As an enabler and a funder in open infrastructure, one of our key goals at Invest in Open Infrastructure (IOI) is to conduct research to better understand and articulate the foundational needs for open infrastructure services, such that they are viable in the short-term and sustainable in the long term.

To this end, in this investigation, we worked to design and test measures that will enable us to better understand the financial health of nonprofit providers and enablers in this space. In this report, we outlined key patterns we observed in the nonprofits’ financial risk and strengths and resource allocation, and clarified sector needs for both funders and providers such that resources can be better allocated.

Read the full report here

More on the Study

Earlier this year, we detailed our proposed methodology and held a community discussion on the topic, where several community members shared valuable perspectives and experience. Critical, constructive feedback from practitioners enabled us in refining our analysis, focusing on exploring the most meaningful parameters and building usable insights and actionable recommendations.

Overall, the research aimed to:

  1. Have a baseline assessment on the financial health of the open scholarship and research ecosystem using financial ratio analysis.
  2. Identify the financial elements that would benefit from further exploration and possible reinforcement.
  3. Explore general guidelines decision makers might consider to improve the financial health of organizations they fund.

To begin, we analyzed 18 US-based, registered 501(c)(3) / 501(c)(6) charitable entities in the research and scholarship ecosystem based on the availability of reliable data over the 2010-2019 period. The report is based on the analysis of 10 ratios that aim to explore the performance of these organizations in three dimensions:

  1. Financial risk, the extent to which an organization is vulnerable to financial external conditions.
  2. Financial strength, the extent to which an organization can cover its financial obligations.
  3. Resource allocation, the spending patterns of an organization.

The report is not meant to spotlight organizations that are not doing well according to some of the ratios used in the report. On the contrary, we believe that these insights will collectively help funders make decisions on their investments and at the same time provide guidance to service providers to enhance their operational efficiency and effectiveness.

Insights

Based on the report, we observe key patterns in relation to the three dimensions of financial risk, financial strength, and resource allocation.

In the financial risk dimension, results show that the studied organizations depend primarily on program service revenue and secondarily on contributions revenue. Reliance on a singular revenue source potentially exposes an organization to disruptions in the execution of its mandate if the funding source is withdrawn. We recommend that organizations explore portfolio diversification among revenue types to best establish reliable and sustainable revenue streams to fund continued operations and to make services sustainable.

In the financial strength dimension, most organizations reported an accumulation of liabilities (debts) relative to their total available assets. Organizations with relatively high levels of liabilities have a limited ability to build up operating reserves that are critical for organizations to endure financial stress, unexpected events, and loss of funding (Grizzle et al., 2015). We recommend that organizations create plans to generate operating reserves for reducing their liabilities and debts. This may be achieved by budgeting for annual surpluses and making sure organizations have solid investment plans.

In the resource allocation dimension, most expenses reported by organizations in this analysis went to programs. While this is theoretically ideal, meaning that money is being spent on achieving the mission of the organization, underinvestment in managerial and fundraising capacity can be problematic for the long-term sustainability of organizations. Consequences of underinvestment may include limited managerial capacity, increased turnover among staff, and limited capacity to track funding and donations. Therefore, we recommend organizations and funders invest more in managerial, operational, and fundraising activities (commonly known as overhead costs) to improve their organizational capacities.

Dimensions
 Opportunities for providers Opportunities for funders
Financial Risk
  • Be more intentional with financial planning to ensure the costs and benefits of revenue sources are aligned with the strategic plan of the organization and minimize the risk of overdependence on any one source of revenue.
  • Explore portfolio diversification within program service revenue and contributions to ensure a variety of funders and funding sources are available to the organization to better ensure the long-term financial stability of the organization.
  • Review internal policies and procedures to ensure grantees are able to allocate available resources to address areas of financial risk and build the capacity to manage these risks.
  • Develop resources (templates, training, mentoring, etc.) for grantees to identify financial risks, particularly around revenue diversification, and build the capacity to address these risks and better identify opportunities for long-term viability and financial success.
  • Work explicitly with grantees to identify funding and partnership targets with an aim to provide additional sustainability and planning support towards long-term sustainability through revenue diversity.
Financial Strength
  • Quantify the regular operating expenses of the organization and ensure the organization has sufficient liquidity to fund at least 90 days of regular operating expenses in the event of unforeseen financial issues.
  • Explore opportunities for additional unrestricted funds to address current liabilities and build a meaningful reserve in line with nonprofit management best practices and the Principles of Open Scholarly Infrastructure (POSI).
  • Develop and implement plans to pay liabilities, ensuring these plans are communicated to internal staff and external stakeholders, with regular updates to meet current and anticipated future obligations.
  • Ensure funding policies and procedures allow organizations to accumulate cash reserves to support operational needs and unforeseen contingencies while still ensuring project objectives are met.
  • Better assess the financial strength of potential grantees and develop useful resources (budget planning templates, training sessions, mentoring, etc.) to improve the internal capacity for strategic financial planning and debt management of grantees at various levels of financial and operational maturity.
Resource allocation
  • Ensure management and fundraising activities are properly resourced in order to put in place managerial mechanisms to grow and expand existing capacity to meet current and future challenges.
  • Ensure labour and human resources activities are properly planned and resourced (especially for organizations currently allocating little to no money in this area) to formalize the structure and processes of the organization in order to ensure long-term sustainability and viability of the organization.
  • Ensure funding guidelines allow organizations, particularly infrastructure service providing organizations, to have higher levels of indirect costs in order for them to use available funds for management investments and organizational capacity building.
  • Ensure funding guidelines allow organizations to use funding for labour and human resources investments to formalize their organizational structures and processes in support of long-term staffing plans and strategic objectives.
  • Develop resources (templates, training, mentoring, etc.) for grantees to expand their capacity to better allocate available resources to meet long-term objectives and strategic goals.


Read the full report here

Next steps


We hope that this study contributes to identifying those funding needs in order for the organizations in this study and the ecosystem to flourish and to continue providing non-for-profit services. Moving forward, we plan to expand the analysis to include non-US based organizations, as we work to understand and articulate the diverse needs of open infrastructure services globally. We look forward to building upon the framework established in this report as we expand our research.

If you have any questions or feedback regarding this report – please use this form to let us know, or email us at research [at] investinopen [dot] org.

Acknowledgements

Our special thanks to those who’ve helped make this work possible, especially the participants of the community discussion we hosted on August 9th, 2022. Their feedback was critical for early revisions on the benchmark thresholds for ratios and foreseen effects of this information on decision-making processes.

We would also like to thank Elizabeth Searing, ChiaKo Hung, Laurie Mook, Katrina Pugh, Rupert Gatti, and Lucy Ofiesh for providing feedback to the complete draft of this report. Lastly, we would like to thank Jesse Lecy, a member of the Nonprofit Open Data Collective for facilitating the databases with Form 990 and Form 990-EZ electronic filers.

Funding for this research was provided by the Mellon Foundation and Arcadia, a charitable fund of Lisbet Rausing & Peter Baldwin.

Social media image by Blogging Guide on Unsplash.

Posted by Tania Hernandez