Nonprofit Organizations Must Adapt to Change to Survive

Many nonprofit organizations are operating with deficits. The demand for services is increasing. Administrative, healthcare, and infrastructure costs are rising more rapidly than revenues. To survive in such an economic environment, nonprofit organizations must operate more like for-profit companies. This is a lesson the organization we lead, FamilyLinks, recently learned first-hand.

FamilyLinks is a nonprofit human service agency that provides services for troubled youths and at-risk families, including residential facilities, emergency shelters, substance abuse counseling, in-home family counseling, mental retardation services and outreach programs for schools. We deliver services at 18 locations in Allegheny County, Pennsylvania.

FamilyLinks was formed in 2001 through the merger of two successful nonprofit organizations, the Parent and Child Guidance Center and The Whale’s Tale. The merger was expected to enable the newly created FamilyLinks to provide an integrated continuum of services for people who need help from both organizations and to eliminate duplicative services and reduce administrative overhead. The greater size of the new organization gave FamilyLinks more clout in dealing with business partners. But the merger also imposed significant new costs on FamilyLinks.

At the same time, our merger was taking place, a new service and funding model for nonprofit organizations were emerging. Funding for our programs started to shift from contract funding – paying an agency a set amount to provide a program serving a large group of people over a set period of time – to fee-for-service – paying the agency for individual services rendered to individual clients. The days of depending on secure, contractually mandated revenue streams were beginning to end for social service agencies. Governments with tight budgets of their own find the fee-for-service approach attractive. Nor can agencies look for much help from foundations in supporting existing programs. Foundations do not want to support the cost of fixed programs, but rather want to be catalysts for innovation.

The depressed economic environment after 2001 magnified the difficulty of simultaneously coping with a dramatic restructuring and a new model for funding nonprofit operations. Temporary disruptions in revenue streams and increased costs eventually resulted in financial difficulty for FamilyLinks in 2002.

Getting out of trouble FamilyLinks followed a straightforward strategy for correcting the financial problems that developed in 2002. Our plan, which can easily be adapted by other nonprofits facing difficulty, has emphasized operating more efficiently without compromising the quality of care provided to our consumers:

Get help to assess the problem.

The worst thing any organization can do when facing a financial crisis is to pretend the problem doesn’t exist. An outside audit is often the best way to get an objective, no-holds-barred picture of the true financial state of the organization. In our case, auditors from the County spent three months at FamilyLinks doing a thorough, top-to-bottom investigation of our finances and programs. We cooperated fully with them because we wanted to know exactly how deep our problems went, and if we had overlooked anything in performing our own financial assessment. The auditors found only minor management miscues with the reporting of some of our programs; they found no criminal or fraudulent activity or gross financial mismanagement by FamilyLinks. Our own independent audit by a well-respected accounting firm identified ways for FamilyLinks to operate more efficiently.

“Rightsize” the staff.

After the merger that created FamilyLinks, we did not realize at first how many excess administrative positions we had. A reduction in force of about 10% in administrative areas in 2003 left client service personnel comparatively untouched and brought our costs back into line without cutting services or reducing the number of people we serve. An appropriately sized administrative workforce is essential because personnel costs can comprise two-thirds of total budgeted expenditures at nonprofit organizations. As a social service agency depends on changing community needs, the definition of the right size of its workforce also changes. If the agency doesn’t always have the workforce in line with the right size, it can’t survive.

Balance the budget.

It is crucial for a nonprofit under fiscal pressure to bite the bullet and achieve a balanced budget as soon as possible. Once personnel costs have been brought under control, an organization must closely examine every area of discretionary spending: telecommunications, office supplies, equipment leases. Most nonprofits can realize significant savings with relatively painless cuts in these areas. We now have a balanced budget at FamilyLinks.

Start change at the top.

New leadership is not always essential for change, but a new commitment from leadership is. An organization’s top management, including executives and board members, must send a clear signal to every employee, as well as every vendor and strategic partner, that the organization will operate efficiently and professionally.

Respect employees.

High employee morale is essential for a nonprofit to thrive. From the first, we made employee morale a priority. When we needed new managers, we promoted from within whenever possible. We reassured employees that they would be moving forward with the agency, and recently held our first-ever staff appreciation day. We believe morale has improved tremendously because everyone at FamilyLinks is confident in the strength of our organization and the importance of our mission.

Enlist reliable partners.

FamilyLinks received strong support from Citizens Bank as we moved through the process of putting our financial house in order. Citizens gave us the flexibility we needed to solve our problems ourselves while expressing confidence in our ability to do so. The Department of Human Services of Allegheny County also helped with unwavering support that was a key element in our recovery.

A nonprofit organization can survive while operating with a deficit – but not for very long. Fortunately, a return to sound financial footing is possible for nonprofit organizations that assess their condition candidly and embrace a disciplined recovery plan. Nonprofits need to become more efficient in their operations and better aligned with new funding models. By remaining open to changing the way it has historically done business, a nonprofit can ensure that the people who depend on it for services will have a friend for many years to come.