Government Jilted Me

The year was 2013. In New York City, a large nonprofit had $21 million in revenue, all received as guaranteed income from Afterschool programs funded by the city. Suddenly, on what he expected was a slow week, the Executive Director awoke to the news that Mayor Bloomberg had cut $150 million from the Afterschool budgets. NYC abandoned AfterSchool, decimating the city investment. Within days, the Executive Director resigned.

Both societal needs and political messaging are fluid.

At the end of WW II, President Truman feared that the USA would return to peacetime with riots (this had previously occurred after WWI). The economy could not absorb all of the returning soldiers into the work force. The GI Bill was an elaborate ruse to divert soldiers out of the work force temporarily until the peacetime economy resumed.

You know the rest. Soldiers went to college, the Marshall plan created demand for USA goods, and the national standard of living advanced steadily in the 1950’s and 60’s.

By the 1980’s, Higher Education was cast aside while Crime and Medicaid projects flirted with government. The City University of New York lost its free tuition and the rest of the NYS system was no longer cheap.

Have you been jilted by government? Could it happen? It’s a sign that political priorities have changed, and your great agency no longer has a private key to the statehouse.

What can you do if you are in a suddenly downsized priority?

Hold on tight! No one will embrace my answers but this newsletter is written for determined leaders in difficult situations. Here are five possibilities for the fictional Nicholson AfterSchool ?to take to a Board.

1.??????? Activate the Network

2.?????? Reduce your Mission to a Niche that can be Funded

3.?????? Strategic Acquisition

4.????? Look for a Hero and Negotiate your Surrender

5.?????? Start a Forprofit Partner

Activate the Network

This is the easiest option and few nonprofits use it! ?“only one of the sixty-five respondents tried a true engagement strategy.” (Angelica and Hyman 2011:96). Convene a meeting of business, community, and other nonprofit leaders to describe the crisis and ask for ideas.

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Nicholson AfterSchool lost its state contract and funding will end in five months. Regina Alvarez, the Executive Director, lost no time in convening a meeting with the leader of Pediatric Medical Associates, Manager of Sarget Mart, director of Last National Bank, and the Director of the Community Development Agency.

?The plan that evolved was not perfect, but good. Pediatric Medical would ask clients to petition elected officials. The banker offered a line of credit if a credible plan was developed. The store manager asked their national foundation for help. And the community development agency reached out to donor-advised funders to alert them of the need.

Return to Your True Love and Passion

In good years, we all tend to broaden our mission. Our best stakeholders demand it with considerable pressure. We gracefully yield, humble, but impressed by our own capacity. Be ready to return to your true love when your government suitor is found with a new lover.

·???????? Review your competencies

·???????? Search for alternate financing for programs that are at your core. For example, can contract funding be converted to fee for service?

·???????? Retain your best staff from closed programs by replacing lesser performers in other programs

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Nicholson AfterSchool lost a tutoring contract as federal cash declined. In the review of competencies, the Board and management decided that their core was academic success. They converted their tutoring program to a virtual program. Some of their tutors were in countries with lower compensation rates. They had no costs for daycare rental and licensing and the tuition rate was affordable. They survived with their core.

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This solution is more practical for nonprofits above $6 million in revenue. The reduced mission means that fixed expenses such as rent will be financed by fewer programs. Reducing a $4 million agency to $3 million in revenue is not feasible.

It’s also not a popular option for large agencies. Firing a lot of staff is bad for morale and the reason doesn’t matter. The surviving staff look around and realize that it could happen to them in a different scenario. Radical honesty and transparent communication will be required to prevent resignations of your best staff as they look for a stronger agency.

Strategic Acquisition

Use the remaining time and money in the current contract to acquire another agency. Notice that I say acquire rather than merge. I know that nonprofits are supposed to merge but that’s happy talk. Mergers often fail as two living organisms try to live as one.

What are the Features of a Strategic Acquisition?

·???????? New Talent – The acquired agency may have experience with programs or funding that your agency doesn’t have the skills to acquire or operate. Your toolkit of competencies just increased. Acquiring competencies is the most common reason for acquisitions of forprofit companies.

·???????? Key Contracts?- The acquired agency may have a key contract or lease that is hard to obtain.

·???????? New Networks?– If the acquired agency has done quality work and managers will not leave precipitously, you can quickly expand your own network with their networks

·???????? Better Talent?– If some positions are now duplicates, you may find that some of the better talent should be chosen from the acquired organization. This is a strategic chance to strengthen your bench

·???????? Efficiencies of Scale?– while service organizations do not profit from scale as much as manufacturing, acquisitions with a total revenue of less than $10 million will likely benefit.

Nicholson AfterSchool had an endowment which bought time to plan their next move. They decided to merge (acquire) Pediatric Associates which was also struggling due to small size. Pediatric Associates had a health network and basic medical and dental services for children were popular in the low-income community. The combined agency was large enough to finance the necessary fixed expenses for leadership, rent, insurance, and other items. Since the two agencies served the same niche of clients with different programs, very few staff needed to be excessed from the new arrangement.

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Look for a Hero

There are too many nonprofits even without the cutbacks and fickle behavior by government. Kobara (2015) states that new nonprofits started at a rate 50 times faster than small businesses in the last decade. Since the funding is not provided by the persons served, the market forces that cause forprofit companies to succeed or fail don’t affect nonprofits as quickly.

Nicholson Afterschool was always in friendly competition with Harford Community Services. Elabeth Tilman, Board Chair at Nicholson AfterSchool was envious of the experience and networks of Executive Director Margaret Chhan at Harford. It was time to set up lunch with Margaret and see if being acquired was possible. The Board Chair created the meeting because it was possible that Regina Alvarez, Executive Director at Nicholson AfterSchool, would not be needed in the new structure.

If you have less than $5 million in revenue and contract revenue is at risk, consider surrender rather than acquisition. Verne Harnish calls the revenue of corporations between $1 million and $5 million the ‘Valley of Death’. Your agency doesn’t have the efficiencies of scale. While you may have the talent to lead a combined organization, you probably don’t have the experience.

There is no dishonor to keep the mission alive in a different corporate form.

Create a ForProfit Partner

?For Profits are helpful vehicles for attracting social investors and business plans that could throw off tax or ownership benefits.

·???????? Investors Easier than Donors?- For long term fixed assets such as buildings, friendly investors such as board members and friends may be more willing to invest in stock than to donate. The building can be purchased with their capital down payment, financed by rent from the nonprofit, and sold if the rental stream fails. The nonprofit gets use of a property that is normally not available.

·???????? Higher Rents?- For government contracts that discourage nonprofit ownership of buildings, a leasing structure from the forprofit partner may permit more contract funded repairs and lease money.

·???????? Exploiting Assets?- If the nonprofit has unused assets, the forprofit corporation can rent them from the nonprofit and exploit them for unrelated purposes.

·???????? Managing Risk?– Contract funded programs have significant risk and the nonprofit can accept the risk since it has few fixed assets. The forprofit keeps the fixed assets at arm’s length and cannot be touched in the event of a lawsuit.

Some Nicholson AfterSchool Board members decided to start their own forprofit corporation. Nicholson Partners would build a multipurpose building. An initial design like a food court would house a branch of the pharmacy where parents could pick up prescriptions, a branch of the dry cleaners where parents could drop off and pick up laundry, and pizza and ice cream stalls. Nicholson AfterSchool would have reduced rental costs with other tenants adding to revenue. The owners would make a nice profit from their investment while doing good.

Conclusion and Next Step

If your agency is largely funded by contracts, changes are inevitable. The needs of communities change and politics change. Even friendly legislators retire or move on. Many of us assume a trust relationship with government that is not reciprocal. Why wait until your nonprofit is one of the many unlucky ones that get jilted and fail? Choose your backup strategy now and rejoice that you can survive singleness!

If this newsletter was too close to home, you may also feel that you have no one to talk to about this. And you may have phantom guilt over things you can't control. Contact me for the Mastermind Group (Community of Practice) starting soon. [email protected]

References

Angelica, Emil; Hyman, Vincent. Coping With Cutbacks: The Nonprofit Guide to Success When Times Are Tight (p. 96). Turner Publishing Company. Kindle Edition.

Harnish, Verne.?Scaling Up: How a Few Companies Make It... and Why the Rest Don't. N.p.: n.p., n.d. Print.

Kobara, John. “Facilitating Mergers and Acquisitions for Nonprofits” Huffington Post.? 9/09/2015

Owen, Greg, et al. "What Do We Know about Nonprofit Mergers?"?Wilder Research?(2011): 1-49. Wilder Research. Web. 12 Apr. 2016.

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