10 Steps for Truly Effective Nonprofit Strategic Planning

Did you know that the typical five-year strategic planning forecasts perform about as well as dart-throwing chimpanzees?

When I shared this research finding with Linda, the operations director at a mid-sized nonprofit, she wasn’t surprised. She told me that about seven years before she and I had this conversation, her organization went through a five-year strategic planning process.

Well, the plan didn’t go according to plan. Political and social developments associated with the turbulent 2016 political season caused a great deal of uncertainty and resulting problems for her nonprofit’s international outreach.

The assumptions built into her strategic plan, and the resulting projects and financial commitments, failed to pan out. She had to cut costs in order to keep some operations running. Linda even had to lay off long-time staff to maintain the nonprofit’s financial viability.

Not a pretty picture; no wonder she wasn’t optimistic about strategic planning. Wouldn’t you be if you had her experience?

The Problems With Linda’s Strategic Planning

After taking a look at her previous strategic planning process, it became clear that it suffered from a number of dangerous judgment errors that result from the biological structure of our brain — what scholars term cognitive biases.

We know from studies that cognitive biases pose a high threat to strategic planning. Linda’s plan, in particular, suffered from the planning fallacy, our tendency to assume that everything will go according to plan. That dangerous judgment error leads to our failure to build in enough resources and flexibility for various contingencies.

Linda’s plan also exhibited the mental blindspot known as the optimism bias. It’s like it sounds: The optimism bias causes us to perceive a more bright and hopeful vision of the future than is the case in reality. We then underestimate threats and risks.

Finally, the plan proved highly vulnerable to sunken costs. This cognitive bias makes us reluctant to terminate projects after we already sunk some money into them. Due to the strategic plan’s structure, Linda’s organization continued to throw good money after bad long after many red flags suggested it might be time to cut the losses on the projects. As a result, Linda suffered substantially more losses than needed, making the required financial corrections significantly more painful than needed.

As I went through each of these problems, Linda found herself both nodding her head and clenching her fists. How she wished she knew about these problems when she worked with the consulting company that helped her leadership team create that plan, she told me. She wouldn’t have fallen for those traps!

Fortunately, there’s a much more effective way to approach strategic planning.

Rather than making a simple strategic plan, you focus on assessing potential threats and opportunities and building them into your plan. You emphasize making your plan flexible and resilient, able to handle unanticipated developments that you didn’t consider when you made the original plan. You also work to counteract the typical cognitive biases that cause your plans to go astray. That’s the path that Linda pursued.

10 Steps for Truly Effective Nonprofit Strategic Planning

Step 1: Scope and Strategic Goals

Decide on the scope and the strategic goals of the activity that you will evaluate, as well as the timeline, anywhere from six months to five years. Remember that your forecasting will deteriorate the further out you go as you make longer-term plans, so add extra resources, flexibility and resilience if you have a longer projected timeline. For the same reason, make your strategic goals less specific and concrete if you have a longer time horizon.

Step 2: Gather

Gather the people relevant to the activity that is being evaluated in the room, or, if there are too many to have in a group, representatives of the stakeholders (a good number is six and not more than 10 people to ensure a manageable discussion). Make sure the people in the room have the most expertise in the activity being evaluated, rather than simply gathering the higher-ups. The goal is to give input on various attributes of a vision of the future and then address any potential problems and opportunities uncovered. At the same time, have some people with the power to make and commit to the decisions that will be reached during the exercise.

Step 3: Explain

Explain the exercise to everyone by describing all the steps, so that all participants are on the same page about the process.

Step 4: Your Anticipated Future

Consider what the future would look like if everything goes as you intuitively anticipate and how many resources it would require.

As I discussed this step with Linda, she recognized that her leadership team and the other consulting firm seven years ago only went up to this step, skipping the rest of the critical steps.

Step 5: Potential Internal Problems

Now, consider what the future would look like if there were unanticipated problems internal to the business activity that seriously undermined the expected vision of the future. Write out what kind of possible problems might arise, including low-probability ones. Also lay out the kind and amount of resources (money, time, social capital) that might be needed to address these problems in alternative visions of the future.

Evaluate the likelihood of each problem in percentage terms and multiply the likelihood by the number of resources needed to address the problem. Try to convert the resources into money if possible in order to have a single unit of measurement.

Next, consider what you can do to address the internal problems in advance, and write out how much you anticipate these steps might cost. Finally, add up all the extra resources that may be needed due to the various possible internal problems and all the steps you committed to taking to address them in advance.

Step 6: Potential External Problems

Complete the previous step for potential problems external to the nonprofit organization’s activity.

Linda really wished that the strategic plan seven years ago had this section, as it would have greatly increased the likelihood of a more realistic assessment.

Step 7: Potential Opportunities — Internal and External

Go on to consider what your anticipated plan would look like if unexpected opportunities opened up; most will be external, but consider internal ones as well. Next, consider the likelihood of each scenario and the number of resources you would need to take advantage of this opportunity. Try to convert the resources into money if possible for the benefit of a single unit of measurement.

Consider what steps you can take in advance to take advantage of unexpected opportunities, and write out how much you anticipate these steps might cost. In the end, add up all the extra resources that may be needed due to unexpected opportunities and all the steps you committed to budgeting to take advantage of these potential opportunities.

Step 8: Check for Cognitive Biases

Check for potential cognitive biases that are relevant to you personally or to the organization as a whole and adjust the resources and plans to address such errors. Make sure to check for loss aversion, status quo bias, confirmation bias, attentional bias, overconfidence, optimism bias, pessimism bias and halo and horns effects.

Step 9: Account for Unknown Unknowns (Black Swans)

To account for unknown unknowns – also called black swans – add 40% to the resources you anticipate. Also, consider ways to make your plans more flexible and secure than you intuitively feel is needed.

Initially surprised by the 40% figure, Linda realized the value of this step when we discussed the collapse of the 2008 housing bubble and the Great Recession, and prior to that, the dotcom boom and bust. Given the current  political turbulence affecting many industries, reserving 40% made sense to her.

Step 10: Communicate and Take Next Steps

Communicate effectively to organizational stakeholders about the additional resources needed. Then, take the next steps that were decided on during this exercise to address unanticipated problems and take advantage of opportunities by improving your plans and reserving resources.

Conclusion

By the end of our discussion, Linda determined that she and her team needed to do this exercise for the next three years; she didn’t want to do a longer plan, due to the current political instability. She was very happy with the outcome and felt confident it would be critical to addressing the threats and seizing the opportunities for her company, along with boosting resilience and flexibility.

And how much would you benefit if you would use this technique for any strategic planning you do for your nonprofit?