Taking the for-profit road.
"The premise for diversification was that there were accessible niche markets that would build on the competencies we already had. That way we could create new revenue sources and growth in services that weren't justified if we just did them for AACN," says Sanford. A work group (including staff, current and past board members, and volunteers with for-profit backgrounds) spent 13 months developing a rough business plan. AACN's primary vehicle for diversification would be a for-profit spin-off. The plan included outsourcing three major association functions - publishing, printing and fulfillment, and meeting planning - as well as marketing those services to others.
Is this a better way to run an association? "Yes, but it's easy to underestimate the unintended consequences," Sanford warns. Two years into AACN's start-up of the for-profit business InnoVision, she offers lessons learned.
Start with your strength. "We went after niche markets based on our competencies. Unlike an entrepreneurial start-up, where you build a product around a market, we spent time getting existing services out to new clients," Sanford explains. Publishing had been AACN's most successful program. In fact, it was growth in ad revenue from AACN's two member journals that Sanford feared would jeopardize the organization's tax status - thus supporting the need for diversification. Launching the journal Alternative Therapies in Health and Medicine "was congruent with our vision but not intended for members," Sanford says. "It responded directly to market data showing consumers spending significant discretionary dollars on alternative therapies." Published by InnoVision, AACN's for-profit subsidiary, Alternative Therapies filled a new market niche.
Limit the experiment. AACN rushed three association functions out the door, outsourcing publishing, mail house, and meetings to the new for-profit. "That's too many," Sanford says with a tired sigh. "I wish we had focused on one or two complementary services."
How much to outsource also matters from the for-profit's perspective. "AACN is a significant InnoVision client. The fine line you have to walk is between looking at the parent association as the priority client and recognizing that if you neglect other clients, the parent suffers," Sanford says. "Anecdotally, we strive to keep the parent's percentage of work below 40 percent of the for-profit's load."
Consider staff and systems. These components are critical at first. "Unless you have enough capital to have a [separately staffed] organization, you have to integrate, and it can require individuals to wear too many hats in some crucial roles," Sanford reflects.
"While you are growing, you don't want to duplicate systems - that just increases overhead. On the other hand, using management and financial processes designed for a nonprofit can kill the for-profit, because they tend to be more labor intensive."
Have separate boards. "If you have overlapping staffs, as we do, an effective way to establish the arm's-length relationship is to have a separate board," Sanford says. "That was an expedient way for us to profit from business expertise without hiring consultants or staff."
Notice cultural shifts. Staff pushed for InnoVision's success - to a fault. Sanford tells a story about a client who asked for a change in a report format. "We found out the person in information management spent 20 hours developing a new form," she exclaims. "Because [in the association], if a chapter had called, we'd just do it for them, that's the mentality. People were killing themselves to meet customer needs. That's good in concept, but it can destroy your margin."
Define success. The lesson Sanford drew from that experience was to "clarify in advance what success will look like for this client population. What are your parameters?" Changing a report format, for instance, "can be done, but it may have to be done on an hourly basis."
Be prepared to switch markets. "When you are selling products rather than letting the market tell you what products will sell, you are vulnerable." Sanford found that out when AACN went after new meeting planning clients among nursing associations. The receptivity of an attractive market "flipped from moderate to hostile in six months," she recalls. A multiple management firm had gone out of business, spooking some groups, and changes in the health care market finally began hitting membership and meeting registration. "Nursing looked at InnoVision as the new player and said it was AACN's attempt to take over. We decided not to fight that battle. We stayed in the association market but went away from nursing."
Accept the learning curve. "Put in the time," advises Sanford. "Understand what you are trying to sell and be very clear what your potential customers are seeking." If you target other associations as customers, you can expect some commonality. "But you don't know what the real hooks are for that group," says Sanford. "Our approach is to ask up front, 'What are your hills to die on? What's really important to you?' We engage in that discussion even during the pricing and bidding process."
Start with a pilot. AACN started with friends. "We went to industry partners to offer our services. In one case, we asked to pilot a service with them. We wouldn't charge to use them as a learning lab. That ended up getting a lot of business from them and a lot of referrals."
Expect a long day as CEO. Sanford wears the executive vice president hat at InnoVision while still leading AACN. "Normally, you probably spend 20 or 30 percent of your day investigating and learning, flexing and rolling with it. Since starting this diversification, I'd say it has been closer to 70 percent during the first 18 months."
Spend enough money. "If it's going to break you to have a 10 percent overrun on something, then better not try it," advises Sanford. "It's a new culture, and most nonprofits can't afford to hire enough experts to avoid making mistakes."
AACN has a three-year plan and an initial capitalization of $2 million. "That was a little slim," Sanford says. "To be successful, a for-profit has to be able to respond to opportunities."
Apply what you learn to the association, too. "We used to say, 'Gosh, this seems to be a member need; how can we do that without losing our shirt?' Now we say, 'What's the market potential here?'"
Sanford points to AACN's annual meeting as an example. Trading on exhibitor interest in different membership groups, AACN added two parallel meetings for members otherwise uninterested in the main meeting.
"Look at what other activities or synergy you can establish with what already exists," Sanford recommends. "Think more comprehensively: It adds to the complexity, but it also adds to the fun."
* Put your foot in, not your toe. If the market is there, go for it.
* Invest and be willing to wait for the return.
* Don't try diversification without a progressive board backing you up.
Kristin Staroba is a freelance writer based in Takoma Park, Maryland.