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Diversification can be your enemy

 While almost every financial professional will tell you to diversify your portfolio, both investment and service or goods offerings, there are times where this can lead to higher Administration and Management costs in both for-profit and not-for-profit organizations.


Most of us have heard the term ‘Span of Control’ being how many staff one person can effectively manage, a common quote being 5-7. This topic has such a high ‘It Depends’ factor, in my opinion this ratio is only valid for introducing the concept.


Let’s consider a few examples.


One program with 100 delivery officers may require one Manager and 7 assistant managers as Span of Control can be stretched from the commonly quoted 1:5-7 ratio to 1:15 if all persons are performing similar tasks requiring similar qualifications. Contrast this to an organization with 100 employees, 6 major areas, and multiple programs with distinctively different occupations and skill requirements. For example, an Assistant Warden Management Services of a Penitentiary who is responsible for Accounting, Human Resources, Contracting and Procurement, Warehousing and Material Management, Facilities Management, Administration, and Food Services. Each of the above requires a division head who specializes in their profession, and even within those there are specialties such as the Facilities Manager who supervises electricians, plumbers, heating plant operators, general labourers, and an automotive mechanic. Given the multiple departments listed above, then add in various supervisors within the sub-elements, there will be far more leadership positions layered on top of the 100 workers than the 7 assistant managers articulated in the first example. 


Now compare the above to Social Service Organization ‘A’ who operates 1 program being supportive housing with 5 facilities using 100 employees, to organization ‘B’ who has 100 employees in 5 distinctively different divisions, 30 different programs, with sub-programs of programs. Both A and B having the same Revenue thus Administration fee, but each requiring different levels of management and administrative support.


As I mentioned earlier, Diversification can be your enemy when it causes you to add layers of supervision, which your funder(s) may or may not be willing to support.


Looking at this from another angle, Diversification also means not being focused on one or two related areas. Is having your mind wandering in different directions versus concentrating your attention in one or two related areas good for your organization and the people you serve? Will this lead you to become a ‘Jack of all trades and master of none?’ While the original meaning of this phrase is positive in that a multidisciplinary knowledge base has its advantages, if spreading yourself too thin, you can lose sight of details which can mean the difference between success and failure for both you and your clients.


My book Means to an end inverted - Financial management of not-for-profit and publicly funded organizations, as well as course Business Basics for Not-for-profit Organizations are coming soon. 


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