What CFOs Really Want

March 1, 2010       Paul Clolery      

Chief financial officers have long been the fall guys (and gals) when it comes to making sure that budgets stay on track. They are often also involved with an organization’s investments. When the perfect storm hits, a recession so that donors don’t give as often and the stock market plummets, CFOs find themselves in the unenviable position of having to work the numbers to save the organization but with results about which few can be thrilled. That’s the position in which Steve Howell, chief financial and administrative officer of The Nature Conservancy in Arlington, Va., Bob Mims, controller and director of investments for Ducks Unlimited in Memphis, Tenn., and Larry Probus, senior vice president and chief financial officer of World Vision in Federal Way, Wash., were placed by their organization.

They aired they challenges during an NPT Executive Session conference call discussion moderated by NPT Editor-in-Chief Paul Clolery.

Paul Clolery: I don’t think anybody can argue the point that 2009 was a tough year. A lot of hard decisions were made. Walk us through the most difficult decision you think you had to make during the past 12 months. 

Bob Mims: As with any downward trend, the most difficult decision involves people because at the end of the day the people are really the assets on the service side. Since we are not profit motivated, and are mission motivated, that by nature makes us people motivated. So, a head count reduction, or benefits-type reduction, is usually the most difficult. 

Clolery: I assume you had to make them last year?

Mims: We had a 10 percent head count reduction in May. 

Larry Probus: We curtailed some of our benefits, no pay increases, but the hardest one by far was the 5 percent head count reduction. 

Steve Howell: Same thing. We ended up laying-off about 10 percent. I would agree entirely with Bob and Larry, it was by far the hardest thing for a nonprofit to do.

Clolery: How do you decide who is going to go? Do you cut an entire program? Do you cut one or two people from everybody so that the programs continue to function?

Mims: These discussions are not hastily made. If it’s related to a contingent plan, the time pressure to make these decisions is pretty quick in some cases. In our case it was over the spring when it was deemed necessary. The difficult parts are the discussions of who and what. Strategically, we tried to balance it between lesser programs, lesser needs in administrative, and look for some of our departments to volunteer up some of the programs that might be cut.

Probus: I don’t think World Vision had a layoff, certainly in the past two years and then probably more, longer than that to anybody’s memory. The leadership team, everybody, came together and prayed how to go about it. We decided that we were opposed to establishing a certain number of people or an amount of money we were trying to save. We decided that we would go off individually to identify the positions and or people that the organization would be most able to do without, recognizing that everybody and every position is important. We came back and compared notes. It was interesting. We all had about 5 percent. In some cases, it was particular positions. You might have had very good people in positions that weren’t as critical. In other cases, we had people who weren’t the best people in important positions. There wasn’t a stated formula, per se, except that we all came back and compared notes.

Howell: I think everybody wants these things to be as strategic as possible, But as Bob mentioned, in a limited time frame, there’s not enough time for a whole new strategic plan. For an organization that’s large and distributed, you end up doing what Larry did, which was give everybody a target percentage, you have them work through the implications of that reduction. In our case it divided into four large groups — the U.S. Program, the International Global Strategy, G&H stuff and then the Marketing and Philanthropy function.  

 

You have to bring all that back together and say, “Well, we don’t really want to cut things that raise resources, direct fundraising and that sort of thing.   And, we wouldn’t necessarily want to leave this country or that one. It ends up being that everybody brings large amounts to the table and you look at the implications. The leadership team decides which implications are the least risky or least damaging to the mission and then decisions are made. 

Clolery: The CFO or the comptroller is the top financial person in the organization, short of a board member. When it comes to these types of decisions, should a CFO have a line item veto? 

Howell: I’ll answer that. The CFO, along with our general counsel, were consulted and had a say on reductions from a risk management perspective, but no “line item veto” on programmatic decisions. 

Clolery: That was Bob snickering right?

Mims: In all seriousness, I think the CFO is probably best positioned to understand the financial implications of what the headcount reductions are in terms of risk management.

Clolery: Should it just be a head count issue or should the CFO be saying, “Do another test. This program really doesn’t work, should we get rid of it?” 

Mims: There is a balance. It is paramount for the CFO to understand not only the revenue side of the organization, but to teach the rest of the staff the importance of the financial position or the balance sheet strength of the organization to be able to sustain valleys in recessions. I believe it’s the top program people’s responsibility to articulate to the rest of the staff and board the areas that are of top priority and the top performers with respect to the mission.

Clolery: Why is this a recession issue? Why wouldn’t this be something that’s done 24/7 in good times and bad?

Howell: It’s hard enough to get people to focus on priorities and programs. I think there’s an unlimited appetite because there’s been so much work to do. Everybody is so passionate, so, it’s really impossible to get anybody to focus or prioritize when the revenue is growing at a healthy pace. It’s more about what new things we are going to do or where are we going to expand.

The one possible silver lining of this kind of thing is that it at least forces a discussion of priorities and focus. I would agree with Bob that I wish I had enough information to be able to, in terms of measures and return on investment and so on, to articulate which programs should be eliminated. But as you know, in our business it’s very difficult to measure mission impact. What we can do, though, is provide useful information. In our case, one thing we do know is what the market supports. For example, if all the philanthropists are giving to program A and not program B, I can at least observe that program B has a deficit problem and program A does not. Now whether that means Program A and B are better than one another or not I don’t know but certainly the marketplace often tells us what they prefer to fund.

Probus: I did take a leadership role in this because somebody had to be the administrator in figuring out how we were going to approach this, what’s going to end up at the end of the day. So the CFO is working perhaps with the HR person as a logical person from my perspective.

One of our objectives was to look back after we were through this and be a stronger organization, as well as communicating to the employees so they would understand how we approached this. We thought it was important not to say, for instance, that we had to save $10 million a year. It was really an incremental approach of “What is really required to do our work in the very best way?” I think we all probably could look back and say, “Well, why didn’t we do this two years ago if it makes you stronger and better?” And, that’s a good question. Of course, it’s because they’re hard things to do and unless you have a driving reason at the time it’s hard to pull those triggers.

And so, when I look back on it I think we are a better-organized structure and more effective organization today than we were a year ago.  

Clolery: Larry, as CFOs, since in many cases there aren’t specific tests for programs, how much of what you guys do on a day-to-day basis is spotting a financial trend that might lead to growth or change in your organization?

Probus: I think there are two things. One is, Steve said it earlier, we have particular programs that the marketplace is not showing as strong support for and we’re either having to supplement or find alternative ways of funding them. Understanding where those areas are, obviously, is a key role for the CFO. Secondly, we’re primarily a fundraising component of World Vision. We do get involved in making decisions about programs and cutting them, but a lot of the very specific decisions we made were around the fundraising and administrative roles. Understanding which fundraising channel is working and efficient and which ones are not was important to that as well.

Howell: Since we’re primarily funded with individual donations, obviously the S&P 500 or other stock market indexes are leading indicators of what’s going to happen. We could see this whole FY’09, the dramatic decline in the market. We knew that things would fall off quickly thereafter and of course they have and really haven’t recovered yet, for us anyway.

The one thing that was happening at the same time was that the federal government, if you rely on government funding which we do for most of our programs, was increasing funding substantially. You could say, “Let’s look at the activities that rely on government funding, and go after that as opposed to the private marketplace.”  We were very successful in helping stem the impact somewhat by doing that. The other thing is looking for trends and what’s popular on the world stage and certainly right now it’s climate change. It’s been very big in our world and the source of a lot of donations, a lot of interest and a lot of support for our organization.

Clolery: You mentioned government. One of the challenges because of government has been cross-border currency exchange. You do a lot of that because of various programs around the world, is that getting harder or easier these days?  

 

Howell: On the cross-border, ever since 9/11, there’s a lot more filing requirements. There are things in the Form 990 and so on that you have to do if you give any money to NGOs outside the United States.   

  

Clolery: Since the change of administrations has it gotten easier or have the guidelines lightened up?   

  

Howell: Since the Obama?

Clolery: Yes.

Howell: The restrictions on stimulus money are more administratively cumbersome than they were heretofore. I don’t think it’s anything other than they want to post everything transparently on the Internet and they also want to make sure that everything created a job. If you’re using money from that particular program there’s more administrative burden.

The other thing is they, at least in our case, negotiated pretty hard on indirect costs and did not want to pay as much for indirect costs with the stimulus funds.

Probus: No. I don’t think we’ve seen any real changes on the government side. We had a pretty robust government portfolio. We just closed out our Fiscal Ô09 and government funding was up 22 percent. I am not aware of any additional administrative restrictions or easing of restrictions.

Mims: We’re seeing a little bit of freeing up on our side, which is probably more related to a better friendliness toward wetlands restoration than anything. However, it’s important to note that most of the time in government revenue and cooperative agreements, those have some inherent restriction for which you have to come up with other revenue sources to match. So, although the government revenue might be easier to obtain, it might be more difficult to pay for in a downward economy. There was one other thing I was going to mention. You asked specifically what do we do as CFOs. I know that Steve and Larry and I have participated on some benchmarking analysis. One of the key ratios that we look at is Unrestricted Net Assets divided by Operational Revenue as a sign of what type of balance we might have in comparison to other nonprofits and which direction we need to go.

We’ve done that both in good times and in recessionary periods. Speaking for myself, and likely for Larry, the message has been the same — we need to have a stronger balance sheet because we’re lower on the scale compared to our peers, and compared to where we want to be. That being the case, we went through a few years where no one really listened. What we learned is talking about building the balance sheet did not really build the balance sheet. Now everyone is listening after we have a recessionary period.  

Probus: Bob has hit on something that has been very important at World Vision during the past several years. This past couple of board meetings I have gone into a lot of detail with our finance committee about understanding our level of unrestricted net assets, understanding the nature of what’s there and the way the strength of our balance sheet has evolved over the past year. It has become more restrictive, frankly, because we realized through this low dynamic economic time that the world’s more volatile than we might have thought it was two years ago.   

Clolery: Speaking of the world being more volatile than it was two years ago, what are you looking for financially and otherwise in 2010? 

Mims: Well, we’re looking for more money. Our projection is that 2010 will at best be flat for our purposes. Our highest source of revenue is our grassroots revenue. Volunteer-related revenue on fundraising events will be at best flat in 2010. A lot of that is tied to the unemployment rate. Typically they match each other. We also believe that major gifts might be flat to down. It’s a growing trend for us but stock portfolios might not have reached their highs again, even if performance has been good in this current quarter and the previous quarter.

We are trying to set our FY’11 budget, in early stages, with a bit of conservatism that things might not go up in FY’10.  

Probus: Our year ended that September 30 of Ô09 was a little bit of a positive. Our total revenues were up 10 percent, but most of the growth was government funds and gifts in kind. Our cash giving was down about 4 percent. But even with that, we continued to have growth in what we call “sponsorship,” which is the $30 a month basic, the core of what we do. It was major donor giving that really fell off. It was down about 30 percent. So when we look into the coming year, we see the sponsorship giving continuing to grow at a single digit rate 5, 6 percent. We’re looking at flat major donor giving, which is still down 30 percent from where it was two years ago. It’s certainly nowhere near full recovery on any parts of our organization, although gifts in kind and government have been very strong for us and continue to be.

Howell: Everything I forecast is very similar to Larry’s. I don’t think anybody believes FY’10 is going to be a dramatic recovery. Remember that most major gifts are made in pledges, usually multi-year pledges. What we’re finding is a lot of the big donors who provide a substantial percentage of the total contribution revenue, have made their giant commitments back a year or two ago. They are paying off those pledges and they’re uncertain or unwilling therefore to make new large commitments right now.   

  

We see a little bit of growth in what we call “the membership,” which is similar to what Larry described, and also growth potential in the government sector. 

Clolery: So basically the major donor, the one everybody wants, is very hard to get but now they’re also the first ones to leave?

Howell: I don’t think they’re the first ones to leave. They’re the ones who make the largest commitments and they usually make them for several years at a time. Most times you don’t go to a major donor who is giving millions of dollars every single year for an annual gift like you do a member. Those people make a big commitment and pay it off over, in our case, three to five years, and then it’s time for a new commitment. If they made that commitment in the good years of 2007 and 2008, and now they are seeing their portfolio decimated, they’re still making good on all of their commitments, they’re just not making new commitments yet.

Clolery: In these economic times, everything is on the table for negotiating and not just inside but outside with vendors. Is everything negotiable and when do you know when it’s in your best interest not to push any further?

Mims: Okay, first inside. There really are not many things that we haven’t looked at. We certainly looked under every single rock, particularly related to business, and salary freezes, and people. And we looked at that to prevent, or to lower the amount of head count reduction that we found necessary to do. Outside, in terms of our professional contracts, we are looking at efficiencies and we’re asking people to either freeze their fees, or in some cases lower their fees, whether it be the auditor or the actuary, legal fees or contract work, to be able to be more efficient with our donors’ dollars.

Probus: We communicated with every one of our vendors. What we said to them was that we were not looking to renegotiate contracts, but that we were in a situation where we would be cutting some critical mission work unless we could find cost reductions, and we were looking for our partners, and we view all our vendors as partners, to suggest ways in which we together could save the organization money.

And we also did say, by the way, that we would be keeping a running tally to see what ideas and help came from each vendor and that that would certainly would be part of our future contract considerations as we renew contracts, etc. We were surprised. I would say 80 percent of our vendors came up with something tangible. Some of them were totally unexpected, large dollar savings that hadn’t occurred to us. Of course there were some big vendors we were expecting big things from that frankly didn’t get it.  And like I said, we’ll take that into consideration the next time we’re looking at renewing our contracts. 

Howell: My answer is probably almost exactly the same as the one Bob gave. I would just add one thing to what both Larry and Bob both said. We use a lot of attorneys in-house and outside because of all of the land transactions we do.

I don’t know if you’ve read any of the articles about law firms delaying hiring by a year and telling lawyers to go do charity work and they’d pay them some amount of money and benefits. We’ve been very successful in getting pro bono legal services as a result. In some cases we’ve used it for important current work and for some cases that were back-logged for which we just didn’t have the capacity.