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The Strategy of Self-Financing – Western Experience
The idea of NGOs taking up additional commercial activity, originated in the non–profit sector of the United States in the late 70s, in a period of economic recession and increasing inflation. These activities developed very rapidly in 1981, during the Reagan administration. It was a period when the gap, between the charitable mission of NGOs and profit gaining, was gradually reducing. The NGOs that carried out commercial activities and ran enterprises, like: museum shops, university publishing houses, magazines and workshops, soon emerged. At that time, such activities were the exception rather than the rule.
In the background of the “new federalism”, the U.S. federal government offloaded certain programs, and the corresponding expenses, onto the state governments and the private sector. Non-commercial organizations, had to diversify and intensify their search for funding at a time of high inflation rates, while maintaining traditional sources of fund raising. The Reagan administration’s message to the NGOs was: to be more entrepreneurial in their activities and to extend progressively into the areas where the federal government was retreating. In addition, program budgets were reducing for NGOs working in the field of social services, legal and environmental issues. This trend persisted in the 1980s and the NGOs had to start seeking additional funds in order to maintain their activities.
Increased professionalism in NGO management produced the personnel willing, and capable, to act in a commercial manner. Some of the organizations started up marketing in their existing fields of service to attract new clients, whilst others developed new services and products to offer to both the existing and new client groups.
From a background of high competition for grants combined with a considerable budget reduction in financing, the public’s positive attitude towards enterprises, and an acknowledgement of the fact that enterprise and charity may peacefully co-exist; emerged NGOs conducting entrepreneurial activity though profit gaining was not their main goal. So far, the percentage of such organizations in the non-profit sector as a whole is low, however, their numbers are gradually increasing.
The strategy of self-financing of non-profit organizations also started in the NGOs from Central Europe, particularly: the Czech Republic, Hungary, Slovakia and Slovenia. By undertaking entrepreneurial activity non-governmental organizations hoped to become self-financing, enabling them to cover the basic operation expenses, specific project or program expenses and, pay salaries to the main staff.
In implementing self-financing strategies, the NGOs used existing resources, based on staff experience, and identified their niche market, offered additional benefits and services to the NGO members and constituencies. The NGOs started up this type of activity through the existing resources (savings and interest), donor financing/donations, state and private loans, with assistance of the governing boards, members, employees or friends, foundations for the development of small businesses and partners from joint ventures.
Additional Commercial Activity in Georgia’s NGO Sector
On a small scale, the tendency for self-financing has been observed within the non-governmental sector of Georgia as well. In January 2001, the Horizonti Foundation surveyed 291 randomly selected NGOs – unions and foundations. The study revealed that 55 of the surveyed organizations carry out additional commercial activities. In May 2001, the Foundation questioned 268 organizations registered as foundations. The study showed that 35 of the surveyed organizations carried out entrepreneurial activities. Foundations having the form of institutions have the highest percentage of commercial activities; followed by Resource Centers and foundations of direct action.
It should be pointed out, that the start-up of entrepreneurial activity appears to be directly linked to the level of organizational development. The study has revealed that entrepreneurial activity has been carried out by organizations of high and medium development. This fact once more proves the opinion that the start-up of entrepreneurial activity requires a well-developed system of internal organizational management.
The following activities are the most widespread among Georgia’s NGOs: educational (training, seminars); information research, analysis and dissemination; consulting services, and publishing.
Positive and Negative Aspects of Self-Financing Strategy
The experience has shown that implementation of a self-financing strategy often causes internal and external problems. Among the frequent problems is the conflict between an organizations’ mission and it’s new profit oriented organizational culture. The lack of business planning skills and management is also easily identified along, with inadequate organizational capacity. Particular difficulties may comprise: a lack of accessible starting capital; a vague legal/tax environment; competition or, potential competition, with the private/commercial sector; and an indifferent or negative public opinion may also be the cause of particular difficulties. When speaking of the additional commercial activity of non-profit organizations, NGO sector experts express some fear that there is a danger of general commercialization of NGOs. In some cases, additional commercial activity may really turn into the main activity of an organization or impede the implementation of its main mission; besides, entrepreneurial activity may be completely unacceptable to certain organizations due to the type of their activity.
At the same time, a large number of organizations have successfully managed to combine their activities useful to the society with commercial activities. A positive aspect in these processes is that NGOs started thinking seriously of the productiveness and efficiency of their activities and seriously analyzing their expenses. Entering the market has compelled them to conduct the type of evaluation that is specific to small businesses. The organizations have started to pay more attention to whether the consumer buys their products or services; and if not – why not. Answers to these questions reinforce the organizations’ management potential and, improve the quality of the offered products and services.
In addition to the above-mentioned positive aspects, it should be noted that self-financing increases the revenue and diversifies the income. In this respect, organizations obtain more opportunities to act at its discretion and be less dependent on the sources of financing and on the shifting of donor’s priorities. Organizations become more flexible, improve organizational planning, management and efficiency. While at the same time, financial discipline, administration and monitoring improve, organizations gain self-confidence and their activities improve creating a positive impression on donors.
Self-Financing is not a Panacea
Projects implemented in Eastern Europe show that self-financing is not a panacea; and is not necessarily acceptable to every organization. Self-financing cannot be the solution if an organization is experiencing a financial crisis. Transition to this strategy requires a healthy, stable organization. The experience shows that self-financing, commercial activities may fail for several reasons, for example: if it is not carried out in a professional manner and approached as a “real” business; it contradicts an organization’s mission; the NGO does not invest sufficient means in the enterprise; the organization is inconsistent in strategy implementation; it does not take into consideration potential obstacles or, plans incorrectly; the NGO does not conduct market analysis (or conducts it incorrectly); the Board provides insufficient support; or the organization lacks the skills to adapt and is too scared to take a risk.
The Horizonti Foundation Supports Development of NGOs’ Additional Commercial Activity
In September 2001, the Horizonti Foundation started to support additional commercial activity of NGOs. The Foundation set up a program for sustainable development of NGOs. One of the main goals of the program was to promote stable existence of the Third Sector in Georgia. In 2001-2002, the Foundation conducted training seminars on the topic of sustainable development and a grants competition for NGOs. The seminars were conducted in Tbilisi, Telavi and Akhaltsikhe. The seminar conducted in Tbilisi was designed for those NGOs acting in Tbilisi, which had already started such an activity and had the appropriate experience. The Foundation provided the regional NGOs of Telavi and Akhaltsikhe with the information on this type of opportunity and conducted training for them.
In 2002, the Foundation conducted a grants competition on the “Promotion of Entrepreneurial Activity of NGOs.” The competition was conducted in two stages. Initially, the NGOs had to submit their idea proposal, at the second stage – the complete business plan. One hundred and twenty eight NGOs submitted applications to participate in the competition; 18 organizations passed the first stage, 15 of those submitted complete business plans. Four organizations received the financing, these were: the Orthos Association of Disabled Children, the Union of Health Lovers of the Chiatura Community, the Union of Mountain Activists, and the Temi (“Community”) Union. The implementation of their projects is currently underway. Orthos will continue with publishing its popular informational magazine “Parents’ School”. The Union of Mountain Activists is to open a tourist-mountaineering equipment rental station in Tbilisi and set up educational camps for children. The Union of Health Lovers of the Chiatura Community will open an ultrasonography unit at the Outpatient Department of Chiatura to provide the service to the region’s population. The “Temi” Union, who providing care to mentally retarded children, will enlarge its farm in the village of Gremi in order to use the revenue for its sustainability.
References:
NESsT case study from the series of “NGO-Business Hybrid”;
Edward Sklootl’s book “Non-Profit Entrepreneur”;
Horizonti Foundation survey conducted in January and May 2001.
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