Charity Comeback

A large Philadelphia charity found itself in trouble after the chief financial officer estimated that the organization’s

revenue would fall about $200,000 short of its $32-million budget for the year. But then things got worse: The electric company started calling, threatening to turn off the lights.

Those calls prompted the charity’s chief operating officer to conduct his own financial analysis. He discovered that, midway through the fiscal year, the organization was already more than $1-million over budget.

A bank executive who serves as a trustee suggested that the charity bring in “turnaround” experts, corporate management consultants who make their living by pulling ailing companies out of financial crisis.

Some charities are turning to such consultants under pressure from donors and board members who have expressed concern about the ability of organizations to manage their finances.

“It’s becoming more of a trend because people are holding board members more accountable than in the past,” says Robert Katz, managing director of Executive Sounding Board Associates, the corporate consulting firm that helped the Philadelphia group recover its financial footing.

Expensive Services

While turnaround consultants have won praise for assisting charities, their services are expensive. Fees range from $500,000 to several million dollars.

Some management experts raise questions about whether the corporate turnaround approach is appropriate for the nonprofit world or whether it can be easily adapted to the needs of charities and foundations. And some critics are turned off by turnaround experts’ reputation as being as ruthless as corporate raiders whose only concern is the bottom line.

“Even in the corporate world where these guys work, people hate them,” says David La Piana, a Piedmont, Calif., management consultant who works with charities. He says staff members at charities that hire turnaround experts could be scared away. “I’d imagine people would leave in droves.”

Hiring a turnaround consultant can also alienate donors and other key supporters, who may conclude that the nonprofit organization is failing and no longer deserves their gifts. In fact, that’s why many groups sign confidentiality agreements with such consultants in an effort to keep things quiet.

Mr. Katz, who declines to name the Philadelphia group because of just such a confidentiality agreement, nevertheless says that his efforts have helped the charity recover financially.

His first step as its consultant was to take on the role of interim chief financial officer and start making changes. He used the same kind of dispassionate, cut-the-frills approach most turnaround experts apply in corporations. That means making hard calls that nonprofit leaders have lacked either the expertise or the stomach to make.

To help the organization, Mr. Katz cut spending and renegotiated its credit agreement with its bank, winning a deferred payment schedule and freeing up money that could be applied to the shortfall and used to improve programs. He also created spreadsheets to help the charity to project whether its performances would make or lose money.

When his projections showed that one acclaimed performer’s ticket sales would be too weak to produce a profit, Mr. Katz advised canceling the show and buying out the performer’s contract at a reduced rate.

When officials at the charity protested, Mr. Katz insisted they adjust to what the numbers were telling them. Ultimately, the show was postponed while officials made some changes to improve marketing and boost ticket sales.

In reviving organizations such as the Philadelphia group, Mr. Katz says, employees and trustees must make unpleasant, but necessary, changes.

“When people sign up for boards, they sign up for the good: service, community, camaraderie and opportunity,” says Mr. Katz, who is also vice president of the Turnaround Management Association, a consultants’ trade group. “What they don’t sign up for is making tough decisions, cutting expenses or overhead.”

Aggressive Forays

Despite charities’ growing use of corporate turnaround consultants, few companies have made aggressive forays into the nonprofit market. Many firms that help charities see them as internship projects or pro bono assignments, using the work to polish their image or gain experience for junior employees, says Sajan George, a managing director of Alvarez & Marsal, a turnaround firm with headquarters in New York.

Mr. George says that his company’s consultants, most of whom are former corporate chief executives, have traditionally handled turnarounds at large companies such as Levi Strauss. But in recent years, they have recognized a business opportunity in charities and government agencies. The firm now has about 50 people working to serve those organizations.

Working with the Broad Foundation, in Los Angeles, for example, Mr. George’s firm has also stepped in — with mixed reviews — to help financially strapped public school systems in New York, New Orleans, St. Louis, and Washington. While critics in St. Louis have said that the company left the schools in worse shape than it found them, and the system broke down again after the consultants left, Alvarez & Marsal officials blame the schools for not adhering to their recommendations.

The Broad Foundation, which focuses on reviving large urban school systems, makes grants to school districts that in turn use some of the money to hire Alvarez & Marsal consultants. Foundation officials say that bringing in the business consultants makes more sense than trying to teach foundation staff members how to restructure the schools.

“We think of it as an investor would,” says Kevin Hall, Broad’s chief operating officer. “Lots of people have been doing this in other sectors, and to bring that talent and expertise to bear is helpful.”

‘Overwhelmed and Undermanned’

Mr. George says his firm has also worked with nonprofit organizations such as the Legal Aid Society, in New York. More often than not, he says, the people leading charities have risen through the ranks, eventually controlling multimillion-dollar budgets without formal training in essential financial and other skills like labor relations.

“They are constantly overwhelmed and undermanned,” he says.

To help them, the first stage of Alvarez & Marsal’s approach involves a three-month analysis of the organization’s financial problems and how it spends its revenue, Mr. George says.

The final stage of the turnaround job is to prepare the organization for the consultant’s departure by hiring new staff to carry out key tasks. “We eventually replace ourselves, usually in about 12 months,” says Mr. George.

But he says that the hardest part of a turnaround consultant’s job is the restructuring that occurs in the middle of the assignment, when he and his colleagues determine which expenses support the organization’s mission and which do not. Efforts that don’t fit the mission are given to paid contractors to handle, or eliminated.

“You have to have thick skin,” he says. “The easy part is coming up with the recommendations. The hard part is implementing them.”