Creating a successful company from an NGO programme: some lessons
While it is still quite an unusual approach, there are emerging examples of NGOs that spin-off a free-standing, for-profit enterprise from a successful development programme. This can be a good option when an NGO has a development programme that has at its heart a commercial model in which goods or services are produced and sold. The term ‘spin-off’ means that the commercial elements of the programme is re-located from being part of the NGO’s larger operations, to becoming a separate legal entity such as a company or social enterprise. Jita is a very good example of this from the BIF portfolio.
This is a very significant transition to make. The new company will still have social objectives alongside its commercial ones, and the NGO may still own all of part of it through a shareholding. But as a business it will need ‘business DNA’ instead of NGO practices, which will impact right across the operation. This will include the governance structures through which ownership is held (a board representing shareholders instead of NGO line management), the expectations of those providing financial support (investors instead of donors), and the kind of managers and the way that they are motivated, which must reflect the need to achieve sustainability through making a profit on its trading activities. This is just to mention a few areas that will be impacted.
It is extremely sensitive and difficult to inject business DNA into a NGO programme that has been running for a number of years, but experience from number of NGO programmes, suggests there are actions that can be taken right from the beginning that may make this much easier.
Here are some of them:
When starting an NGO programme that is intended to spin-off as a business at some point in the future:
1. Governance and legal entity Bear in mind from the start what governance structure will be needed when the programme spins-off. Starting off with a board structure may be helpful as this can transition into a company board. If not, consider setting up the programme so the programme manager always has clear lines of communication to a governance structure where different interests are represented in a steering group, which can then transition into a Board. Remember that NGOs often have a very consensual style in which a programme manager will be expected to interact with a number of stakeholder groups in quite a subtle way, but this won’t work when external shareholder become involved. Be clear when funding flows to the programme from different parts of the NGO that this may lead to expectations as to future influence on the transition to a free-standing enterprise. BIF has published a Project Resource with detailed guidance to Jita on this topic.
It may even be best to start with a legal entity that can be a subsidiary of the NGO and will then be straightforward to transition to an entity that private sector investors can take shares in.
2. Compatible goals and objectives Capture the long term commercial goals alongside the intended social impacts clearly from the start so that there is no internal confusion later. Ideally, do this in a way that can form the future company’s memorandum and articles. Express the intended balance between social and commercial goals, and the criteria for how any necessary decisions on trade-offs between these goals will be made. Bearing in mind that the social impacts are the reason why the wider NGO and its donors support the development of the programme, think at an early stage about how these social impacts will be embedded in a future company, and what this implies about the future relationship between the NGO and the enterprise once it is spun off. Jita’s modelling of social and commercial goals is explained in a BIF Insider.
3. Management structures and HR As early as possible set up management structures that can easily be transitioned to a stand-alone enterprise. Clearly there will be benefits from using existing NGO staff and structures, but think ahead and set in place new structures and HR processes such as: clear incentives and key performance indicators for managers that match the long term objectives of the programme as a stand-alone enterprise; and the right skill sets that will be needed for managing as a commercial enterprise. It is important to avoid major ‘gaps’ in terms of the support structures and personnel once the enterprise spins off.
Whilst running as an NGO programme, pay attention to the following issues:
1. Documenting and tracking to demonstrate value. Building and demonstrating a successful track record as a commercial proposition and as a social business is essential. Ensure that there is an ability to understand the commercial income and ongoing costs, and build up a financial track record. A key point will be to recognise one off and on-going subsidies to the underlying business activity from the NGO. These subsidies can be straightforward internal and donor funding that is available, and less easy to recognise subsidy from the support that the NGO programme will have from being run by the NGO with its existing staff and structures. Ongoing subsidy that is not recognised as such may undermine the ability to demonstrate strong financial performance later.
Whilst NGOs are usually good at tracking performance of programmes for donor accountability purposes, also make sure to track social performance that will establish a track record for impact investors in the future. Be mindful that this could be as important to some investors as the financial performance. Think about using indicators that are already recognised by the impact investment community, such as the IRIS indicators.
2. Setting the right precedents Try to set up trading arrangements with companies on a robustly commercial basis that will be sustainable rather than accepting soft terms as a way of getting quick returns for poor beneficiaries. Be clear when working with private sector partners whether or not this from their CSR budget and what the implications are for the commercial proposition. Have realistic staff and management costs in relation to working in a commercial environment in due course.
3. Planning and reporting NGO planning and budgeting processes can looks quite different to those of a company. Use a business planning methodology where possible, paying attention to financial planning that plans both income and expenditure. Engaging private sector business consultants to take the programme through a business planning process may be a good investment. Ensure that the NGO accounts enable separate tracking against the business plan, or set up a parallel system.
4. Presentation in the market It is normal for an NGO to use a descriptive name (The ‘So and So Development Programme’) and also to feature its own role when communicating about a programme. Donors and other social stakeholders will be impressed to know that an NGO is running a successful programme. However if the longer term aim is to spin off a stand-alone enterprise, bear in mind that this approach to communications might not be the best. The private sector uses branding very strategically to establish a presence in a market and a relationship with customer, so it may be better to have a neutral name that can be part of a strong brand, and for the NGO role to be downplayed in communications.
When the time comes to transition the NGO programme into a free-standing enterprise we hope that some of the actions above may mitigate some of the challenges, but some or all of the following may have to be managed:
1. Doing the commercial deal with new investors There may be strong views within the NGO that a successful programme is worth something and that private sector investors are getting something ‘on the cheap’ in the situation where private sector investors are putting funds into the spun-out business. This is very unlikely to be the case in my experience. Fixed assets and less tangible things such as networks, reputation know-how and contracts and patents are all building blocks of a successful business, but a common mistake is to make a valuation based on past investment by the NGO and donors. The reality is that a private sector investor is primarily concerned about how the combination of these assets creates future value. A further complication can be that investment in a spin-out may be mistaken by some as a competing form of corporate donation to the NGO itself which can provoke distracting in-fighting. The larger lesson is that expectations within the NGO will have to be managed carefully. Having a clear objective, good advisors and strong and committed leadership will be essential.
2. Mindset Retaining NGO staff of a social project and then expecting a quick mindset change from them to think like business people is not very practical or easy. On the other hand, a key success factor may be to keep the knowledge base that has built up in the NGO programme in place. To get the best of both you need to invest in agile-minded staff, or blend different skills.
3. Workload Trying to transform a project into a company, while it is still operational has additional challenges. As one of our team said about a project BIF supported: ‘it almost felt like performing a heart transplant while keeping the patient alive!’ Additional capacity and external support should be built in to the process.
I hope these suggestions are helpful and I look forward to further learning emerging on this fascinating topic. In conclusion I should acknowledge that many colleagues in BIF have done work that has prompted many of the reflections in this blogs: for example Parveen Huda of BIF Bangladesh, Kenneth Bell of Challenges Worldwide and too many consultants from ADP to mention here.
To read more about the transition from an NGO programme to a self-sustaining inclusive business see this blog series, which includes links to our March Newsletter on this theme, links to related blogs, projects and more.