• Building Resilience with Strategic Restructuring: An Interview with HI USA’s Russ Hedge

(Part 1 of 2)

Russ Hedge has been CEO of Hostelling International USA (HI USA) since 2000. HI USA is a nonprofit whose purpose is to inspire a genuine understanding of people, places, and cultures to create a more tolerant world. It delivers its mission by operating hostels and programs. In this interview, he speaks with Makiyah Moody, Senior Consultant at La Piana Consulting, about HI USA’s transformative experience of restructuring, leadership lessons, and the value of advocacy.

In recent years, HI USA has undergone major transformation. How is the HI USA of today different from the HI USA of 5-6 years ago?

We went through a process we called unification, which was basically the combining of 27 independent operating entities (26 local councils and 1 headquarter office) into a single organization. Previously, local councils delivered our mission in regional service areas and were organized with their own tax ID numbers, boards, budgets, and staff. They operated under affiliate agreements with HI USA, so they had some obligations, but it was difficult and time-consuming to develop common strategies, tactics, or policies because staff were all reporting to their own boards. Even with a focus on consensus building, we weren’t able to get everyone regularly on the same page. As a result, we simply were unable to deliver our mission in a coherent and consistent way.

In June 2011, the leaders of our local councils made a very generous decision: they recognized the limitations of the old structure and they voted their councils out of existence. The councils voted by more than a two-thirds margin in favor of unification — meaning with their active support, we legally dissolved the 26 councils, and through a series of asset transfer agreements, brought them all into what is now HI USA.

Can you describe some of the results?

We have a network of 34 hostels in the U.S. that we operate, and we’re reliant on primarily millennial travelers making the decision to stay with us in exchange for a fee. We don’t rely on contracts and grants over 90% of our income is earned so our financial and mission health is heavily influenced by the marketplace. A challenge with the old structure was that at different times particular destinations can fall out of favor with travelers. For example, after 9/11, travelers were scarce along the East Coast, and particularly in New York and Washington, D.C. And in 2003, a SARS outbreak hit travel to San Francisco and the West Coast. Since our councils were also regionally based, a sharp decline in a hostel’s revenues could be all-enveloping, and lead to near-term decisions based on budgetary expediency rather than long-term design. Today, with the common ownership that came with unification, when a hostel suffers an episodic downturn, we can more easily shift financial resources within the national network to smooth out the impact.

Unification has also provided significant efficiencies as well as advantages to our employees. One of the pre-unification realities of the organization was we had varying pay scales from council to council, with some compensating well and others not having the financial means to do. During the unification process, financial, property, and people resources were transferred to the national organization, so employees were brought under common compensation, benefits, and supervision. It was satisfying to be able to raise salaries and provide higher benefits for those who otherwise would have had to be at a low end of the pay/benefit scale. We also were able to introduce centralized human resource support that provided a new, consistent level of service and support across the organization.

A less tangible but significant benefit relates to organizational dependability. Under the old structure, we would offer nationwide programs, but our capacity to consistently deliver on them could be inadvertently undermined by the structure. It’s difficult to talk confidently about a program with funders or sponsors and know your national organization consists of 27 different organizations, each with good intentions but varying priorities and limited accountability. With unification, I can speak with the confidence that comes from a national structure.

What kinds of environmental trends or external factors were most instrumental in motivating these changes?

In 2008 we had the Great Recession, and for the 3-4 years following, the capital markets were unstable. Yet our hostel development plans depended in part on debt financing. Pooling our property and revenue streams held best promise to unlock debt financing and leverage our untapped collateral. At the time, our councils had limited capacity to do it on their own. Unification has allowed us to build our financial profile and attract wider lender interest.

The growth of private hostels in the marketplace was a factor with the decision to unify, but not in the way one might expect. We don’t consider private hostels as direct competitors. We are a nonprofit organization that operates hostels and offers programs to deliver our mission of intercultural understanding, so for example, we have engagement and education staff on site to further that purpose. Private investors operate using a different business model and the user experience is different. That said, private hostels are raising the bar for the physical hostel facilities; we welcome that and we know millennial travelers will come to expect it. Unification has broadened our financial base and allowed us to make key investments in both existing and new hostel buildings.

Are there any other new or emerging trends you’re preparing for?

We expect our hostels to experience some downturn in stays as private hostels enter the marketplace and consumers sample them, although we trust millennials will quickly figure out the difference; in the long term we expect overall hostel demand within the USA to grow. More significant is the financial uncertainty within the global marketplace. The exchange rate is no longer favorable to international travelers coming into the U.S. and 60% of our travelers are international, so we expect fewer visitors overall for the foreseeable future. Also, we will be hurt if the world’s perception of the U.S. government and society turn negative. For example, four countries so far (including New Zealand) have issued travel warnings to their citizens considering travel to the United States citing the state of U.S. racial relations. In times like these, our mission has never been more important, but we might need to deal with contracting revenues at the same time. 

What do you most look forward to in the coming year for HI-USA? Where is it headed next?

Last year we piloted a program called the Community Hostelling Fund, which this year was rolled out in 14 cities across the country, and the response has been amazing. The program establishes local pools of funding to create international travel scholarships for worthy college-aged young people who want to travel abroad for learning, but whose financial circumstances wouldn’t allow them to do so. The program has had tremendous impact on the psyche of the organization and of the young people. This is a program we couldn’t have done prior to unification, either financially or from a practical, logistical standpoint. Next year we expect to offer international travel scholarships in even more cites, and introduce them for domestic travel as well. 

We also are moving more into the advocacy realm. Youth travel and tourism can be a powerful force for education and understanding. With our recent election as an Affiliate Vice-Chair of the UN World Tourism Organization, we’ll have the opportunity to help advance UN Sustainable Development Goals in the United States. Plus next year we’ll launch a key education program around the social impact of travel as part of the International Year of Sustainable Tourism for Development. Engaging travelers  prospective and returning around issues that matter to them is an important way HI USA can increase its impact and invite wider participation.
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For more insights on issues related to networked organizations and their affiliates, see our new Federated Nonprofits resource page. And stay tuned for a follow-up blog with more from Russ Hedge on HI USA’s strategic restructuring experience, focusing on cultural integration and change management.

Tags: advocacy, market awareness, strategic restructuring, strategy

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