Balancing the Mission Checkbook

When economic times get stressed, as they are now, nonprofit organizations are often urged to consider mergers or other collaborative structures as a strategy to navigate reductions and shifts in funding. The topic came up again at a meeting last week titled “The State We’re In: Fulfilling Human Service Needs in a Time of Economic Uncertainty.” Scott Russell at MinnPost.com wrote a good summary of the tone and comments of the meeting, Nonprofits hear a gloomy forecast about future funding. With financial pressures from all sides, coupled with increased demand for services stemming from employment and housing problems, many nonprofits will be hard pressed to keep up the juggling.

No one would say that mergers are the right answer for every nonprofit, but if you do think that joining forces would make sense and help your organization maintain stable services, where do you find your mate? All of the articles and books I’ve read discuss the importance of finding the right fit with leadership that can work together, board buy-in, and mission alignment. But where do you find them? What happens when the board chair or director of a small nonprofit calls the CEO of a large, established agency to inquire about a potential merger? Do they invite you over for coffee? Do they even return the call?

I think I’ve found the answer – speed dating for nonprofits! Speed dating is an organized event to help singles meet a number of people in one evening with the intent of finding one or two for an actual date. Speed dating for nonprofits would follow the formula. Nonprofit leaders, from large, medium, and small organizations, would be scheduled for a series of 5 to 8 minute conversations about mission, programs, and goals. A bell would indicate time to move on to the next “date.” No commitments or promises are made. At the end of the event everyone indicates on the list which of the nonprofits they would like to talk with further. It’s efficient and direct.

On the other hand, if you’d rather proceed with more control and confidentiality, there are a number of resources available. A short study published in 2004 by a collaborative of Milwaukee funders, Nonprofit Collaborations and Mergers: Finding the Right Fit, lists these key characteristics of successful partnerships: committed leadership, unambiguous goals, clearly defined roles, commitment at multiple levels of the organization, dedicated staff time, and sustainability in the midst of change. Fieldstone Alliance has two workbooks by David La Piana on nonprofit mergers. For hands on assistance, Project ReDesign is a new service from MAP for Nonprofits to assist with any part of considering, planning, and carrying out a merger.

I was at breakfast last week with the founding executive director of a nonprofit and he made an off-hand, joking comment about how he supposed that that meant the organization had “Founder’s Syndrome.” It did make it sound like a disease, like Carpal Tunnel Syndrome. This isn’t the first time that I’ve heard this annoyance from a founder about this term that is used so frequently. Is it really fair, or even accurate, to label all founders with a pejorative term? It doesn’t sound very appreciative – like, “Thanks for having the guts and moxie to start this organization.” Most founders who I know didn’t fully realize what they were getting into when they started the nonprofit. Most start nonprofits because they feel deeply about the program and mission. They didn’t anticipate needing to fundraise, recruit and develop a board, manage staff, and make dozens of decisions every day. They did what they needed to – and now they have this Syndrome.

I won’t deny that there are organizational development issues that frequently occur in organizations with a strong founder/leader that impact decision-making, control, knowledge, and direction. When we call it a Syndrome, though, it sounds incurable. I think it needs a better identity as a leadership problem that can be corrected. I also take issue with the description of Founder’s Syndrome since I’ve worked with many nonprofits with all the same poor practices that were led by a second, third, or fourth director. Whoever the director is, these characteristics describe a common leadership problem that becomes an obstacle to effectively sharing responsibility, authority, and building a strong organization.

Does the founder, or strong leader, have to leave the organization to “cure” the Syndrome? I hope not, and I have seen plenty of examples of founder/leaders taking part in an organizational transition. It takes commitment, effort, and lots of trust – and requires that the board and staff respect the leader for what they have done in the past and what they are capable of in the future.

We’ve worked with several nonprofit organizations during the difficult period leading up to closing the organization. Sometimes the decision is internally driven and intentional, and sometimes it’s after fighting it, kicking and screaming. How do you know if it’s time to close, and how to make such a monumental decision? I can think of three specific instances with very different characteristics and outcomes. The first is an arts organization that carefully and systematically paid their obligations and closed their doors after several difficult years of declining earned and contributed income; the second a youth-serving nonprofit that stayed in denial for too long before filing bankruptcy and leaving both students and creditors uninformed; and last is a small organization that remains in operation, though their relevance in the community and support from both donors and volunteers dropped off years ago. They stay alive as long as the director is willing to work with little compensation and little support. In another situation, though, I worked with an organization whose executive director repeatedly suggested closing the doors because fundraising was so difficult. The board realized that the mission was as vital as ever, though, and the solution was a different, less burned-out, director to bring new energy and ideas. These are important organizational questions that touch on financial, governance, fundraising, and mission questions. There aren’t easy answers or absolutes when it comes to closing or changing structures. Come participate in an ongoing discussion of these questions in an online discussion at Nonprofit Quarterly’s Web site - see the invitation from editor Andrew Crosby below.

Find out how one organization weighed the decision about whether it should close, and contribute your own analysis of whether they made the right decision in the Nonprofit Quarterly Online Forum.

Beginning today you can join Mark A. Hager of the University of Texas, San Anton, and Kate Barr of the Nonprofits Assistance Fund in the Twin Cities, to discuss “The Ultimate Question,” authored by Mark and published in the Fall 2007 issue.This will be a great discussion for executives, consultants, board members, and funders interested in how such decisions are made — and may be considering such decisions themselves.Just register on NPQ’s Web site to access the Forum and join us for a thought-provoking exchange where you can offer your experience, pose questions, and comment on those of others.

Once you have registered, a link to the NPQ Forum appears under the User Menu. Inside you’ll find a reprint of the case, financial background material, and some starter discussion threads that you can add to, comment on, or create your own.

So register on the NPQ Web site today to participate. Andrew Crosby, Editor

p.s. If you have any technical questions, contact webmaster James Morgan. For any questions regarding content, please contact Andrew.

Reading the headlines reflecting concerns and jitters about the direction of the economy is causing leaders of nonprofits to ask how it will affect their organizations. For some people, a state of worry has set in. I can see why. Today, the StarTribune posted this article on their website, “Chairman Bernanke says Fed ready to cut interest rates again as needed.” The article predicts further cuts to key interest rates “to rescue a weakening economy.” Factors cited included the unemployment rate, weak real estate, tightening credit, and high energy prices. What’s a nonprofit leader to do? Anyone who has worked for a nonprofit for more than three years has experience with a tough economy, so many directors and managers will be well prepared to respond to lean times. But how worried should you be right now and what are your concerns? I think it’s worth a review of the causes and effects that may have a direct impact on your nonprofit organization.

The key is to understand your income mix. There are essentially five distinct sources of nonprofit income and each income source expands or contracts depending on different factors in the economy. If you understand the sources of income that are most important to your organization, then you can focus on following movements and trends that will matter. One overall trend to keep in mind is that the “nonprofit economy” tends to lag the general economy by about a year. Here are some ideas for trend watching the economy.

Program service revenue, or payment for directly providing services, is the largest total source of income for nonprofits. Income from contracts for service, especially from government agencies, is determined based on tax receipts and state and local budgets. We know how many reductions occurred a few years ago and most of these sources haven’t rebounded. If this is your primary income source, the keys are the reports from the state and the budget process. You can track these through the Minnesota Budget Project. To survive with contracts, it’s important to understand the true costs of delivering the services (which is probably not the amount you are paid for delivering the services) and having your eyes open about the need for additional subsidy - and where to get it.

Program service revenue that is paid directly by the user of the service - like tuition, memberships, tickets, and fees – is a lot like business income and reacts to market downturns depending on the buying power of your customer. If your service is considered discretionary, like entertainment, then consumer spending is worth tracking by reading the business section of the paper.

If foundation grants are an important component of your income, watch the stock market. Because endowment payouts are calculated in a way that evens out big increases and decreases, there is no reason to expect a big decrease in 2008. However, pay attention to the excellent surveys and analysis from Minnesota Council on Foundation including Grantmaking Outlook and Giving in Minnesota. If the market performs poorly over time, some reductions in grants could develop. Keep in mind, though, that even with the poor market performance several years ago, grants from Minnesota foundations have increased total dollars almost every year (more details in the MCF reports). If your endowment is an important source of income, the same market trends described above apply.

For nonprofits that rely on individual donors it’s a mixed bag of economic news. This recent online discussion about the Outlook for 2008 hosted by the Chronicle of Philanthropy highlights some opportunities for planned giving and large gifts that transcend the economy, and emphasize the importance of relationships and communications in maintaining a building a donor base.

So don’t assume the worst or start a chorus of woe about the poor economy. Yes, there will be challenges, but you can understand how economic trends will affect your nonprofit. Knowledge is power and will help you anticipate and plan for any changes.

My secret embarrassment is that evaluation has always intimidated me. I think it’s because my first experience working with an evaluation consultant was on a huge, multi-year project and the evaluation was driven by the funder with little input from the program managers. Every stereotype of evaluations was true for this program - lots of jargon, reams of data of uncertain value, hidden agendas, and a huge bill at the end. After that, I have steered clear of formal, process-laden evaluation projects. In the back of my mind, though, I always knew that we need to have a way to understand, assess, and communicate what we do and why it matters.
I am happy to report that I’ve conquered my fear and anxiety, and become a believer. I will credit three terrific, understandable, and approachable professionals - Ellen Shelton of Wilder Research, Stacey Stockdill of EnSearch, Inc., and Leah Goldstein Moses of The Improve Group - for assisting in my personal growth. The definition I like is that evaluation looks at what you did, what happened, and what difference it made. Evaluation doesn’t have to be onerous, complicated, secretive, or expensive. After listening to these masters talk, and reading some plain language articles, I can now talk logic models and understand the difference between outputs and impact (though I still don’t want to get into regression analysis).

It’s critical that nonprofits can speak this language to improve the quality of our programs and to communicate with stakeholders. If you’re still harboring a secret fear, look at these resources for understandable guidance on the purpose and strategies for useful evaluation:

• Wilder Research has a series of tip sheets on evaluation concepts and techniques. Type “tip sheets” in the search box to see this collection of materials.
• The Improve Group has an overview of logic models.
• WK Kellogg Foundation is a leader in publishing resources for nonprofits on evaluation, all available in the Knowdgebase section of their Web site, including their workbook guide to developing logic models.

I’ve had several discussions lately with board members of nonprofits on financial management topics that had an odd, disconnected feel to them that I couldn’t pinpoint at the time. One was about operating reserves and how much was the ideal amount to have in reserve – 3 months, 6 months, or a full year’s expenses? Another was about how to determine the best mix of income sources for a nonprofit that has grants, government contracts, and fee income. In both conversations I asked the board members my favorite question: Why? This is a set up, of course, since I think that reasonable reserves are valuable to have, and that understanding the sources of income is a key to financial health. The “Why” question has to be asked when financial matters are considered without any connection to the nonprofits’ mission - that’s the disconnect. The purpose of these particular queries had more to do with creating a financial model and satisfying the board members’ perception of their role than with improving the nonprofit’s ability to serve its community. Finding the balance is very hard, though, and we have few guides.

Nonprofit Quarterly has been one of those guides recently with their spring issue titled “Revenue is Destiny”. I enjoyed reading a preview of the summer 2007 issue, especially this excerpt from an interview with Richard Brewster, executive director of the National Center on Nonprofit Enterprise. NCNE “helps nonprofits make wise economic decisions”.

NPQ: What should boards focus on if they are concerned about long-term sustainability?

RB: This may be counterintuitive, but the central question is the quality of the program. In other words, the worst threat to nonprofit sustainability is if your program is crap. A nonprofit’s only reason for keeping going is to change people’s lives, communities, the environment, and so on for the better. If a nonprofit is not making the biggest difference it can with the resources available, it is being wasteful. From an economist’s perspective, it is not putting its resources to best use and is inefficient. I’d find it odd to apply the word sustainable in any really meaningful way to such an organization.

I love the directness of this comment. Why should nonprofit directors and board members be concerned about their financial and economic condition? As a tool to deliver good programs to change communities and lives, both today and in the future.