Background on Business Modeling for Community Foundation Services

Community foundations face tough choices about their overall business models and
the business models and financial models for specific products and services. This
white paper summarizes insights on those choices from inside and outside the
community foundation field. It may be particularly helpful to staff and volunteers
newer to the field of community foundations.

Terminology

What are the differences between a business plan, business model, and financial
model?

In their book The Nonprofit Business Plan, consultants from La Piana Consulting write
that a nonprofit business plan “tests the proposition that a particular undertaking—
program, partnership, new venture, growth strategy, or the entity as a whole—is
economically and operationally viable.”

NCFP’s Family Philanthropy Playbook and its Philanthropic Services Business Model
Canvas for community foundations are tools for business modeling. The La Piana
Consulting team wrote that “The nonprofit business model is the interplay of an
organization’s scope (geographic, programmatic, and customer) with its economic
logic (how it structures and pays for itself)” They note that a good business plan
reassures its readers that the business model “really does makes sense and has a
high likelihood of success.” What is a Business Model? by Harvard Business Review’s
Andrea Ovans adeptly summarizes 10 years of evolving thinking on the definition and
structure of a business model.

The financial model is the underlying economic logic of a business model. It forecasts
revenue streams and cost structures over time and articulates the assumptions made
about both.

Strategic Questions

From 2003-2013, the consulting firm FSG developed reports and tools to help
community foundations better understand their business models. The firm donated
the resources to CF Insights at the Foundation Center.

FSG wrote in its 2013 report, Align, Adapt Aspire, that four questions are
fundamental to making decisions on the economics of any product or service:

1. What are our strategic priorities?
2. What mix of products and services aligns with our strategic priorities?
3. How do we position priority products for growth?
4. What operational changes do we make by product – including pricing,
processes, development focus, and revenue diversification – to achieve the
economic outcomes we desire?

Four Competing Business Models

Two consulting firms – Ekstrom Alley Clontz and FSG – developed similar ideas
around four competing choices for a community foundation’s business model. Each
choice creates different and often conflicting demands for staffing, operational
capacities, marketing, donor engagement, and more. Each community foundation is a
mix of the four models, but no foundation can grow effectively trying to do all of
them well. Both firms encourage a community foundation to pick one model as its
key differentiator – its primary means of growing in its market.

Choosing to offer deeper philanthropic services or family philanthropy services falls
in the “Fuel for Change” category in FSG’s 2012 Do More Than Grow report. It falls in
the “Donor Focused” category for Ekstrom Alley Clontz and for CF Insights in its
following graphic and in its presentations.

Trusted Advisor Model

Deloitte’s Center for the Edge studies trends that are disrupting business models.
The trends range from public policies to online flows of information, and from
migration of talent to consumer loyalty and power.

In the 2016 report Approaching Disruption and other articles, the Center describes
three types of businesses that will thrive in the future: “infrastructure providers will
manage routine, high-volume operational tasks; platforms will connect businesses
with a growing range of third parties; and trusted advisers will build deep, trust-based relationships with customers.”

Each type of business requires differing capabilities and culture to deliver value to
the marketplace. The Center for the Edge advises a business to focus on only one of
those three types, and the trusted advisor concept fits a community foundation’s
family philanthropy services well. The Center’s team wrote:

“The trusted advisor seeks to increase a customer’s return on
attention…by proactively and objectively recommending products,
services, and opportunities that help the customer meet her goals.” –
Deloitte, Approaching Disruption, 2016

Center co-founder John Hagel later wrote that the key success factor for the trusted
advisor model is the:

“capability to build and sustain deep trust so that the customer is
comfortable in sharing more and more information about themselves. The
advisors in this business type must have a deep sense of emotional
intelligence so that they can constructively challenge customers and help
them to accomplish even more.”

Cost Structures

NCFP’s Community Foundation Family Philanthropy Playbook is based on the
Business Model Canvas. Experts in this tool write about two opposing choices for the
cost structure of a service or product:

• Cost-driven – your customers value very low costs, so you will dedicate little
  staff time to your philanthropic services and focus on mass-market events and
  off-the-shelf tools. In this choice, NCFP’s Knowledge Center resources and
  webinars can play a key role in augmenting support for giving families.
• Value-driven – your customers value premium services such as those received
  at a high-end wealth advisory firm or vacation destination, so your
  philanthropic services offer more of a concierge and customized experience.
  NCFP’s resources tend to play more of a background role in those services.

Most products and services fall somewhere in between those opposite choices, and your mix of philanthropic services will likely a mix of those cost structures. The Seattle Foundation offers both choices in its Donor-Advised Funds, charging 1.25% for value-driven services and 1.00% for cost-driven services.

Business Model Canvas experts also look at these characteristics of a cost structure:\

• Fixed costs – expenses that are not dependent on the amount of goods or
  services being delivered. These include overhead costs and salaried staff.
• Variable costs – expenses that change in proportion to the amount of goods
  or services being delivered. These include materials, meeting costs, processing
  costs per gift and grant, and more.
• Economies of scale – as volume rises, so does the overall cost per product or
  service. Common examples are bulk purchasing and reduced fees for larger
  loans or deposits.
• Economies of scope – cost advantages available due to a larger scope of
  operations. For example, a highly-skilled marketing office can effectively serve
  multiple lines of business, or existing distribution channels can be used for
  multiple products.

Revenue Sources

FSG’s 2010 report, Fueling Impact: A Fresh Look at Business Model Innovation and
New Revenue Sources, documented how community foundations were diversifying
their revenue sources beyond standard fees on fund assets. This chart described fees
for advanced philanthropic services and family philanthropy services:

Many community foundations are now offering fee-based services and products to
their donors and fund advisors and to private foundations. Subscribers to NCFP’s
Community Foundation Network can access a folder full of sample fee structures,
project scoping templates, and agreements.

Three Case Studies

In this excerpt from NCFP’ 2005 issue brief, Making the Commitment to Family
Philanthropy, author Bryan Clontz offered three examples of how community
foundations navigated business model choices for family philanthropy services. He
based the examples on three factors:

• How closely family philanthropy services fit the foundation’s overall mission
• The staff and budget capacity of the foundation
• The decision to offer “standard services” to a wider customer base and “addons” and “enhanced services” for families and other high-priority customers.

Tier 1 – Partial Mission Fit with Limited Resources and Capacity

Rationale and strategy: Be a solid, high-quality core resource for families who practice philanthropy. Minimize overall cost, invest in fixed- cost resources, avoid hard-to-control variable costs, especially staffing. Primary service delivery is on a doit-yourself basis. Begin to segment high-end funds for potential users of add-on services, outside resources, and prospects for future specialized fee services.

Standard Level:

• Lending library resource materials
• Reposition current services to adapt to families
•  Off-the-shelf “How To” tool kits:
  o Develop a grantmaking strategy
  o Organize your family philanthropy process
  o Engage your children
  o Help your children develop good practices, etc.
•  Stable of outside resources for referrals
• Add-ons:
  o NCFP’s Knowledge Center
  o NCFP’s monthly family philanthropy webinars

Tier 2 – Minimal Mission Fit with Ample Resources and Capacity

Rationale and strategy: Be a solid, high-quality complete resource for families who
practice philanthropy. Segment high-end funds for enhanced level services. Invest in
fixed cost resources, minimize hard-to-control variable costs, especially staffing,
reserving them for enhanced level personalized and customized services. Deliver as
much as possible on a do-it-yourself basis.

Standard Level:

• Lending library resource materials
• Reposition current services to adapt to families
•  Off-the-shelf “How To” tool kits:
  o Develop a grantmaking strategy
  o Organize your family philanthropy process
  o Engage your children
  o Help your children develop good practices, etc.
• NCFP’s Knowledge Center
• NCFP’s monthly family philanthropy webinars

Enhanced Level:

• Family philanthropy events
• Alliances with outside resources to provide needed special services to donor families (and train staff)
• Selected personalized and customized services for a fee

Add-ons:

• Offer contracted grantmaking, administrative, and other services to private/family foundations

Tier 3—Optimal Mission Fit with Abundant Resources and Capacity

Rationale and strategy: Be a solid, high quality full range/full service resource for
families who practice philanthropy, including family foundations. Segment high-end
funds/foundations for enhanced level services. Invest in fixed cost resources,
minimize hard to control variable costs, especially staffing, reserving them for
enhanced level personalized and customized services. Deliver as much as possible on
a do-it-yourself basis.

Standard Level:

• Lending library resource materials
• Reposition current services to adapt to families
•  Off-the-shelf “How To” tool kits:
  o Develop a grantmaking strategy
  o Organize your family philanthropy process
  o Engage your children
  o Help your children develop good practices, etc.
• NCFP’s Knowledge Center
• NCFP’s monthly family philanthropy webinars

Enhanced Level:

• Family philanthropy events
• Alliances with outside resources to provide needed special services to donor families (and train staff)
• Selected personalized and customized services for a fee
• Custom grantmaking services to private/family foundations

Add-ons:

• Administrative services for private/family foundations

Note: These models are also readily adaptable for donor family segments with a community foundation based upon the fee income levels.