16-U2D1 - Describe the areas that might cause the greatest problems in collaboration and how you might mitigate these issues?

Trust as an Asset: Building a Managed Service Organization within MACC (A)1

In December 2002, the state of Minnesota faced a $4.5 billion shortfall caused, as in many states, by the national recession and the corresponding decline in tax revenues. The newly elected governor, Tim Pawlenty, warned that everyone would need to share the pain – townships, cities, counties, nonprofits and individual Minnesotans. The state’s nonprofit sector, which had enjoyed years of growth and a reputation for social innovation, steeled itself for cuts. The outlook for nonprofits was made worse by dramatic reductions in giving from the Twin Cities United Way and private philanthropy. Eighty-nine percent of Minnesota Council on Foundations membership reported asset declines that decreased their giving.2

The state government’s crisis was exacerbated by a pledge for no new taxes taken by the Governor during the election. Like many Republican leaders, Pawlenty had signed a pledge of the Taxpayers League of Minnesota, a citizens’ group that advocates for smaller, less expensive government and lower taxes. The message of the Taxpayers League resonated with many Minnesotans; polls revealed that the majority of citizens believed that state lawmakers should avoid increasing taxes. The League’s President David Strom took direct credit for change public in a state that had, historically, seen a positive role for government. "The fact that we've been able to, with the help of the governor, convince the majority of Minnesotans that government is too big, it's time to cut back -- that's the real power that we have -- our ability to persuade people."3

This attitude infuriated many other nonprofit leaders. Although the League was a nonprofit organization, to many others in the sector it represented a philosophy that they directly opposed – a philosophy that placed the burden for coping with scarcity on the backs of those who already had the least. The Minnesota Council on Nonprofits, for example, launched an aggressive public media campaign in 2002 to educate Minnesotans about the roles nonprofits play in providing public services and meeting the needs of the disadvantaged. Other nonprofit leaders began to develop innovative solutions in the increasing challenging fiscal environment they faced. Jan Berry, the new President of the Metropolitan Alliance of Community Centers (MACC), considered various options. A coalition of thirteen human service providers in Minneapolis and St. Paul, MACC would be seriously hurt by cuts coming to state and county contracts. As Jan studied the Taxpayers League, she saw how successful it was at marketing its ideology, at

1 This case study was written by Jodi Sandfort and Timothy Dykstal both of the University of Minnesota, Humphrey Institute. Please direct comments or questions to [email protected]. 2 Minnesota Council on Foundations (2002). “Minnesota Nonprofits, Grantmakers Explore Funding Outlook at MCF Meeting.” Retrieved 12/11/06 http://www.mcf.org/MCF/forum/2002/mcfmeeting.htm 3 Zdechlik, Mark (2003). “Taxpayers League Puts ‘Fear of God’ Into Lawmakers.” Minnesota Public Radio.Retrieved 12/11/06 http://news.minnesota.publicradio.org/features/2003/04/15_zdechlikm_taxpayers/

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seeming to be larger and more influential with politicians and policy makers than it actually was. As a nonprofit, the Taxpayers League clearly focused strategically on marketing and systems change. Although MACC agencies were nonprofits working towards different ends (providing human services), Jan realized there was much that could be learned from the League’s approach. They clearly articulated their value to taxpayers, funders, and every other stakeholder. Jan admits now, “This was a significant shift for me. I had never thought strategically about human service organizations before.” She knew any strategy needed to build upon organizational assets, moving members out of the reactive position they traditionally had taken to fiscal uncertainty. Jan began to focus her attention on how to grow MACC and push it to work smarter at both the operational and strategic levels. A Vision of Deep Collaboration When Jan became President in 2003, MACC was comprised almost exclusively of agencies established in the early 20th century and built upon the settlement-house tradition of Jane Addams’s Hull House (See Appendix A). The hallmark of this approach was deep engagement with communities to provide services and support, holistically meeting family needs rather than the more piece-meal service provision that dominated much of social services in the 1970s and 1980s. While many of these agencies were exemplary service providers, most were not particularly strong in advocating on behalf of their communities or mobilizing different constituencies. In the mid-1990s, the executive directors of these settlement houses in St. Paul began to meet informally to share information. By 1997, this informal gathering had expanded to the other side of the river, and two years later the organizations decided to incorporate as the Metropolitan Alliance of Community Centers (MACC). Spearheading the founding was Tony Wagner, the prominent leader of Pillsbury United Communities. “I had tried for ten years to get something together,” Tony recalls. “I realized that, as non-profits, we had to get bigger to command respect. Otherwise, we were going to get nickel and dimed to death.” At first, MACC hired a part-time operations director and over the next few years, provided some management and leadership training, formed affinity groups for some staff to encourage peer learning, and hosted a few joint conferences. The biggest idea they explored, however, was for all of the agencies to provide a single health- benefits package to their employees. The attraction of such an idea was obvious - health care is the biggest expense in any benefits package for employers; health care costs and premiums were rising; and the complexity of program choices is challenging even for experienced human resource professionals. Why not pool the expertise of the various MACC agencies and arrive at one streamlined, more efficient plan? Why not collaborate on the item that promised the biggest savings, the soonest? Yet, initial attempts to share health benefits failed. According to Tony Wagner, the effort didn’t succeed because executive directors, rather than human resource professionals, led the charge; they tried to negotiate deals but did not understand the details of the packages. There was also the reality that health benefits were a charged topics within many organizations. Some agency boards of directors had preferences for particular providers and some employees resisted the idea of the change. In the end, the leaders did not relish the idea of confronting their employees over one of their prized benefits. MACC backed away from shared health, but worked out a common package for disability and life insurance benefits.

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By 2003, MACC was ready to build upon their small successes and expand its reach. They hired Jan Berry into a new position of President. It was not a risky decision. Jan, who had directed a Minneapolis-based youth services organization, was known in the community for her innovative programming, her long-term vision, her ability to connect the dots and make relevant connections between the challenges of practice and larger ideas. In short, she was what one colleague termed “an innovator of high order.” At the same time, the board knew that by hiring Jan they were asking for change. From the start, Jan make clear her intent to steer the alliance to an unprecedented level of collaboration. In Jan’s eyes, the board was, “A bunch of guys who wanted to change, but didn’t know how.” MACC had received a small grant of $30,000 for strategic planning but were unsure of how to spend it. There were a number of questions on the table that kept surfacing for the Board. Should MACC remain small and relatively nimble, with all its essential functions retained by its individual agencies? Or did MACC have to be bigger to exploit economies of scale? Should it grow? And, if so, in what direction? During the first months of her tenure, Jan began to systematically explore these questions, spending a day with each member agency, asking questions and listening to responses. Through these conversations, she learned that these agencies shared a “a very beautiful set of values” – that their work was neighborhood-based, focused on the poor and disadvantaged and that they were passionate that it should create social change by combating prejudice and teaching tolerance. These values and passion grew directly from the settlement-house tradition and were an asset that MACC could use to enrich the collaboration. Once articulated, these values became a touch-stone to appeal to when the going got tough. And it was tough. Despite the espoused values of collaboration and the small, early achievements, there was considerable distrust among the agency leaders. They were, at base, competitors in the tough environment for public contracts, staff talent, and private funding. To curb the distrust, Jan interviewed the CEOs during her first few months and deliberately asked what they thought about each other, then shared their opinions with each other. The technique, which Jan borrowed from family-systems theory, was meant to lower barriers to communication and take power away from what was not being said. Jan recalls, “I told them things that they wouldn’t tell themselves.” Then, at the 2003 annual meeting, she challenged each leader to publicly recognize an asset that another executive director brought to the collaboration. “It was uncomfortable for them to hear good things about themselves,” Jan recalls, “but they all did it, and they all loved it.” From Jan’s perspective, trust was an essential foundation upon which other innovations could be built. As Jan thought more strategically, she realized that the MACC human service providers resembled a credit-card company in the late 1960s that, ultimately, became Visa International.4 Initially, the industry was failing as banks undercut each other in pursuit of the lowest-common customer. Each bank had to administer its card individually, creating high costs and razor-thin profits. What VISA provided was a way to centralize the payment process and de-centralize its marketing, encouraging banks to “create, price, market, and service their own products under the Visa name.” While the card adheres to certain common standards and each bank honors the other’s card, banks continued to compete for customers. In short, member banks had to be intensely competitive and intensely cooperative at the same time. Jan recognized that the individual agencies that made up MACC were in much the same situation the banks before the

4 Dee Hock, The Birth of the Chaortic Age (1999) reviewed in Michael M. Waldrop, “The Trillion-Dollar Vision of Dee Hock.” Fast Company, October 1996, 5:75.

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“birth” of VISA International: performing the same social good, serving the same kinds of clients, but distrustful of each other and fearful of change. As the agencies worked together to craft common disability and life insurance policies, they hit a stumbling block which provide an important test to their evolving collaboration. When agency staff explored different options, it seemed that many involved large financial differentials; some organizations would save money from the pooled benefits plan, while others would need to pay significantly more. The MACC board considered what to do. They ultimately decided that any initiative needed to be financially neutral for all agencies; some organizations would need to sacrifice short-term savings to assure that their partners would not have to shoulder the additional costs. As Jan recalls, “It was a transformational moment when they began to see a larger common good and move beyond merely ‘what was in it for me.’” These conversations sparked another idea – why not develop a “common backroom” or managed service organization (MSO), whereby participating agencies would cut costs by sharing administrative functions like finance, human resources, and information technology. [See Appendix B] Yet, when Jan followed up with CEOs, the idea was met with a tepid response. Rather than pushing the idea, Jan began to consider how to grow the organizational membership of MACC, particularly with agencies that shared the core values and brought other key skills in the areas of community organizing and marketing which would enable MACC to move more strategically in the policy environment. In 2004, five agencies accepted MACC’s invitation to join, including the ARC Hennepin Carver, which works with disabled people; the Tubman Family Alliance, an anti-family violence group; and Family and Children’s Services (FCS), a large social-services agency in Minneapolis. The growth added diversity to MACC as well as fresh perspectives. While all but one of the original agencies were headed by men, the new additions were led by women. Not everyone, though, was entirely pleased with the growth. Brad Englund, CEO of Loring-Nicollet Bethlehem Community Centers in Minneapolis, liked the shared missions and goals of the original group. “We all came out of the settlement-house tradition, and we all served low-income families,” he says. “We had similar histories. The organizations that were joining us are fine organizations, but they changed the nature of the alliance.” One of the new organizations, for example, focused programs on adolescents, alone, rather than their whole families. Another organization’s niche historically had been mental health services. As a result, its culture was more professional, bureaucratic, “beige” in contrast to the more informal and “colorful” culture that existed in the settlement house organizations. These differences brought into sharp relief questions about what held MACC together. Molly Greenman, CEO of Family and Children’s Services, explains what drew her to the collaboration. “I had been through the ‘collaboration craze’ of the 1990s,” she says. “It was all funder-driven, and not necessarily effective. I was looking to partner with people with whom we had a relationship.” In fact, Molly maintains, the quality of the relationship might trump other factors in building the alliance, like similar programs or the need to cultivate strengths where her agency itself was weak. “We need to work with others who shared our values.” However, it was difficult to represent this internal relationship building – and the strength that came out of it – to MACC’s funders. While Minnesota enjoys a relatively rich and diverse philanthropic community, foundations are drawn to programs because they provide a tangible sense of accomplishments as a result of a grant. Investing in operations infrastructure or

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community building among agencies does not have not have the same appeal. From the funder perspective, MACC’s appeal was like that of a trade association: an organization, separate from but constituted by its individual members, that offers its members a range of services that they can take or leave. Trade associations also often have a policy advocacy function that MACC was interested in building. In this environment, foundations knew that cost-savings were in order and that one way to reach them would be to share infrastructure. The idea of a “common backroom” had some appeal and a number of funders encouraged MACC to pursue it, in keeping with the trade-association model. Yet Jan and Tony Wagner intuitively felt that such a model would not sustain MACC in the long-term. MACC’s membership did not want it to become a service provider. They cherished the social missions of their organizations and expected their collaboration to cherish it as well. The emerging practices of MACC, where executive directors of member agencies served on the board and agency staff participate in affinity groups, required organizations to invest more of their time and energy than a trade association required. MACC’s structure also was quite different than a trade association model where centralized decision-making creates efficiencies. For MACC member agencies, the value added of the collaboration was as much in effectiveness as efficiency. As Tony Wagner said, “For nonprofits, our bottom line is service to the community. Our return to customers is this service that is built upon relationships.” Unlike a simple trade association, MACC had to be efficient where it matters and effective where it matters. It had to be big in administration and public policy and small in program offerings. It had, in Tony’s formulation—a formulation that got written into every grant proposal and mentioned, like a mantra, at every board meeting —“We need to be big where big matters and small where small matters.” This articulation of values allowed the Board to consider new choices for the growing collaboration. So while the private funding community was encouraging MACC to assume a trade association model, its leadership realized their emerging model was much more complex. And more difficult to explain. There were some good reasons, though, to explore the idea of a “common backroom.” However, forming a managed service organization would be far more nuanced than merely throwing together the operational departments of different agencies and hoping that they would get along. Drawing Upon Technical Consultants The MACC leadership decided to take a first steps in exploring this idea. They hired a large consulting firm with a nonprofit department that was well-respected in the foundation community. The firm had the trust of MACC’s board. The consultants began by assessing the potential of using the managed service organization to create an independent, fully formed MACC organization. They then convened the board for a planning meeting so that they could “…articulate their hopes and concerns” about the MSO idea. Finally, they reviewed MACC’s financials to try to ascertain the point at which the MSO became a self-sustaining entity that would allow MACC to be financially viable. By December 2003, they presented their report to the board. They restated the assumption that had framed their analysis – that MACC would form as a separate, full-scale management service organization and gradually assume all the operational functions of its member agencies. The core of this idea was that MACC would become the common backroom for what had been separate finance, human resources, and informational technology departments, and would be the

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central employer of the staff performing these roles. Overtime, the MACC budget would need to grow from $350,000 to more than $5 million. Like a trade association, it would price its services to member agencies at prevailing market rates: HR services at $525 per year per employee, for instance, and financial services at 1% of the agency’s previous year revenues. Following the “big where it matters and small where it matters” dictum, the consultant model proposed both centralizing strategic decision-making and keeping day-to-day administrative functions local. In human resource management, for example, decisions about staff training, hiring coordination, and benefits administration would be centralized while functions like issuing payroll checks or tracking services would remain with the member organizations. Above all, the analysis made two central assumptions: 1) that a critical mass of MACC-agencies would quickly assent to the new, centralized system, and 2) that those agencies would financially support the migration. The final report also concluded that without these assumptions the model as proposed was “not sustainable.” For cost savings to appear, many agencies needed to migrate to the new system by 2007. Yet there was little that could be done to absorb the upfront or defray costs of the migration. Staff at the Loring-Nicollet Bethlehem Community Centers analyzed the viability for their organization and concluded that the costs far outweighed the benefits. “We already have a streamlined staff,” Brad Englund insists. “We had made cuts.” Now, in order for the MSO to be viable, this new model required Loring-Nicollet to make more staff cuts and turn over some of its middle-management capacity to a third entity. Dan Hoxworth also had deep misgivings about the model. “It required that we hire new staff and train them—and the operating cost after all that was still high. It just wasn’t showing economic savings.” While still believing in the essential idea, Tony Wagner realized that the consultant report exposed the difference between outsider funders’ assumptions and those of the MACC membership. “We sold the MSO idea on efficiency. But outsiders equate efficiency with cost savings, and they were not immediately apparent” in this early model. Perhaps most importantly, the model did not reflect one of the fundamental values of MACC, one that Jan Berry had spent so much time developing – that all organizations had an equal space at the collaborative table. Under the proposal, larger organizations were the only ones who would benefit from the transition. “We knew that the ‘winners’ in any consolidation effort had to share their winnings, so that the ‘losers’ could benefit,” says Hoxworth. “The gains to some had to be reduced, so that others could do all right.” Deepening the Relationships As the consultants did their analysis, Jan continued to build the relationships among MACC agencies, working a different levels within each. The Board meetings, for example, were changed so that every other month focused on learning topics rather than just business. This change allows leaders to begin to grapple with deeper issues together. As Dan Hoxworth observes, “In MACC, we truly get at compromise and the level of our discussions are real…people are honest about where their conflicts are.” Such a process changed his own expectation of collaborative groups. When asked to be a leader of a Council of Agency Executives for the United Way, Dan relied directly upon his MACC experience to help him be more effective as a collaborative leader. Molly Greenman reflects, “We (executive directors) give each other courage. We know our values, and we respect each other. We help each other be our best in leadership, culture, values.” The affinity groups of other staff members also gained traction. The Human Resource, Financial, Information Technology and youth program staff began to come together regularly to

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reduce their own isolation and share knowledge and good ideas. For many, this was the first time there was a structure to facilitate peer learning and they used that resource to improve what they did each day. Some program staff began to work on joint programs together and share information about communities needs. There seemed to be increasing benefits at all levels of the organizations from working more collaboratively. Back to the Drawing Board In spite of the real limitations of the consultant report, a small group of MACC leaders continued to be interested in the MSO idea. No action was taken for seven or eight months. Yet, the idea was still percolating. Could they, for example, cut back on the functions and start by sharing only financial operations or information technology? Jan also began to realize that this idea did not have to become the defining aspect of MACC. Tony Wagner credits that as one of her most important contributions to keeping the collaboration alive. “Jan taught us that we didn’t all have to jump in at the same time.” Jan began to bring together the small group of executive directors who remained interested in the idea. They, in turn, decided to give it to a committee of the chief financial officers (CFO) from six organizations, who had formed relationships through an affinity group, and were intrigued by the problem. Somehow, they felt certain that an alternative model could be developed. By late 2004, the CFO group was ready to present their analysis to the MACC board. First, they critiqued the consultant model. Stan Birnbaum, CFO from Family and Children’s Services, described how the model had relied upon an implied three-fold division of administrative services. As figure one illustrates, the foundational level focuses primarily on tactical and transactional activities of day-to-day operations: in financial management, this is doing accounts-payable tasks; in human resource management doing payroll or tracking personnel files. The middle level, “professional practice,” consists of those middle managers who implement professionally guided “best practices” in a particular area: in financial management, doing investment; in human resources, creating performance appraisal systems. Finally, the top level really focuses on strategic management, fundamentally setting the course for how that functional area will be carried out. In the committee’s assessment, nearly all MACC organizations—some just traditionally, and some because of the funding crisis—had severely compromised these three roles across many management areas. The consultant’s model, in fact, required that they further compromise their middle management by outsourcing responsibilities to the MSO. The committee began with a different assumption. If the MSO was going to add value to MACC organizations, it needed to offer services at the tactical/ transactional level where organizations face significant challenges in finding staff and managing risks. Without the distractions of the day-to-day, agencies would be better poised to use their managerial talent. By providing nuts and bolts services, this approach might well allow the MSO to enable the organizations to, in the words of Stan Birnbaum, “solve problems together that they can’t take on alone.” Yet, it would not probably result in immediate cost savings.

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Figure One: Division of roles within each functional management area

tactical/ transactional

professional practice

strategic

Second, the committee recast the proposition of the MSO itself. Rather than being a means to reducing costs, the whole effort was presented as a means to reduce risk and improve talent management in the functional areas. Operational efficiencies might well result and, over the longer-term, at larger scale, they could produce cost savings. Yet, that was not the focus of the initiative. Third, the committee provided two options for MSO implementation. The first, “steady-state” model focused on the implementation of one functional area at a time and allowed for a highly controlled, orderly implementation of a full-scale MSO (See Figure 2):

Figure Two: Steady state implementation

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Service 1 (HR) ProductionDesign Ramp-up

Year 1 Year 2

Service 2 (tbd) Design Ramp-up Production

Service 3 (tbd) Design Ramp-up Production

etc.

The steady-state model might involve hiring new people, or it might mean simply moving staff from an existing MACC agency to the new MSO. But any hiring would follow a careful design process whereby the MSO would decide which services to offer its member agencies, one by one, and then decide how to staff that service. The second option was a “rapid-rollout” or “smooshed” model. This model took the existing administrative functions of two or more MACC agencies and combined them (see Figure Three). New staff would not need to be hired, but existing staff needed to be willing to work with staff outside of their current organizations.

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Figure 3: Smooshed model of implementation

Org 1 admin

Org 2 admin

Org 3 admin

stage 1

Org 1 adminOrg 2

adminOrg 3 admin

stage 2

New org

stage 3

A third alternative existed, although it was not discussed much in the deliberations. In a “staff- pooling” model, organizations simply shared existing staff between them. Neighborhood House, for example, had an existing relationship to share human resources personnel with Minneapolis’s East Side Neighborhood Services. One staff member would work part-time at each agency. While Jan had encouraged this kind of sharing, others on the MACC Board thought it drained time and energy from the development of a “true” MSO. In all of these options, though, were not focused on reducing costs. The steady-state model was less risky but more costly than the smooshed model: less risky because the MSO would closely examine each service before it offered that service, more costly because close examination took time and money. The smooshed model was faster and cheaper but riskier. By throwing together existing staffs, the model saved on start-up costs; however, it was not clear whether it would provide long-term cost savings. That uncertainty, in fact, was one of the risks, as was the potential loss of productivity that could result as existing employees were required to retool, learned new jobs, and begin to work with a different group of professionals. Because the agency CEOs did not want to terminate any staff in the transition, the benefits of an MSO would be experienced in the greater redundancy and expertise offered by a consolidated staff, not in lower costs. There was a chance that money might be saved in the long run, but only if enough agencies joined early enough to offer economies of scale. The committee noted other risks inherent in both models, risks that could be minimized by the third option of the simple staff-pooling model approach: 1. Joining an MSO meant that individual agencies had to give up control of their financial,

human resource, and information technology systems to a third entity that they had little control over. The MSO would not be just a vendor of these services to its participants. Agencies would need to be jointly liable through a limited liability corporation (LLC).

2. Agencies that joined the MSO would find it difficult to get out of it once they got in. The

LLC would create a hefty exit penalty.

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3. The MSO would stipulate that participants would have to buy or contribute to the offering of all three services—finance, human resources, and information technology—even if those services were staged in how they came “on line” (via the steady-state approach).

4. Contributing resources to the MSO would lower the resources available to individual

agencies, making it more difficult for CEOs to balance their budgets. 5. In change of this sort, there are always risks involving personnel. Would agencies’ cultures

clash? Would their people? Who would supervise MSO employees, especially if they were hired before a chain of command was in place?

The MACC board now faced a critical decision. Should the organization move forward on one of the three models? Or should it, instead, focus on other areas of collaboration that had cropped up as potentially important? To become more effective in shaping the state political environment, like the Taxpayer’s League, they needed to do public education, and make their values and their programming more visible to the public and policy decision makers. The MACC public policy committee was proposing an initiative to do just that by encouraging agency clients to register and vote in elections. There also was a partnership with a large local realty company in the works that would focus on promoting home ownerships among MACC agency clients. There were many ways that MACC could continue to collaborate and work toward being big where it matters and small where it matters. However, the current environment, with limited funding and a charged political polarization, required that they make a purposive and strategic decision around the MSO issue.

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Appendix A MACC’s Mission, June 2002: To assist individuals and families to achieve greater self-sufficiency by strengthening the capacity of community-based social service organizations. Membership: Minneapolis

St. Paul

*Pillsbury United Communities *Neighborhood House *Phyllis Wheatley Community Center *West 7th Community Center *Plymouth Christian Youth Center *Merriam Park Community Services *Eastside Neighborhood Services *Merrick Community Services *Sabathani Community Center Hallie Q. Brown/Martin Luther King Center *Loring Nicollet-Bethlehem Community Centers

*Confederation of Somali Community in Minnesota

Neighbor to Neighbor MACC’s Mission in 2006: Unleashing the connective power of communities to build their own future. Membership: Minneapolis

St. Paul

*Pillsbury United Communities *Neighborhood House *Phyllis Wheatley Community Center *West 7th Community Center *Plymouth Christian Youth Center *Merrick Community Services *Eastside Neighborhood Services *Keystone Community Services *Sabathani Community Center Hallie Q. Brown/Martin Luther King Center *Loring Nicollet-Bethlehem Community Centers

*Confederation of Somali Community in Minnesota

Arc-Hennepin Carver The City, Inc. Family and Children’s Service LDA Minnesota Life’s Missing Link Minnesota Indian Women’s Resource Center Tubman Family Alliance Way to Grow * denotes organizations that developed from a settlement house history.

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Appendix B: Other Managed Service Organizations (MSOs) One of the early memos from the consulting firm hired in early 2004 to assess the viability of a single managed service organization (MSO) for MACC, claimed that “no such model . . . exists either locally or nationally.” Yet how could that be true? In the world of health care (which, in Minnesota, remains non-profit), “managed services organizations” are not uncommon. Many hospitals, for example, sell their payroll or billing services to the smaller providers with whom they work, doing the more complicated and more costly tasks that they would otherwise have to do for themselves. In other nonprofits, a MSO may step in as third-party organizations to provide temporary management or management consulting services for organizations in need of help. Yet, MSOs have been largely overlooked in the professional literature. Yet, neither for-profit nor non-profit MSOs have been much analyzed in the professional literature. Arsenault (1998) surveys the risks and costs of the various alliances available to non- profits, from a joint venture to a merger, and including MSOs; and Golensky and Walker describe a rehabilitation services provider that formed a separate non-profit “to achieve greater efficiency and effectiveness by providing management and administrative services to other organizations” (2003: 68), a description that, however broad, sounds close to what MACC was trying to do with its MSO. In a briefing paper, La Piana consulting firm concede that non-profit MSOs “are not very common.” (Coy & Yoshida, no date). From their view of the field, three other options exist other than an MSO for organizations that want to share or consolidate functions: “administrative collaboration,” “administrative consolidation,” and contracting with external service providers. Of these options, MSOs are the most formal arrangements of all because in this model an entirely new organization is formed and a governance structure must be developed. The promise of an MSO is that all participating organizations must come to be on the same page. The peril of an MSO—as the MACC development team had identified in their analysis at the end of 2004—is that getting everyone on the same page may be more trouble, and take more money, than it is worth. La Piana briefing thus concludes that “successful MSOs typically have a mission related to serving a specific community.” So perhaps the consulting-firm memo was right: the MACC was venturing out into uncharted waters by considering the implementation of an MSO based upon and focused on solidifying the collaborations they were development among human service providers in the Twin Cities. Yet, although MACC members did share a broad set of (settlement-house) values, did that provide a strong enough base to move forward in early 2005?

References

Arsenault, Jane (1998). Forging Nonprofit Alliances: A Comprehensive Guide to Enhancing Your Mission Through Joint Ventures and Partnerships, Management Service Organizations, Parent Corporations, Mergers. San Francisco: Jossey-Bass Publishers. Coy, Bill and Vance Yoshida. “Administrative Collaborations, Consolidations, and MSOs.” La Piana Associates, Inc. Retrieved 1/8/07 http://www.lapiana.org/downloads/Admin_Partnerships_briefing_paper.pdf Golensky, Martha and Margaret Walker (2003). “Organizational Change—Too Much, Too Soon?” Journal of Community Practice 11(2). 67-82.

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Trust as an Asset: The MACC Alliance for Connected Communities (B)1

As the board of the Metropolitan Alliance of Community Centers considered whether or not to pursue the vision of a managed service organization in the tight, fiscal environment facing Minnesota nonprofits, there were many trade-offs to consider. While the managed service organization (MSO) idea had taken up much of their time recently, there were others projects, other means of collaboration, that could yield benefits with less effort. The MSO was such a big idea, after all, that most of the 17 MACC agencies paled in front of it. If the real purpose of MACC was to deepen the idea of collaboration, perhaps time would be better spent moving ahead on its public policy platform. In fact, the alliance had found rare unanimity on the issue of voter engagement. It could use the close contacts that its agencies had cultivated among underserved, underrepresented populations to educate people about the importance of voting and to turn out the vote in greater numbers. This program could be brought on line much less expensively than the consolidation of administrative functions; the budget for the 2004 “Community Power Vote” campaign was only $79,500. Alternatively, MACC could devote more resources to an innovative partnership developing with Edina Realty, a large, locally owned real-estate firm that, in its own field, faced many of the same threats and opportunities as MACC. For example, Edina Realty realized that the ethnic composition of its sale force, like the managers and line staff of MACC, did not mirror the Twin Cities at large; they wanted more diversity to both expand their business and better serve their existing customers. Just as MACC was an alliance of independent agencies who grew stronger when they articulated common goals, Edina was an alliance of independent contractors who gained credibility by associating with a greater whole. If the fundamental purpose of a human- service agency, was to get people out of poverty, why not work through a realty company to make it more possible for poor people to buy their own homes? The benefit of the partnership to Edina Realty was more customers; the benefit to MACC was greater exposure and new way to further its mission While Jan Berry and the MACC Board continued to explore these options, however, the sheer promise of the MSO continued to be compelling. But what kind of MSO? In a perfect world with unlimited time and money, the steady-state model for implementation had many strengths. It selected just the right system for each task and carefully built consensus among the member agencies around those systems. But funds were not unlimited. In a less-than-perfect world where time was of the essence, the “smooshed” model of implementation was more realistic. To save money, the board decided to select a system for each function—one financial system, for example, and one information technology platform—and to require each agency to adopt it. In January 2005, six agencies—Pillsbury United Communities, Family and Children’s Services,

1 This case study was written by Jodi Sandfort and Timothy Dykstal, both of the University of Minnesota, Humphrey Institute. Please direct comments or questions to [email protected]

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Phyllis Wheatley Community Center, Plymouth Christian Youth Center, Tubman Family Alliance, and MACC itself—signed on to the smooshed model of an MSO and began detailed planning to start operations one year later. Notably, this “early adoptor” group also did not include Neighborhood House, one of MACC’s most involved members. The hesitation did not come from a lack of appreciation of the design or the strength of the collaboration. Rather, the organization was in the middle of moving into a brand new, 93,000 square foot community and administrative center. “The logistics that we were dealing with were huge,” remembers Dan Hoxworth, Neighborhood House’s President. “It wasn’t time to take on anything.” By May 2005, the early adopter group also had lost one of its members: the Tubman Family Alliance. Because of financial stressors, Tubman could not find the resources to participate in the experiment. Tubman also had wavered from the start about the decision to implement in the smooshed rather than the steady-state model; it wanted the best to begin with and felt uncomfortable with the incremental approach. Planning the Details of Implementation The leadership did not under-estimate the amount of work that needed to be accomplished to realize this vision. The five agency CEOs began to meet every other week to decide on the structural details and puzzle out the legal status of the MSO. CFOs from the agencies divided up other design details: Stan Birnbaum took the lead in selecting an information technology platform. Two other CFOs from the original design group, Dan Ursin, from Pillsbury United Communities, and Mike Johnson from Plymouth Christian Youth Center each, respectively, assumed the leadership of developing the financial system and human resource policies. While cost-savings was not the initial goal, the leadership wanted to contain costs. The CFO group knew that complexity drove up costs and that some savings would be felt as they implemented a single system. For example, the agencies ultimately would save money as they moved from five financial statements to one. As a result, they recommended an aggressive schedule for co-locating the MSO staff and move the systems changes forward. This would be the first step towards a pricing model that ultimately would help the budding MSO break even on the services it was providing its members. There were also design questions to consider. Some services could be provided on a “flat fee” basis: the MSO would charge its members a percentage of some factor, like their annual budgets, to provide them. Other services could be provided on a “professional” basis, with charges based on planned or actual time spent. The functional services, though, really influenced how the price would be set. Finance services were easy to define: basic financial management services were flat fee, but any kind of analysis, forecasting, or research would be charged professionally. Technology services were more difficult. If a senior manager were engaged in defining IT “governance” issues, for example, was that a flat-fee task, or a professional one? Over the longer term, though, it seemed that costs should decrease. The economies of scale and reductions in complexity that the MSO achieved should allow it to provide member services more efficiently and reduce the price charged to members. Outside vendors (in areas like telecommunications) might be persuaded to charge less for their services. The MSO also might reduce the risk that any one of its member agencies might be defrauded by a service provider. Yet, for the MACC leadership, the MSO concept was never only about saving money. Fundamentally, the experiment focused upon collaboration and the deeper lessons—about trust,

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sharing, and community—that could result. Whatever long-term savings would eventually result, they believed, would probably come from fundamental changes in operations because of the collaboration itself. In spring 2006, more than a full year after the process of consolidation began, the MACC leaders issued a “fact sheet” that put this principle most succinctly: “The theory behind the MSO is that the cost of operating sub-optimally is higher than investing in efficiency.” In other words, the initial costs where not as significant as the eventual costs of not investing in the MSO. In addition to these concerns about operations and cost, the implementation planning groups grappled with the human challenges of consolidation. All recognized the challenges inherent in trying to “smoosh” people used to working in a variety of organizations, with their unique missions, chains of commands, and cultures. Unless handled carefully, legal action could result when different supervisors took over. As Tony Wagner, CEO of Pillsbury United Communities, worried, “What if one of my employees doesn’t like the performance evaluation that he or she gets from Stan?” As a member of the MSO, however, Tony realized that he needed to support the new management and structure, even at the risk of alienating longstanding and loyal employees. As Stan adds, “Probably one of our biggest lessons is that trust and the shared culture that we were creating is a critical, essential resource.” Throughout the summer and into the fall of 2005, the two upper-management teams—the CEOs and the CFOs—continued to meet, the CEOs weighing the strengths and weaknesses of various legal structures, the CFOs selecting systems and ironing out details of the move. In September 2005, the CEOs created a joint ventures agreement that specified important details. There was, for example, a clause that allowed each participant to leave the partnership until July 1, 2006 without any financial penalty. It also created a formal advisory group with two representatives from each of the founding agency boards of director in addition to the CEO. The group also realized that they needed to better market the creative synergy occurring. Rather than calling their creation a “managed service organization,” they decided to call it the MACC “Commonwealth,” a name that conveyed all the richness of the collaboration. The MACC board, as a whole, also considered the overall cost of the MSO and ongoing operations for the collaboration. The all committed themselves to raising money jointly for both components, relying upon relationships with foundations and other donors that supported their home agencies. Over three years, they estimated that the Commonwealth would cost between $900,000 to $1 million, allowing for costs that would occur when additional organizations joined the effort. The launched a formal campaign and were pleased when the Otto Bremer Foundation, a modest-sized foundation in St. Paul, stepped forward to invest $300,000 in the Commonwealth over three years. It was, as one leader noted, “…a real stretch for them.” This investment encouraged other, more sizable local foundations to contribute to the campaign. The “Smoosh” Begins As long as the work remained at the planning stage, it was possible to idealize it. But when the time came, in November 2005, to actually select a physical space for the new organization, it quickly became clear that simply calling it the “Commonwealth” did not mean that the move would be painless. There was no space at either Plymouth Christian Youth Center or Phyllis Wheatley. The choice seemed to boil down to a Pillsbury United Communities facility in North Minneapolis or the downtown offices of Family and Children’s Services. The north

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Minneapolis facility had ample parking but was cramped inside. The downtown site had more space, but many employees from the other agencies were uncomfortable with the downtown location and did not want to pay for parking. Moving the Commonwealth to the site also would require some long-time Family and Children’s Services staff to move and they expressed opposition. To make the final decision, the CEO team chose to consider cost containment as their overriding priority; in the end, they chose the downtown, Family and Children’s Services space and established a March 2006 date for the move. The downtown space needed remodeling and, as the work commenced, the reality of the MSO began to become clear to larger number of staff. The complaints increased. Many staff began to worry that the new administrative consolidation would result in layoffs. The CEOs, however, had decided early on that they owed their longstanding employees the same consideration as the clients that they served and adopted a ‘no layoff’ policy. Yet, the rumors continued to swirl. When the physical move occurred in March, the CFOs (who themselves moved to the new location)—Stan Birnbaum, Mike Johnson, and Dan Ursin—realized that simply smooshing people would not automatically create a coherent, efficient organization. To aid the transition, they carried it out in various stages. First, the staff continued to carry out their old responsibilities, just in the new, shared space. A consultant was hired to assist in team-building and begin to create a shared culture for the Commonwealth, even working with a set of Legos so that staff teams could construct an image of what the new organization should be. These efforts paid off, and slowly but surely, people began to feel themselves less employees of their home agencies and more employees of the Commonwealth. Yet, the transition did not work for everyone; one 19-year employee of one the agencies decided to leave fueled, in part, because of her dissatisfaction with the MSO. In the meantime, the Advisory Board group continued to work on identifying a legal structure beyond the joint venture agreement that could both allow for a full collaboration and protect the assets of individual agencies. No such structure existed. The Commonwealth needed to create one and the stakes seemed high. As the CEOs analyzed the problem, they had four options. They could simply retain the joint venture agreement, as skeletal as it was. They could create a new, 501(c)(3) corporation: a new non-profit, to mirror the legal structure of their existing agencies. Alternatively, they could create a new, limited liability corporation (LLC) with MACC as the sole member. Finally, they could create a new, LLC whose members were the current MSO members. All of the options, though, felt scary for the leaders. As Jan Berry remembers, “each (person) had a moment of ‘remind me again of why we are doing this.’ They needed each other to remind them and bring them back into the fold.” While all options provided significant differences, some were more significant than others. The Advisory Board could tolerate a less-favorable tax situation, they reasoned, but the new legal entity had to support the transfer of assets from their home agencies to the Commonwealth. Jan explained:

“Our Board makes its decisions on the general principle of one organization, one vote. But shares in the Commonwealth are based on how much each agency contributes to the whole. Our members, at least our bigger members, had to have some assurance that their assets would be protected: that they would get out of the new organization what they put into it. Without that legal assurance, they would not have joined.”

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Based on this analysis, the CEOs decided on the fourth option: a new LLC owned by its individual members. That new LLC was formally incorporated in the state of Delaware, because Minnesota law did not allow non-profits to be constituted as LLCs, on January 3, 2007. Throughout the on-the-ground development of the Commonwealth, the leadership understood they were wrestling, not just with occupying physical spaces or merging corporate cultures: they were wrestling with maintaining the loyalty of their employees’ hearts and minds. After all, many people work for non-profit agencies —often for less pay than they can get in the private, for-profit or public sectors–because they are true believers in the agency’s mission. As Stan Birnbaum put it, “People just hunger for participating in an organization that has value.” The real danger of constituting the Commonwealth as a new LLC, a new corporation, was that in asking new employees to affiliate fully with a generic organization whose mission was merely administrative, the Commonwealth’s managers would kill the passion and larger good that motivated their employees, in the first place. “This is high risk,” Stan added. “If we really tamper with what holds them here then we have wrecked the whole thing. What keeps these people in the non-profit sector is their heart. We must keep their hearts engaged with the mission.” In the longer term, financial statements will prove whether the Commonwealth is realizing any financial savings. In the transitional stage, however, how will the leaders know if the Commonwealth is a success? Tony Wagner has a simple answer. “The Commonwealth will be a success if it attracts new members.” Molly Greenman agrees; growing the Commonwealth by approximately two new members each year is critical. If this growth can’t occur or if any of the other early adopter leave the LLC, the viability will be seriously compromised. More members are necessary to realize the longer-term economies of scale. Recruiting New Members One agency that seems ready to take that journey is Neighborhood House. Their participation would be a coup for the Commonwealth. For one, it would be the organization’s first member in St. Paul—the five early adopting agencies were in Minneapolis—and reaching the other side of the river is important given the dynamics in the Twin Cities. As the Neighborhood House board evaluates its possible participation in the Commonwealth, they are both attracted by its array of administrative services and wary of compromising their own edge in facilities. Even though Neighborhood House is not yet a full participant in the Commonwealth effort of MACC, Dan Hoxworth, the President, is articulate about the meaning of it all. “Look at all the money that the state of Minnesota is throwing into biotechnology,” Dan remarks.

“They recognize the value and potential of that. The social innovation represented by the Commonwealth is just as real as the scientific innovation of biotech. Our funders are always asking us to try new things, to experiment, to collaborate. Well, with the Commonwealth, we did what they asked us to do. It is time for them to recognize the value of what we did and to support it accordingly.”

If new organizations join the Commonwealth, new issues will arise. What are the minimal assets new organizations must bring to the table to be viable partners? Will new members have to commit to the same, intensive amount of management time as the early adopters? What other

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services might be appropriate beyond finance, human resources, and information technology? Would adding new members strain the close relationships among the existing five organizations involved in the Commonwealth? Yet, Stan Birnbaum believes the Commonwealth staff will figure out answers to such question. As he reflected, “The most important lesson learned (in this experiment) is how to focus on problems and create solutions.” In the environment of charged politics and limited public and private resources, agencies in the MACC collaborative have learned much about this lesson.

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