05/11/2011 | 3 mins |

Assessing Your Human Service Program Portfolio: Financial Impact vs. Mission Impact

05/11/2011 | 3 mins |

The bad news for human service nonprofits is that there is rarely enough money to do everything they want to do to advance their missions. This is increasingly the case with government-funded services. The silver lining is that not everything is worth doing. The last post explored how nonprofits can prioritize their programs based on which ones are most “worth doing”—i.e., their relative mission impact. Today we dig into how nonprofits can ascertain and use knowledge about what it really costs them to deliver services in order to better sustain their mission impact. As some Bridgespan colleagues observed a few years ago, there is tremendous strategic value in economic clarity.

But this clarity can be surprisingly hard to come by. For starters, there is seldom accurate data on how front-line staff—usually the single biggest expense—spend their time, how other key assets are utilized, and how this drives the organization’s cost position. Most internal expenses are typically tracked against discrete funding sources or in aggregate functional accounting line-items instead of against particular programs or beneficiary groups. When programs are costed out, it often is only at the direct expense level. Indirect or so-called overhead costs are either not allocated out or if they are it is done in ways that fail to reflect the true cost drivers of the work. And little if any distinction is made in the use of restricted vs. unrestricted revenues by particular programs.

Indirect expenses in particular are sources of confusion due to what my colleagues Ann Goggins Gregory and Don Howard have elsewhere termed “the nonprofit starvation cycle.” They note that “the cycle starts with funders’ unrealistic expectations about how much running a nonprofit costs, and results in nonprofits’ misrepresenting their costs while skimping on vital systems – acts that feed funders’ skewed beliefs.” Once a nonprofit is in this doom loop it is hard to break out—not least because it results in a chronic shortage of funding for the financial systems and capabilities needed to track and manage the true cost to deliver services.

The first step in breaking out of this doom loop is to get at least an initial fix on how much it costs—both directly and indirectly – to operate different programs, as well as the extent to which these costs are off-set by revenues attributable directly to those programs. For nonprofits that need to and are interested in taking this step, we have developed a free web-based toolkit, including an overall description of the analysis, links to key resources, a step-by-step workplan to guide you through the process, and spreadsheet templates for you to use in completing it.

Once you have worked through this process and compared your assessment of the relative financial impact of each program with the relative mission impact, you will be in a position to map out the program portfolio matrix along the lines of what one client developed below. Such a portfolio perspective enables you make better decisions taking into account the totality of your programs and their aggregate mission and financial impact instead of trying to decide what to do with them (start/grow/maintain/shrink/exit) on a case-by-case basis, as this or that contract or grant opportunity comes up. With the economic clarity that comes from this analysis you can:

  • Focus on growing and enhancing those programs that are providing “sustainable impact”

  • Identify and justify a select set of “mission investments,” even as you work to improve their economics to make them more sustainable

  • Optimize the cash flow from a select set of “income opportunities” in order to underwrite other work that more directly advances your mission

  • Decide how to improve either the financial contribution or mission impact of the “potential distractions” that—if left untended—will be a drag on your work

Establishing the program portfolio matrix thus positions you to make better tradeoffs—something you will increasingly have to do as government funding dries up. In our next post, we will discuss how to establish decision rules and processes to get the most out of the matrix tool on an ongoing basis.

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