Spinning Straw into Gold

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As we go to press, many of our readers are struggling with their budgets, trying to make the best of a bad situation. We have been watching the state budgets and trends in foundation and corporate giving. We have been hearing stories of organizations downsizing, merging, or closing their doors altogether. Though shutting down is at the extreme end of the spectrum, most of our readers are juggling like crazy.

What follows are a number of inspiring, first-hand stories from a talented and resourceful group of nonprofit executive directors whose agencies are facing significant cuts in most of their revenue sources. We offer their thoughtful solutions to add to your own store of good ideas. We will follow these organizations in these pages over the next year and will add others along the way to document the nimbleness and, as Salamon terms it, resilience of nonprofits in responding to their environments. We’d love to hear your stories and your comments–and share them with your fellow executive directors–so drop us a note.

“It started as an evolution. We began seeing the trend about this time last year when we were wrapping up our end-of-the-year drive. Frankly, people’s assets were in the tank and friends who had already made pledges started calling to say that they had to reconsider. They were telling us that they no longer had the assets and would have to get back to us later.”

Betsy Vander Velde is the CEO of Heart of America Family Services in Kansas City, KS, where the local nonprofit management support organization has just completed work on a curriculum about how to close your nonprofit agency. Heart of America Family Services has an eight million dollar annual budget and 142 employees. It served approximately 130,000 people last year in the Kansas City metro area and is striving to meet the needs of the same number of people next year despite across-the-board revenue decreases.

“Some of my colleagues described last year’s economic downturn as the ‘perfect storm’,” she says. “If you saw the movie, you know that everybody on that fishing boat died. The crew ignored what was happening around them–and how much of it was beyond their control–and they went down. The tragedy was, drowning didn’t necessarily have to be their fate. What I am seeing in the nonprofit community is essentially the same cut.

“We belong to a national organization, the Alliance for Children and Families. Not long ago we had a national meeting in Philadelphia. I got to connect with agencies like mine from all over the United States. In conversations with my colleagues, it became clear that the organizations that are listening, adapting to new information, reshaping their programs, and shifting course are the ones weathering the storm. In the strongest organizations, board members and the staff are coming together around new strategies, sharpening their focus on mission, and reshaping how they do business. This requires an enormous amount of vigilance, creativity, and discipline.

“In our case, we began asking, ‘What is it that Heart of America Family Services does best? What are our core competencies? How can we capitalize on our strengths in a more entrepreneurial way?’ We began considering whether we could charge fees where we hadn’t before. And what market could pay for services and generate a surplus that could be used meet the needs of people who can’t afford to pay.

“We also recognized that collaboration would be more important than ever in meeting community needs. We expanded the meaning of collaboration to include program coordination between departments and established cross-department think tanks to explore new and more efficient ways to serve children and families.

“We have just completed our budget for the new year. Everybody, at every level of the organization, is making sacrifices and taking ownership of the budget process. For the past year, folks have bird-dogged each line item in our monthly financial statements, looking for trends, looking for other ways to cut costs without cutting services to families and children.

“Executive leadership is deeply engaged throughout. We meet every Monday morning to check the financial pulse of the agency, to review plans, and to think strategically about programs, resource development, and administration. The consistent dynamic is dialogue among staff everywhere in the organization, and between leadership, the board and myself. The collective wisdom of the group has been a powerful tool for survival.”

“We’ve been very aggressive. This has been our tactic–rather than looking at the trend and just letting it roll over us we’ve turned up our [fundraising] campaigns.”

Scott Elsishans is the executive director of Shanti, a 28-year-old, six million dollar organization providing resources for people with HIV/AIDS, breast cancer, and other life-threatening illnesses. Founded in San Francisco, it now has operations all over the United States, providing training to caregivers, as well as programs teaching people how to manage themselves and volunteers through serious illnesses. Shanti has taken a strategic (and less expensive) approach to its national expansion by resisting the temptation to “open up bricks and mortar offices” in favor of offering technical assistance to local providers through its National Training Institute.

“We have experienced funding cuts of all kinds,” Elsishans notes. “We are experiencing serious downturns in Ryan White funding, direct mail, major donors, telemarketing, foundation and corporate giving. Our response has been to turn up the heat on all our campaigns. For instance, we’ve hired people who are masters in the art of donor cultivation, recognizing that a major donor left unchallenged will not increase their contribution. There are effective ways of managing and cultivating donors that don’t bug them, but keep them informed, engaged, and challenged to consider increasing their contribution. Our year-end appeal has just gone out so I can’t speak for how that might go but so far, since the beginning of July, about a third of our requests for increases have actually increased.

“Similarly, with grant writing, where contributions were coming in at 20 percent less than last year, we contracted another grant writer to augment our staff here.

“Our overall revenues are off by about three percent this year. The long-term question remains: ‘How far can you crank it up and is there a wall at the other side?’ In the end, we will not be able to handle budget shortfalls through increasing revenue alone, we will have to look at the expense side as well.

“We have done some of this already. The entire staff has been attentive to right staffing–each department head is charged with making sure that every staff position has a real purpose in relationship to the whole operation and is covered by existing funding. There are no padded positions. We saved $175,000 this year by making the transition from individual contracting with benefits providers, to group purchasing through the United Way Group Insurance Trust, which is available to any California nonprofit.”

“Scheduled for September 17, 2001, our annual event proved a telling moment, prophesying much of what was to come later. We had people flying in–and of course many didn’t make it. The event netted only $9,000, a fraction of the anticipated $70,000, which we had netted the year before. Entering 2002 with a revenue shortfall, we were denied funding for one critical grant and received a very small portion of an other. Also, corporate gifts dropped significantly.”

The Southern Regional Council (SRC) is an 83-year-old institution promoting racial justice, protecting democratic rights, and broadening civic participation. Over the past year, the SRC’s budget has been reduced approximately one-fifth.

Wendy Johnson, executive director, describes the Council’s current work as focusing on two flagship programs, a youth civic engagement and voting project and the Partnerships for Racial Unity, which promotes and supports interracial dialogue and coalition-building in the South, and supports a training program on the civil rights movement for civics and history teachers at middle and high school levels.

“What we had to do in the face of budget cuts was to focus on those programs that attracted the constituencies that we were most hoping to reach,” Johnson explains. “We looked at the resources needed to do these programs well and then had to make some tough choices about what to do with other programs that were not so central to our strategy.

“We had two longstanding programs, a 33-year-old book awards program and a journal we have published for almost 25 years. Through a vetting process involving both board and staff, it became clear that while these programs were worthwhile and had followings of some tenure, they weren’t contributing to the bottom line of our mission. As a result, the board has decided to produce only one more issue of the journal in 2003, and then figure out whether it has a life beyond next year. We are also taking the awards program to a university that has expressed interest. Here, we are hoping for a partnership that will lift some of the fiscal burden from SRC–either shifting it totally or sharing it in a way that won’t significantly impact our budget. “We also decided to increase spending on marketing, retaining a specialist in nonprofit marketing to help refocus our communication strategies on key audiences and vehicles. The board established a communications task force of board and non-board members to advance and support this new investment. While some layoffs proved inevitable, staff remain overwhelmingly committed to strengthening SRC for the future.”

“I’ve been in this work since 1969 and it’s the first time that all of our funding sources have declined at the same time.”
Paul Gemeinhardt is CEO of Cornerstones of Care in Kansas City, MO. Five years ago Cornerstones of Care was designated the new organizational parent for five existing residential treatment programs. All were solid, well-known organizations, with the oldest being 125 years old. None were in financial crisis.

As Gemeinhardt, who was previously the executive director of one of the five agencies, explains, “We felt that we needed to be a part of a larger system in order to provide better services for children and families. It was uncharted water because mergers are usually a takeover responding to some kind of difficulty. In this case, we wanted to make sure everyone still had their own 501(c)(3) status and had their own identities, but had access to a consolidated business office for administrative functions, health insurance, property and general liability insurance, and memberships. We did this five years ago with the anticipation that it would become harder and harder for us to keep pace with the changing environment independently.

“Our first six months were difficult, but today it is a hundred times better than before consolidation. Still, it wasn’t until year three that we actually felt that everything was coming together.

“The merger allowed us to face these tough times differently than we would have. We’ve been able to offset a 10 percent dip in present funding by making some adjustments in programming. For example, working with a more difficult adolescent or pre-teen population, the occupancy rate in our residential program has increased from 97 percent to 98 percent. A gain of one percent in occupancy means a one percent increase in the amount of dollars coming into our program.

“We haven’t had to turn anyone away whom we would normally serve. When you look at our system, the largest percent of clients coming to us come with some kind of payer. So what we’ve done is grow our private insurance business and made some changes in our residential programs that have allowed us to contract at a little higher rate for certain kids.

“Of all the infrastructure improvements we made, I think our management information system [MIS] has served us best. Prior to coming together, we did not have an MIS system but local foundations funded one million dollars in system improvements. We hired high level MIS staff to manage an integrated information system that provides better information and cost analyses about our programs. It’s permitted our intake people to be more efficient and allowed us to do better in identifying and reporting critical outcomes to the funding community and with the families we work with. These are some of the things that I think have helped us respond to the current crisis that we are all in.”

“There was no tie-off–no additional support—no effort on their part to help us reach out to other funders. We basically got a letter saying, ‘We have revised our foundation priorities and discontinued the program that you are a part of. So here’s your warning–you’re not getting any more money’.”

Power of Attorney (POA) was established with a grant from a single funder. The five million dollar, five-year grant was to support an ambitious national initiative encouraging and coordinating pro bono legal work for nonprofit organizations. Much of the money was slated to be re-granted to develop local programs in a number of cities around the country. Three years into the grant, the funder made it known that the larger foundation initiative, within which this grant was made, was being eliminated from their portfolio. Power of Attorney was left wondering if and how it might replace that money. POA was probably unique among the abandoned grantees in having no other major funders.

“Having a single funder was a big risk for us,” POA’s president, Allen Bromberger, says. “We weren’t really prepared to lose that support.” With two years of funding remaining, POA is becoming more entrepreneurial, looking at revenue generation strategies, redesigning programs to get a higher impact at a lower cost, and considering whether some programs might be better housed elsewhere. While he is optimistic, he is also a realist. Ultimately, “it’s about the work,” Bromberger says, “not the organization. The truth is that even if you gave me a million dollars tomorrow we would still be exploring many of these options because they may make good strategic sense over the long term. One thing we do know is that whatever we do will require strengthening our services and our relationships with the national and local networks of capacity builders so that they include legal services in their future programming.”

We don’t think there can be too many cautionary tales on the subject of funding diversity. This applies not only to single organizations but also to whole fields. Recent estimates suggest that the amount of funding available to support the national infrastructure for nonprofits has been reduced by a third with the complete withdrawal of two major national foundations. The question of sustainability looms large–not just for POA, but for the various partners with whom it might eventually think about consolidating. Situations like this should remind us that over-dependence on too few funders carries with it the risk of catastrophic loss.

The Nonprofit Quarterly has introduced the concept of “survival of the fitting” in previous issues. This conceptual framework encourages us to look at our survivability and our specific value as a part of the larger civic environment. This means we must know the world outside the walls of our own institutions–and that it must know us, support us, and have confidence in us. Anything less can be fatal.

As Peter Senge, author of The Fifth Discipline, writes, “Maladaptation to gradually building threats to survival is so pervasive in systems studies of corporate failure that is has given rise to the parable of the ‘boiled frog.’ If you place a frog in a pot of boiling water, it will immediately try to scramble out. But if you place the frog in room temperature water, and don’t scare him, he’ll stay put. “Now, if the pot sits on a heat source, and if you gradually turn up the temperature, something very interesting happens. As the temperature gradually increases, the frog will sit there and boil. Why? Because the frog’s internal apparatus for sensing threats to survival is geared to sudden changes in his environment, not to slow, gradual changes.”

Don’t be a boiled frog! The cases above demonstrate the value of forethought, of having apparatus to assess accurately and in time the risk factors in your operations, and of being able to bring staff and board together around sometimes complicated strategies for managing budget cuts. Most of the organizations had such capabilities—they had engaged in careful strategic planning years before this crisis hit and pointed to that work as having positioned them to handle current cuts. But the robustness of their systems also figured in–in the best cases, providing the needed information and capacity to make decisions quickly. This can be the result of size and maturity, but not always.

On a common note, all of the organizations we talked to have stressed the need for focus–the central question became, “How can the essence of what we provide for our constituents be safeguarded over time?” Some early responses have involved the strategic redesign of programs, some involve a history with or openness to collaborative possibilities, and some involve the “cranking up” or redirection of resource generation and marketing.

You might also note that none of the executives discussed cost-cutting as the place to concentrate in responding to the environment–rather they took a “whole systems” view and, in some cases, even increased certain strategic expenditures. Again, Senge cautions managers against succumbing to “corporate anorexia” by concentrating exclusively on cutting costs as the answer to a failing financial picture.

Going back to the boiling frog metaphor, it is unlikely that the water will cool down anytime soon, and most nonprofits are at serious risk of boiling unless they recalculate the reliability of their funding and get energetically creative even in this dangerous environment.

As Betsy Vander Velde concludes, “Look, we have to keep focused on the mission, we can’t keep arguing over the bones. This needs to be a time of opportunity and innovation–not hunkering down and hibernating until the winter is over.”

Ruth McCambridge is editor in chief of the Nonprofit Quarterly.

Organization: Heart of America Family Services
Location: Kansas City, KS
Founded: 1963
Assets: $5,590,000
Annual Budget: $8 million
Number of Staff: 142

Health and Educational Services
Organization: Shanti Project, Inc.
Location: San Francisco, CA
Founded: 1974
Assets: $1,400,000
Annual Budget: $6 million
Number of Staff: 70
Caregiving Training and Health Services

Organization: Southern Regional Council
Location: Atlanta, GA
Founded: 1944
Assets: $700,000
Annual Budget: $1.1 million (this year $850,000)
Number of Staff: 9-10
Racial and Social Justice

Organization: Cornerstones of Care
Location: Kansas City, MO
Founded: 1998
Assets: $630,000
Annual Budget: $250,000
Number of Staff: 20 core (550 combined, all agencies)
Behavioral Health Services

Member agencies of Cornerstone of Care
1. Ozanam
Founded: 1948
Assets: $4,980,000
Annual Budget: $6,080,000
Counseling for Children / Human Services

2. Gillis Center, Inc.
Founded: 1870
Assets: $2,510,000
Annual Budget: $4,600,000
Residential Care and Heath Services

3. Spofford
Founded: 1916
Assets: $2,830,000
Annual Budget: $4,020,000
Residential Care and Health Services

4. Marillac Center, Inc.
Founded: 1897
Assets: $3,170,000
Annual Budget: $5 million
Residential Care and Health Services

5. Spofford Ozanam Services, Inc.
Founded: 1989
Assets: $80,000
Annual Budget: $300,000
Behavioral Counseling and Family Services

Organization: Power of Attorney, Inc.
Location: New York, NY
Founded: 1999
Assets: $2,240,000
Annual Budget: $1 million (5 million for five years)
Number of Staff: 5
Pro Bono Legal Work for Nonprofits