Responsible Retrenchment: Advice to Nonprofits

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The headline “Budget Threatens Human Services” stood out from the front page of the New York Nonprofit Press. The publication’s May 2003 issue cataloged the ways in which underserved New Yorkers—young people, seniors, people with AIDS, among others—will bear the brunt of the continued disinvestment in the social infrastructure and the inability (or unwillingness, depending upon where you stand) of private philanthropy to step into the breach.

Forest Hills Community House (FHCH), the poster child for bad things happening to good organizations, predicted a budget decrease of more than $1 million. In “Bringing Down the House, a Case Study in Cuts,” in the same issue, choices facing the leadership of Community House are starkly representative of the budget options presented to many of us. The proposed cuts could mean outright purging of some government-funded programs, the elimination of specific sites, or across-the-board cuts. When speaking of the nationally renowned Beacon program, the FHCH director of school-based youth development centers laments, “It cuts to the heart of the design. If it is only operating 15 hours a week, it doesn’t really do what the model intended.”1

One could argue that we’ve been here before. Indeed, back in the early and mid-1990s (the last time we all experienced financial crisis), we saw a flood of  books and guides, as well as funder and consultant-driven initiatives aimed at helping nonprofits through hard times.2 Some of us have turned back to these books for guidance. Others are just losing sleep.
The current data clearly demonstrates that most organizations are operating with little or no cushion. We see this financial situation more often than not with our clients. We advise that the strategies developed now in response to this economic downturn should actually be integrated into everyday management practices. Nonprofit leaders need to be vigilant about navigating their agency’s financial path—a path that is sometimes treacherous. Here’s how, in practice, we’ve integrated that basic tenet into the Community Resource Exchange’s consulting work for over 300 clients each year.

Re-evaluate Programs and Services

While program assessment is probably not where many of us would start when faced with significant budget problems—we generally expand fundraising first, then get more serious about controlling costs—our public purpose requires us to think first about program. Specifically, we need to analyze what programs are most critically needed. An ironic twist in these times is that some of the programs most attractive to your funders may be those that are least aligned with your mission or with what the community thinks is important. Eliminating programs that are mission-critical because of financial difficulties can cause other profound organizational problems, such as loss of attractiveness to the communities we serve, loss of morale among staff and board members, etc.

In times of scarce resources, we need to evaluate each program in terms of its fit with (1) our community’s needs and (2) our agency’s capacity to deliver the service in a quality and cost-effective way. In other words, serving a community well does not always equate to saving a particular program within but it does equate to finding the best overall solution.

This may be the time to push forward and find a more suitable home for a program that your community needs—but your agency is not best suited to implement. This alternative is appropriate when your organization’s mission and core competencies and the purpose of the particular program no longer fit, or when there is another organization where the program fits better (for reasons having to do with a better resource mix or program synergies). The board of a Brooklyn-based youth development organization, for example, noted that participation in its girls’ program had dramatically dropped off as more Muslim families moved into the neighborhood, while its boys programs seemed to be holding their own. After speaking with residents and new community-based organizations, they decided that it made more sense to support the development of a girls’ program within an indigenous organization.

While moving a program to another agency or shutting it down completely are hard choices to make, programs that aren’t a good fit are often a drain on management, staff, energy and time. Moves like this will prune your organization to its best shape, and free the time and talent of key leadership people to focus on providing a vital, high-quality program mix—ultimately allowing for even stronger fundraising.

A deep and honest analysis could also lead to a decision to close altogether. Over the course of a four-hour retreat bolstered by feedback from key volunteers and program participants, the board and staff of an organization focused on women’s health issues assessed their ability to meet their organization’s mission and decided to go out of business. They developed a set of key questions, interviewed some people one-on-one and held meetings with groups of others. They realized that even before the projected budget cuts, their program model was not sufficient to meet their mission. They chose to make their curriculum—and other materials they considered most valuable assets—available to others, celebrating all that they had accomplished.

Advocate, Advocate, Educate

If you believe in the worth of your programs for the community, and those programs are at risk of not being funded, now is the time to involve your stakeholders in taking ownership. Notify your constituents—including board members, staff, and private donors—of the potential impact of proposed initiatives on your services. Help them develop advocacy strategies and to develop information necessary to take the case to key officials and the media.

Of course, this should not be new to you. Advocacy should be a core competency of nonprofit management. We should not try to activate only when we are under attack in some way. We are all affected by late payments of government  contracts, the reluctance of the foundation community to provide general operating support, and the unwillingness of all funders—public and private—to cover the true administrative costs of programs, services and accounting in all the ways required. These are only a few of the issues with which we all struggle. As an industry that has a major financial impact on the country, we can have influence through our local and national sector advocacy organizations to challenge the basic rules under which we operate.

More broadly, we need to understand that advocacy should be central to what we do—whatever our programs or services. Our voices are often the only way that the needs of the communities we serve are brought to the table.

Analyze Expenses and Cut Costs

While you are assessing programs and beating the advocacy drum, it’s also critical to step back and look at all organizational costs. Staff and rent are normally an organization’s largest expenses, with everything else trailing far behind. With the exception of personnel, be prepared to revisit every service agreement—phone system and services, copier, and bottled-water delivery—to ensure the agency is getting the most for its money and to locate opportunities for savings. Also, look to achieve economies of scale through collaboration; explore joint-purchasing with neighboring organizations, and share or reduce your share of office space.

Maximize your fringe-benefit dollars, which is not to say cut benefits or increase employees’ share dramatically (a practical impossibility when salaries are likely to be frozen). Instead, analyze patterns of employee use, and consider moving to a plan that allows choices among a variety of benefits. Also, consider the use of a HMO-only plan if there is not much out-of-network use by staff.

Explore job-sharing with other organizations, use consultants rather than adding full-time staff (particularly if the work is time-limited or seasonal), and if work patterns allow, cut the work week from five to four days for some or all staff. On the other hand, a move from a seven-hour to an eight-hour day would provide the agency with additional manpower—without a corresponding increase in costs. Participation from staff on such measures will be important so that you don’t risk a costly loss in morale, which can seriously impact productivity.

Maximize productivity: This means knowing what each person costs (salary, benefits and share of overhead) and comparing that number to an analysis of the worth of the product from that activity. This is, as any manager knows, not a straight dollar-to-dollar exercise. There are, in many organizations, unpaid activities that are critical to our overall performance.

Don’t automatically take an axe to the administrative and technological infrastructure that you’ve built up over the years. But do eliminate redundancies and position overlap, if they exist. We caution nonprofits to not immediately assume that client-services staff is somehow better than administrative staff. You need both types of staff to operate well in this time of ever-increasing emphasis on accountability. Maintain systems and maximize use of the information they provide to inform ongoing discussions about program quality, productivity and efficiency. Determine your information needs for marketing and fundraising efforts.

Finally, note that collaboration was not a major theme under this category. While collaboration can be an effective strategy for improving services to the community, programmatic collaboration rarely results in cost savings—unless you are combining within a tight network that already exists.

Doing More with Less

Following the last financial crisis, most savvy nonprofit leaders heeded the advice to diversify, diversify, diversify their agency’s funding base to minimize the financial and service disruption caused by funding cutbacks from any one source. Many organizations developed fee-for-service capacities, either for current services or for new business ventures. During this down-cycle, however, most institutional funders (government, foundations and corporations) and individual donors are decreasing their giving, which suggests that the advice should have been diversify and save for a rainy day. So what do we do now?

What’s hopeful about these times is the willingness of some funders to think a bit differently about how we each do our work. Some funders are exceeding the government-mandated five percent payout floor that many foundations have interpreted as a ceiling. Others are making what they term “institution building investments” in organizations considered central to the foundation’s ability to fulfill its mission.3 J.P. Morgan-Chase recently added a new project-funding effort that provides unrestricted project support and multi-year grants to some of its core nonprofit partners. These moves demonstrate that the foundation and corporate community are listening, and we need to be talking with them at every opportunity about our organizations’ challenges.

However, the above are more macro foundation-driven strategies and somewhat out of our control. What are the strategies we want them to consider for our own grants? We might inquire whether a supportive funder would consider a two-year grant instead of one. Or ask to convert a project grant to a general operating grant, or at the very least, adding the true administrative costs to the grant. Assuming the absence of a reserve of dollars that supports deficit funding, you should turn down grants or contracts that don’t pay for themselves—or will likely cost you even more money to implement.
When all is said and done, your organization’s budget-balancing efforts will be supported by leaders who are making strategic decisions guided by timely information, rigorous analysis and a vision for common good. While it seems antithetical, now is the time for you to invest in building and sustaining your capacity to lead. We encourage you to seek out mentors, executive coaching opportunities, books and any other source of advice that will better enable you to face the options that your organization has for its immediate future. Remember that what you do now will have many future consequences—including some that may not be immediately obvious. Try to thoroughly think these through with your stakeholders’ involvement, even while you are poised to move quickly and decisively.

1. New York Nonprofit Press. May 2003. Volume 2. Issue 5.
2. Strategic Alliance Fund, an initiative of the United Way of New York City; New York Nonprofit Management Assistance Collaborative, formed by CRE; Cause Effective, Lawyers Alliance for New York; Nonprofit Finance Fund to help groups with downsizing, dissolutions and mergers; and a publication that has become an instant classic in the field, Coping with Cutbacks: The Nonprofit Guide to Success When Times Are Tight, by Emil Angelica and Vincent Hyman.
3. Re-Engineering Philanthropy: Field Notes from the Trenches, a presentation by Michael A. Bailin, President, The Edna McConnell Clark Foundation.