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Deciding to Restructure

The Funder’s Role in Strategic Restructuring

Over much of the course of the Strategic Solutions project, we have focused our attention on those most directly involved in strategic restructuring: nonprofit organizations and the consultants who serve them. Beginning in 2001, we expanded our focus to include funders. This shift occurred in recognition of the important role that funders can, and do, play in helping nonprofits to become more effective. Because strategic restructuring is essentially a tool to help nonprofits improve their effectiveness, it is important for funders to have sound knowledge and understanding of it. They should know when strategic restructuring is appropriate and what the process entails. They should also know about the tools and resources that exist to support nonprofits in considering and undertaking strategic restructuring. This can help funders perform their role in acting as a resource to nonprofits for information and funding, as appropriate.

The funder-nonprofit relationship

While funders are often best-positioned to share information with nonprofits — helping them know about the tools and resources available to support improved organizational effectiveness — this can be a difficult role for them. Because the relationship between funder and grantee is inherently one of unequal power, a funder’s well-meaning suggestion that a nonprofit should consider strategic restructuring may be misunderstood as a mandate to restructure. This can result in strategic restructuring being undertaken unwillingly, which is far less likely to be successful than that which results from a thoughtful and honest process of assessing the internal and external situation, potential partners, and possible benefits and challenges.

The role of the funder

Funders must tread a delicate line between providing information and support, and tipping the balance of power, making nonprofits feel that they must embark on a given course of action because funding is dependent on it. Knowledge and understanding of strategic restructuring — the potential outcomes, success factors, challenges, costs, and tools and resources available to support it — will help funders determine when and how to discuss it, and the type of support to provide to grantees. (See our Best Practices for Funders for practical ideas on how to work with your grantees.)

Realistic goals and costs of strategic restructuring

First, it is important to set realistic expectations. Often organizations turn to strategic restructuring in times of financial hardship, looking to it as a way to save money. While strategic restructuring frequently yields savings in terms of reduced staff and administrative costs, organizations that undertake strategic restructuring with the primary goal of saving money may be disappointed. A more realistic goal of strategic restructuring is to increase an organization’s ability to advance its mission.

	Reality check: The cost of strategic restructuring Often organizations embark on strategic restructuring to save money. However, strategic restructuring generally costs money the first year – looking for short-term savings will generally not bear out. For example, there are one-time costs associated with integrating organizations. The cost efficiencies are more likely to be realized over time. Thus, though organizations come to strategic restructuring with the expectation that there will be cost benefits, there must be a bigger picture that is driving the effort – stronger services to the community, for example. As noted above, while there are savings in some areas, there are typically significant costs involved. These include costs related to: Time and energy diverted from other work Consultant to facilitate the negotiations and/or integration Travel and meetings Implementation/integration: Severance for the ED/CEO and/or other departing staff Human resources Integration of programs and systems Communication and marketing Design and printing Moving For more information on the cost of strategic restructuring, see our tip on Understanding the Cost of SR.

Strategic restructuring consists of two primary phases: negotiation and integration. The negotiation process most always involves costs, including the diversion of staff and board members’ time and energy away from other functions, and the cost of a consultant to help facilitate the process. Cost savings may result if, and when, the organizations are consolidated, but these costs must be balanced against the costs of the integration process itself.

Benefits/outcomes of strategic restructuring

Research and first-hand experience — both our own and that of others who have worked in this area — reveal that there are many potential benefits of strategic restructuring. These include a greater ability to pursue mission, increased stability, reduced duplication, and less inappropriate competition. This can translate into measurable, positive outcomes, such as increases in services provided, administrative capacity and quality of services, and market share. When the necessary readiness and success factors (described below) are in evidence, and a sound process is in place, outcomes such as these are more likely to be realized.

Risks and roadblocks

There are also risks involved. Strategic restructuring is not always successful. Organizations that are not truly ready to engage in the negotiation process, and/or those that do not have the necessary structure and processes in place to undertake integration, are less likely to be successful. A failed strategic restructuring effort can have devastating outcomes including negative publicity, lost time and money, and/or damaged relationships. This can sometimes reflect poorly on a funder, depending on their role in and closeness to the process.

Pre-negotiations: readiness assessment

How can funders help nonprofits determine whether the benefits will outweigh the risks in any particular situation? Over the years, La Piana Associates has helped hundreds of nonprofits explore strategic restructuring as a tool for improving their organizational effectiveness. Through this experience and our extensive research in this area, we have identified a handful of factors indicating “readiness” to engage in strategic restructuring. The greatest potential for success is found when organizations evidence these readiness factors on their own. However, funders can play a role in educating nonprofits about the importance of these factors. This may prove helpful to nonprofits in developing the mindset necessary for success. Among the most important factors are:

• A strong mission-focus;
• A strong relationship between the board and the executive team, especially between the board and the Executive Director;
• A deliberate growth and risk-taking orientation; and
• Flexibility in the way the mission is pursued — e.g., an understanding that the mission is more than a specific program or service.

	A caution Given the time and energy that must be devoted to the negotiation process, it is also helpful if the nonprofits involved are not in an immediate crisis. This can detract from a realistic assessment of the partners and of the potential outcomes. While the strategic restructuring may appear to solve an immediate problem, a poorly and hastily designed partnership can do more damage than good. The reality, however, is that some organizations are chronically in crisis, and many of these organizations may be strong candidates for strategic restructuring. Such an organization may need to jump at an obviously good opportunity, even if it is not currently able to put its best foot forward.

Additional readiness factors include:

• A history of successfully collaborating in some fashion and/or an understanding of the value of strategic restructuring;
• An understanding that the process is long, arduous, and time-consuming; and
• An understanding that the outcome of strategic restructuring is not necessarily to save money, but rather to make the organization more effective.

Assessing a partner

A precursor to entering into negotiations is the selection of a potential partner. This is a critical decision. Unfortunately, it is not possible to truly know what it will be like to work with an organization before actually doing so. Realistically, this understanding often cannot develop until the negotiations are underway. However, before embarking on negotiations, nonprofits should ask themselves the following questions about the potential partner organization:

• Do we trust them?
• Do we know them, and have we had a history of working successfully with them?

If the nonprofit can answer these questions in the affirmative, the negotiation process is more likely to be successful.

Challenges of the integration process

As consuming as the negotiation process is — in terms of time, costs, and energy — it is just the precursor to the integration process. Organizations should enter this phase well aware of the challenges they face, and of the tools and resources that can help them succeed. Just as in the assessment and negotiation phases, funders can play a key role in helping organizations understand the challenges. They can help nonprofits have the knowledge, resources, and tools to meet and overcome the challenges. With this support, it is more likely that the integration will be successful.

The main challenges involve:

• Cultural integration;
• Board integration; and,
• “People” issues.

The people issues are often the most challenging. Strategic restructuring involves significant change. Regardless of whether the outcomes are positive or negative, change causes fear and anxiety. The leadership of the new organization should take the time to address and resolve the people issues. Otherwise, they will fester and detract from the organization’s ability to move forward.

Success factors

Just are there are factors that predispose nonprofits to have successful negotiations, there are factors that are conducive to a smooth integration process. Funders should be aware of these and help nonprofits understand their importance. Funders should also keep these factors in mind when evaluating proposals from nonprofits for funding of the integration process.

In addition to the factors that indicate readiness to pursue negotiations (see above), the following factors are important in the integration process:

• A champion, whether a staff or board member, who is a cheerleader for the process and helps motivate others. Optimally, this individual is an excellent communicator, keeps the focus on the mission, and models a positive and forward-looking attitude;
• Leadership focused on mission and vision, and able to move quickly, making difficult decisions and keeping the forward momentum. This includes making staffing cuts and other changes all at once so people don’t constantly worry “what next?,” and instead are able to focus on the mission;
• Focus on creating a new organization: honoring the past histories and cultures of the organizations, and creating new “shared” culture;
• Clear, honest, open, frequent, respectful, and two-way communication throughout the organization;
• Celebrating success early on, and on an ongoing basis;
• Having a consultant to facilitate the process and keep it on track; and
• Having a plan and an integration team.

In Sum ….

Funders have a critical role to play in helping nonprofits improve their organizational effectiveness. Because strategic restructuring is a tool for improving effectiveness, it is important for funders to be aware of its potential benefits, and the challenges and costs involved. They need to draw on this understanding and knowledge in serving as a resource for nonprofits, while avoiding the suggestion that they are mandating it.