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GCAA 2016 Conference - Working Better Together: An Exploration of Shared Services and Other Collaborations

GCAA 2016 Conference, Savannah, Georgia - July 2016
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Veronica Zhang

on 30 September 2016

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Transcript of GCAA 2016 Conference - Working Better Together: An Exploration of Shared Services and Other Collaborations

Shared Services
Merger and Partnership Case Studies
Before Jumping In
What do we hope to achieve?
When should we start?
What's the first step?
What are some ways of identifying possible partners?
What should we look for in a partner?
Preconditions for success
Potential roadblocks
UBIT issues to consider
How Does Federal Funding Affect CAA and Head Start Mergers?
Roles of Board, Management and Outside Advisors
Structuring Collaborations
Working Better Together:
An Exploration of Shared Services and Other Collaborations

Definitions of
Shared Services
Collaborative use of resources
across traditional organizational boundaries
Imagine this is a nonprofit agency, and at the core is its
mission
.
MISSION
SUPPORT
Everyone wants to
FEED THE MISSION
In the space are all the things that support the
mission
:
hiring and
training staff, reporting and compliance, accounting, building maintenance, collecting fees, etc.
MISSION
SUPPORT
MISSION
STRONG
SUSTAINABLE
SUCCESSFUL
But it's hard to excel at both
MISSION
and all things that
SUPPORT
the mission.
MISSION
SUPPORT
When too much time is spent on support, the
MISSION
begins to
STARVE
Why Share Services?
One
SOLUTION
is to
POOL NEEDS
with other nonprofit agencies, who meet those needs
TOGETHER
.
The overlapping space represents shared staff and other resources
to meet those needs.
When organizations
share staff and tasks
,
more time, money and
energy is available to
feed the mission
.
What do
we
gain
?
CAPACITY: THROUGH SCALE
(e.g., lower costs via joint purchasing of goods/services)
CAPACITY: THROUGH SPECIALIZATION
(e.g., skilled staff, focused on shared fiscal and program leadership, get better results)
Source: Infographic, Opportunities-Exchange.org
At its core,
shared services
is a simple idea:
Organizations can
REDUCE COSTS
and
IMPROVE
the strength of management and the quality of services they deliver by
SHARING ADMINISTRATIVE FUNCTIONS
with other organizations that provide similar types of services
Benefits of Sharing Services
Efficiency
Reduce duplication of functions / infrastructure
Reduce operational costs
Standardize processes / faster service
The CAA (Board and senior staff) should evaluate:
What Do We Hope to Achieve?
"At the outset of the process, ask not ‘Do we or do we not pursue [shared services, a merger or other collaboration]?’ but rather ‘How do we best fulfill our organization’s mission and strategy to be effective, and
is [this] a better option than other alternatives?
’”
(Thomas McLaughlin, Nonprofit Mergers & Acquisitions, p. 4)
Identify specific, potential
synergies
Project
financial impact
and cost savings
Form
(choice of partner and structure) will follow
function
(what we hope to achieve)
When Should We Start?
Before it is necessary
(i.e., before there is a crisis / before programs have been damaged)

Often
leadership transitions
can be a good time to initiate conversations internally and externally
What's the First Step?
Organizational self-assessment:
Motivations
Desired goals
Critical issues
Organizational obstacles and red flags
Financial position
What are Some Ways of Identifying Potential Partners?
Existing alliances
/ collaborations
Board or ED contacts /
relationships
Working with a
consultant
What Should We Look for in a Partner?
May, but need not necessarily be
another CAA or Head Start grantee
Both organizations bring strengths (e.g., resources, relationships, experience, skills) to the table
Compatible missions
, services, and organizational cultures
Strategic service fit
Geographic fit
Preconditions for Success
Trust
(e.g., through familiarity with partner)
Clear strategic planning and vision
for the shared services or partnership and compatible with both organizations’ missions
Champion of the cause
(board member or executive director) and board leadership
Experienced
executive director
Board and staff
buy-in

Thorough
due diligence
Attention to
organizational culture
and integration issues, internal and external communication
Potential Roadblocks
Concern about
loss of identity
Costs
and time involved
Short-term focus on day-to-day operations and survival,
difficulty focusing on long-term
Funding source
rules
Lack of board or staff
buy-in
Underestimating differences in
organizational culture
Lack of attention to
communication
strategy
UBIT Issues to Consider
Exempt organizations are subject to a tax on
unrelated business income
:
Is it a trade or business?
Is it regularly carried on?
Is it substantially related to the CAA's exempt purpose?
Information Sharing
Joint Venture /
Fiscal Sponsorship
Shared Programs /
Merger
Shared Administrative
Services
Informal Cooperation
Shared Administrative Services
Organizations remain legally independent, but have a
formal, contractual arrangement ("management services agreement")
to provide and receive certain defined services.
Shared Programs / Merger
What is a merger?
Various methods of combining the programs, assets, or entire corporate entity of another organization with a CAA

Possible Structures:
Merger: One "surviving" corporation

Merger: Parent-subsidiary
Asset Transfer
Consolidation
Program Transfer
GCAA 2016 Annual Conference
July 20, 2016

Christopher Logue, Esq., Staff Attorney, CAPLAW
Link to Presentation:
CAA #1
CAA #2
Merger:
1 Surviving Corporation
Before
After
CAA #1
CAA #2
Merger:
Parent-Subsidiary
Before
After
CAA #2
CAA #1
CAA #2
Sole member
CSBG
For CAAs, get state CSBG office on board
Especially if merging two CAAs

Will new designation be required?

For all mergers,
maintain tripartite board
composition
Head Start
If grantee's "legal status" changes
,
HHS will require recompetition
of grant
E.g., Head Start grantee is not the surviving entity in a merger or consolidation
Recompetition not required
if Head Start grantee survives the merger
Notification to HHS
of name change or hiring of Head Start Director and ED/CFO
(if > 50% salary paid out of Head Start funds)
Other Regulatory Issues
Merger/transaction costs
likely to be unallowable charges to federal grants, except with prior approval
See Uniform Guidance, 2 CFR §200.455
Procurement
for shared services
Personnel recordkeeping
system
Indirect costs
Conflicts of interest
- overlapping staff/board
Keep your funding sources informed
Board
Management
Advisors
Fiduciary Duties of Board
Duty of Care
: In overseeing the organization, nonprofit board members must act with “the care an ordinarily prudent person in a like position would exercise under similar circumstances”

Under the “
business judgment rule
,” nonprofit board members who exercise good faith judgment will usually be protected from liability to the corporation
Even if the corporate action turns out to be unwise or unsuccessful
Duty of Care - Informed Decisions
Board members must make informed decisions
Board should obtain and consider written reports and professional advice before making important decisions
Board should ensure that a full, deliberative process is conducted and that directors are able to ask hard questions and get answers
Role of Management
Due diligence
Programs and activities
Financial strength and viability
Sustainability
Staff culture and roles
Plan for integration
Role of an Outside Attorney
Evaluate organization’s
current legal situation
Guide
choice of restructuring
options
Advise the board
on role and responsibilities
Conduct
legal

due diligence
Advise board and management during
negotiations
Draft legal documents

Filings with state
(articles of merger etc.)
Role of Other Outside Advisors
Consultants:
Help identify partners and facilitate merging or other partnership
Accountants:
Tax filings
Impact on financial statements
Financial due diligence
Funding sources / state association / local municipality:
Understand landscape of organizations with shared missions, providing similar services
Role of an Outside Attorney
Involve an attorney early on
: Work with an attorney in your state with relevant expertise
CAPLAW is available
to consult with CAAs on CSBG-, Head Start- and other government-grant specific issues
Each partner
should work with its own attorney to conduct due diligence and draft agreement
MesaCAN and ANL Merger
Additional CAPLAW Resources
Working Better Together:
CAPLAW's Guide to Shared Services and Mergers
http://www.caplaw.org/resources/PublicationDocuments/mergersandsharedservices/Introduction.html
Includes two sample shared services agreements that other CAAs have used to structure shared services arrangements
MFCU began in 1954 - committed to financial inclusion and expanding access to affordable financial services and
became a CDFI in 2010

Alternatives to payday lending
Makes first $25 deposit for customers
Microenterprise initiative
Services for ANL employees and clients

Other partnership elements
MFCU CEO serves on MesaCAN's tripartite board
MFCU provides non-federal match dollars for IDA grants and houses IDA customer accounts
MFCU provides free financial literacy classes for clients
MesaCAN - MariSol Federal Credit Union
Environmental Factors
Reduced government funding
Reduced private funding
Increased competition
Growth in number of nonprofits
Aging programs
Difficult economic landscape
Increased operational costs
Increased demand for accountability
Increased demand for services
One Organization with Excess Capacity
One organization provides contract administrative services to other agencies
Legally-separate entities
Centralized business practices
:
One employee benefits package
One salary scale
One financial software system
One set of operating procedures
Joint purchasing
One audit firm
All records maintained in a centralized location
One client intake process
Management of licensing requirements
Hub and Spoke - Intermediary
Nonprofit support agency can provide or organize services on behalf of all members
Agenda
Why
share services
or
merge
?
Services That Can Be Shared
Shared Physical Resources
Workspaces, libraries, kitchens, conference rooms, offsite storage and servers
Buses, transportation systems
Copiers/printers/fax machines
IT, hardware, software, servers, cloud applications
Communications systems, phones, video conferencing
Easiest to share
Easy to value, divide and monitor
Pay rental or usage fee
Doesn't require high level of trust
Often requires upfront investment and decisions about features/amenities
Shared Staffing
Financial and administrative
- payroll, billing, marketing, tax/finance
HR
- employee benefits, unemployment insurance
Staff recruitment and screening
Group purchasing
of goods/services
Performance
- professional development system
Fundraising and development
- grant applications, strategic planning
Facilities management
- licensing/permitting, insurance
ED
functions and leadership
Shared Programs
Client intake
Program operation
Curriculum research, development and delivery
Community events
Advocacy campaigns
More difficult to share
Requires high level of trust and commitment among participating organizations
Mesa Community Action Network (MesaCAN)
501(c)(3) nonprofit CAA
25 employees; $ 2 million annual operating budget
Programs offered include:
Homelessness prevention/emergency housing
LIHEAP
Men's homeless shelter
Emergency food assistance
Marisol Federal Credit Union
Individual Development Accounts
Income tax preparation
Financial literacy classes
A New Leaf
(ANL)
501(c)(3) nonprofit organization
250 employees; $20 million annual operating budget
Programs offered include:
Affordable housing units
Domestic violence shelters and services
Family homeless shelter
Youth and behavioral services
MesaCAN: Challenges
Operating at a loss for several years

Attempted, but ultimately failed, to secure additional funding

Main office and men's homeless shelter needed significant repairs

Key staff member unexpectedly passed away
A New Leaf: Opportunities and Questions
Both MesaCAN and ANL actively involved in anti-poverty efforts in Mesa, AZ

Part of the same network of community service organizations

Often shared the same clients

ANL had merged with other nonprofit organizations
But, significant capital investments required
Mesa
CAN
ANL
Merger:
Parent-Subsidiary
Before
After
ANL
Mesa
CAN
Sole member
*Preserved separate legal and tax-exempt status of each entity
Lessons Learned
Get early buy-in from boards of both organizations

Recognize unique culture of each organization and address potential changes in conversations about retention with employees and board members

Leverage pre-existing relationships between board members and key staff at both organizations

Seek training and assistance from state association

Have not just a driver of the transaction, but a champion
What Happened After the Merger?
Some MesaCAN board members joined ANL board

All MesaCAN employees (other than ED) stayed on for 1st 6 months

Changed some processes to eliminate duplication and leverage resources (e.g., intake, grants team)

Invested in new programs following strategic planning (e.g., IDA program for college students)

Retained MesaCAN's name on facilities/programs to preserve identity and goodwill in community
ANL had over $1 million in
Assets for Independence (AFI)
grants that were not being used

Fast Tracking the Dream:
2008 partnership with
Mesa Community College (MCC)
and
Mesa United Way
:
Qualifying individuals deposit earned income into a savings account (IDA) each month for at least 6 months
Matches savings 3:1 (up to $3,000 match), used to pay educational costs at MCC
Must complete free financial literacy course
MesaCAN - Mesa Community College - Mesa United Way
ANL assumed operational management of MesaCAN on July 1, 2006
http://bit.ly/2016gcaashared
Partial integrations
of nonprofit services for a group of agencies, provided on a fee-for-service basis, in order to achieve economic and program efficiencies
Economies of specialization
Access specialized expertise, service and technology
Provide opportunity for all agencies to rise to highest level of sophistication and services
Sustainability and investment
Expand donor base
Reduce risk of losing institutional knowledge
Built-in backup
Purchasing power
Bulk purchasing discounts
Keep community identity and retain autonomy
While minimizing costs
Fees
generated from performing administrative services for other non-profit organizations may be deemed to be UBI
if they are not consistent with the organization’s exempt purposes
.
Relationship of service provider to the recipient
Fee charged for services
Nature of services (commercial?)
Recipients of the services
What are
different options
for collaborating with another organization?
What should we think about
before moving forward
?
MesaCAN - ANL Collaborations
Full transcript