assert greater control over the sustainability of their agencies, nonprofit leaders are turning to the creation of earned revenue business ventures in increasingly greater numbers. Regardless of the type of good or service being offered, when launching a new venture or growing an existing business, it is important to begin by thoroughly evaluating the opportunity to avoid investing time, money and energy in a business with little chance for success or whose failure could leave the organization in an even worse financial condition.

While nonprofits are correct in seeking new types of revenue and very often have good business ideas, they lack a standardized way to evaluate those opportunities to separate the high–potential opportunities from the illusions or pet projects with little potential. To that end, Dewey & Kaye presents the Business Opportunity Filter, a tool providing eleven criteria to consider when evaluating a new business opportunity. For each criterion listed, a rationale is provided which defines and explains the relevance of the factor as well as an indicator describing what constitutes a favorable opportunity in that category. While the relative importance of each factor will likely differ by organization based on many factors (present circumstances, priorities, mission, history, etc.), Boards of Directors should consider all the factors to guard against conceptual "blind spots" in planning. The Filter also includes a column describing the process the nonprofit typically would follow to collect and analyze each particular criterion. For instance, understanding market demand can be accomplished through completing a market analysis, while understanding how a business opportunity fits the organization's mission is a question addressed through a strategic planning process. The Business Opportunity Filter is presented below.

Dewey & Kaye's Business Opportunity Filter

Business  Opportunity Criterion	Description and Rationale	Indicator	Evaluated Through
Mission Fit	Mission fit is the degree to which the business opportunity fall within the mission of the nonprofit organization. The business venture will be more successful if the services are a natural extension of the nonprofit's current operations, where staff has experience and familiarity with the good or service being delivered. Also, it is important for business ventures to fit with the mission so that the business is a fulfillment of the mission, not a distraction from it, which could discourage both staff and public supporters.	Services should closely fit the mission of the nonprofit. The degree to which a service or product fits the mission of the agency is a determination made by the Board of Directors with input from the executive and from major funding sources if applicable.	Strategic Planning
Demand	Demand is shorthand for the level and nature of an aggregated group of consumers' needs and wants. Whether demand exists for the product or service is a central consideration in the market analysis. Demand should include the level of unmet need for the good or service, a description of the market segments and information on consumers' preferences.	A good business opportunity is characterized by a high level of demand.	Market Analysis
Pricing	Pricing describes the price consumers are willing to pay for the product or service as well as their preferred method of purchase, such as pricing per hour or per day compared to pricing per service or on a membership basis. Pricing is essential in evaluating whether a product or service is viable because a price level at or below the cost of providing the good or service will increase risk and lead to financial losses for the agency.	Price that consumers are willing to pay should be sufficient to cover the cost of services as well as provide a margin of surplus to support the nonprofit’s overall administration and growth. Price needs to be evaluated against the cost of goods provided, a factor determined through business planning.	Market Analysis
New or Existing Service	Whether the service is new or existing directly relates to the level of difficulty inherent in the business venture. The agency should clarify whether the good or service is something already being provided or a new service; organizations are more likely to recognize success with services they have experience delivering.	Expanding an existing service into a new client base is easier than approaching a new client base with a new service. The agency should make an internal determination as to what degree the proposed service overlaps with current operations.	Business Planning
Competition	Competition encompasses the degree to which other organizations are providing the same goods or services or substitute goods or services. Competition is another essential element of the market assessment because the degree of competition will influence the quality of services demanded by consumers, the margin the agency is able to build into its price and the overall difficulty related to the business opportunity.  The relevant competitors for the organization are those entities that consumers identify as providing similar or substitute goods of services.	The indicator for competition is the inverse of demand; low competition presents the best business opportunity.	Market Analysis
External Trends	External trends include any changes that could affect the viability of the business venture, particularly the factors of supply and demand, including economic or demographic trends, legislative or regulatory changes, the political environment and other factors. The organization should be aware of the external trends to understand the context of business opportunity and its concomitant risks and opportunities.	Relevant external trends and their interpretation will vary by service and industry. Overall, trends that are likely to increase demand or decrease competition would be indicators of a viable business opportunity.	Market Analysis
Past Results	Past results include the level of success the organization has experienced in the past providing a good or service as well as past clients’ level of satisfaction. Past results will indicate whether the service is something the organization does particularly well and whether past clients are likely to demand that service from the organization in the future.	For new services to an existing client base, high client satisfaction would indicate a higher likelihood of success. For new services to a new client base, this factor may not apply.	Market Analysis
Value Proposition	The value proposition is the unique value the organization offers to its consumers. Two examples of a value proposition the organization should consider are whether they can deliver a higher quality or a lower–cost product than the competition.	The indicator will vary depending on the value proposition. If the value proposition is low cost, the indicator might be the organization’s cost of delivering the service, found through business planning. If the value proposition is high quality of service, an indicator will be found through external inquiry of past and potential clients. Overall, the organization should be able to communicate a compelling value proposition for the good or service.	Business Planning
Impact on Other Programs	This factor is the degree of impact the addition of a new service or client base will have on the existing provision of services. This factor is relevant because the organization will need to make an internal assessment of what resources will be needed to deliver the program, such as terms of space and staff, and whether the use of those resources will negatively impact other mission–oriented programs.	Services with the highest business opportunity should not create a burden for existing programs.	Business Planning
Organizational Capacity	The organizational capacity is roughly defined in this case as the ability of the organization to deliver the service/goods in the appropriate quantity and quality for a sustained period of time. Factors included in capacity are the organization's knowledge, skills and resources. Other factors to consider as part of the organization's capacity are whether the organization will be able to train and develop employees to continue to deliver the service in the long–term. The organizational capacity is inherently an internal assessment that is completed through business planning, but it is a critically important factor to consider before launching a new product or service. Without the requisite level of organizational capacity, chances of success are greatly diminished.	The organization essentially should judge whether its resources are sufficient to deliver the service at the necessary level of quality. The organization should be able to have sufficient number of well-trained, capable staff to deliver the service.	Business Planning
Cost	This is the cost to the organization, in terms of staff, space, marketing, supplies and other resources required to deliver the service. The organization must understand the cost of delivering a product or service in order to evaluate its profit margin. The organization should also understand the nature of its costs, whether they are fixed or variable and whether they are subject to economies of scale based on quantity. The organization should recognize that costs increase for highly customized goods and services and that prices should be adjusted accordingly to maintain a sufficient margin.	The cost to deliver the service should be low enough to allow the nonprofit to collect a sufficient profit margin per unit. The cost of the organization should include both direct and indirect costs associated with its provision.	Business Planning

While there is no "one size fits all" formula for the number of positive indicators that will ensure business success, evaluating business ideas using the Business Opportunity Filter will provide nonprofit leaders a rational, standardized mechanism for assessing opportunities before taking the leap and lead to improved decision–making and more thoughtful planning of new business ventures.

Shawn Sheridan specializes in nonprofit budget analysis, market analysis and strategic business planning.

Dewey& Kaye can help you through this process. Give Shawn a call if you would like to discuss. Shawn can be reached at 412-434-1335 or ssheridan@deweykaye.com.