Are you exploring consolidation? Which segment are you?

I attended a meeting recently about a local United Way conference that potentially will deal with exposing nonprofits to models and ideas concerning consolidation. As the discussion proceeded, the complexity of the issue kept coming up. One of the conclusions was that there might actually be different market segments of organizations, and that, perhaps, the segments are distinct enough to actually provide programming for them differently….maybe. Read More 

How We Can Work Together Through Difficult Times

Many pundits believe that the nonprofit sector is in the most serious trouble in its history.  The sector in both the US and Canada has known only growth in its history, and, since 1977, expansion  in numbers of nonprofits and in revenues have far exceeded  the growth in business revenue in that same time period.  The recession is predicted by some to put 100,000 nonprofits out of business over the next two years.  Certainly there are very few nonprofits who are not struggling to keep their budgets balanced, and there are many who are failing to do so, dipping into reserves to stay open or laying off staff in large numbers, slashing salaries and benefits or closing altogether.  In my 25 years of consulting in the sector, I have never been asked to teach retrenchment planning, until now. 

As we look to the next couple of years, the economy may continue to turn around but there are structural problems that indicate that the climb out for the nonprofit sector will not parallel the private sector.   Those factors are:  the anticipated decline in foundation payouts due to the major losses in equity funding (according to some estimates the sector could lose up to 40% of foundation revenue); and, the serious, if not desperate, condition of state budgets across the country. Clearly this will most seriously impact those nonprofits who contract with state government.

As I work in various locations across the US, I am distressed that there is so little rational planning at the systems level going on at this juncture.  Most states are cutting budgets and nonprofit  contracts across the board.  There is really very little thought given to how human services can be re-engineered to ensure services to the most vulnerable clients or to bring about efficiency. Adequate retrenchment planning at the systems level should involve protecting those aspects of the system that will be most difficult to rebuild after the downturn,  targeting core competencies that must be protected, making choices about whose supports are needed most.  Are these easy decision?  No,  but they are necessary ones if our human service systems are to making any sense when things turn around.

The recently completed study of the Safety Net in RI by United Way and RIPEC is a great example.  The problems and the opportunities for addressing those problems are apparent but there is no political will to act.   Instead, changes in human service systems are happening but they are happening serendipitously as each organization makes decisions largely based on economics, about which programs stay open and which close.   It is impossible to envision what our human service systems will look like in a couple of years if this continues.  

This is a different kind of environmental  scanning than we are used to doing….searching out the vulnerable organizations and programs to determine the potential impact on the clients we serve.   This is information that large nonprofits need to have for two reasons:  first, if a competitor is closing a program, those clients may come to you for help.  How will you handle the increase in volume?  Or, if what has been a dependable source of help for your clients will no longer be there,  then the lack of that resource (food or shelter, for instance) could easily undermine or destabilize what your organization is trying to do. 

Once an organization's leadership understands what is happening around them, they need to learn to use the tools that the for profit sector uses in difficult times, to use models of consolidation:  joint ventures, management service organizations, networks, parent corporations and mergers.  They need to build a floor of strategic alliances under the service array that their clients need so they can continue to be successful.  Large organizations have a very distinct competitive advantage in this climate and that is the internal infrastructure and systems that they have built over time.  Most management systems have built in excess capacity…an MIS system that can track two or three separate subsidiaries can probably accommodate more.  Supporting the back office of a small agency is not more difficult than adding a program.   Working in partnership with organizations providing similar or duplicative programs, can spread overhead and reduce costs for both partners.    There is economy in jointly negotiating contracts for commonly purchased items.  There are ways to use corporate restructuring to collapse back office expenditures but still maintain the identity and special relationship with community that small organizations have.  There are even ways to make these relationships temporary;  if a small organization is able to go back out on its own when times are better, they can.   Mergers are a very useful way to save a set of unique competencies, or a special relationship with a particular community,  that would simply disappear if the current entity in which it is housed must go out of business. 

We need an explosion of understanding in the sector about these tools, about how useful they are, about how important they are as strategic alternatives for large and small organizations alike.  And we must remember, for large organizations to think this way and seek the learning that is necessary, is not about being altruistic…it is about building understanding of what it takes for their clients to succeed and then moving strategically to ensure those supports are still there (though helping a struggling arts or environmental  group is also a good thing).   The profit sector has used these tools to build market share and dominate, but that does not mean that we, in the nonprofit sector, need to behave in the same way.   This is not about developing  "power over,"  it is about developing "power with.'' It is about approaching these issues with a spirit of partnership and a strong focus on the ultimate bottom line…the long term health of our community.

Jane will be submitting this entry to the Providence Journal as an editorial. 

Photo Credit:  USAsearch.gov Public Domain Images

Op-Ed: The Proliferation of Nonprofit Organizations

The Op-Ed below was published in the March 11, 2008 edition of the Providence Journal.  (Please note: You may have to register with www.projo.com to read the original editorial entitled, "The Executive Director State.")

The editors of The Providence Journal have again chosen to express dismay at the number of nonprofit entities operating in our state, suggesting that wiping out smaller organizations might be a way to deal with this issue.   I suggest that we examine some of the root causes of the problem before adopting a solution.

The trend towards an ever larger nonprofit sector is occurring in every country of the developed and developing world.  The number in the US has doubled since 1977, standing now at 1.4 million.  Why? Nonprofits come into existence wherever and whenever there are resources to fund them.   Corporations wish to be viewed as generous to the communities in which they operate so they give money to nonprofit organizations.   Foundations have their own missions and use the nonprofit sector as the vehicle to accomplish their aims.  Government wants certain things done and uses the sector to do them. 

The foundation community has contributed by providing start up funds to new agencies, some of which start because their founders feel that existing organizations are ignoring their issue or community.   Small, new nonprofits are nimble and entrepreneurial and able to respond quickly to emerging needs.  They are the cutting edge of the sector and are often the source of innovative approaches and a testing ground for new ideas. However, once open, these entities have remarkable staying power because they soon find government contracts.

The partnership between the government and nonprofit sector began in the 60’s.  A 1990’s analysis of international trends directly correlates the existence of nonprofit activity with government funding and shows that when government contract rates contain sufficient profit margins, for profit entities enter these markets.  The incursion of for profit hospitals in response to the extraordinary funding of Medicaid and Medicare is an example.  Where government fees are less generous, nonprofits tend to be the sole providers.   Nonprofit contractors are cheaper than other alternatives because they are willing to subsidize government fees with funds donated by others.    Wages and pension costs are universally lower than in government or for profit businesses due to the willingness of nonprofit professionals to put mission before personal financial well-being. 

If government is in control of contracting, why are so many nonprofits involved?    The sector, in response to government incentives, has grown sets of agencies (silos) for each new need or new population needing attention.  We have sets of agencies that deal with particular diseases, mental health issues, physical health issues, the poor, the developmentally disabled, the elderly, child welfare issues, the needs of minority communities, etc.   Within these service silos, further proliferation has occurred.  When a small group of providers begins to work together effectively to influence how services are shaped, state governments increase the number of providers in that silo to reduce the influence of the founding few.  They do that by openly inviting others to open new agencies. The larger silos require state positions to license and regulate and review them, evolving a parallel state bureaucracy.

So we have both a nonprofit sector and state government that has only grown larger, but let’s be clear.  The nonprofit community did not create itself by itself.   Its shape and size have largely been driven by the choices of those who fund them.   The root of the problem is the structure of health and human services and how government and the nonprofit community provide these services.  What is required is a complete rethinking of how we, as a society, care for those who are not so blessed.  Incremental changes, or wiping out all the small agencies, will not address the fact that our current human service system is unsustainable and will only become more so as the baby boomers age.  We must start this change process by asking two questions: (1) what are the values and principles that should drive RI’s approach to supporting individuals who need help, without regard to the source of the impairment?  And, (2) given those values and principles, what is the most minimal role of government that will allow those principles and values to become real?   When we have answers to those two questions, we can redesign the service systems that support these individuals in a more sensible way, providing a constructive transition for all concerned. 

The Governor, with the Legislature’s support, should appoint a group of independent individuals to design and create a plan to transition to a more efficient and effective system.  These individuals must have knowledge of how government and the nonprofit community interact.   Above all, this must be a thoughtful process undertaken by people of vision and intelligence whose primary concern is the well being of our state’s most vulnerable citizens.   The results of that redesign, I am sure, will not only require fewer nonprofits than currently exist but will also bring greater efficiency to RI government. 

Marketing challenges as systems change

In the last week, I have worked with several agencies serving the developmentally disabled community in both Rhode Island and Calgary. One of these engagements was with a group of organizations seeking to use their existing trade association as a base for deeper collaboration in order to deal with the major changes in how services in this field are funded. Another was a board retreat to help an organization choose a planning model that would suit their field and a third was an ongoing process of strategic assessment, reporting out the results of our internal review of climate and management systems in an effort to prepare this organization for the significant challenges ahead. So what’s going on?

This work is among the most interesting aspects of our practice right now. The Developmental Disability Field is facing a significant change in consumer expectations as the generation of children raised in community environments reaches adulthood. Many of these children bring complex medical and behavioral challenges due to the sources of their developmental delays as well as expectations that they will live in community. At the same time, people with developmental disabilities who were raised in institutions, and then moved to group homes when those institutions closed, are aging, reaching life spans that were unheard of just 25 years ago. The system, then, must meet the needs of an ever larger group of consumers. In fact, the field of developmental disabilities is struggling to meet these challenges in every country of the developed world. The challenge is to take the community based residential system that was built as a result of closing major institutions and allow it to evolve into a system of supports for people who live in their own homes. The current residential system is, in almost everyone’s estimation, not sustainable through another generation and perhaps not sustainable for the current population that is aging in place.

The issue of sustainability is made more pressing for the Rhode Island system due to the budget problems of state government and is exacerbated in Calgary by a shortage of direct care employees. Care must be taken, however, not to define the problem as either the need to absorb significant cuts in funding from the state or as the need to secure a stable workforce. To do so will result in less than thoughtful solutions to what will be long term challenges. The problem is how to create a system that will provide a wide array of services efficiently and effectively to all who need them while generating sufficient funds to pay for those services.

One means of getting to efficiency by government is this service system’s experiments with voucher systems. What were once contracts for groups of consumers became individually funded plans. These individual plans have now become Family Administered Funds in Calgary and are about to become vouchers in Rhode Island. Essentially funds are placed directly in the hands of family or guardians who then make the choice of services and the choice of providers. This means that organizations whose primary customer has always been offices of government must market directly to consumers and their families.

There was an article in this morning’s Providence Journal about a partner at Continuum in Boston who spoke at a local college. Gianfranco Zaccai talked about how this innovative company designs products (think the Reebok pump and the Swiffer). He spoke of the need to think about the emotional response to products and services in design. As DD agencies consider how to adjust to this new reality, this will be a central concept…thinking through the journey of choice for a family or guardian, anticipating the “touch points” of first contact through contracting. This transition will require far greater understanding of managing customer relationships through the purchasing process.

We will write more about how agencies are meeting this challenge as the various strategies emerge.