Why Nonprofits Should Rethink Risk

Nonprofit and risk are two words that tend to fit uncomfortably in the same sentence. When they do come together, it is inevitably in the context of the former avoiding the latter, as in risk management or risk mitigation. But, should nonprofits ever proactively seek to take more risk? If we hope to move the needle on the long-standing problems that plague our society, the answer is a resounding ‘yes’.

Of course, when we’re working with people and communities who are already in vulnerable situations, the idea of introducing any unnecessary variables may seem irresponsible. Ensuring we do no harm is essential. Yet, when people are suffering, disenfranchised, or otherwise unable to achieve their full potential, the status quo is also not acceptable. We have a responsibility to do the most we can. And, when our existing interventions are insufficient, that includes taking the calculated risk required to seek better solutions.

To put this in stark perspective, if the polio vaccine had not been administered, at some risk, to the first human being and then subsequently to thousands of schoolchildren through extensive clinical trials, hundreds of millions more people would have been paralyzed or killed by the disease. Of course, such experiments are only undertaken after eliminating as much risk as possible through lab and animal testing.

When we don’t run such staged experiments to allow for failing small, we risk failing big. One Acre Fund, a nonprofit that helps desperately poor smallholder farmers in Africa increase their incomes, learned this lesson the hard way. Early on, it rolled out passion fruit as a new crop to its farmer network after financial modeling indicated strong potential profits, only to discover that real world conditions didn’t match the theoretical assumptions. Transport was more expensive and fruit quality low in the absence of extensive training on proper cultivation. The economics never worked.

This failure motivated One Acre Fund to adopt an innovation framework to stage risk more gradually, so that potential issues would be identified and addressed earlier. Promising ideas are first tested with a small number of farmers, then successively larger trials, and either improved or discontinued based on the results. By the time something is rolled out to the full network, most of the risks are well understood. Today, One Acre Fund dedicates 7% of their annual budget to research and development (R&D), highly unusual for the nonprofit sector. Based on the impact to date, it estimates a four- to six-times return on investment. This means better livelihoods for more farmers.

In the private sector, investors treat a company’s R&D spending as a sign of health and a leading indicator of future growth. After all, wise investment leads to better products and services. While nonprofits do not have the same profit motive, the quest for mission fulfillment should equally drive a search for better solutions. Even for the most lauded programs, opportunities will always exist to enhance effectiveness, decrease costs, adapt to a changing landscape, and leverage technological advances.

Practically speaking, this requires both donors and nonprofits to make the tough tradeoff to forgo a degree of short-term benefit in favor of potential greater long-term impact. Here are four important steps to take to get started:

  1. Goal. Establish and reinforce an audacious goal for impact and scale, based on real world needs. A stretch goal that cannot be achieved with business-as-usual forms the foundation for innovation.
  2. Invest. Budget resources that are not tied to short-term deliverables to seek better solutions through staged experiments. The further the trajectory of current interventions fall short of mission achievement, the greater the appropriate investment. Funding may be sought as an R&D component of a larger grant or from new, flexible sources.
  3. Metrics. Identify and track the key unit-level (as opposed to aggregate) metrics that are the underlying drivers for success – such as conversion rate, unit cost, and success rate. Optimizing the metrics that matter will pay dividends over time.
  4. Culture. Reinforce a culture of innovation by incentivizing rapid learning rather than predictable execution. Celebrate rather than punish the small failures that underlie progress and prevent larger failures.

Just as companies are expected to maximize profits and shareholder value, nonprofits should be expected to maximize impact and stakeholder value. Doing some good is not enough. We need to raise the bar. And, that means risk can no longer be considered a four-letter word.

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