NESsT Case Study 16: Vydra (Slovakia) by NESsT

Nonprofit Enterprise and Self-sustainability Team (NESsT)

NESsT Case Study Series

Slovakia December 2006

English

Vydra:

Outsourcing Social Enterprise Management to Maximize Mission Impact

A case study by the William Davidson Institute at the Ross School of Business, University of Michigan (WDI)

In cooperation with NESsT and Vydra.

Social Enterprise Summary NESsT Venture Fund Portfolio Member Since: 2001 Sector: Environmental conservation, rural development and employment Social Enterprise Activity: Outdoors tourism and tourist services Target Percentage of Budget from Self-financing: 10%

This case study was made possible thanks to the generous support of the United States Agency for International Development (USAID) Office of Private Voluntary Cooperation, Bureau for Democracy, Conflict and Humanitarian Assistance.

Vydra Outsourcing to Maximize Mission Impact Slovakia

2 1

The term Civil Society Organization (CSO) is used herein to refer to the wide diversity of formally registered nonprofit, non-state organizations as well as community-based associations and groups which fall outside the sphere of the government and business sectors. Microregion is a statistical category, which includes 5-6 communities in close vicinity. The number of communities included in a microregion depends on their size, i.e. the number of inhabitants. Please see a detailed definition in the “Selffinancing and Social Enterprise” section.

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Executive Summary Vydra is a civil society organization (CSO)1 established in 1997 in Slovakia. Its mission is to preserve local traditions and culture and to support the sustainable development of Microregion Cierny Hron2 in rural Slovakia. Vydra’s Rural Tourism Program is designed to enhance environmental awareness, encourage tourism, create local employment opportunities, and sustain Vydra’s operations through self-financing activities such as the sale of travel packages, food, and souvenirs to visitors. In 2003, Vydra decided to launch an additional social enterprise3, a snack bar to sell refreshments and food typical of the region. The snack bar would cater to tourists in the Vydrovo Valley, at the end of the historic Ciernohronska Railway line and adjacent to an open-air Forestry Museum. The social goal of the enterprise was to provide job opportunities for local residents, business opportunities for local suppliers and increase the inflow of tourists to the region. Financially, the social enterprise aimed to provide untied revenues for the organization. Vydra received business planning support from the Nonprofit Enterprise and Selfsustainability Team (NESsT)) for the development of this enterprise idea and later, financial and capacity-building support for launching and running the snack bar. NESsT is an international nonprofit organization that works to strengthen the financial sustainability and mission impact of CSOs. Through the NESsT Venture Fund (NVF), it manages a portfolio of high-impact social enterprises owned and operated by CSOs. With a very strong business plan in place, Vydra launched the enterprise in 2003. As operational challenges arose, Vydra worked closely with NESsT to address them in a timely manner. During the following season, the organization was better positioned to manage the complex operations of a food business. However, due to several factors, by the end of 2004, Vydra questioned whether to continue managing the snack bar. Day to day operational challenges continued to pose capacity and time challenges to Vydra staff. The snack bar earned profits in both seasons but they were far below projections. Also, it was clear that Vydra’s organizational budget would be significantly reduced as several program grants were ending and staff would need to be laid off. Finally, the departure of the founding executive director required Vydra redirect energy to managing a leadership transition. As a result, Vydra decided to rent out the snack to a local entrepreneur who would provide the same services to tourists. The rental agreement was a good compromise for Vydra as it allowed for steady rental income while continuing to meet important mission goals. This study shows the power of social enterprise to meet mission goals but also demonstrates the degree of difficulty in managing such an enterprise. The Vydra case specifically shows these challenges during the implementation of the enterprise, obstacles the organization faced despite having a very detailed DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

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Vydra Outsourcing to Maximize Mission Impact Slovakia

business plan. Further it highlights the value of receiving the ongoing and tailored support provided by the NVF. In the case of Vydra this became particularly evident when the need to make informed decisions and significant changes in its business model arose.

Section A. Background A.1. Country Overview As a relatively new independent state in Central Europe, the people in todayâ&#x20AC;&#x2122;s Slovak Republic have lived through a turbulent past, having been part of various empires and states in the last few centuries of the Austro-Hungarian Monarchy. The precursor to todayâ&#x20AC;&#x2122;s state was the independent republic of Czechoslovakia, created in 1920 from the previously Austria-Hungary controlled Bohemia, Moravia and Slovakia. After World War II, the country fell under the political influence of the Soviet Union together with its Central and Eastern European neighbors, which resulted in a communist regime that lasted for over 40 years. With the collapse of Soviet Union in 1989, Czechoslovakia regained its political independence. In 1993, a few years later, the country peacefully split in two, creating the independent democratic states of the Czech and Slovak Republics. Slovakia became a democracy, where the 150-member Parliament is elected for a four year team. The country joined NATO and the European Union (EU) in 2004. Slovakia has also experienced an economic transition, and has become an open market economy in the heart of Europe, with a population of 5.4 million and GDP per capita reaching US$ 15,745 in 20054. It has been characterized by steady growth of GDP and increasing foreign direct investment in 2001-2005, while the unemployment rate has fallen from around 18% in 2000 to an estimated 11-12% in 20055, a level which is nonetheless still considered high both in Slovakia and the European Union. A.2. Nonprofit Sector in Slovakia Slovakia has a vibrant and dynamic nonprofit sector, which covers a wide range of issues including advocacy, environmental protection, and education. Civil society organizations are becoming more professionalized and are, in general, wellequipped with the necessary human and physical infrastructure. There is a wide range of services offered by CSO support centers or umbrella organizations, such as Partners for Democratic Change Slovakia or the First Slovak Nonprofit Service Center. The number of nonprofit organizations officially registered with the Ministry of Interior was 27,100 at the end of December 2005, over 90% of these being civic associations.6 While this is a growing number compared to previous years, many organizations were forced to reduce their activities and staff in 2005 due to increasing funding constraints, mostly resulting from the withdrawal of foreign donors. This especially affected advocacy and watchdog CSOs, as they cannot accept funding from the state and have limited capacities to generate their own revenue.

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3 4

The Economist Intelligence Unit (EIU) estimate; purchasing power parity.

EIU.

Freedom House, Nations in Transit 2006, Slovakia p. 9.

Vydra Outsourcing to Maximize Mission Impact Slovakia

Moore, David. Laws and Other Mechanisms for Promoting NGO Financial Sustainability. The 2004 NGO Sustainability Index for Central and Eastern Europe and Eurasia May 2005: 42-52.

The Section “Selffinancing and Social Enterprise” is drawn from multiple NESsT publications, www.nesst.org/publicati ons.

NESsT December 2006

According to the United States Agency for International Development (USAID) 2005 NGO Sustainability Index, financial viability is the weakest aspect of the Slovak nonprofit sector. Organizations are turning increasingly towards state and local government funding, as well as to the Cohesion Funds of the EU that became available in 2005. Many CSOs, however, experience major difficulties in accessing these funds due to lack of capacity, the need for co-financing (to obtain EU funding, CSOs have to cover up to 30-40% of the total project budget) and the reimbursement nature of the EU funds; most organizations are unable to cover project costs upfront and bridge the financing gap until the EU grant arrives. This encourages CSOs to look for other alternatives, such as corporate or individual donations or self-generated revenue. Corporate and individual philanthropy is underdeveloped in Slovakia, like in all countries of the region, and legislation does not encourage giving as it provides no tax incentives. There is, however, legislation known as the two percent law which although voluntary and not a tax incentive does allow individuals and companies to designate up to two percent of their income tax for charitable purposes. According to estimates, in 2004 more than EUR 22,000,000 was allocated to CSOs in Slovakia as a direct result of the “percentage philanthropy” law.7 Slovakia is unique in the region by including corporate income tax in its percentage law, and thus allowing large amounts of money to be designated for philanthropic purposes. However, this also allows companies to set up their own foundations and use the designated funds for their own public relations or pet projects. CSOs use various forms of self-financing in Slovakia. There are many successful examples of CSOs running social enterprises, which generate significant revenue for the organizations. However, this is still far from being a wide-spread practice. CSOs in Slovakia could gain higher acceptance and legitimacy among the public through better communication of their achievements and increased transparency. The annual campaigns of CSOs to obtain the 2% designations help to increase visibility of individual organizations as well as that of the sector in general. A.3. Self-financing and Social Enterprise8 The terms “self-financing activities,” “social enterprise activities,” and simply “enterprise activities” are used to refer to various CSO revenue-generating strategies. Self-financing activities include fees for services, product sales, use of hard assets, use of soft assets, membership dues, and investment dividends and are used by CSOs to generate revenues to supplement external donor funding. The terms “social entrepreneur” and “social enterprise” have been used in a range of contexts and may refer to individuals or entities that pursue social change through earned income or business activities or simply to individuals or entities that use innovative methods to advance social change but that are not necessarily generating revenues. In its work, NESsT uses the former definition of social enterprise, but specifies that a social enterprise is a planned activity that has a high potential for advancing social change and generating untied revenues for the organization. DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

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Vydra Outsourcing to Maximize Mission Impact Slovakia

Table I summarizes the different self-financing strategies for earning income. In the case of Vydra, they have adopted several of the available strategies (see details in next section). It is important to remember, however, that no one self-financing or social enterprise strategy is the “right” model. Each model has its place. The applicability of each is context-specific and sometimes more than one can be used. Table I: Types of Self-financing Strategies - Fees for services: contracting work for paying clients in the public or private sector (e.g., providing consultation services to businesses or local government); - Product sales: selling the products of a project (e.g., books or publications), reselling products (e.g., in-kind donated items) at a marked-up price, or producing and selling new products (e.g., T-shirts, handicrafts); - Use of “hard” assets: renting out real estate, equipment, or other physical resources when not in use for mission-related activities; - Use of “soft” assets: generating income from patents through licensing agreements or by endorsing products with the CSO name or reputation; - Membership dues: raising income by collecting dues from members or constituents of the organization in exchange for some product, service, or other benefit (e.g., a newsletter, a magazine, or discounts on CSO products or services); - Investment dividends: earning income from investments either passively, through interest from savings accounts or mutual funds, or actively, by trading on the stock market or engaging in debt swaps.

Taken from Lee Davis, Nicole Etchart, Brian Milder and Cecilia Jara, Risky Business: The Impacts of Merging Mission and Market, NESsT, Santiago, 2003, page 22.

Moreover, the business that the nonprofit engages in does not necessarily need to be central to the organization’s mission. See Table II for a spectrum of product or service /customer relevance to organizational mission.

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Vydra Outsourcing to Maximize Mission Impact Slovakia

Freedom House, Nations in Transit 2006, Slovakia p. 9.

11 Food and Agriculture Organization of the United Nations http://www.fao.org/es/ES S/compendium_2005/pdf/ ESS_SLO.pdf.

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Table II: Spectrum of CSO Self-Financing Activities <RELATED

10 A related business activity is one that is not defined in the organization’s statutes as its primary purpose, but is necessary in order for the organizations’ statutory activities to be carried out.

NESsT

CSO MISSION

UNRELATED

CSO MISSION>

New Product/ Service Existing Customers

Existing Product/Service New Customers

New Product/ Service New Customers

Program Activities

Existing Product/Service Existing Customers

Services specified in the CSO charter, bylaws, mission

Earned income directly from the CSO’s program activities

New products/services offered to the existing CSO constituents

Extension of the mission-related activities of the CSO to new paying clients

New product/service to new paying customers (unrelated/ancillary business activities)

Example:

Environmental Education CSO offers public education seminars and publications

Environmental Education CSO charges fees for its educational seminars and charges for its publications

Environmental Education CSO opens vegetarian restaurant and environmental products shop

Environmental Education CSO offers cleaner technology seminars/ consulting to businesses

Environmental Education CSO opens Internet website design studio

Taken from Lee Davis, Nicole Etchart, Brian Milder and Cecilia Jara, Get Ready, Get Set…Starting Down the Road Toward Self-financing, NESsT, Santiago, 2004, Guidebook, page 19.

A.4. Legal and Regulatory Environment for Self-financing and Social Enterprise in Slovakia The legal environment for nonprofit organizations continues to be free of state pressures and controls. No significant change has taken place since basic legislation was enacted after the regime change in the early 1990s. Registration of CSOs is simple and most organizations now include economic activities in their statutes.9 Nonprofit organizations, with the exception of foundations and noninvestment funds, are allowed to engage in economic activities, as long as they use the proceeds to further their statutory activities. Nonprofit organizations enjoy favorable tax laws in general, and are exempt from income tax and tax on gifts. Income from mission-related business activities10 is exempt from the 19% income tax up to SKK 300,000 (approx. USD 10,215 or EUR 8,200 based on 2006 exchange rates), if a) the business activity is not conducted with an unfair price advantage over for-profit entities, and b) the income is proportionate to costs. The determination of proportionality is made by comparing the ratio of income to costs of this economic activity to the income/cost ratios of “other entities.” A.5. Environmental Protection and Regional Development Forty-three percent of the Slovak population lives in rural areas11, where unemployment rates are higher and living standards lower than the average. The Banska Bystrica region, where Vydra is located, is classified as significantly rural, with population over 50% living outside of cities.

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Vydra Outsourcing to Maximize Mission Impact Slovakia

Forty percent of the territory of Slovakia is occupied by forests12. Efforts to protect the environment started as early as the end of the 19th century, when the first protected area was declared. After establishing the first Tatra National Park (Tatranskv narodnv park TANAP) in the High Tatras in 1949, and following the law on nature conservation in 1955, more protected landscape areas and other national parks began to be created. Today, there are five national parks, which represent four percent of Slovakia’s territory. The overall acreage of the protected areas and their protection zones represents 28% of Slovakia’s territory.13 The Slovak Environmental Agency, established in 1993 by the Ministry for Environment, is responsible for environmental protection and landscape planning in accordance with the principles of sustainable development. The protection of Slovakia’s natural and cultural heritage has become a priority for the government in the past two to three years, which combines this aim with that of enhancing economic development in rural areas. The Sectoral Operational Program for Agriculture and Rural Development14 names the improvement of the quality of life of the rural population as one of its three objectives and puts emphasis in environmental sustainability and sustainable forest management. The Sectoral Operational Program for Industry and Services (November 2003) considers tourism to be the most promising sector of development, with multiplying effects in other sectors. Tourism and related services accounted for seven percent of GDP in 2003 and are expected to contribute to growth by creating synergies between transportation, forestry, culture and environment.15 The policies set by the government include the creation of support mechanisms for small and medium size enterprises and for networks and links between various institutions in the tourism and related services sectors. Although these policies were supportive of Vydra’s work and offered important funding opportunities in its early years, there have been few resources available in the past few years. In fact, 2005 and especially 2006 have been difficult years in terms of regional development programs, as the budgets did not include resources in support of the above cited policies. Regional and rural development will again become a priority in the next 2007-2013 budget cycle, which has allocated resources for this purpose.

Section B. Vydra B.1. History, Mission and Objectives Vydra was established in 1997 as a non-governmental, nonprofit organization whose mission is the preservation of the traditional, cultural and natural heritage and the sustainable development of the Microregion Cierny Hron in rural Slovakia. The organization is located in Cierny Balog, a small village with approximately 5,100 inhabitants located in the center of the microregion, adjacent to the Vydrovo Valley, the geographic focus of Vydra’s activities. It is only six kilometers away from the national nature reserve Dobroc, one of the oldest protected areas in Slovakia with exceptional wildlife in its virgin forest.

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7 12 National Forest Center Slovakia, http://www.nlcsk.org info-o-lesoch.htm. 13 http://www.fris.sk/en/lesy o-lesoch/zakl fakty/nature.htm. 14 Ministry of Construction and Regional Development of Slovak Republic, www.build.gov.sk. 15 Ministry of Construction and Regional Development of Slovak Republic, www.build.gov.sk.

Vydra Outsourcing to Maximize Mission Impact Slovakia

16 Although Vydra means “otter” in Slovak, the name also comes from the Slovak term for rural development activity vidiecka rozvojova aktivita.

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Vydra has its origins in the Tree of Life voluntary organization, a youth movement, which was formed at the end of the 1980s to save the dismantling of the historic Ciernohronská Railway (CHZ). The narrow gauge railway running through Cierny Balog dates back to 1908 and was originally built to transport timber from the dense forests of central Slovakia. Visitors to the region can now arrive by road or, between May 1st – September 15th, take the train from Bratislava to Chvatimech to enjoy a 14 kilometer ride on the historic CHZ line. Visitors can also explore the open-air Forestry Museum in the Vydrovo Valley, which offers a three kilometer educational walking path with 48 stops to read and learn about the forest and the different types of wood. In addition to the preservation and maintenance of the railway, Tree of Life in Cierny Balog developed summer camps, workshops, and weekend meetings to facilitate environmental education of the general public, especially children and youth. In 1997 the founders of the Tree of Life - Cierny Balog Branch decided to close the Branch and establish a new, local membership association named Vydra. 16 It is managed by the Executive Director, who is appointed by the Administration Board; the Board in turn is elected for indefinite term by the highest entity of the association, the General Assembly.

A hiking trail and footbridge in the Vydrovo Valley.

Through its programs and projects during its nine year history, Vydra has demonstrated how a rural community can make the most of local assets to generate positive impact and create sustainable livelihoods. At the center of its philosophy has been partnership with local actors, such as municipalities, entrepreneurs, the forest and railway companies and other CSOs. Vydra currently has two main programs, and in the past had two additional programs that are no longer active: -

Volunteer Program and Summer Camps (current) Regional Development and Rural Tourism (current) Community Development Program (past) Consulting and Information Services (past)

The Volunteer Program and Summer Camp focuses on nature conservation and includes weekend events, seminars, workshops and an environmental education summer camp for children and youth every July and August. The volunteer program is the oldest program, which is a direct continuation of the movement started by the Tree of Life and engages between 50 and 180 volunteers each year to prepare, run, and close up all summer camp activities for children. Regional Development and Rural Tourism has become Vydra’s most dynamic and growing program, which now provides the context for all Vydra activities and also DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

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Vydra Outsourcing to Maximize Mission Impact Slovakia

the opportunities for the development of social enterprises. The main pillars of this program are partnership, entrepreneurship and environmental sustainability. Vydra believes that tourism can create sustainable development in small communities linked by the railway in the region, since it encourages development of small enterprises such as restaurants, hotels, as well as the production and sale of arts and crafts as souvenirs. As a result, Vydraâ&#x20AC;&#x2122;s first activity in this program was to set up and operate tourist information offices along the railway line and in Vydrovo Valley; these information offices also sell postcards, local crafts and other souvenirs. Since the year 2000, Vydra has built a solid partnership with several local partners in order to turn the rural tourism program into a long-term strategy for Cierny Hron: Vydra now shares ideas, resources and responsibilities with CHZ, the Forest Company of the Slovak Republic and the municipality of Cierny Balog. The CHZ wished to extend the railroad to the Vydrovo Valley but it needed to have a destination for passengers. At the same time, the Forest Company of the Slovak Republic indicated that it wanted to build an open air museum near the railway stop to educate visitors about the forest as well as to help preserve the nearby Dobroc virgin forest by diverting visitors to the open air museum. The municipality needed help to create opportunities for economic development, which could attract more resources to Cierny Balog. Thus these interests converged, to form the Rural Tourism Partnership, initiated and held together by Vydra. As the fourth member of the partnership, Vydra became responsible for the coordination of the implementation of the tourist package. According to the representative of the Forest Company, the division of labor established in the partnership agreement is beneficial for everyone, and helps to reach out to people and obtain resources outside the scope of their own missions and activities.17 The Community Development program (1998-2002) started out as workshops for women in Cierny Balog, offering cooking classes, hygiene classes, a childrenâ&#x20AC;&#x2122;s program, and activities for minority groups such as the Roma population. It was the first program in Slovakia to help Roma children in basic schools through assistance provided by a Roma government employee, and it became a model for similar state-run programs. The Community Development Program eventually spun off into a separate Community Center in 2001, where Vydra holds two seats on the Board of Directors. Vydra also provided micro grants for local groups to start small businesses and improve the local environment, a program that is now subsidized by the local municipality. Through the Consulting and Information Service program, Vydra responded to the increasing demand for business development services. The organization provided assistance to locals who wanted to start their own businesses, but lacked the necessary information and skills. The services offered included writing business plans and completing grant proposals and bank loan applications. Vydra believed that by encouraging and aiding entrepreneurship, they would contribute to the development of a sustainable local economy. This program was slowly phased out as Vydra focused attention on other program and self-financing priorities. DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

17 Interview with Boris P. from the Forest of the Slovak Republic on April 6, 2006.

Vydra Outsourcing to Maximize Mission Impact Slovakia

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Vydra also works in partnership with other CSOs in the region. Vydra has been acting as the coordinator for various rural tourism activities, known together initially as “Strolling in the Hills” in conjunction with two local CSOs that promote bicycling activities and horseback-riding in the region. The project took off in 2003 and Vydra plays the role of the tour operator, allocating one of its staff members to be the coordinator for clients and partners. B.2. Social Enterprise Development and Operations Vydra has focused on sustainability since its inception and set a goal to increase the amount of self-financing revenues and maintain it at 50% of total organizational revenues by 2006. Vydra utilizes several self-financing methods, including membership dues, fees for services and product sales to support its mission and to sustain its operations. Over the past few years, Vydra has instituted an annual membership fee of SKK 100 (USD 3.40; EUR 2.71) paid by Vydra’s members. Vydra charges families to attend summer camp, it charges admission to annual cultural events in Cierny Balog; and sells postcards, regional crafts, and other tourist trinkets in tourist information offices managed by the organization. In 2001, Vydra approached NESsT seeking support for a strategy intended to encourage tourism, create local employment, increase the organization’s portion of self-financing and sustain the operations in the Vydrovo Valley. The plan included a sit-down restaurant offering traditional Slovak recipes to tourists, as well as the expansion of other educational and environmental activities such events on an openair stage, environmental education programs for schools, and recreation areas for tourists. The plan was based on Vydra’ s initial research, which indicated that tourists in Vydrovo Valley wanted better restaurant services, specifically offering food from the region. Vydra believed that a food service operation aligned well with its mission since it would directly contribute to the region by hiring area residents and buying supplies and food from local vendors. In addition, the organization hoped that this operation would attract more tourists to the valley. B.2.1. NESsT and the NESsT Venture Fund NESsT operates the NESsT Venture Fund (NVF), a venture philanthropy fund which provides both technical and financial assistance (on a case by case basis) to CSOs in Central Europe and Latin America to plan, launch, and develop their social enterprises. Social enterprises developed and supported through the NVF should demonstrate potential to be innovative models that can be replicated for maximum impact. The NVF is designed to demonstrate that: - CSOs can strengthen their organizational sustainability and mission impact through social enterprise. - Through a careful and well-planned enterprise development process, CSOs can reduce the risks of social enterprise and increase their chances of success. - Funders can play an important role in supporting CSO financial sustainability. DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

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NESsT uses the experiences and lessons of the NVF portfolio members to drive the development of the field by providing role models, replicable case studies and best practices. The process consists of two distinct, sequential stages: Stage 1: NVF Early Stage Portfolio (feasibility of the social enterprise idea) During five to seven months of intense cooperative work, NESsT provides ongoing technical assistance and consulting advice to guide CSOs through the evaluation of their prospective social enterprises. The amount of assistance provided is approximately 30 days of consulting. CSOs are provided with tools and training in organizational readiness for social enterprise, business plan development and sustainability planning. This assistance both helps to professionalize the CSO, and to evaluate the feasibility of the proposed enterprise. Each step in the process builds upon the previous one to deepen the level of analysis culminating with the development of a business plan. CSOs are expected to take the initiative to push the process along and are assessed at the end of each stage to determine if they will advance to the next. Stage 2: NVF Later Stage Portfolio (launch and implementation of the social enterprise) Organizations that are selected to join the NVF later stage portfolio receive tailored multi-year (three to five years) support combining strategic, managerial, and financial support from NESsT and its collaborating team of business experts and partner institutions. The amount of technical and financial assistance provided by the NVF to later stage portfolio varies according to the needs of each organization and depends on the levels of human and financial resources available by NESsT each year, but tend to average 30 days per year. Typical amounts of financial support range from USD 1,000-10,000, with an average of USD 5,000. NESsT works with each portfolio organization to ensure that it meets the enterprise development, social change impact, institutional development and financial sustainability goals established in the planning process. Over the period of time that CSOs are in the NVF, portfolio members develop the ability to operate their enterprises independently and in a sustainable manner. At both early and later stages, NESsT is assisted by members of its Business Advisory Network, who offer their knowledge and skills on a pro bono basis to members of the NVF.18 In 2002, using the NESsT feasibility study template and tools, Vydra completed a full feasibility study for the proposed restaurant. The investment committee composed of NESsT staff and local business advisors recommended that Vydra revise its ambitious and potentially risky plan to build a restaurant in Vydrovo Valley, citing concerns about Vydraâ&#x20AC;&#x2122;s internal capacity to manage a restaurant, as well as whether or not a sufficient number of customers would travel to the location to warrant a sit-down restaurant with wait staff. Vydra revised its strategy and scaled down the project to a self-service snack bar located in Cierny Balog but maintained its original plan for serving local fare, providing employment to surrounding residents, and increasing the flow of tourists to this economically disadvantaged rural area. DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

11 18 Network of businesses and business professionals who donate their time to support the NESsT Venture Fund portfolio and that in some instances make investments in portfolio organizations for a social return.

Vydra Outsourcing to Maximize Mission Impact Slovakia

NESsT December 2006

Following the successful presentation of the snack bar feasibility study to NESsT staff and members of the Business Advisory Network, in 2002 NESsT provided Vydra with a venture planning grant of US$ 1,000 and further capacity-building support to develop a full business plan for the snack bar. The business plan was completed in March of 2003 and included detailed descriptions of operational systems for the enterprise; identified a prime location for the snack bar and called for offering packaged snack foods such as sandwiches and pastries rather than elaborate meals â&#x20AC;&#x201C; all changes that made the snack bar more accessible and suitable for the target market and more manageable for Vydra. The social goals of the enterprise were the following: - preservation of regional cultural and culinary traditions; - preservation of the environment by guiding tourists along the educational path; - enhancement of environmental education; - contribution to the sustainable development of the microregion and to the community development of Cierny Balog through tourism activities, by providing jobs to domestic producers and local firms; - strengthening of professional cooperation with the CHZ and improved conditions for volunteers. Vydraâ&#x20AC;&#x2DC;s financial goal for the enterprise was to reach net profit of SKK 137,000 (approx. USD 4,872; EUR 4,300) by 2007, which would enable the organization to further reduce its dependency on donations and grants, and increase the amount of unrestricted revenue. This strategy was approved by the BAC and Vydra was invited to join the NESsT Venture Fund later stage portfolio in 2003. As a member of the portfolio, Vydra received a US$10,000 investment in 2003 to develop the snack bar, and construction was completed in June 2003, just in time for the opening of the season on May 1st. Vydra enjoyed a relatively successful first year of operations, although profits were under projections, due to a shorter season and a lower than expected average spending per purchase at the snack bar: 2003

Goals

Actuals

Social enterprise financial performance

Planned revenues SKK 492,600 (USD 17,515)

SKK 440,749 (USD 15,670) SKK 11,315 (USD 400)

Planned net income SKK 38,960 (USD 1,385) Exchange rate to the US$: 36.768 SKK

One of the main goals for 2004 was to increase revenues by providing cooked meals, which would increase visitor spending and be more profitable than selling just sandwiches and pastry. In order to do this and to address building code requirements, Vydra decided to build a water pipeline in 2004. The organization received US$ 9,700 in 2004 from NESsT for this additional construction at the site. The pipeline took approximately 18 months for approvals and certification DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

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Vydra Outsourcing to Maximize Mission Impact Slovakia

and was completed after the end of the 2004 season, hampering Vydra’s ability to meet the expected income projections for the snack bar for the year. Exchange rate to the US$: 32.29 SKK

2004

Goals

Actuals

Social enterprise financial performance

Planned revenues SKK 675,000 (USD 26,370)

SKK 77,046 (USD 22,550) SKK 24,268 (USD 950)

Planned net income SKK 147,825 (USD 5,775)

Due to the delay of the water pipeline and an unusually cool summer, the snack bar generated significantly less income than projected in 2004. In addition, costs were proportionately higher in this second year because significantly more money was allocated to wages and the cost of goods sold was increased based on experience from the previous year. By the end of the second season, information and feedback from Vydra staff to management indicated that it was becoming very hard to operate the snack bar. It was very challenging to meet logistical requirements, such as purchasing food products that expire, serving visitors and monitoring customer satisfaction, let alone the myriad of details associated with infrastructure construction.

Section C. Management Challenge – Facing Operational Problems of the Snack Bar The day to day operations of running a snack bar proved to be significantly challenging for Vydra. The staff and volunteer team had limited capacity (time, experience and skills) to run a food service business. - The business plan budgeted staff, volunteer and management time for the snack bar, but the team felt that they had underestimated the time that they had to invest in everyday management and running of the snack bar. Most things took longer than expected and additional team members were needed to help out. Oftentimes there were not enough staff to meet all customer needs at the snack bar. - The team was unable to accurately plan the timing and amount of beverage and food supply orders from a variety of suppliers. Orders were seldom on time and too large This affected the variety of fresh bakery products and resulted in a great deal of waste during the first season as expired products had to be thrown away (up to 30% of certain types of pastries, for example). - Vydra underestimated regular operating costs and so did not budget for any janitorial services and under-budgeted utility consumption by 25% and goods and materials by more than 30% in 2003. - Queues and waiting times were long: it took a long time for customers to get their food and drink. The problem was two-fold: 1) lack of procedures as to which member of the service staff should do what and in what order, DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

Vydra’s snack bar on a snowy day.

Vydra Outsourcing to Maximize Mission Impact Slovakia

19 NESsT Venture Fund portfolio members use the Performance Management Tool (PMT) developed by NESsT to manage and measure the impact of their social enterprises. The PMT helps enterprises develop and monitor their social and financial goals and indicators in four areas: enterprise performance, social change impact, institutional development and financial sustainability.

NESsT December 2006

as they were serving customers, 2) the size of the window and counter was too small to allow serving several people at the same time. This slowed service down considerably. The layout of the Vydrovo Valley complex presented challenges for selling products of the snack bar: although the train stopped right in front of the building, people who went on to the educational trail or watched performances on the open-air stage were not always willing to walk back to the wooden house where the snack bar was located. The customer area of the snack bar was all open air, it did not have a roof, so rain or even occasional showers meant that people got wet or sought shelter elsewhere and did not return Vydra had difficulties monitoring customer numbers and customer satisfaction, as there were no mechanisms in place to count how many visitors went to Vydrovo Valley and how many of those actually bought a drink or some food at the snack bar. The cash register showed the number of purchases and the value of each, but gave no indication of the number of customers. There was no planned way to ask or survey visitors about their satisfaction with the services of the snack bar. There was only a small notebook for customers’ comments and requests available near the cashier. The building and licensing of the water pipeline took a lot longer than expected, which meant that it was not ready for the second season. This annulled all hopes for offering cooked meals, which would have higher profit margins

The above operational challenges led to lower then expected revenues and increased costs, which reduced the profit generated by the enterprise. Although the snack bar was generating approximately 10% of the organization’s total revenue in 2003-2004, it was still significantly under revenue goals (see above revenue charts). Vydra’s Responses to the Challenges Obvious problems and issues raised by customers that did not require a great deal of investment or time, were dealt with immediately and rather swiftly. Vydra staff was on the ground all summer and was sensitive to visitors’ comments and observations. At the same time, rigorous monthly tracking of key indicators, such as revenues and costs, which had been established using the NESsT Performance Management Tool (PMT)19, allowed Vydra to take corrective action already during the first season. Speeding up the service process: - In order to put an end to the initial chaos among staff serving, new procedures were implemented soon after the first few difficult days, in which tasks and individual steps of the selling process were described and allocated to each person. This way, for example, some people only filled glasses, while others only handled money at the cash register. - A new idea to reduce queues and reach customers in other parts of the valley was to introduce mobile sales people, who were Vydra volunteers with a basket in their hands, who constantly walked around the area and DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

NESsT December 2006

Vydra Outsourcing to Maximize Mission Impact Slovakia

sold the products they carried. This of course, presented two additional operational issues: namely that of handling and tracking money and the need for more volunteers. The changing availability of volunteers prevented the mobile vendor idea from becoming a permanent solution. Use of new ideas or expertise: - When planning the enterprise and coming up with target figures for visitor numbers, Vydra realized that it needed to be able to monitor those figures to see how many of the visitors would also become customers of the snack bar. Vydra turned to NESsT for advice on how to monitor customers. As a result, in 2004 Vydra introduced an entrance fee and ticket to Vydrovo Valley, which was sold at the train stop or the car park (parking lot), two main ways in which tourists arrived to the park. Tourists paid a symbolic amount and got a ticket in return. This way Vydra was able to count at the end of each day how many tickets were sold, i.e. how many visitors came to the area. - Regarding customer satisfaction, together with NESsT staff, Vydra designed a brief customer survey questionnaire, copies of which were laid out on the tables in front of the snack bar and on the counters. Customers were encouraged to fill in and return them to the staff in exchange for a little souvenir or present. Vydra used the findings to improve services. This was extremely important, as the information obtained from customers filled in the gaps that existed due to lack of experience in food services and customer service. - After the first season, revenue and cost estimates had to be revised and scenario analysis performed. Weather turned out to be a major factor influencing visitor numbers, and was taken into account. With NESsTâ&#x20AC;&#x2122;s assistance, Vydra revised the cost estimates for 2004 increasing line items such as cleaning, utilities or transport. At the same time, revenue projections were also revised, hoping for a higher average spending per visitor and higher visitor numbers, based on the positive effects of the water pipeline. A conservative scenario predicted that 40% of visitors to the area would make purchases at the snack bar, translating to revenues of SKK 675,000 (USD 23,000; EUR 18,355), total costs of SKK 492,500 (USD 16,770; EUR 13,380) and net (after tax) profit of SKK 147,825 (USD 5,030; EUR 4,015). This assumed 15,000 visitors and average purchase size of SKK 45 (USD 1.53; EUR 1.22). Additional time and financial investment: - The enlargement of the counter and window could not be fixed in the first season. This was an investment that required building remodeling that had to wait until after the closing of the 2003 season. A larger sales counter was subsequently constructed by the opening of the 2004 season. -

A second major investment and construction took place in early 2004: the completion of the water pipeline, which brought drinking water to Vydraâ&#x20AC;&#x2122;s snack bar. This decision was motivated by three factors: 1) Informal talks with customers which showed that people would welcome and buy simple cooked meals; 2) After the financial analysis of the first season, it became

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Vydra Outsourcing to Maximize Mission Impact Slovakia

NESsT December 2006

clear that sales should be focused on products with higher profit margins, if possible, even though some of the most popular products (e.g. beer) had the lowest margin. 3) If Vydra wanted to serve hot meals rather than just snacks, the organization was required by law to install a water pipe to provide mandatory toilet facilities with sinks for washing hands and taps for drinking water where prepared foods are sold. -

NESsT advised Vydra to draft a mini-feasibility study for this additional investment and explore, how the water pipeline would affect the revenues of the snack bar and how much would need to be invested for its construction. Vydra investigated the administrative and licensing requirements as well as funding needs and opportunities and presented the proposal to NESsT. NESsT assessed the feasibility study in terms of potential costs and benefits taking into account the current operational challenges faced by Vydra and the investment was approved. The construction project was financially supported by NESsT, the Forest Company as well as other donors. Future sales estimates showed handsome profits, a projected total of SKK 147,000 (USD 5,010; EUR 3,990), as a result of raising average purchase from SKK 36 (USD 1.22; EUR .98) to SKK 45 (USD 1.53; EUR 1.22) in 2004, and increased customer numbers.

An enlarged roof was added to the snack bar in 2005, once Vydra had the sufficient amount of money needed for its construction. Now it covers a large area in front of the house and allows for large size groups to sit and eat and drink, even when it rains.

Reorganization of work processes, added staff time and numbers: - The capacity that was required to run Vydraâ&#x20AC;&#x2122;s summer season activities, including the snack bar, was at its maximum by the end of the summer of 2003 and Vydraâ&#x20AC;&#x2122;s response to this challenge was to close the season two weeks, early. This would also mean two weeks of lost sales for the organization. This turned out to be quite significant according to the financial data of the first season. At the same time, the team felt that the benefit of running the snack bar for two more weeks while balancing mounting pressure from other programs and activities was not worth the costs. Volunteer availability drops at the end of the summer, so it was difficult to add more people. - Vydra considered hiring an additional, full-time permanent staff member to manage the snack bar, among other tasks, but the profitability of the enterprise was not enough to cover the salary. Volunteer availability drops at the end of the summer, while funding was insufficient to continue paying the wages of five seasonal workers. The above challenges and the tremendous efforts to respond to them slowly dampened the enthusiasm that existed at the beginning for the snack bar. Although many of the problems were eventually resolved and Vydra learned a great deal in the process, the team wondered at what price. Vydra did not want to see any long term diversion of resources from its programs to the social enterprise. The organization had been willing to spend more time on the launch DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

NESsT December 2006

Vydra Outsourcing to Maximize Mission Impact Slovakia

of the enterprise initially; but was not in a position to do so on a permanent basis. This was particularly so as the social enterprise was still not generating the projected profits. Though the organization realized that the recent investment of the water pipeline would yield higher returns in the coming seasons, Vydra lacked the financial latitude to continue managing the snack bar.

17 20 Interview with Ales B., Director of the CHZ on April 6, 2006.

Ultimately they decided to rent out the snack bar facility to a local businessperson for a flat annual rate during the 2005 season. Vydra would simply become the landlord and would not actively participate in the logistics of running the establishment. Vydra consulted NESsT, who first advised the organization not to rent out the snack bar, unless a good rental fee could be negotiated, service quality maintained and organizational reputation protected. Vydra was very determined to stay true to the mission goals of the social enterprise (see page 13 of this study), and vowed to create a contract which obliged the tenant to comply with all conditions required by these goals. At the same time, Vydra felt that the rental arrangement itself would further an additional mission goal by creating a business opportunity for a local entrepreneur and employment for his or her team. In the end, Vydra found a suitable local entrepreneur and rented out the snack bar for an annual fee of SKK 80,000 (USD 2,725; EUR 2,175), slightly less the amount that they had projected as their profit goal for 2005, SKK 111,600 (USD 3,800; EUR 3,035) but significantly less then their original goal of SKK 137,000 (approximately USD 4,900; EUR 4,300) for 2007 and their revised goal as a result of the water pipeline study of SKK 147,000 (USD 5,010; EUR 3,990for 2004. In terms of other financial obligations, Vydra would be responsible for paying for certain larger investments, such as building an additional roof while smaller improvements would be paid for by the entrepreneur. Given the fact that the snack bar was part of an integrated rural tourism program that involved other partners (the Railway and the Forest Company) in the Vydrovo Valley, the decision was not easy for Vydra. Handing over the management of the snack bar to a third party could potentially damage the reputation of the partners as well. Vydra had to face potential mission-related consequences of renting out the facility and losing the control of the employment of local people at the snack bar and the use of local ingredients from local suppliers. In addition, the food would have to continue to be of very high quality so that the customers would return. â&#x20AC;&#x153;Vydra is a nonprofit organization whose mission is community development. As a result, it will be concerned with the benefit of the valley as a whole and maintaining tourist satisfaction instead of focusing solely on profitability since Vydra [and the region] benefits by mission success more than it benefits from financial success. On the other hand, a private businessman is likely to consider the profitability of the operation exclusively, even if it is detrimental to the overall success of the valley developments.â&#x20AC;? 20

A group of visitors enjoys Vydraâ&#x20AC;&#x2122;s activities along its trails.

DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

Vydra Outsourcing to Maximize Mission Impact Slovakia

18 21 Interview with Ales B., Director of the CHZ on April 6, 2006. 22 Although both parties agreed to a three-year term in the contract, there was no penalty to Vydra for terminating it early.

NESsT December 2006

Further, the option to close down the business would also go against mission goals. The original business plan exit strategy indicated that the facility would be maintained and designated for other purposes. At this point, however, Vydra was convinced having a food service operation in the Vydrovo Valley was key to attract tourists and meeting rural development goals. In other words, it was critical to provide this service in order to benefit the entire valley even if profitability was compromised. The rental solution solved several challenges for Vydra and the partners were comfortable with the agreement “as long as Vydra still owned the property and could influence the food offering and quality of service.”21 Conscious of the potential mission risks, Vydra maintained control as the landlord of the property and made sure the rental agreement guaranteed a snack bar for visitors. Vydra’s exposure to risk was also reduced since its income was no longer dependant on unpredictable weather conditions and/or tourism interest. Vydra was guaranteed a set income each season and this improved the accuracy of its financial projections. Vydra’s first experience with the snack bar tenant was not very positive. Admittedly, Vydra did not spend a significant amount of time researching the first tenant and selected a caterer with whom the organization had had good experiences over the last five or six years. Although the first tenant was good at catering Vydra’s larger events, he was not successful at serving individual visitors in the valley. The quality of the customer service and the breadth of the product offerings did not meet Vydra’s expectations. After communicating with the businessperson throughout the summer in a continuous unsuccessful effort to rectify the issues, Vydra terminated the contract22 and deliberated once again about the most effective way to manage the snack bar for the 2006 season. Again, the decision was not an easy one and Vydra also considered taking over the snack bar operation again, by hiring an employee with food service experience. Additional factors which influenced the decision were the departure of Vydra’s founding Executive Director, Michaela G., at the end of the 2005 season. If Vydra attempted to run the snack bar internally, there was a concern that the facility would not get the necessary attention during the transition to a new director. Also, Vydra anticipated the closing of several grants which would most likely require significant staff layouts in the coming year. For all of these reasons, Vydra decided to established a new rental contract for the 2006 season with another local businessperson Although the rent amount was the same, the new contract is not term-specific, providing Vydra the opportunity to vacate the tenant at will. However, the contract contains some new elements in comparison to the previous one: It specifies hours of operation for the 2006 season regardless of weather conditions (8am – 8pm from 5/1 – 9/15), and they have been coordinated with the hours of operation for the museum and the railway. The contract also specifies a menu, which includes hot meals, for the 2005 and future seasons that will be reevaluated each year. All parties will evaluate if these terms are still reasonable at the end of the season and Vydra will continue to monitor the new tenant’s level of service and food offerings. Word of mouth and feedback from the tourists and DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

NESsT December 2006

Vydra Outsourcing to Maximize Mission Impact Slovakia

the partners will help measure the tenant’s success rate since Vydra does not intend to use customer surveys at this time. If the second tenant does not work out, the organization does not intend to close the operation. Vydra has found that it is not difficult to find a local businessperson who is interested in running the snack bar. NESsT Value-Added In the early stage of the enterprise development, the use of NESsT tools and methodology was key for Vydra to analyze and recognize the best enterprise opportunity with the potential to meet their goals. It was at NESsT’s advice that Vydra did not invest in the original sit-down restaurant project. The location chosen and the demands required by a full restaurant indicated that this was not a feasible enterprise. With NESsT’s guidance Vydra decided to plan for a snack bar located at more accessible location that would still meet its mission goals. NESsT evaluated Vydra’s business plan for the snack bar, and after several rounds of feedback and input, deemed the plan to be of very high quality. The plan included the many details called for by a business with complex operations and also included well developed risk mitigation strategies to deal with potential problems. Both NESsT and the Business Advisory Network were aware of the many challenges involved in managing a food business. However, the overall assessment was that Vydra had shown a great deal of professionalisms in the preparation of the business plan, educating itself on the many needs of the snack bar and the food industry, and therefore was well positioned for its eventual implementation. When the day to day problems of managing the business began to emerge, NESsT was available to provide guidance to Vydra. After the end of the 2003 season, NESsT agreed with Vydra’s desire to build a water pipeline to better the quality of the menu and improve hygiene standards. NESsT was concerned over the staff capacity constraints that had surfaced during the first year of operations, but agreed with Vydra that many of the more immediate and to some extent expected issues during the first year had been resolved and that it was important for them to use this experience to improve performance in the second year. However, at the end of the second season, realizing that the enterprise was taking a tremendous toll on Vydra staff, and that there was a persistent lack of in-house capacity and financial resources to respond to the situation, NESsT also agreed that Vydra should outsource the management of the snack bar, at least temporarily, and advised the organization to negotiate an agreement with the best possible conditions. Given the recent water pipeline investment and the subsequent potential for additional revenues, NESsT was concerned that Vydra would lock into a fee that was insufficient. But, the negotiations were led by a DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

The historic train on its way to Vydra’s site.

Vydra Outsourcing to Maximize Mission Impact Slovakia

NESsT December 2006

board member with strong business experience who negotiated the best possible terms under the circumstances. Given the snack bar’s recent financial performance, Vydra had little leverage and agreed to a fee that reflected the originally projected net profit for 2005. The following year, NESsT guided Vydra in its decision to outsource once again. Given the pending departure of the Executive Director, both parties agreed that this was the best alternative despite the potential higher returns projected now that the water pipeline was installed. Had Vydra been in a different financial and organizational situation, the organization could have brought in a full-time experienced manager for the business and potentially brought it around. However, the dramatic decline in the availability of traditional funding sources seriously limited their maneuvering room and affected Vydra’s ability to respond to the situation. At this point, NESsT focused its support on the issues that were more pertinent at that time; to assist Vydra with the leadership transition, to build and institutionalize organizational systems, and fundraise for additional revenues. As a member of the NVF later stage portfolio, Vydra had benefited from the continued guidance and support provided by NESsT during the implementation of the business plan. This was particularly valuable given that Vydra was still learning the unique skills needed for running a food facility. Only through the day to day experience of so doing, did Vydra and NESsT realize that the internal management model originally chosen was not a good fit and presented serious time and capacity challenges. NESsT support allowed Vydra to make more informed and frugal decisions when transitioning to an external management model. This experience highlights the importance of a venture philanthropy approach that provides assistance from the first step of selecting an enterprise idea, to assessment and planning, to launch and implementation. It also reinforces the value of NESsT’s proactive management of its investments and the need to remain attentive to: client needs and new market trends; changes in internal capacity; shifts in prices and costs; and other business and organizational factors. Further, Vydra’s management challenge provided NESsT with its first experience with an outsourcing business model which has since become a viable option for other NVF portfolio organizations.

Section D. Social Enterprise Impact and NESsT’s Role to Date The impact of the social enterprise was measured with the NESsT’s Performance Management Tool (PMT), which is critical for tracking key indicators, designing intervention and identifying future social enterprise capacity needs. It was these performance indicators that shed light on the operational and financial issues discussed above and prompted Vydra to take corrective action. In addition, the tool allowed NESsT to assist Vydra in mitigating risks and enhancing their financial and social impact performance.

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NESsT December 2006

Vydra Outsourcing to Maximize Mission Impact Slovakia

Enterprise Performance The snack bar underperformed financially in its first two years of operation. Both revenues and profits were under projections. The rental arrangement allowed Vydra to realize a fixed level of revenue, SKK 80,000 (USD 2,725; EUR 2,175) in 2005 which was higher then net income for both 2003 and 2004. By renting out the snack bar, Vydra passed the risk of potential lower revenue on to the local entrepreneur. At the same time, by agreeing to a fixed income, Vydra also accepted the fact that in case of a good season, it must forgo any additional revenue to the new tenant. Overall, Vydra feels the financial arrangement is good in that it guarantees a steady revenue stream and prevents deviation of other financial resources from the organization to the enterprise. Snack bar performance

Revenues SKK

2003

2004

440,749

577,046

(USD 15,670)

(USD 22,550)

2005

2006

Rental fee for snack bar: 80,000

(USD 3,350)

(USD 2,270)

11,315

24,268

40,00023

80,000

(USD 400)

(USD 950)

(USD 1,675)

(USD 2,270)

Number of visitors to Vydrovo

12,243

21,271

16,752

Min. 28,000*

Number of customers

12,243

13,773

N/A

(USD 1.30)

(USD 1.70)

N/A

Net income SKK

Average consumption SKK *projections

N/A â&#x20AC;&#x201C; no longer applicable, since Vydra has no active role in the daily running of the snack bar

Social Impact Due to the closeness of the venture to their core program activities, Vydra has experienced limited mission drift. At the same time, because the operation of the enterprise had been so demanding the decision to rent out the snack bar was to key to avoiding this possibility. In fact, there has been a range of other positive mission impacts as a direct result of the enterprise. In conjunction with the Rural Tourism Partnership, Vydra developed business relationships with 15 local businesses, creating new jobs and attracting thousands of new tourists (doubling the number of visitors) to the region each year. The organization has also contributed to infrastructure development by building the water pipeline and the DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

23 In 2005, net income for the snack bar was only SKK 40,000, rather than the full rental fee of SKK 80,000, because Vydra paid SKK 40,000 for the extension of the snack bar roof, enabling visitors to purchase and enjoy meals under shelter on rainy days.

Vydra Outsourcing to Maximize Mission Impact Slovakia

24 The Central European Heritage Award is annually announced by the Environmental Partnership for Sustainable Development. This association of six independent foundations awards the best projects with the aim to honor outstanding grassrootsbased model initiatives focused on protection of unique natural and cultural heritage.

NESsT December 2006

various structures in Vydrovo and encouraging others to follow suit; preserved cultural traditions through performances on an open air stage, and promoted Vydrovo and the historic railway in various trade shows and travel fairs throughout Slovakia and the Czech Republic. Vydra now has a strong position in the local community and is able to impact its development. The Rural Tourism partnership has been formally established by a written agreement, signed by all four partners, which commits them to share resources and subscribe to jointly agreed strategies and plans. Based on this agreement, Vydra has created a long term development and marketing strategy to encourage rural tourism in the region. The enterprise has proven to be a key part of their strategy of becoming a national role model. In addition, a visit by the then Prime Minister of Slovakia resulted in a commitment of support and recognition of Vydra as an exceptional example of rural community revitalization. Vydra has also received an increased number of requests from peer organizations for consulting assistance to replicate its model in other parts of rural Slovakia. Based on its Performance Management Tool tracking, the number of consulting requests to the organization is three times higher than expected. The organization has received growing media coverage and invitations to make presentations to municipalities and trade fairs. In 2005, Vydra was awarded the Central European Heritage24 Award for the Open Air Museum. In addition, through NESsT, Vydra presented at the Yale/Goldman Sachs social enterprise event in New York City. Institutional Development

Tourists disembark the historic train in Vydrovo Valley on their way to hike, bicycle, or enjoy theatre events.

When Vydra joined the portfolio in 2003, its main institutional development goal was to clarify staff structure and responsibilities. As Vydra went through the NVF process, the organization identified new capacity needs, and at the same time gained sills and abilities through the process itself. NESsT worked closely with Vydra staff on key goals such as improving financial systems, strengthening human resource capacity, and increasing public recognition. The team became more entrepreneurial, improved language skills, and improved external relations and partnerships. With NESsT guidance and tools, they developed additional ability and skills to manage their finances. A new financial system allows them to budget and track each program and self-financing activity separately. They are also able to develop annual financial projections. By running the snack bar, the organization acquired useful skills and experience in planning and managing a business, which they have been able to apply to other aspects of their tourism business. In addition, they use these skills for aiding local small and medium entrepreneurs in planning their own businesses or in writing DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

NESsT December 2006

Vydra Outsourcing to Maximize Mission Impact Slovakia

funding proposals. Vydra staff gained more confidence and experience in external communications as a result of regular interaction with managers of the Forest and Railway companies. The marketing and market research skills Vydra acquired through development of the business plan for the snack bar has aided staff to carry out effective surveying and market analysis for new services in the tourism package. With the departure of the executive director who had been a very strong leader for Vydra, the need to establish human resource systems came to the forefront. A big step in human resource management was the introduction of time sheets and a staff performance review system in early 2005, following NESsT recommendation and using NESsT tools. Michaela G. did her best to select and train her successor and asked NESsT to assist her with the preparation of the handover in leadership. As a result she was able to leave behind a basic set of documentation and elements of a future knowledge management system. The board has become increasingly involved in supporting the enterprise. Financial Sustainability Vydra’s had always shown a commitment to financial sustainability and self financing but had pursued those objectives in an ad hoc manner. This changed when in 2002, the organization made the decision to join the NVF and develop a business plan for a food facility. Today, the snack bar generates an annual fixed income of USD 2,725, representing about two percent of total organizational revenues. Although this contribution is modest compared to the original 10 percent projected goal, it represents a fixed income which carries few risks and numerous social returns. Further, this experience has given Vydra an in-house capacity to develop a business plan and manage an enterprise which they have already transferred to existing and new social enterprise activities. NESsT has worked closely with Vydra to help them develop a sustainability strategy by further diversifying sources and types of revenue, as well as assessing the profitability of different revenue streams. By 2005, Vydra had to face the problem of diminishing grant sources for rural development, and a budget that was half the size of that of the previous year, SKK 2,816,301 (USD 95,870; EUR 76,515). The opening of EU structural funds for rural development in 2007 will offer Vydra new grant funding opportunities. Given Vydra’s commitment to selffinancing that generate untied revenues will allow Vydra to meet EU matching funds requirements and ensure that it does not become dependent on any one single source of funding. The social enterprise provided Vydra with a new asset- the snack bar facility. This, as well as its other existing appreciating asset (a house purchased in 2005 that is used as an office), provide a good basis for long term sustainability. In 2005, the income from the snack bar was used to finance additional small construction works in Vydrovo valley.

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“We appreciate the encouragement NESsT always provided; looking for answers from NESsT was very instructing.” - Vydra Executive Director, Michaela G.

Vydra Outsourcing to Maximize Mission Impact Slovakia

NESsT December 2006

Section E. Summary “Being a member of the NESsT portfolio brings you a great deal of credibility.” - Former Vydra Business Manageer, Ivana M.

While Vydra did have some practical business experience and theoretical experience in teaching small business basics, the snack bar was Vydra’s first enterprise that required extensive business planning, technical support, specialized experience in the food business and significant upfront financial investment. Vydra requested NESsT assistance in developing, launching and running this complex enterprise for the development of Vydrovo Valley, skillfully leveraging NESsT support with that of its Rural Tourism partners, the CHZ and the Forest Company of Slovakia. This assistance was greatly valued by Vydra, as former Executive Director Michaela G. said, “We appreciate the encouragement NESsT always provided; looking for answers from NESsT was very instructing”. NESsT worked with Vydra on the snack bar enterprise for over four years, and developed a very close and open relationship with the organization. In that time, NESsT invested US$20,700 in financial support and provided capacity-building support valuing US$45,000. Furthermore, NESsT’s financial support and Vydra’s professional business plan enabled the organization to attract additional in-kind and financial support from other business and government leaders amounting to US$11,772. It played an important role in convincing CHZ and the Forest Company about Vydra’s competence and serious intentions. Vydra’s former Business Manager Ivana M. stated “Being a member the NESsT portfolio brings you a great deal of credibility.” By going through the feasibility study stage of the NESsT Venture Fund business planning process twice, Vydra tested two business ideas and decided to launch the snack bar instead of a restaurant, thus minimizing the risks involved. Detailed marketing and operational plans were drawn up to ensure the smooth running of this seasonal business. However, in the face of several major challenges in daily operations, it became clear that the snack bar was straining Vydra’s capacity. The organization felt that human resources were being diverted to snack bar activities and ran the risk of compromising other activities. NESsT’s assistance and ongoing consulting equipped Vydra with general business planning and management skills and tools, and assisted with specific day-to-day issues. However, the need for a trained professional to manage the business became more and more evident. Added to the operational challenges were an unfavorable funding environment, and the upcoming departure of the founding executive director, and as a result, Vydra had little maneuvering room to directly manage the snack bar for another season. At this point, Vydra sought alternatives to running the snack bar itself, as closing down the operation was not an option due to the ripple effect it would have on the rural tourism developments in the Vydrovo Valley. Vydra was still committed to the idea of sustainable enterprises and CSO financing, and found an external solution that seemed satisfactory for all partners: a rental agreement with a local businessperson. With this solution Vydra was able to maintain control over the food selection and customer service without getting involved in the daily logistics. Although this meant transferring potential profits to a third party, this was a logical exit from a potentially successful but challenging enterprise.

DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.

NESsT December 2006

Vydra Outsourcing to Maximize Mission Impact Slovakia

Vydra’s example is powerful, as the organization shows how a rural community with scarce resources can make the most of the community assets to generate positive impact on both the organization as well as the community at large. Vydra is an inspiration to rural communities across the world. Today, Vydra has developed a new social enterprise, Vulkán Polana, which offers travel packages to tourists, including adventure trips, hiking, cycling, horsebackriding, rock-climbing, and accommodations through the Hotel Vulkán Polana. In addition to the Valley’s regular tourists, these packages are targeted to two other groups: Slovak companies that needed locations for their retreats and foreign (Czech and Hungarian) tourists. Vydra continues to play the coordinating role for team-building activities, outdoor exercise and educational trips, as well as accommodation, catering, and guided tours, and receives a commission from the vendors of the various services. Vulkán Polana is also a network of various local entities working in cooperation to facilitate tourism and benefit the community at large. This partnership enables tourists to easily book trips, which in turn, increases visits to the region and can potentially benefit all parties. Just as the snack bar has proved key to Vydra’s rural tourism package- in partnership with CHZ, the Forest Company of the Slovak Republic and the municipality of Cierny Balog- it will continue to be critical for the success of Vulkán Polana. The snack bar experience has not deterred Vydra from pursuing another social enterprise, and the organization is currently working with NESsT to fully develop Vulkán Polana. In terms of NESsT’s experience, the case provided numerous lessons learned, including, the unique support required by a seasonal social enterprise, and the need to reconsider the original business model when circumstances dictate. The case also reinforces NESsT’s core value of remaining flexible and attuned to organizational circumstances and their effect on the social enterprise, and the importance of supporting an enterprise not just during planning stages start-up and implementation of its enterprise.

DRAFT Case Study: Not to be distributed, cited, copied or referenced without permission of NESsT.