Despite recent stock market gains and speculation that the recession has ended, the situation for many nonprofits continues to decline. Over the last year, we reached out to approximately 800 nonprofit leaders at six month intervals, asking questions about how their organizations were managing through the downturn and received approximately 100 responses to each survey.

Our latest survey, conducted in the fall of 2009, showed that 93 percent of the nonprofits surveyed were experiencing the effects of the downturn, up from 75 percent one year ago. As city, state, and federal governments have slashed budgets, foundations have reduced their grant-making, and individuals have cut back their charitable giving, the number of organizations that reported funding cuts has increased to 80 percent from 52 percent, the number dipping into reserves rose to 48% from19%. Even in the last six months, the situation for many nonprofits has continued to deteriorate: 44 percent of leaders reported that their situation was worse than it was six months ago, while only 15 percent said their situation had improved.

While the hardship of prolonged financial pressure cannot be overstated, many organizations appear to be making the difficult decisions that may gain them stronger footing as market conditions improve in the future. Not surprisingly, while the funding situation for our survey respondents has deteriorated, the demand for services has increased: 58 percent of our respondents in November 2009 noted an increase in demand versus 30 percent a year ago.

Responding to the Challenge

In what follows, we share findings from our November 2009 survey versus prior polls, drawing throughout on the felt experiences of two organizations: St. Luke's Community House in West Nashville, TN, and Service Coordination Inc. of Maryland, two organizations from our survey pool that provide a more in-depth look at how nonprofits are coping with the recession. St. Luke's and Service Coordination Inc., while differing on many dimensions–core beneficiary group, organizational size, age, and funding model–both demonstrate the myriad tradeoffs and tough choices facing leaders in a struggling sector. Moreover, their experiences provide insight into how organizations are making decisions that will allow them not only to survive the recession, but also position them to take advantage of new opportunities as the economy improves. "I'm not glad that we're having rough economic times," said Brian Diller, executive director of St. Luke's Community House, "but we've made decisions in a healthy way…We never thought of this as 'gloom and doom, the sky is falling!' but rather 'how can we ensure that we will be around for another 97 years?'"

Planning for cutbacks

Like many nonprofits, St. Luke's biggest fundraising month is December. However, after the stock market crash in 2008 giving plummeted, leading St. Luke’s to use reserves to cover a $50,000 deficit. As Diller put it, "We have always set aside some money for a rainy day, and let’s just say that it rained!"

The decline in giving, however, did not take St. Luke's by surprise. In fact, they had been warned by major funders as early as September 2008 to expect cuts, so like many organizations, the organization created a contingency plan. As economic uncertainty has increased, many organizations have turned to contingency planning as a tool to prepare for the worst: 70 percent of nonprofits surveyed said they have contingency plans compared with 48 percent last year.

Protecting the core

When faced with reductions in revenue, most organizations have no choice but to cut costs. Our most recent survey shows that 75 percent of nonprofits are engaged in cost-cutting measures compared with 56 percent last year. However, the choices made in determining where to cut costs now can often shape the future of an organization. In order to protect their core for the future, many nonprofits are thinking beyond across-the-board cuts and digging deeper into service extensions and higher cost offerings. A focus on protecting core services was clearly articulated in the contingency plan developed by St. Luke's Community House. It called for the elimination of its newest program, a job skills training program in the culinary arts due to a lack of stable funding. Additionally, the organization identified ways to reduce its overhead. St. Luke's facilities occupy an entire city block, so it shut down ancillary buildings and moved all of its programs into the main facility to reduce maintenance and utilities costs. St. Luke's also made major procurement changes and put all of its contracts–"from office space to toilet paper"–out for a minimum of three bids, which led to significant savings. As a result of these cost-cutting measures, St. Luke's was able to reduce its expenses without cutting back any of its core services or disrupting relationships with key partners.

Many nonprofits in our survey are using similar approaches to those of St. Luke's Community House to manage in the recession. Fifty-four of the organizations in our current survey said they are scaling back or eliminating a subset of programs to free up resources for others, while 67 percent said they were cutting overhead–an increase of 10 percentage points since last year.

Reducing staff

Since salaries make up the bulk of the expenses for most nonprofits, thousands of organizations across the country are being forced to reduce total staff. Forty-three percent of organizations surveyed said that layoffs are a somewhat or major part of their plans to address the downturn compared with 28 percent last year; 25 percent of organizations said that cutting staff salaries is a somewhat or major part of their plans to address the downturn compared with 16 percent last year.

During the summer of 2009, the state of Maryland realized that tax revenue projections were short. Due to the shortfall in state revenues, the Maryland Board of Public Works approved significant budget cuts to state-funded services for people with developmental disabilities. On August 28^th Service Coordination Inc. received a call from the state announcing a $3.2 million budget cut, 15 percent of its total revenue. The organization's executive director, John Dumas, commented: "We had a contingency plan at the outset of the fiscal year, but even our contingency plan had not imagined a 15 percent cut…So we had to think about a new approach since our strategic plan, which we'd started implementing in April, had been turned directly on its head."

The severity of the cuts meant that a reduction in staff was unavoidable. Service Coordination Inc. first relied on staff attrition to reduce total headcount, and then was forced to use layoffs to close the remaining gap. In total, the organization eliminated 74 positions, approximately 20 percent of its staff. “One of the goals in our strategic plan was to become a preferred employer [in the state], so we were already thinking critically about HR and people processes…this positioned us well to think through the downsizing we needed to do.” Service Coordination Inc.'s first consideration was to ensure it had sufficient geographic representation across the 14 offices that span the 11 jurisdictions that it served. Staff members were let go, on a last-hired, first-fired basis within each office. In addition to layoffs, Service Coordination Inc. implemented a tiered salary reduction from 1 percent to 5 percent across the board and froze merit increases for the current fiscal year. Other cuts involved freezing all outside training, a decrease in mileage reimbursement, and an attempt to renegotiate with vendors and contractors.

Redesigning programs

Ultimately, the people who are hurt the most when nonprofits are forced to cut their budgets are the individuals and families that rely on their services. When faced with the possibility of program cuts, many nonprofits choose to rethink their program design to identify ways to continue to achieve results while reducing costs. Among the nonprofits we surveyed, 69 percent of organizations cited redesigning programs to achieve outcomes in a less costly manner as a somewhat or major part of their plan to address the downturn. This was a 10 percentage point increase from 59 percent last year.

After the layoffs, Service Coordination Inc. faced exactly this dilemma. "We wanted to provide the same level of service with fewer resources," commented Dumas, "But knew that simply wasn't possible…so we decided to implement a tiered system of service as opposed to trying to provide everything to all of the people we support. We developed two levels of service delivery, and defined deliverables and costs associated with each." This two-tiered system enabled Service Coordination Inc. to provide some level of services to as many individuals as possible, including those who would otherwise not be receiving services from any other agencies.

Communicating with the stakeholders and strengthening key relationships

While tough times force hard choices, they can also bring people together. As a result of the recession, many nonprofits are reaching out and strengthening relationships with key stakeholders. Indeed, 69 percent of organizations we surveyed are developing new plans to communicate with stakeholders, 88 percent are investing more deeply in relationships with core funders, and 77 percent are engaging their boards or a subset of their boards to address the financial ramifications of the downturn. Reaching out to key supporters is often a nonprofit’s first line of defense in a crisis. Our survey shows that the high percentages of organizations that report the use of these tactics have remained consistent over the course of the year.

Service Coordination Inc. decided it was important that policy makers understand the impact of their decision-making after the state reduced funding for services to the developmentally disabled. The organization is working with a coalition of service providers, as it sets up a series of town hall meetings all across Maryland to educate the community about the effects of the budget cuts on people with developmental disabilities. "It is a delicate balance, given that we are the largest coordinator of services in the state, but I talk more about the impact at the systems level rather than the effect on our organization. When speaking to government officials, I never focus on the decisions that have been made, but rather talk about how to get through these challenges." Dumas believes that these efforts have strengthened Service Coordination Inc.'s relationship with developmental disabilities service providers, something that is critical to its success as an organization.

In some cases, funders are increasing their giving to help organizations cope with the recession. Among the organizations we surveyed, 42 percent said some funders are providing additional support in response to the downturn compared to only 11 percent last year. The executive director of St. Luke's Community House described his organization’s efforts: “We convened our key funders and supporters. We held a meeting with big individual donors and the Episcopal Bishop of Tennessee to share where we were. We did this in order to inform them of our current situation, reassure them that we would make it through, and ask for their input on how to move forward.” As a result of this outreach, St. Luke's was able to develop a matching-gift fundraising initiative, whereby those who gave in excess of their prior year’s donation had the difference between last and this year’s contributions matched by an anonymous donor. The fundraising campaign has been a success, and St. Luke's Community House expects to end 2009 with a small surplus.

Moving Forward

Despite continuing tough times for nonprofits, our survey results suggest many organizations are taking the steps required to survive and thrive. Thirty-nine percent of respondents reported they believe the financial situation of their organizations will improve next year even though 67 percent of respondents reported that funders have told them to expect less in future grant revenue. The examples of St. Luke's Community House and Service Coordination Inc. show how both responses could hold. They exemplify the nonprofit sector’s ability to think strategically about budget cuts and work closely with key stakeholders to maintain critical services, strength their relationships, and ensure that they are well-positioned as the country emerges from the recession.