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Surviving failure in the not-for-profit sector : How to effectively innovate

Innovation is a sought after concept; seen as a way for organizations to respond to disruption, become more competitive and improve their financial position. Generally speaking, innovation suggests using different methods, such as pioneering product development and challenging the status quo, to improve a product or service. Naturally, there are some organizations who innovate better than others; 3M is a prime example with their Innovation Space focused on “improving every life”. With this, 3M has remained relevant for over a century, moving from its origins as a mining company to its research into electronics and software among many other sectors. Organizations that do not share the same mantra risk stagnation and loss of competitive advantage. Successful innovation results from a variety of factors, but two critical ones for the NFP sector is the successful management of risk and failure, as innovation needs an environment that encourages experimentation.

The NFP sector is traditionally risk averse, with pressure and expectations from public bodies and major sponsors, as well as an overall lack of excess capital. This means they are largely constricted to operating as they always have. Organizations are looking for alternative ways to achieve their goals, and in many cases look to consulting organizations to help address their challenges. In my experience, consultants have a role to play in helping NFPs create an environment that contains risk, whilst allowing measured experimentation using the intelligent failure concept developed by Rita McGrath, a professor at the Columbia Business School.

Innovation is a difficult goal for any organization, and particularly the NFP sector. Dealing with the inevitable failures associated with the experimentation needed for innovation, is a key aspect. Yet, research shows that this is done poorly by many firms and industries. For example, 10 years ago PwC found that across $4.5 billion worth of projects globally, only 2.5% firms completed all projects on time, budget, to scope and delivered the intended outcomes. However instead of interrogating why, it was swept under the carpet, passed off as something that just happens, rather than examining the root cause. In their most recent survey, many of these issues still exist.

The same attitude extends throughout many organizations; when CEOs were asked how much they had learnt from their failures on a scale from 1-10, the response was a 2 or an occasional 3. This suggests a systemic issue in the overall business environment, that failing should be ignored. These failures can be turned into opportunities to improve processes and outcomes. Or in other words, an opportunity for incremental innovation. Instead of a liability, the incremental improvements could result in substantial gains.

Organizations, with their extensive resources and motivations, are still challenged with overcoming these failings; and even more so in the NFP sector. NFPs face even more difficulty with innovation, as any failure is magnified and likely more damaging. As Dan Pallotta outlined in his popular Ted Talk, The way we think about charity is dead wrong, the public perception of how a NFP should act places severe constraints on their ability to experiment and grow.

Almost like a set of unwritten rules, for NFPs it is even more unacceptable to fail. They are discouraged from using funds for advertising or overhead expenses, as people expect donations to support the front line cause. If there is a perceived misuse of funds, or failure – it can result in negative scrutiny and publicity – and may even affect donations and sponsorship in the long run. In turn, this reduces the NFPs impact, or in extreme cases, the organization can fold completely. Failure, and therefore innovation, is effectively prohibited for NFPs.

One possible solution is to identify small scale projects and incubate them in a contained, environment. This would allow an organization to safely experiment within some clearly defined boundaries, but also minimize the risk of negatively impacting the wider organization. If it fails, it can be examined, learnt from and built upon.

Rita McGraths, ‘Intelligent Failure’ framework provides some ideas on how to achieve these goals, as discussed in the seven following principles:

  1. Decide what constitutes success and failure from the outset of the project
    In any environment, having clarity and a common understanding of goals and the definition of success and failure is key to achieving a successful outcome. This is especially important when engaging with external parties. For NFPs it may mean approaching strategic goal setting from a different perspective, such as that outlined by Stacey Barr, who recommends using sensory descriptors rather than business buzz words to articulate an organisation’s goals. Framing the issue in this way makes it more palatable to those providing donations, as activities are no longer lost in the murky world of business jargon.
  1. Convert assumptions into knowledge
    Recently the Lean Canvas business model for business has drastically altered how we approach start-ups. Rather than spending time and resources developing a product behind closed doors, businesses are encouraged to investigate if their market assumptions are correct before investing significant resources. This should be no different for NFPs. Whether looking at new revenue streams, or trying new work methods, there should be proactive fact checking and testing of theories throughout a project.
  1. Fail fast
    McGrath suggests that if a venture is going to fail, then let it happen as soon as possible. There are two very good reasons for this. Firstly, NFPs are stretched for resources, there is no benefit in sinking more resources than absolutely necessary into a project if it is destined to fail. These resources can then be redirected to another project that may be more successful. Secondly, if you want to learn from and understand the failure, it is much easier to attribute cause and effect if it they happen close together.
  1. Fail cheaply – know your no fail zone
    This is particularly relevant for  NFPs with their funding challenges. Organizations should try and create a small contained project, to minimize any adverse effects on the rest of the organization. It may also mean compromising what resources the project focuses on. For example, rather than use donations expected to be passed on directly to the cause, the project may initially use capital or labor. Secondly, the initial project could be a smaller iteration of a larger project, allowing the NFP to effectively test the assumptions behind their ideas, before embarking on a larger project.
  1. Limit uncertainty – work within the scope of existing knowledge/familiarity
    NFPs already have a good handle on their area of work. Organizations should attempt to innovate incrementally, rather than go for a big bang approach, with higher risks for a NFP.
  1. Build a culture that celebrates intelligent failure
    Individuals need to feel comfortable acknowledging failure in order to successfully understand why the failure occurred. This is particularly important for incremental innovation which the NFP should strive for, as it provides insight into the current processes and areas for improvement.
  1. Document and share what you learn
    Formalizing knowledge and sharing this in an accessible format provides a range of benefits to NFPs. They should be shared with everyone in the organization, to ensure lessons are learned for future. They should also consider sharing with other NFPs in the hope that others can also improve their practices.

These seven principles are simply unachievable without a culture that understands failure as an element of innovation. McGraths intelligent failure seems intuitive. ‘Learn from your mistakes’ is a mantra that is repeated to us on a personal level throughout life. However, many avoid openly admitting to failure in a work situation as it may be damaging for the individual and their workplace.

As previously discussed, failure is particularly frowned upon in the NFP sector; admitting your contribution to the failure is daunting. There is a need to break the cycle with a culture and environment that accepts failure for what it is – an element of innovation. By effectively containing the failure it can provide the opportunity to reduce risk while learning and adapting from the experience.

Published in Consulting Finance