The not-for-profit (NFP) sector is under continued pressure to reform. With the welfare system beyond its funding limit, all levels of government are looking for greater system efficiency and productivity, including better citizen outcomes for its investment.

At the same time, consumers are now much more informed and empowered. They expect personalised, tailored or ‘consumer-directed’ services underpinned by a free-market dynamic with greater service contestability.

The NFP organisations that are thriving in this context have some common characteristics. Successful organisations often share a focus on strategy, building capability, effective governance and their culture. A unifying characteristic of organisations that thrive through changing times or reform is a clear sense of the performance they expect. It’s knowing who they are serving and a dedication to the making the greatest impact. Second best won’t do.

I have worked extensively with NFP organisations across Australia, including major disability, mental health, homelessness and aged care service providers. In this article, I’ll outline some of the reform challenges facing NFPs and the change strategies and tactics being adopted by industry leaders.

Service providers are under pressure to demonstrate value and meet growing consumer expectations

Government is increasingly insistent on results and wants to deal with fewer entities to ease administrative burden and better manage quality. Public investment will be directed to those who can do more with less. For the majority of NFPs, somewhere between 60 and 99 percent of income comes from government. For those that do not have a diversified funding base, it is particularly important to be responsive to government expectations and policy in order to maintain financial viability. This means understanding and adapting to the changing government requirements around efficiency, service quality and other performance outcomes. This is putting pressure on NFPs to demonstrate greater impact and value for money, and find greater capacity to invest in service improvements and innovation to achieve this.

Changing consumer expectations are also placing pressure on NFPs. As technology continues to foster consumer connection and empowerment, even the most vulnerable clients are becoming well informed and finding their voice. This gives NFP consumers the ability to influence change in a new ways. For NFPs, this – coupled with increased public scrutiny due to recent royal commissions and parliamentary enquiries – means a greater sense of accountability for service experience and quality than ever before.

Alliances and acquisitions are becoming more commonplace as NFPs respond to this pressure

Scale is becoming more attractive to many NFPs as a way to respond to these pressures. Many loosely federated organisations are coming together either by pure acquisition or as subsidiaries of a parent organisation. Some are forming alliances with other service providers in their locality to build their presence and connections horizontally.

Others are resisting the pressure to consolidate, preferring to stay small and nimble and maintain a niche set of objectives, specialised skill, or a defined client group or geographical area to pursue. For these organisations, matching their expertise to the specific market, at the right price and showcasing their value is the pathway to sustainability.

M&A is inherently complex and NFPs, like most businesses, lack the expertise required to effectively manage the process alone. For those choosing this path, Nous and other organisations have created online toolkits to help NFPs better manage M&A, including the commercial, people, client, technology and legal implications.

A strong sense of purpose is helping providers navigate complex, disruptive change

NFPs face a heightened level of accountability for financial decision making. Whether funds are from government, philanthropy or enterprise, NFPs are more constrained in, and scrutinised for, their investment and spending decisions than most for-profit organisations. Typically strategic change efforts require considerable investment, so this scrutiny is an added challenge or pressure on change leaders.

In contrast, a unique strength for many NFPs lies in their purpose. This quality keeps people very focused and unified during disruptive change efforts and can be a strong energising and motivating force when the effort gets tough. This sense of purpose also inhibits the tendency to become distracted by opportunities and trends that don’t show real benefit for citizens or consumers.

Business acumen and effective collaboration are other key ingredients for success

The NFPs that are leading the charge are those that are evidence based and show greater business and commercial acumen. They track external trends, gather evidence to support their strategic choices, and then move quickly to deliver.

Other NFPs are successful because they collaborate effectively in a highly contestable environment. An example of this would be mental health services working with housing and homelessness services and local estate agents to secure safe, long term housing for people affected by mental illness, including ensuring tenancy while in hospital.

Effective practices in the health sector offer useful guidance and inspiration to many NFPs

The health sector is very focussed around evidence based practice, risk management, and the consistent application of standards. I think these protocols and ways of working will become more and more prominent in NFPs – particularly in areas like ageing, childcare and out of home care – because the sector is focussed on delivering positive outcomes. It’s no longer enough for things to be well meaning. There needs to be the same level of rigour that is applied in the health sector for consumer expectations to be met.

There are some specific organisation design features from the health sector that can work well in NFPs. Community advisory groups that report direct to the board are a great way of escalating accountability. Although at times difficult to manage they can promote and maintain a zero tolerance approach to falling below quality standards.

Strong governance, meaningful purpose and a culture of excellence distinguish the best from the rest

Strong governance arrangements are essential. Effective NFP boards bring the requisite diversity of professional expertise – legal, marketing, finance, risk management – but also a strong ethical compass and unwavering expectations regarding quality standards and evidence based practice. These boards contribute at the governance level, and resist the temptation to interfere in the operational details of the business.

The most successful NFPs have a tangible coherence between their purpose and their choice of who they serve, their branding and marketing, the networks of their CEO, their investment strategy, research agenda, and employee value proposition. They stand for something, deliberately build leadership in selected areas, and speak confidently through stories and facts about the impact they are making.

My final piece of advice would be to create a culture of excellence across the workforce. Leaders should have high expectations of themselves and all those they employ. This always begins with role modelling. The expectations bar has gone up and NFP leaders need to reform their organisations to meet it. People want to work in organisations they can be proud of, which often comes from what the organisations achieve and the manner in which they achieve it. So high expectations can be more motivating than some leaders think, and it is essential for successful change in challenging times.

This article was originally published in Third Sector Magazine, Issue 37, December 2016.