Bleeding For Programs

November 1, 2009       Thomas McLaughlin      

Streetsmart Nonprofit Manager

Many of the managers in the nonprofit field bleed for programs and services. They like them, respect what they try to do, and they want to see them thrive. Programs are the heart of the nonprofit sector.

Why, then, do people sometimes appear to bleed for corporations? The economic downturn has squeezed virtually every nonprofit in the country. Paul Light, Ph.D., New York University Wagner’s Paulette Goddard Professor of Public Service, last year predicted that 100,000 nonprofits will close their doors and few dissented. In many communities there is collective breath holding as everyone waits to see exactly where the damage will come.

Let’s look at this question more closely. There is an unstated assumption that there is a loss to society from nonprofit closings. But exactly what goes away when a nonprofit closes? The only thing can be said for sure in any given situation is that a corporate structure and the trappings that go with it are lost.

It is a safe bet that many of the nonprofits that will close are small, if only because the majority of nonprofits have less than $1 million in revenue. For small organizations, the corporate structure is minimal and the trappings are probably non-existent. The reason for the concern about closings is that when people mourn the potential loss of nonprofits what they are really concerned about is the programs and services those organizations offer.

This is a crucial distinction. The corporate structure is often confused with the programs and services the structure provides, but they are very different things. Corporate structures are really nothing more than a legal framework, which happen to be one way we organize services. Programs and services are, at least potentially, lively and effective ways of improving society. So what people should fear is not the loss of 100,000 corporations but the loss of the many more programs and services those entities provide. Or should we?

The Link

Let’s circle back to the original linkage between corporate structure and programs. If 100,000 nonprofit corporations are to fail, what should become of their programs and services? The unhappy answer is that most of those programs and services will cease operations when their sponsoring corporations go out of business.

The next question is: ÒShould we bleed for those programs and services?Ó Most of the time, it can be argued, the answer is no. Nonprofit corporations are designed to have a lot of power over the programs and services they run. When a corporation begins to fail, it inevitably drags its programs down with it. Like it or not, program decisions, such as whether to expand a service, are often deflected, delayed or denied because of corporate factors outside the control of the program managers.

Even if a program is profitable and well-run, if the sponsoring corporation runs low on cash it will have to make painful decisions affecting all programs no matter what their value. The result is that failing corporations tend to make their programs fail as well.

One can argue that failing programs cause failing corporations, and that is often true. But corporations also fail due to lack of funding for their programs, poor leadership at the top, inadequate investment in management systems and people, and strategic mistakes. When the senior leadership of a nonprofit makes widespread and systemic misjudgments and miscalculations it is hard for programs to keep providing good services. In most such cases, eventually, just about everything fails.

During a recent public forum one community leader who was advocating for preserving a long-struggling local nonprofit was asked what value the organization currently had. It was a revelation for all when he thought for a long time before responding Òtheir building.Ó In that case, ought not the building be transferred in some orderly fashion to an organization as similar as possible to the original owner?

What to do?

What can be done to ensure that good programs and services don’t get trapped under the idled computer servers and dust-covered human resource manuals of extinct corporate entities? The most effective systemic change is to make it easier for nonprofit corporations to walk through the exit door. Legal specialists believe that nonprofits tend not to declare bankruptcy and instead just dissolve. Public officials responsible for public charities quietly talk about the nonprofit corporations that simply stop responding to mail or email or even telephone calls. Thousands of unacknowledged non-operating public charities clutter the public records in many states.

Ironically, a lesson on what to do can be taken from the recent financial services smashups. Products and services that the market felt were worth retaining were sold to the corporate survivors who are now putting their unique stamp on them. One of the reasons this can happen is because there is an orderly and recognizable process for exiting the business world well short of bankruptcy. For-profit corporations are bought, sold, and merged regularly, especially in the publicly held world where executives are always looking for business bargains.

Nonprofits are now beginning to accept mergers as a legitimate strategic option, and in the long run that should help create an accepted pathway out of business for failing corporate entities. But in the absence of an external arbiter, such as the investor class, there will always be a tendency in nonprofits to deflect, delay and deny the moment of hard choices.

In the absence of structural legal changes, the nonprofit world can opt for a cultural solution. The first step in doing this is to reinforce the idea that what should be salvaged, if possible, are programs and services as distinct from the corporate vehicle itself. While this might sound like a trite differentiation, the tendency to confuse corporate matters with programmatic ones could use some unpacking.

Wholesale funders of programs, such as government officials and foundation executives, could be especially effective in making this shift. In any large group of organizations there will be troubled members. The question is not whether this will happen but what to do about it. Considering the link between corporate fiscal health and programmatic success, funders could commit to a more rigorous screening effort. Fiscal screening is the obvious first step because the knowledge is readily available, it can be quantified, and it is widely understood. Even so, many funders pay surprisingly little attention to fiscal capacity when considering whether to fund an entity. Screening for fiscal health is the best way to help prevent failing corporations from wrecking good programs.

Beyond fiscal considerations, it is in everyone’s interests to encourage the development of and respect for programmatic metrics. In addition to the obvious advantages of such program indicators, program failure is often a reliable sign of corporate failure.

Next, funders could explicitly adopt a triage attitude for failing programs. That is, if one wishes to try to bring back weakened programs, be explicit about investing in the ones that are most likely to be restored. This means that everyone will become comfortable about separating still-promising programs from failing corporations and somehow situating them in a more supportive environment. One of the reasons why this sort of thing does not happen more often is that there is not yet sufficient cultural acceptance of the idea, which in turn means that there is little of the well-known precedent and infrastructure that needs to be in place for it to occur routinely.

Finally, nonprofits and funders alike must quicken the pace of research into metrics. One reason more attention is paid to corporate financial indicators than to programs is that we know how to measure financial inputs and outputs, whereas there often is not agreement on what constitutes a program from one organization to the next.

Part of that difference is a strength of this sector. But to be credible and effective with the general public, executives must develop robust data for making programmatic decisions. So go ahead and bleed for programs. Bleed for the consumers of failing programs, and bleed for the staff members trapped in those programs without support or resources to do their jobs effectively. But don’t bleed for the failed corporations that dragged them down. NPT

Thomas A. McLaughlin is Director of Consulting Services, Nonprofit Finance Fund, and a member of the faculty at the Heller School for Social Policy at Brandeis University. His email address is tom.mclaughlin@nffusa.org