Funding Innovation in the Nonprofit Sector

What is a safe and cost-effective way to transport vaccines to children in developing countries? Many life-saving vaccines and antiretrovirals need to be stored in specific temperatures and conditions difficult to accommodate during long periods in transit. One international nongovernmental organization (NGO) discovered drones equipped with climate-controlled technology offered a solution.

Nonprofits are problem solvers, faced with questions like this every day that require innovative solutions. They’re at the front lines, addressing the world’s most pervasive social issues. There’s no clear-cut formula or one-size-fits-all approach to solving humanitarian crises, curing diseases, supporting insecurely housed individuals, improving patient care or engaging students in higher education. New technology holds the potential to improve program delivery, fundraising campaigns, accounting processes, impact reporting and virtually every aspect of organizations’ operations.

Nonprofit leaders recognize the need to innovate, yet they operate in a resource-constrained reality. Many organizations are ensnared in the “starvation cycle” and are forced to consistently underfund critical infrastructure like technology in order to keep their programs up and running. Nonprofit Standards, BDO’s benchmarking survey, revealed about 1 in 5 nonprofits are at risk of falling into the “starvation cycle” and 48 percent recognize changing technology is a key hurdle for their board.

While companies in the for-profit world enjoy incentives like the research & development (R&D) tax credits to reward their innovative efforts, the nonprofit sector doesn’t have comparable funding mechanisms or incentives. What can nonprofits do to bridge the resource gaps and allocate, or secure, the funds to innovate? Consider these four avenues toward innovation:

1. Ask funders to “pay what it takes.” Many grantmakers have a strict ceiling set on the percentage of funding nonprofits can allocate to indirect costs, or overhead expenses. Innovation is not a direct cost. Going to the drawing board and beta testing new solutions and technology require a considerable financial investment and time commitment. Funders are starting to recognize the detrimental impact of the starvation cycle on the nonprofit sector, and several foundations are reassessing their restrictions on overhead. The road to fully address the mismatch between nonprofits’ needs and funders’ expectations is long, but change is underway. Having frank conversations with your stakeholders and funders about the actual cost of rolling out a new solution is a good place to start.
2. Tap into alternative funding sources. While traditional project grants may overlook innovation, a number of other funders exclusively fund innovative projects. These innovation awards are competitive, but worth pursuing. Emerging funding sources like impact investors and community development funds may also be more flexible with limitations on indirect costs.
3. Foster a culture of innovation. Financial backing is an essential ingredient for innovation, but it’s just as important to cultivate a team of creative thinkers to champion new ideas and solutions. Take a page from the corporate world and consider appointing a chief innovation officer to integrate a culture of innovation from the top down.
4. Embrace collaboration. Nonprofits are no strangers to collaboration. The sector shares a common goal of solving pervasive social issues that break down silos. Organizations regularly host roundtables and forums to share best practices and lessons learned. More than one-third of nonprofits (37 percent) are considering a strategic partnership with a similar nonprofit organization in the next two years. As nonprofits experiment with new technology, combining resources and seeking opportunities to learn from their peers can help accelerate the rate of change.

For nonprofits struggling to keep the lights on, setting aside innovation funds might sound like a pipe dream. It’s not. Innovation encompasses improvements of any kind, not only the seismic shifts that alter the philanthropy world as we know it. Smaller organizations can scale innovation to fit their budgets and immediate priorities. Maybe your nonprofit isn’t ready for drones and artificial intelligence yet. Near-term innovation for your organization might be upgrading your accounting and financial reporting processes from Excel to Tableau.

The scope of the transformation is less important than the iterative act of improving your organization and investing in its future. Any steps you take now to streamline processes and achieve efficiencies can help your organization save resources to fund your mission and future innovations. Even the most sophisticated nonprofits admit that when it comes to financing innovation, they’re not quite there yet. Consistently searching for new ways to tackle problems is a core pillar of sustainable organizations, and ultimately expands the impact of your organization’s mission-driven work.

This article was originally published in Philanthropy Journal. You can access the original article, here.

Reprinted from the Nonprofit Standard blog.

For more information, contact Andrea Wilson, managing partner, Nonprofit & Education Advisory Services, at aewilson@bdo.com.

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