Benevolent Takeovers, ctd.

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[For context, click here and here]

Earlier this year, I pondered the idea of non-profit mergers and acquisitions, and spoke of a small consulting project I was doing for a local non-profit, whereby I was tasked to explore the potential for such benevolent takeovers.

I analyzed organizations along criteria that included net asset balances, revenues, and efficiency ratios.  Out of the 60 similar service providers analyzed, I found seven that exhibited the minimum criteria for a takeover target.  Firstly, they were organizations with small asset balances, which meant that they were not only affordable but also in danger of going under; a few years of operating losses could wipe them out.  Second, these organizations were less efficient than my client organization, meaning they spent proportionally more on administrative expenses.  Presumably, if my client took over an organization’s revenue and operations, they would be able to do so at a lower cost and pocket the difference.  This is what is often referred to by business folk as synergies.

With the list narrowed down to seven, next came the tough political stuff: founders, funders and boards.  In the corporate world, mergers and acquisitions are often beneficial to the target company, since owners and management usually receive big payouts and a chance for the company to expand.  But in the non-profit world, unique barriers exist.

Exhibit A: Fame and Founderitis

Non-profit leaders are far more possessive about their organizations than corporate leaders.  Each wants to be the leader of the small grassroots organization, and will scoff at the notion of bringing outsiders in to lead or absorbing themselves into another larger bureaucracy.  Founders are often worse.  Among our list of organizations, we immediately scratched one because the family that founded the organization still had representation on the board.  It was not worth entertaining the idea of asking someone to take their name off of the building, even if we could promise better service and a path out of fiscal disaster.

Exhibit B: There’s always another funder

A struggling organization will look fiercely for new funders and can continue to tread water so long as it has the energy to keep chasing the dollars.  Fortunately, there are a lot of options for these organizations: fee for services, foundations, government grants, fundraising events, individual donations.  Only when all of these have been exhausted will the opportunity arise to discuss a takeover.

In the case of the organization’s under discussion, most were heavily government funded and shared many sources with my client.  As such, there is room for discussions with the city funders, who may be able to recognize one organization’s weaknesses vis-a-vis another one’s strengths.  The CEO of my client has already been in discussion with various city officials who are looking to reapportion their grants.  This could ultimately prove to be the key to loosening the grip over these struggling organizations.

Exhibit C: the politics

At the same time, organization’s that are heavily government funded might exhibit signs of patronage.  Their continued funding and support may come directly from strong relationships with important government officials and not much else.  One of the organizations that was in the worst shape was unfortunately dead-on-arrival because the board was full of community leaders and others with ties to government.  We felt there was little chance of getting them off of the government grant-roll.

Finding the one

The only thing that can overcome these hurdles is desperation, the reality that an organization will not survive much longer without some outside help.  For that, we had to narrow down the list to organizations that had lost money in recent years and didn’t have much of an asset cushion to survive similar losses.

Ultimately, only one organization fit the bill of an ideal takeover target.  It has low asset balances, had struggled in recent years, shares many funders with my client, and most importantly, the CEO was about to retire, creating a unique opportunity to enter into discussions.

Starting with 60 organizations and ending with one doesn’t particularly seem like a good rate of return, but I still stand behind the idea of non-profit mergers and acquisitions.  And there are other options, too.  While some of the organizations were too entrenched or too indebted to be considered takeover targets, we did flag two as potential management agreement targets.  Under such a scenario, our more efficient client could manage the operations of a piece of another organization’s business, thus doing it cheaper and potentially helping them to get out of their fiscal woes.

The point is that there are gains to at least sharing capacity across the non-profit sector and we need to find ways to allocate it best.  Many peoples’ lives depend on it.

Posted on May 28th 2010 in ideas

Non-profit Millionaires

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Did you hear that the CEO of the Boys and Girls Clubs of America made $1 million dollars in 2008?

A group of Republican senators, led by the Senate Finance Committee’s ranking member Sen. Chuck Grassley, R-Iowa, sent a letter…criticizing the non-profit organization’s use of tens of millions of dollars in federal funds that it receives every year.

[...] the letter specifically cited [CEO Roxanne] Spillett…for raking in $988,591 in total compensation in 2008, according to IRS filings.

That’s right.  A million dollars.  It seems pretty astounding that an organization dedicated to public service and opposed to distributing profits can get away with paying someone a million dollars, especially one that boasts on its website that its “efficient use of resources has won national recognition.”

I have to admit, I am empathetic to the idea of paying competitive salaries to non-profit executives.  The work is as hard, if not harder, than that of any other sector and you are forced to deal with its ambiguity of success.  With evidence-based funders and impact/efficiency critics (myself occasionally included)  questioning the difficult-to-measure outcomes of your efforts, it can seem pretty thankless.  Anyone not particularly keen on having their good intentions judged, or carrying any significant education debt, will undoubtedly consider if their efforts might be better compensated in the private sector.

And one should at least consider the scale of this organization.  BGCA operates over 4,000 clubs nationwide, with over 50,000 employees, and serves over 4 million kids each year.  Spillet is essentially paid $0.25 per kid – not a bad price to pay if she is able to successfully fulfill her mission: “To enable all young people, especially those who need us most, to reach their full potential as productive, caring, responsible citizens”

But a million dollars?

For argument’s sake, lets dig a little closer into the numbers:

[...] of Spillett’s total compensation, $360,774 was her base salary, which the organization said had not changed since 2006. She also received an “incentive based on performance” of $150,000 as well as benefits, expenses and contributions to deferred retirement plans totaling $477,817.

The numbers still seem shocking, but perhaps there is potential in “incentive based on performance.”  If folks in the non-profit world want to justify this kind of compensation, it seems to me the best way is to tie it to impact.
Its essentially what the private sector does when it buries the bulk of executive compensation in stock options.  Pay for outcomes, not just leadership.

The key is transparency.  Unfortunately, we have no idea what Spillet’s incentive was based on, but I’d guess that if people knew that her compensation came as a result of increasing the rate at which teenagers graduate high school and earn college degrees, they may not be as appalled by the prospect of paying her a quarter per kid to do it.

Thoughts?

p.s. Not to be a hater, but BCGA and others could at least take 1/1000th of these salaries and build decent websites?  No one is gonna want to miss out on the impending iPad fundraising bonanza.

Posted on April 9th 2010 in news

The Myths of Consulting

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Non-profits often think of consultants as too costly or too out-of-touch to bring real value to an organization.  But properly understood, the consulting industry seems like a perfect fit for the non-profit sector.  Below are the principal misconceptions I once had about consulting.

[Disclosure: the following observations were made during a failed attempt to solicit internships from top tier management consulting firms. I did not even get any bites. This may threaten the validity of my conclusions. Oh well.]

Myth 1: Consultants are industry and/or functional experts

It always blew my mind to think that management consulting firms hire an endless stream of twenty-somethings, have them analyze multi-billion dollar businesses and present their recommendations to C-level executives. What about the validity of these kids’ conclusions?  Well, I quickly learned that what consultants are truly expert at is knowledge management.  They amass tons of information about every company they serve, every balance sheet they analyze, every project they implement, every management issue they see; organizations of every size, shape and  mass.  Every country.  Everywhere.

Information is documented, organized and at the fingertips of every single consultant in the firm.  If you need advice, there is the primary human recall of hundreds of people that have willingly drowned themselves in these issues.  And by the way, they work for every company in every sector.  They record every best practice and basically distribute freely.  Copyright law need not apply.

In a way, its scary.  They sort of have their hand on entire industries.  Entire economies.  That is damn BIG PICTURE.  But they are able to test different theories in different circumstances.   They are able to see what works and what doesn’t and are paid to share these secrets with you.

Myth 2: Consultants don’t understand my organization

At the big management consulting firms, consultants spend anywhere from three months to multiple years working on a single project for a single company at a time.  They spend four business days a week embedded in the company, and every waking hour sifting through complex management questions.  They have management and staff at all levels available to answer questions.  I’m sorry, but if you can’t teach someone the ins and outs of your organization in three months, now would be a good time to reevaluate your training programs.

Myth 3: Consultants brings unique skills and perspective

Whenever I asked a consultant about the work that they did for clients, I often heard that they did exactly what I understood was supposed to be the client’s primary value proposition.  Due diligence for private equity firms?  I thought that is what PE firms did.  Why would you hire a consultant for something you are already damn good at?

But then it hit me; consultants often bring nothing more than extra capacity.  They are highly competent individuals that understand how to complete functional tasks.  Often, they are brought on to fill the gaps when extra hands are needed at a company.  In that way, they are like sub-contracted employees and can be seen as an effective way to turn fixed costs into variable costs.

Together, these reasons are why the non-profit sector should embrace consultants.  Non-profits are fundamentally resource-constrained organizations.  Consultants offer the opportunity to bring in the best practices and knowledge of the sector that non-profits often do not have the time and resources to obtain themselves.  They should be able to immerse themselves in an organization, understand how it fits in the larger world, and work with management to develop coherent and promising strategy.  And they make strategy development ad-hoc for organizations, saving critical resources that might otherwise be spent on full-time staff that do not have access to the same knowledge-base that will allow them to develop strategy quicker and comprehensively.

Posted on March 23rd 2010 in ideas

Owners vs. Donors

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There is no shortage of legitimate debate about what ideas from the business world can and should be applied to the non-profit world, but one that I often wonder about is the Board of Directors.

It is pretty much assumed that non-profits should have a Board of Directors, as they bring in outside expertise and help craft a long-term strategy for the organization.  But that is not the true reason boards exist in the private sector.

For-profit entities create boards for one fundamental reason: to protect the interests of shareholders.  As owners, shareholders are the beneficiaries of the company’s profits as well as the victims of its losses.  Thus, they appoint a Board of Directors to oversee management and make sure they don’t do anything that might threaten their payout.  Long-term strategy development is simply the outcome of this pure self-interest.

Non-profits have adopted board governance, but that founding logic doesn’t hold quite as well.  These board members are not owners; they have no stake in the outcomes of the organization.  Instead, they are often appointed on the basis of their ability to raise funds or through personal relationships.  And unlike for-profit board members, they are not paid; their involvement is strictly extracurricular.

Yet non-profit boards tend to perform the same role, overseeing management and crafting long-term strategy.  I will concede that there are plenty of boards that perform this role well and enthusiastically, but one has to question whether this is the correct alignment of power and incentives.  If we were to rethink this structure, would we maybe consider appointing other stakeholders? Employees? Foundation Reps? Dare I say clients?

To drive the point home, think of Bravo’s Real Housewives of Wherever, who are all often engaged in some charity work.  Close your eyes and imagine that one of them is in control of your organization’s mission and long-term strategy.

Are you worried yet?

Posted on February 24th 2010 in ideas

Beggars AND Choosers

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I recently read a 2008 report from the John’s Hopkins Center for Civil Society Studies on the priorities non-profit organizations had for the Obama administration coming in.

I was struck by how needy the organizations seemed:

[the] poll finds the vast majority of nonprofit executives reporting little improvement in government policy toward their organizations over the recent past, and pinning high hopes on a new national administration to establish a more supportive policy environment for their work at this crucial juncture of our national life. Heading the list of priority measures identified by these executives were four specific measures:

  • Restoration and/or growth of funds for their field in the federal budget;
  • Reinstatement and expansion of tax incentives for individual charitable giving;
  • Federal grant support for nonprofit training and capacity building; and
  • Reform of reimbursements under Medicare, Medicaid and other federal programs to ensure that they cover the real cost of service.

So basically all of the top priorities involved a demand for greater funding.  This seemed pretty interesting to me considering that, according to the 2008 Non-Profit Almanac, total revenues and assets at non-profit organizations grew 54% from 1990 to 2005, a full 20% greater than GDP over the same period.  Granted, these figures are skewed by the large proportion of revenues coming from the high-inflation education and health sectors, but the message is clear: non-profits haven’t been starving.

So what gives?  I think its addiction.  Similar to the way some corporations get addicted to growing through acquisitions, non-profits have become addicted to growing by acquiring new funders.  Sure enough, it is the largest revenue organizations that placed priority on these funding supports, while smaller organizations at least placed some emphasis on training and capacity building for their employees and student loan forgiveness for public service careerists.

Of course, I understand the need for funding support for the critical services in society that private markets fail to pay for, but the dollar addiction is intriguing when considered alongside this:

Only 22 percent strongly favored strengthening the capabilities of government oversight agencies or introducing “community benefit standards” to clarify the basis for tax exemption.

Ok.  No one likes to be regulated, but it needs to be accepted that organizations that are fully tax-exempt and benefit from the tax deductibility of charitable contributions cannot just have their cake and eat it too.

This is something that private markets understand.  Becoming a publicly traded company promises a huge and ongoing source of capital, but any company that wishes to get even a taste of those dollars has to endure major hurdles and regulation.  There are enormous legal, accounting and underwriting fees, onerous accounting standards and quarterly reporting requirements, and constant oversight from the Securities and Exchange Commission.

But most non-profits want subsidized, hassle-free, blank checks.  At the very least, they should be willing to accept some “community benefit standards” in order to get that money.  But it should go deeper than just the money.  An organization should want that validation, to be able to point to a standard they have met that certifies they are indeed providing their stated benefit to the community.

The icing on the cake is that standardization would only help them raise more money by allowing organizations to avoid to the dazzling array of individual foundation requirements on a case-by-case basis.

Posted on February 22nd 2010 in news

Benevolent Takeovers

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We hear about mergers and acquisitions all the time in business news.  It almost seems as though private markets necessarily consolidate, a process that can help great companies achieve improved growth or operational efficiency.  Some of these deals are mutually beneficial arrangements that allow companies to achieve economies of scale and synergies (see HP-Compaq).  Many others represent attempts to diversify the product portfolio or extend the business model (see Apple-Lala).  And then there are the few that are hostile takeovers aimed at acquiring market share (see Kraft-Cadbury).

I’ve always felt there was a place for mergers and acquisitions in the non-profit world, where success is defined less by financial gain and more by developing effective, efficient solutions to pressing problems. One would assume that anyone truly seeking to solve problems would welcome convergences that would allow the best organizations to extend their reach and create more efficient impact. Yet the non-profit world is replete with anti-cooperative structures, despite the requisite non-compete proclamations. Organizations vie for the same talent. They fight for the same grants and funding. And even if they only care about the end result of eradicating the problem, they still face extinction-by-funders if their organizations are not playing some dominant role in the process. No matter what is said, we are not in this together.

Fortunately, there is hope. I am currently working on a consulting project for a non-profit organization that has given me an interesting task: find organizations to take over. The organization is engaged in services that are heavily financed by local government. The CEO, noting significant budget cuts now and in years to come, imagines that many similar organizations will be in danger of going under. I have been asked to identify those organizations and develop a plan for potential benevolent takeovers.

There is strong support for this idea. The Boston Consulting Group recently published a study that showed that the most successful mergers and acquisitions occur during periods of economic downturn. In times of crisis, many fundamentally strong companies enter periods of distress that threaten their sustainability, making them ripe for takeover. An acquiring organization can gain greater efficiency through operational synergies and economies of scale, as well as an opportunity to broaden their impact. The risk of inaction is letting a fundamentally strong organization fail.

There are barriers. Non-profit boards and founders are far more possessive about their organizations than their corporate counterparts. And finding the appropriate measures by which to identify suitable targets is always a challenge. Nonetheless, it will be very interesting.

I will chronicle this experience. Although I will not divulge specific information about any of the organizations, I will certainly share all lessons learned. Stay tuned.

Update: follow-ups here and here.

Posted on February 3rd 2010 in ideas

Dude, where’s my client?

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One of the worst things you have to endure in graduate school is crappy IT services.  In order to be a functioning student – pay my tuition, register for classes, read syllabi, email – I have to log in to nearly a dozen different platforms.  Printers are a nightmare to configure.  Necessary software is often incompatible.  I’m not even sure how to get on the internet in some places.

Animosity towards the technical backbone of the school is practically universal.  Considering that students put forth a lot of time and effort to get something out of these degrees, not to mention a ton of money, you would think there would be more effort to keep us happy.  I began to think about how universities can get away with such poor client relations and concluded that the IT problem has to do with the unique model of higher education:

In.  Up.  Out.

With the possible exception of the umbrella-salesperson who seems to materialize out of thin air as soon as it starts raining, almost all businesses require repeat customers in order to survive.  The failure of a customer to repurchase a good or service is an indication it was provided inadequately.  This implicit feedback mechanism is one that keeps businesses on their toes, relentlessly focused on improving their product and keeping their customer satisfied.

Universities, on the other hand, have an in-up-out model that precludes this critical feedback mechanism.  Their core customers are the students, who enter the university, soak up whatever knowledge possible and then leap back out into the world.  Poof.  They are gone, they almost never come back, and the school no longer need concern itself with the pesky grievances those students had with wireless printer configuration.  Problem not solved.

(Some will say alumni donations can play the feedback role, though I don’t think this argument holds water.  First, when alumni make donations, they are not repurchasing the university’s services.  Instead, they are often actually donating to improve those services.  Second, they often do so under the misguided assumption that the university provided them with a service that helped them to succeed, when in fact it was either the simple act of getting that degree checkbox marked off or the illusory prestige that the top-tier universities have managed to preserve.  Either that, or they just want to support their football team)

The bottom line is that IT remains crappy because, with no expectation that a customer will return, there is no incentive fix it.

But worry not, because my experience led to a profound realization about non-profit management: the basic model does not inherently promote self-improvement because it follows the same in-up-out model.

Most non-profit organizations do not want return clients.  Some even define success by the rate at which their clients leave.  Think about homeless services: perfect execution would bring clients in, let them soak up whatever services they can (transitional housing, rehab, job-training, etc.), and have them leap back out into the world, never to return again.

But if you do not expect your client to return, how can you truly know whether or not you adequately provided the service?  Failure to return may mean that your client is off the streets and working, but it may also mean they have relapsed and are back living on the streets, having determined that your organization is useless.  You will never know for sure and you will never improve.

Hell, you may even use your useless non-return metric to raise money, claiming that all of your clients moved on to bigger and better things.  And this, in my opinion, is how donors got all crazy, paternalistic and problematic.  After years of funding in-up-out organizations with little or no tangible improvement in outcomes, they felt compelled to come up with their own metrics.

This is a welcome step, but the absence of standards makes it unsustainable.  Non-profits today are forced by donors to jump through hoops and maintain metrics that are often irrelevant to the organization and the context in which it operates, further straining their resources.

I am not sure what the answer is, but I am certain that it involves the client.  We must know where they go when they walk out our doors and we must find ways to get their feedback.

Thoughts?

Posted on January 24th 2010 in ideas
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