Fio Partners Perspectives

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. 

So this conversation has been niggling at the back of my brain and I thought I would attempt to define the segmentation.    In some ways all of these groups are early adopters of the technologies of consolidation.

The Innovators:  These are organizations that are pushing the cutting edge of their fields or the sector.  Think social innovation.   These organizations are mostly new, young, and flexible.  They don't have entrenched boards or lots of money to spend, or lose.  They do have ideas, lots of them.  Because they are young, they are not hung up on structural change or working collaboratively. This segment also includes some older and more established organizations who are market/client driven and are intent on capturing larger market share or just serving people better, and are not afraid to change their structure, either through alliances, networks, subsidiaries, or mergers in order to accomplish their aims.  I include in this group some of our larger clients who are beginning to articulate an acquisition plan as part of their strategic management work…a completely new phenomenon in the sector.

The Cost reducers/Back office enhancers/Group purchasers:  These organizations are experiencing declines in revenue but not so much decline that their organizational lives are threatened.  They are interested in either reduced back office costs or enhancing their back office supports. By sharing space and/or back office services such as finance, human resources and information management, these organizations are seeking a better return on their investment on infrastructure expense and/or the ability to shift funds spent on administration to programming to meet increased demand.  This segment is very broad and includes arts organizations, environmental groups, and health and human service entities.

Negotiators of Systems Level Change:   There are a number of human service systems that are affected by significant field changes that would have happened anyway, even without the recession.  Examples include the movement of the child welfare field away from long term residential placements for kids and changes in adult education that more clearly link adult education programming to workforce development efforts.  The recession has picked up the pace on these initiatives but did not cause them.  There are also systems changes that directly relate to the recession, e.g. the nursing home industry, where threatened programming cuts in state contracts are so severe that there is a need to completely rethink how the system will operate with greatly reduced funding.  

The Nearly Bankrupt:  These are organizations that have cut staff, reduced programming, cut benefits, exhausted their reserves, and are running out of options.  These are merge or die situations in which the goal should be to salvage that unique program that no one else has, preserve jobs for particularly talented staff, pass on unique tacit knowledge that would other-wise disappear, or ensure that the nonprofit's assets are appropriately reinvested in services with a similar mission.   This group also includes organizations who are being pressured by funders to close due to quality issues, either to close specific programs or to shut down completely.

The Vast Majority:  Those who are either not feeling economic pressure or prefer to shrink to a smaller size than share resources or give up autonomy.  

I can already see some overlap in these groups and some "combos" that share attributes of more than one segment, e.g. organizations facing system level changes may simultaneously consider back office consolidation. The question for capacity builders is whether we actually need different educational programs or support services for these groups.  What do you think? For nonprofits, which segment do you see your organization in?  What types of programs or support services would be most helpful to you?

 

 

 

Some thoughts on market segmentation relative to consolidation in the sector

 

I attended a meeting this week about a 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, and that, perhaps, the segments are distinct enough to actually program for them differently….maybe.

 

So this conversation has been niggling at the back of my brain and I thought I would attempt to define the segmentation.    In some ways all of these groups are early adopters of the technologies of consolidation.

 

1.        Innovators:  these are organizations that are pushing the cutting edge of their fields or the sector.  Think social innovation.   These organizations are mostly new, young, and flexible.  They don’t have entrenched boards or lots of money to spend, or lose.  They do have ideas, lots of them.  Because they are young, they are not hung up on structural change or working collaboratively. This segment also includes some older and more established organizations who are market/client driven and are intent on capturing larger market share or just serving people better, and are not afraid to change their structure, either through alliances, networks, subsidiaries, or mergers in order to accomplish their aims.  I include in this group some of our larger clients who are beginning to articulate an acquisition plan as part of their strategic management work…a completely new phenomenon in the sector.

2.       Cost reducers/back office enhancers/group purchasers:  these organizations are experiencing declines in revenue but not so much decline that their organizational lives are threatened.  They are interested in either reduced back office costs or enhancing their back office supports. By sharing space and/or back office services such as finance, human resources and information management, these organizations are seeking a better return on their investment on infrastructure expense and/or the ability to shift funds spent on administration to programming to meet increased demand.  This segment is very broad and includes arts organizations, environmental groups, and health and human service entities.

3.       Negotiators of systems level change:   there are a number of human service systems that are affected by significant field changes that would have happened anyway, even without the recession.  Examples include the movement of the child welfare field away from long term residential placements for kids and changes in adult education that more clearly link adult education programming to workforce development efforts.  The recession has picked up the pace on these initiatives but did not cause them.  There are also systems changes that directly relate to the recession, e.g. the nursing home industry, where threatened programming cuts in state contracts are so severe that there is a need to completely rethink how the system will operate with greatly reduced funding. 

4.       The nearly bankrupt:  these are organizations that have cut staff, reduced programming, cut benefits, exhausted their reserves, and are running out of options.  These are merge or die situations in which the goal should be to salvage that unique program that no one else has, preserve jobs for particularly talented staff, pass on unique tacit knowledge that would other-wise disappear, or ensure that the nonprofit’s assets are appropriately reinvested in services with a similar mission.   This group also includes organizations who are being pressured by funders to close due to quality issues, either to close specific programs or to shut down completely.

 

5.       The vast majority:  those who are either not feeling economic pressure or prefer to shrink to a smaller size than share resources or give up autonomy. 

 

I can already see some overlap in these groups and some “combos” that share attributes of more than one segment, e.g. organizations facing system level changes may simultaneously consider back office consolidation. The question for capacity builders is whether we actually need different educational programs or support services for these groups.   Don’t know…helpful?  Not helpful?

 

 

Tips for Saving Money in the Back Office

A recent project to help an Executive Director whose agency has had to downsize infrastructure to match a reduced program portfolio led to some interesting learning that I thought I would share. 

It is not difficult to determine the relative efficiency of a finance office.  The use of comparables can help a decision maker determine whether seeking further efficiency is likely to be fruitful.  Using personnel costs only (salaries and benefits), it is easy to compare the relative efficiency of organizations of different sizes.  Dividing the total salary and benefit cost by the numbers of dollars managed by this staff will yield a cost per dollar managed.   Use organizations in the same or similar industry and the same geographic location in order determine this cost so that prevailing wage rates are comparable.

In talking with CFO's from various organizations, we also learned about several ways that nonprofit organizations are working to reduce back office costs.   Certainly the most consistent and highest cost in a finance office is personnel.   What drives the number of personnel is the number of transactions that must be carried out and recorded.  One way to drive down the staff costs is to examine whether the number of transactions can be reduced.   The following are some ideas for ways to reduce the numbers of transactions:

1. With careful safeguards in place, use credit cards for purchasing predictable products and services that cannot be bought in bulk.  While each item purchased will still be entered into the books with its assigned account number, use of credit cards reduces the number of checks that have to be written and recorded.   Credit cards in one agency are locked in a safe in the finance office and can only be taken out by program managers for specific purposes.  Choose   credit cards accounts can be monitored online. 
2. To more efficiently manage petty cash, one organization is negotiating with its bank to set up debit cards with strict dollar limits. Again online monitoring is key.
3. Examine your organization's payables list carefully.   Identify vendors who are receiving checks every month or more than once per month.   Can you aggregate these purchases?  Can you negotiate with the vendor to be paid quarterly?
4. Use of www.firstgiving.com:   this entity aggregates donor giving and provides the charity with a single check.   Annual fund donations, as well as ticket purchases for special events can be set up so that the donor can make the donation or purchase the ticket on-line.  Use of this tool can reduce the number of checks recorded from hundreds to a few.
5. Use of a bank sponsored scanner for deposits:  one agency, working through its bank, has purchased (one time cost of about $1000) a scanner that allows deposits to be made daily in the Finance Office without costly and time consuming trips to the bank.  The scanner also creates a deposit receipt.  The use of this tool greatly reduces accounts payable staff time, increases accuracy, and speeds up cash flow.
6. Analyze purchasing to determine purchases that should be combined or bought in bulk.  This analysis is also helpful in discussions with strategic partners who might want to work with your organization around joint purchasing.  What are the five highest volume purchases that your organization makes?  Is there potential here to both reduce these costs as well as reduce the transaction cost to make these purchases?
7. Work with your bank and payers on electronic fund transfers to speed up cash flow and reduce staff costs. 
8. Do you use ADP or another payroll service?  Be sure to work with them closely to determine whether there is merit to using some of the ancillary service packages such as tracking earned time off, pension accruals, etc.   Tracking this information can be very costly in staff time and automating this function can also increase accuracy. 

What other tips have you implemented?  What would you recommend?

Photo Credit: AMagill

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.  

So, in the absence of rational planning at the systems level, what should nonprofit organizations do?  I am fortunate to work with larger, rather than smaller, nonprofits who provide human services.  All of them will, almost undoubtedly, survive this difficult period and live to grow again when things get better. But none of them operate in isolation from a larger community of services.   In my work, particularly around strategic management, I encourage them to not just think of their own organizational survival in these times.  I encourage my clients to think about the organizations that support the populations they  serve and to consciously construct a relational map, if you will.  Then monitor  that map to understand the effects on the organizations in their arena.    Who are the organizations that refer clients to you?  Who do you refer to for ancillary or supportive services?  If your clients need housing supports, or basic needs supports, who is providing them?     Who are your competitors and what shape are they in?  What are their plans…which programs will they close or cut back on?  If you have partnerships with other organizations, how are they doing?  Will they be able to maintain their contribution to your joint work?  

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

Bring on 2009!

Jane and I spent the day meeting yesterday reflecting on 2008 and planning for the coming year. As we reflected, we were excited about how FIO Partners has grown over the year.  From the breadth and depth of our work with our clients, to establishing our office in Connecticut, to our website being up for a full year, to blogging, to offering training …it was an important growth year for our firm.  And we would like to thank you for being a part of that.   Thank you for your interest in our work, for reaching out to discuss the challenges you are facing, and for allowing us to support you in moving through this challenging time for the sector and our nation. 

In planning for the coming year, we discussed what we see as the two major trends that will drive the sector - retrenchment and consolidation.  For the first time in the history of the nonprofit sector, we believe that the sector will be forced to contract and that organizations, of all sizes and across all industries, will be forced to make difficult decisions about shrinking and/or giving up autonomy .  What does this mean?  This means that healthy group process and evidence-based decision-making are both crucial.  In difficult times, our ability to successfully communicate with our key stakeholders can go out the window - when, in fact, that communication is critical.  It also means tremendous change for your clients, your staff, your board members - figuring out how to lead through challenging changes in a proactive way is another critical success factor.  We will be developing a series of blog entries and digital articles to explore these challenges and to provide you practical, useful advice.  We would also like to hear from you - what information would be most helpful to you? What are you facing? What topics are you most interested in?  Please post your comments here, connect with us on LinkedIn or Twitter, send us an email - we want to hear from you. 

So bring on 2009! You are not alone in navigating these times…we are here to help. Reach out and let us know how we can support you.

Photo Credit: Jin T

The Economic Downturn & The Importance of Value

Contributed by Anne

What a month it has been…for everyone.  The economic downturn has many of our clients anxious, rattled, and concerned - and rightly so.  This post is inspired by this week's Carnival of Nonprofit Consultants, being hosted by Michelle Murrain, over at Zen and the Art of Technology, on Monday, November, 3rd.  She asks: Is the economy changing the way you work, or the way you think about your work? In what ways? 

In terms of how we think about our work, there is a sense of urgency and priority that we, as consultants, are delivering high-value, high impact services.   This is true in good times as well, but even more so right now. 

For all of our clients, there is a choice around how to spend funds -- choosing a third party consultant to support a process or to facilitate a session - or even deliver a training - is a significant decision, even for larger agencies.  Given the downturn, this has only deepened our focus and attention on delivering value.  What does mean?  It means that we will work more efficiently by integrating the use of on-line project management software (we use Basecamp) to continue conversations in between in-person meetings.  It means we will ask for feedback on a consistent basis on the progress of an engagement or the effectiveness of a training session.  It means that we will do everything in our power to communicate effectively and frequently to avoid missteps or miscommunication that will incur additional cost or confusion.  It means that we are offering clients menus of services to select from - realizing that not every agency has the funds to invest in a significant 3-4 month strategic planning process, but a shorter, more nimble process will do the trick.  We realize that and support our clients through prioritizing the sets of possible activities - and help them choose the most helpful, most informative, or most impactful.

The economic uncertainty means that we are working everyday with clients to teach them to manage their organizations through uncertain times.  From retrenchment planning to building networks with peer agencies, we are helping organizations see that each one of them has a future that they can CHOOSE to define.  Instead of running amok and being overwhelmed, we are helping our clients to take stock and to act decisively.  It is our hope that through hiring FIO Partners to support them in some way, our clients will ride through the downturn and come out better and stronger on the other side. 

In the meantime, it is the mission of FIO Partners to provide each of our clients guidance and support to make them healthier organizations and more able to enact the change they wish to see in the world.

 

Thinking About the Core In A Time of Retrenchment

I have been having so many discussions about retrenchment lately.  The fiscal situation in Rhode Island is so scary and there are so many deep cuts in human service supports under consideration.  I am hearing from clients that I haven’t spoken to in years, asking for help with mergers, management service organizations, and networks capable of managed care contracting. 

While I certainly know the mechanics of creating these entities and have preached for years that they are necessary for the survival of the sector, it is still tough to outline what organizations have to undo, give up, shift away.  It is hard to interact with people who have only known how to build and expand, whose entire careers have been about expanding access, adding services, pushing out to wider geographic areas, inventing new ways to help, building teams of staff that have taken years to assemble and refine, when your message is about undoing, pulling back, shrinking, eliminating services, crafting a smaller, tighter, more nimble organization, letting people go.  Too often the people who are adversely affected are not just employees, not just colleagues, but have, through a career of shared proximity, become friends.  This is just painful to watch.

So I have been working to craft a set of experiences and processes, and a message strategy that helps with the transition, that envisions what could be on the other side of this great divide full of potential loss.   The message is about fighting back of course (who would we be if we did not advocate for those we serve?),  but it is also about finding what is essential in what you have already built.   I draw on analogies from psychology and medicine.  When the body is stressed, when the mind is stressed, you focus very clearly on survival.  But when you are very ill, it can be helpful to envision yourself well and whole again, rather than give in to the deer in the headlights syndrome of utter paralysis.  Part of that envisioning, is to understand who you are, what makes you, you.  The process also involves stretching notions of possibility.  When we are stressed we do focus, but often too much, inadvertently narrowing our options. 

One ED asked me point blank, “How can we plan now?  We don’t know what will actually happen?”   While it may seem counterintuitive, this is when planning will count the most.  So I start by asking my clients to focus on the core of what they have built.  There are a variety of ways to get at the core and it takes an iterative process to find that set of values, or competencies or programs that express, for the leadership, the essential core of this particular nonprofit. For some it is the whole agency and they envision all of what they do but in a smaller sized package.  For others, there is a paring away of the not so essential programs, to find the heart of what they do.  For others it is a primary relationship that must be enacted in a certain way to have value:  a particular model between service provider and consumer.  Others choose a group of people as the core, the group of people who have the most creative minds, who are the most likely to be able to reposition and reinvent. 

Once the core is identified, we engage in a process of envisioning the organization with an intact core and craft a strategy to ensure that happens.  This is enormously useful when planning for layoffs.  It is so helpful to know, quite clearly, who you can let go and who you must convince to stay.  Once this picture becomes clear, it becomes possible to go back to environmental scanning that looks at new possibilities or to talk about mergers.  It is much easier to enter into merger discussions if leadership knows quite clearly what must survive for the organization’s history of service to have ongoing meaning and worth. 

It does occur to me as I write this, that this mental exercise might be healthy for any organization in any environment. If you are facing these types of challenges, what types of planning activities are you undertaking?