Rethinking the business model: the case of Espacio Público

12 March 2018

When asked, think tanks all over the world identify funding as one of their biggest concerns. In some parts of the developing world, think tanks have been witness to the gradual withdrawal of foreign funding for policy research. Some organisations have experienced sudden and dramatic shocks to their annual income, while others can foresee these shocks in their near futures.

Recently, for instance, the African Capacity Building Foundation changed its approach to supporting think tanks and withdrew core support to many of its grantees. In another example, the Think Tank Initiative, which comes to an end this year, will leave close to 50 think tanks across Latin America, Africa and South Asia without the core funding it has provided them for 10 years.

In light of this, most think tanks are still pursuing efforts to replace long-term funding with new, very similar, grants. Other think tanks have attempted to make small changes to their business models to keep afloat and fill holes in their budgets.

Espacio Público, from Chile, offers an alternative solution to think tanks facing a challenging funding context: rethink your business model.

Espacio Público changed its business model (including its funding model), and in the process created a stronger institution. It also offers lessons for any think tank considering following a similar path.

On Think Tanks spoke to Guillermo González, Espacio Público’s former Executive Director, who oversaw the organisation’s business model reform.

Enrique Mendizabal: Before we consider the change that Espacio Público underwent, what was the challenge you were facing?

Guillermo González: We were facing the end of core funding- something that other organisations are also facing or will have to face at some point. We had three years of core funding before it “ran out”. This funding allowed us to set up the organisation and develop important research projects. We knew early on that this set up was not sustainable in the long-term, so we decided to change our business model towards project based funding.

It is an interesting case of a successful transition, although it required a significant effort from the organisation.

Espacio Público began operating in 2013. We had two large core funders which provided 100% of our budget: the Institute for New Economic Thinking in the US and Lord David Sainsbury in the UK.

The original agreement with one of the funders was that their support would last three years. As for the other funder, we agreed that they would reduce their funding every year. This was intended to encourage us to seek out new funding sources. This is worth pointing out as good practice from the donor’s perspective and for think tanks looking for new sources of funding.

As for Espacio Público, by 2015 we had less core funding, which triggered us to look for project based funding.

EM: But this wasn’t just a case of looking for a few more projects to make up for a small reduction in your core income. You made significant changes to the funding model.

GG: Yes. In 2013 we had 100% core funding and by 2015 we had 80% core funding and 20% project based funding. 2016, was a year of change: we had around 50% core funding and 50% project based funding. By 2017, our funding model had changed completely: we had 20% core funding, 70% project based funding and 10% local funding.

2016 was an important transitory year during which our income was about 60% of what our income had been in 2015. This was a temporary slump though. By 2017 we were back to our 2015 income.

It is important to note that a lower income in 2016 did not mean a reduction of outputs. As a matter of fact, in 2016 we did a lot more- and much of it using our reserves.

EM: Was the change limited to the funding model?

GG: Funding is just one aspect of the change we underwent.

At the end of 2015 we realised that the transition demanded a larger change in our business model. Up until 2015, our Board members also acted as senior researchers. Back then, the organisation considered that its core staff had to be competent but not necessarily autonomous. The role of the staff was to carry out and execute the ideas of these great thinkers.

However, these senior Board members / researchers were highly regarded in their sector and, as such, they were on other boards and involved in several other projects. This meant they did not really have time to focus on Espacio Público, which consequently meant our business model was incompatible with the project based funding model we were planning to implement. Project based funding demands greater autonomy from the executive or operating team. Researchers must be able to engage with funders, collaborators and other relevant stakeholders.

We had no choice but to change our business model entirely. At the time, the junior research team was a group of outstanding individuals who were highly competent but had very little experience. Out of the five researchers, one stayed in the organisation. We then brought in three mid-level researchers with master degrees in public policy and PhDs from top foreign universities – and lots of growth potential.

This was a necessary move: our team had to be autonomous. Our Board continues to be a fantastic “cover letter” for our think tank, and they are crucial in providing the strategic direction of our projects and in ensuring the quality of our work. But once a funder opens their doors we must be able to respond rapidly.

This change also demanded a greater investment. Although our new team is smaller, it is made up of more senior researchers, who are more expensive. We also raised significantly less funds in 2016, which meant that we relied heavily on our reserves which we knew would not last for much longer.

EM: How convinced were you that this reform would work?

GG: At the time, we knew this was a chance we had to take. If we did not do this, it was evident we were not going to survive.

As an executive director, it was very difficult to convince the Board of the new business model. The idea of bringing in a more intellectually autonomous team made some of them slightly nervous. I explained to them that we needed a team who could stand before donors in their own right- not as the assistants of someone who did not have time to show up. We also needed researchers who could represent the organisation.

EM: How bad was the situation? Many think tanks face a similar challenge to what Espacio Público experienced, but they stick to their business model. Could you have remained as before?

GG: The core funding we received in 2013 was a godsend. Some Board members felt that more funding like this would come along again. By 2015 we realised this had been a one-off, so we agreed that change was necessary.

We might have been able to continue operating on our reserves, but they would not have lasted more than two years. The agreement with the funder to support us with decreasing funds each year allowed us to avoid a sudden drop in funding, which would have been too shocking for us.

EM: Who developed the arguments to convince the Board (and staff) of the need for change?

GG: As the executive director, I put the issue on the agenda. But this was a long process. The analysis of the context took time and was made jointly with the team, which is an extraordinary group of very creative and committed professionals. I had multiple discussions with the Board. I pushed it forward, but with the team’s support.

EM: Is this the end for core funding for Espacio Público?

GG: No. We continue to seek out and discuss opportunities with funders but this has not yet materialised.

I am also involved in a bit of an ‘education’ project on better funding for think tanks. The limitations often imposed on projects can have negative effects on the organisations themselves.

What we also realised is that, for middle income countries, funding must come from domestic sources. It would be unconceivable that funding for a think tank in Spain came only from abroad. Chile is not Spain, but we are also not a low-income country from sub-Saharan Africa or Latin America. From a donor’s perspective, our funding context is closer to Spain’s. With this in mind, this year we want to increase domestic funding from 10% to 30%.

EM: This is great. Domestic funding is much better for think tanks than foreign funding. You tend to have a much greater space for negotiation with domestic funders than with foreign ones. +

In the new model, is there a change in the responsibility for raising funds within the organisation?

GG: This is a very interesting issue. It was discussed with the Board. My proposal was that each researcher should have a target. Their view was that this was their responsibility as Board members (and senior researchers). Upon reflection it became clear that fundraising, or ‘business development’ under the new model, was not something they would be able to undertake on top of their responsibilities within and outside the organisation.

They finally agreed to establish two targets: one per researcher and one for a point person responsible for coordinating all fundraising efforts. Last year we presented 32 proposals-about three proposals per month. This was made possible by the close collaboration of our director of international relations and the researchers.

EM: And out of the 32, how many were successful?

GG: Of those 32, 15 were successful, which isn’t bad. But it must be said that while almost half of the proposals were approved, they were worth only around 29% of the total amount we applied for. We got the smaller projects and missed out on the larger ones.

This is, of course, a learning process and there is no reason why we may not win those larger funds as our model evolves.

EM: Did you have a director of international relations before the change?

GG: We had the role before but it wasn’t working as it is now. Before she was the only person responsible for fundraising. Researchers, who were much younger and inexperienced, did not share the responsibility and therefore did not necessarily collaborate.

By changing the profile of the researchers and sharing the target responsibility we have strengthened this role.

EM: This reform suggests that Espacio Público had to upgrade its systems and processes, too. Besides funding responsibilities and sources and the composition of the research team, what other changes were necessary?

GG: The reform we underwent also demanded change in the way we manage staff, projects and our finances. Whether we call them consultancies or not, the projects we deliver and our back-office look like those of a consultancy (we have timesheets, streamlines budgets, costs-cards for various activities, etc.). We need them to deliver high quality services to our funders and stakeholders.

This investment in management- this professionalization- is also a central part of our story of change.

EM: How do you assess the success of this process?

GG: Success does not mean that the organisation might double in size. Our success is in our sustainability. At the last Board meeting we realised that the team is more relaxed now than it was a year ago. We are still small, but we are in a much better position than before.

EM: This is a truly remarkable reform. In three years, Espacio Público managed to change its business model 1800. Of course, the circumstances every think tank faces are unique but there are still lessons that can be learned from this effort and applied by other think tanks.  What lessons do you take from this effort?

GG: First, core funding and project based funding involve two different worlds. While Espacio Público has not changed from the outside, it is entirely different from within.

Second, and this might be harsh, when change is necessary you must do it, even if it involves firing people. The details of this process depend on each organisation and the kind of contracts they have with their team members. Our researchers had contracts and we paid them what they were entitled to according to these contracts.

Third, learn along the way. We tested the model. We had a junior team. We first brought in a senior researcher who did not fit in the new model. We then opted for mid-level researchers: top degrees and some experience, but more room for growth. This had better results. Of course, in a think tank, the team is crucial, and after that trial and error process, we now have an amazing team that is really well suited for these challenges.

Fourth, plan. Ideally, organisations should plan for change before they reach the edge of the precipice.

Fifth, include your current funders in the discussion. Many think tanks keep their funders in the dark about their financial health because they worry that any sign of concern may risk their current support. However, by involving them, funders are likely to increase their confidence in their grantee and its leadership and, when possible, offer useful advice.

EM: Are there any limits to the model?

GG: We are much stronger financially and as an organisation, but we are also aware of a loss of autonomy to choose our agenda. We recognise that we have to negotiate on a project by project basis to defend and support, as best as we can, our own agenda.

Domestic funding may offer us a chance to compensate this new challenge. It offers greater opportunities to develop our own agenda in the long run.

Watch this webinar led by Guillermo: