Synopsis: If you have noticed that fewer government RFPs are arriving for your mission, it’s a possible sign that political priorities have changed and your great agency no longer has a private key to the statehouse. This article proposes 4 ways a nonprofit can respond to cuts in contract funding.

Background

Higher Education is a jilted lover.

At the end of WW II, the President feared that the USA would return to peacetime with riots (this had previously occurred after WWI). The economy could not absorb all of the returning soldiers into the work force. The GI Bill was an elaborate ruse to divert soldiers out of the work force temporarily until the peacetime economy resumed.

You know the rest. Soldiers went to college, the Marshall plan created demand for USA goods, and the national standard of living advanced steadily in the 1950’s and 60’s.

By the 1980’s, Higher Education was cast aside while Crime and Medicaid projects flirted with government. The City University of New York lost its free tuition and the rest of the NYS system was no longer cheap. While almost all states have cut funding since 2008, Alabama, Arizona, Louisiana, Pennsylvania, and South Carolina have the sad distinction of removing 35% or more funding for higher education (Center on Budget and Policy Priorities, (2015:Mitchell and Leachman).

 

What can you do if you are in education, AIDS, or some other downsized priority?

I suggest that you choose one of four alternatives:

  1. Reduce your mission to a niche that can be funded
  2. Acquire a similar agency
  3. Look for a hero and negotiate your surrender
  4. Start a forprofit partner

 

Reduce Your Mission

In good years, we all tend to broaden our mission. Our best stakeholders demand it with considerable pressure. We gracefully yield, impressed by our own capacity. The trick is to understand the core where we are determined to be the best and  return to our true love when our government suitor is found with a new friend.

In my agency, our core is academics for kids who don’t have English as a home language. We have supplemental programs as well and many additional students from English speaking homes participate because they like our quality.

NYC does not always have our constituency at heart. The last administration proposed stopping all after school programs throughout the city for fiscal reasons. The current administration thinks more about diversion to avoid youth violence than college prep.

We accept some of those contracts but we also understand our core for those times when the love affair with government falters. We work hard to keep our tuition based programs filled and expanding to guard against the day when funding cuts occur

 

Acquire a strategic company

Notice that I say acquire rather than merge. Mergers often fail as two living organisms try to live as one.

  1. Weak finances of many nonprofits make bad mergers. Owen et al. state that “…. many organizations have grown quite weak in the present economy and are today in an extremely vulnerable position. ….. it would be difficult to carry out effective mergers with organizations that had grown financially desperate as demonstrated by an inability to meet ongoing monthly expenses or the loss of significant revenue sources.” (Owen, 2011:46)
  2. Unusual leadership is needed for mergers– While there are examples of successful mergers, the success depends on skills of boards and executives. I submit that these skills are the exception more than the rule.
  3. Less conflict in acquisitions– The power of the acquisition is simply for one organization to surrender its resources in the expectation that the combined company will have more efficiencies and two networks for its continued mission. There will be staff reductions, but the acquired organization may easily have some talent that will get preference in merit based selections. The spirit of the acquisition under the lead executive will be understood. People accept in advance in an acquisition that difficult decisions will be made to protect what we do for the people we serve.

What do acquisitions provide?

  1. Key contracts– The acquired agency may have a key contract or lease that is hard to obtain.
  2. New networks– assuming that the acquired agency has done quality work and managers will not leave precipitously, you can quickly expand your own network
  3. New talent– if some positions are now duplicates, you may find that some of the better talent should be chosen from the acquired organization. This is a strategic chance to strengthen your bench
  4. Efficiencies of scale– while service organizations do not profit from scale as much as manufacturing, acquisitions with a total revenue of less than $10 million will likely benefit.

 

Look for a Hero

There are too many nonprofits even without the cutbacks and fickle behavior by government. Kobara (2015) states that new nonprofits started at a rate 50 times faster than small businesses in the last decade. He points out that there are no investment banks, specialists, and attorneys that assist non profits as they begin operations.  Since the funding is not provided by the persons served, the market forces that cause forprofit companies to succeed or fail don’t affect nonprofits as quickly.

If you have less than $5 million in revenue and contract revenue is at risk, consider surrender rather than acquisition. Verne Harnish calls the revenue of corporations between $1 million and $5 million the ‘Valley of Death’. Your agency has not attained the efficiencies of scale. While you still may have the talent to lead a combined organization, you probably don’t have the experience.

There is no dishonor in strategic planning to keep the mission alive in a different corporate form.

 

Create a ForProfit Partner

For Profits are helpful vehicles for attracting social investors and business plans that could throw off tax or ownership benefits.

  1. Investors Easier than Donors– For long term fixed assets such as buildings, friendly investors such as board members and friends may be more willing to invest in stock than to donate. The building can be purchased with their capital down payment, financed by rent from the nonprofit, and sold if the rental stream fails. The nonprofit gets use of a property that is normally not available.
  2. Higher Rents– For government contracts that discourage ownership, a leasing structure from the forprofit partner may permit more contract funded repairs and lease money that essentially pays the mortgage.
  3. Exploiting Assets– If the nonprofit has unused assets, the forprofit corporation can rent them from the nonprofit and exploit them for unrelated purposes.
  4. Managing Risk – if the programs have significant risk, the nonprofit can accept the risk since it has few fixed assets. The forprofit keeps the fixed assets at arm’s length and cannot be touched in the event of a lawsuit.

Conclusion

If your agency is largely funded by contracts, changes are inevitable. The needs of communities change and politics change. Even friendly legislators retire or move on. Many of us assume a relationship with government that is not reciprocal. Why wait until your nonprofit is one of the many unlucky ones that fail? Choose your backup strategy now and rejoice that you could survive singleness!

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References

Harnish, Verne. Scaling Up: How a Few Companies Make It… and Why the Rest Don’t. N.p.: n.p., n.d. Print.

Kobara, John. “Facilitating Mergers and Acquisitions for Nonprofits” Huffington Post.  9/09/2015

Owen, Greg, et al. “What Do We Know about Nonprofit Mergers?” Wilder Research (2011): 1-49. Wilder Research. Web. 12 Apr. 2016.

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