So-called nonprofits differ from for-profit entities because they enjoy protection under section 501(c) of the United States Internal Revenue Code, which establishes twenty-six types of organizations exempt from federal (and often state) income taxes. The most prevalent of these organizations tend to fall under section 501(c)3, which identifies organizations devoted to religious, charitable, scientific, public safety testing, literary, educational, athletics, artistic, or social (e.g., for the prevention of cruelty to children or animals) causes. In order to qualify for tax exemption, such organizations must not distribute its surplus funds (i.e., profits) to shareholders or members, but must instead use them to advance its stated mission. The largest American 501(c)3 organization is the Bill & Melinda Gates Foundation, which has a very broad mandate of solving hunger, health care challenges, and poverty abroad while increasing access to information technology and education in the United States. Other 501(c)3 organizations have narrower, slightly less ambitious missions, such as the Society for the Preservation and Advancement of the Harmonica (SPAH) which aims to "cultivate, develop, improve, foster, promote, preserve and advance the harmonica and harmonica playing."^[157]

A similar environment exists for nonprofits in trouble. Recognizing their distress, suppliers to nonprofits will grow increasingly wary of advancing them any trade credit, demanding cash in advance. Lenders and donors may grow hesitant to cut checks to an organization in fear that it may soon shut its doors. Donors to nonprofits want to feel that their funds went to accomplish that organization's mission, not pay the last Comcast or PG&E bill before it closed up shop.

Nonprofits face many of the same external causes of distress that for-profit companies experience. For example, the recent economic downturn has crippled many nonprofits, who rely heavily upon donations that come from disposable personal income or draw operating capital from shrinking endowments. Such economic turmoil can be especially painful for organizations focused on addressing poverty or homelessness, which face a spike in demand for services just as funding sources dry up.

Just as with for-profit companies, economic downturns do not need to be global in their scale to affect nonprofits. In the Introduction, we discussed how the closing of the Fore River Shipyard in Quincy, Massachusetts, destroyed local restaurants and bars that relied on the lunch and after-work traffic of shipyard workers. Similarly, the creeping decay of the Detroit metropolitan area in general and the U.S. automotive industry in particular throughout the 1980s and 1990s saw Detroit's Temple Baptist Church lose some 75 percent of its weekly attendance base, driven in large part by the dramatic demographic shift that saw residents flee Detroit in droves.

Changes in technology can throw nonprofits into disarray, requiring strategic refocusing. The March of Dimes was originally founded with a goal of eradicating polio, and supported that mission for seventeen years. Upon Dr. Jonas Salk's development of a vaccine that effectively accomplished this goal, the organization found itself without a mission, and eventually revised its charter to refocus upon preventing birth defects and premature births.

Shifts in consumer demand can affect nonprofits, as some donors may be less loyal to any one particular mission and may instead donate to whatever cause has received recent significant media coverage. For example, in the wake of September 11, many local charitable organizations noted significant decreases in donations, as donors gave to funds such as the Survivor's Fund in lieu of their traditional charities. Similarly, the rise in popularity of long-distance air travel forced Amtrak to operate at a loss ever since its creation in the early 1970s, because the massive fixed costs of operating a national passenger railway require demand levels that have been siphoned away by air carriers.

Industrywide issues can plague nonprofits, particularly those focused on regulatory-intensive sectors such as health care. Visiting Nurse Service System suffered along with hundreds of other home health agencies in the wake of Congress's 1997 Balanced Budget Act, which resulted in major reductions in Medicare reimbursement. Many similar nonprofits counted Medicare reimbursements as the primary driver of their revenues, so the bill put a great deal of pressure on their operating budgets.^[158] State delays in Medicaid payments caused small pharmacies and medical practices to declare bankruptcy.

Other seemingly unrelated changes in regulation can also challenge nonprofits by spurring demographic changes. Many urban school districts struggled mightily in the wake of the desegregation mandated by 1954's Brown vs. Board of Education. The resultant "white flight" from urban areas to the suburbs and to private and Catholic schools left urban school districts significantly underfunded and struggling to attract top educational talent. Some have only recently turned to outside turnaround experts to strengthen the delivery of their education mission, as discussed later.

Internal causes of distress are also similar in the nonprofit environment.

The same blind pursuit of growth that plagued Sara Lee has crippled more than a few nonprofit organizations. From 1985 to 1991, Greenpeace's total income grew fourfold to $179 million, but its headcount grew proportionately such that when income dipped to $130 million in 1995, the organization had to resort to significant layoffs to break even.^[159]

Drifts from core competency akin to the strategic drift that plagued Krispy Kreme can plague the nonprofit world, in which such lack of focus is referred to as "mission drift." Big Brothers Big Sisters of Metropolitan Chicago (BBBSMC), a nonprofit organization affiliated with the larger Big Brothers Big Sisters of America, is a mentoring organization that has been active in the Chicago community for over forty years. The mission of the Chicago Chapter is to empower youth by mentoring children through one-to-one mentoring relationships in community-based and school-based programs. Fueled by rapid growth into fourteen new programs during the 2000 to 2005 period, fundamental organizational problems became more apparent and ultimately came to a peak in 2006. The symptoms were classic, with no clear strategy, revenues barely covering the organization's overhead cost, funding payroll difficult most weeks, and a $350,000 line of credit from a local bank that was fully used. The local group depended on two sources for the vast majority of its revenues—grant money from United Way and from the United States government. Its antiquated IT infrastructure did not allow it to fully coordinate fundraising and marketing activities. After thoroughly investigating their options, the board of directors asked Art Mollenhauer, a member of the BBBS Lake County Board of Directors, to spearhead the turnaround efforts as CEO. The turnaround he attempted is discussed later in this chapter.

Not surprisingly, insufficient capital hamstrings many nonprofits. Failed charities abound more than people realize. About 30,000 to 60,000 charities disappear from IRS files each year, presumed to go out of business, with about as many new ones formed each year.^[160] Charities can fail because their key donors go bankrupt or because the charities put their funds into failed organizations, such as massive funds lost by charities who had invested in Enron or in failed Icelandic banks. These issues exist worldwide. In the United Kingdom, for example, a charity that gave legal assistance to migrants and refugees left 13,000 adults and children facing uncertainty when it entered liquidation administration.^[161] The managers blamed external factors, particularly late payment of governmental legal aid, but the government noted that "every other organization" was more efficient and coped with timing of legal aid payments.^[162]

Despite the even worse societal effect implied by such actions, fraud and dishonesty can also submarine nonprofits. In late 2008, the JEHT Foundation—devoted to reforming the U.S. criminal justice system—had to close its doors, having lost almost its entire endowment to Bernie Madoff's Ponzi scheme.^[163] Fraud is also an all too frequent problem within nonprofits themselves.

Nonprofits travel down the very same organizational distress curve, through the blinded, inaction, faulty action, and crisis phases. The primary difference is that until recently, nonprofit organizations have proceeded much more rapidly and consistently from the crisis phase to dissolution than their for-profit counterparts. This has probably resulted from the fact that an extremely troubled nonprofit typically lacks a sophisticated creditor base that is motivated to maximize its recovery, so inertia (and the desire to save face by frustrated donors) drives nonprofits into a quiet shutdown with few objections if they can't raise sufficient new money.

Nonprofits exhibit many of the same warning signs as do corporations. For example:

Just as for other organizations, protecting intellectual property is very important for nonprofits. After "for the cure" became a successful slogan for the Susan G. Komen for the Cure breast-cancer charity, others began to copy it. With many charities trade-marking slogans with the three-word phrase, the Komen group felt they had to stop the proliferation of group names such as Kites for the Cure, Bark for the Cure, Juggling for the Cure, Blondes for the Cure, and Kayaking for the Cure. The Komen group had launched legal battles against these and even against those who use their signature pink ribbons, stating "We see it as responsible stewardship of our donor's funds."^[164]

Nonprofits can pay as well as their for-profit counterparts when new leadership is needed. When a fairly new Tampa area hospital defaulted on its $80 million in loans due to mismanagement, the lenders foreclosed into bankruptcy after a multiyear court battle. The county board which was supposed to oversee the county's hospital insisted that the auction for the sale and operation of the facility be limited to nonprofit hospital entities. The board balked when they learned the nonprofit chain that was the high bidder had a CEO who earned $17 million the prior year, which was a comparable salary for his for-profit counterparts. The delay was temporary until the Tampa bankruptcy judge approved the sale.

When a nonprofit begins to struggle, it should immediately build a 13-Week Cash Flow Model, just as a for-profit company would, for they must immediately determine which creditors must be paid without delay, which can be placated for the time being, and when cash will come in and out of the organization's bank accounts, with the ultimate goal of determining exactly how much cash is need (and how quickly) in order to assure survival.

For nonprofits, the challenge of estimating sales is replaced by the difficulty of forecasting donations. Organizations reliant on governmental funding face an even greater seasonal challenge, as governmental budgets are typically planned only once annually. Publicly funded railroad system Amtrak faced precisely this difficulty in attempting to enact its own turnaround, for it based its capital budgeting process on the amount of funding Congress would appropriate for it each new fiscal year. The organization's resultant need to wait until the passage of a new budget sometimes prevented it from utilizing its full budget appropriation before the end of the fiscal year, when the budgeting process began anew. In response, Amtrak began preparing longer-term budgets with scenario analysis built in to provide for a more flexible response to each year's federal grant amount. In many for-profits' departments as well as most government agencies, there is a rush to spend money left at the end of the year for fear lower spending would lead to a lower budget next year.

Turnarounds at nonprofits still require the use of the turnaround tripod, with the strategic aspect requiring the identification of the organization's true intended mission. The operational change will involve reengineering the organization to identify every process that contributes to that mission, and stripping out any assets, operations, or employees that do not. Finally, the financial restructuring may require renegotiation with any creditors, a burst of fundraising, or increasing the price (if any) charged for the organization's services. Art Mollenhauer did all of these when he turned around Big Brothers Big Sisters.^[165]

Mollenhauer had a twenty-four-year career with Baxter Healthcare in general management and had been a volunteer as a big brother for over ten years. Because the organization had a history of receiving bailouts from either United Way or the U.S. government when necessary, the management team had never considered implementing a more sustainable revenue model. Lack of diversity by the board of directors made it unable to anticipate and understand the challenges faced by the communities that the agency was trying to reach. Mollenhauer recognized that the agency's lack of interest in marketing seemed illogical for a nonprofit that relied on donations from outside the organization. Antiquated technology limited the ability of multiple chapters of Big Brothers Big Sisters in the Chicago area to coordinate and target their fundraising efforts effectively. Further, the agency offered fourteen different types of programs across the entire metropolitan area. This fragmented approach increased the cost of delivering services. Their reliance on unpaid volunteers helped the organization ensure passion and a sincere desire to help, but it also limited the quality control process and made succession planning very difficult. It is difficult to fire someone who truly wants to help, but may not be performing to expectations. The high turnover rate among the paid staff was another indicator that there were problems. To accomplish the turnaround and as part of strategic due diligence, Mollenhauer and many of the directors went out and met every single donor and volunteer in the program.

First, Mollenhauer refocused the strategy and mission to get the organization down to its core competency. Overall, ten programs were eliminated, which meant a cut of over 70 percent of the offerings. The new agency was going to strategically focus on just four programs across twelve zones throughout the Chicago metropolitan area. This included a reduction of underperforming and money-draining programs. The main program of community mentors and students would remain the most prevalent program, plus the continuation of three partnership programs that provided site-based mentoring. The three variations of site-based are a group of adults from a corporation or university providing tutoring at a specific school, a group of students going to a workplace setting for mentoring, and a hybrid program that focused on targeting a specialized group of students. An example of the latter is the African American executives from McDonald's who mentor African American students at a specific school. Changes were also made to the IT systems to create a centralized donation database. Mollenhauer made a significant donation, which encouraged many others to do the same. Once he focused on creating a comprehensive plan to trim costs, he then went on to another phase which focused on growing the organization in a controlled manner. The agency increased the number of students served under the various retained programs, and revenues grew from $600,000 to $2,000,000. Corporate partners grew from six to twenty-six. University partners grew from one to six. The agency went from about 70 percent of their funding being from the government or United Way to now only about 7 percent. A line of credit is now used only to address seasonality issues, just like a for-profit company.

The turnaround of BBBSMC clearly demonstrates that in order to successfully turn around an organization, strategy, operations, and the finances must all be addressed. Mollenhauer completely reshaped the strategy of the organization. He recognized the need to stop pursuing activities that were not contributing and refocused on its core competencies to grow from there. He changed consolidated operations for the decentralized activities of the county-run branches to help everyone streamline fundraising, as well as mentoring efforts, thus reducing turnover, and was able to pay more realistic wages and employee benefits to the paid staff. It has been a successful turnaround.

Just as at Fortune 500 companies, turnarounds at nonprofits require entrepreneurial, out-of-the box thinking to break through the status quo and return the organization to health. One must find or rediscover the core competency of the organization.

Leadership is every bit as important in turning around a faltering nonprofit organization, as executives must use different levers to unite a unique set of constituencies. Any creditors will invariably be nervous about advancing any goods to a nonprofit that has fallen behind on its bills, and employee morale can crash when it seems that an organization will fail to meet its ambitious mission, so leaders must gain credibility quickly and demonstrate the courage necessary to make difficult decisions.

Former Brigadier General Michael Mulqueen won national recognition for the leadership he displayed in turning around the Greater Chicago Food Depository, which has become the food bank industry standard for efficiency. Though many expected that the "command and control" style of leadership prevalent in the military would clash with nonprofit culture, Mulqueen has proven successful by setting very high standards for discipline and accountability for his staff. He recruited staff from for-profit organizations, and compensates them based on performance to ensure that the organization's mission of feeding the hungry is not the only thing incentivizing them. This increased the group's organizational efficiency to 94 percent, attracting many more small donors who want to know that their funds are going to support the organization's mission.^[166]

Board members of nonprofit organizations hold similar fiduciary duties as do directors at for-profit corporations: the duty of care and the duty of loyalty, with the slight difference that the duty is owed to the beneficiaries, rather than to its shareholders. Board members must keep informed about the organization's operational and financial performance, attend board meetings, and generally serve the best interests of the nonprofit. Allegations to the contrary generally pertain to overpaying management, failing to maintain adequate cost controls, frittering away corporate assets, mismanaging endowments, or keeping inadequate records required by law. The business judgment rule offers the same protections to such claims, and will generally prove sufficient except in cases of dishonesty or not acting in good faith. The duty of loyalty similarly prohibits self-dealing, as it does in for-profit corporations. A nonprofit can drift into the zone of insolvency, at which point its board's duties expand to a broader requirement to balance the interests of all the organization's stakeholders, including the community it serves, its creditors, donors, any customers, and employees. Furthermore, boards must take every action possible to attempt to exit the zone of insolvency, either by a turnaround, a merger with a healthier organization, or dissolution.^[167]

Nonprofits often demonstrate the same reluctance to change management or hire outside consultants as do managers at for-profit companies. Both types of executives will look to shift blame to vague "market forces," reluctant to be held accountable for the organization's distress. Nonprofit managers will express the same belief that an outsider couldn't possibly understand or demonstrate the same passion for their mission, and may make even more pointed remarks that outside consultants are "only in it for the money." Nonetheless, they are highly likely to need such outside assistance.

Bankruptcy is an option for troubled nonprofits, although until recently, few had availed themselves of the protections offered by Chapter 11. Historically, troubled nonprofits would occasionally find a healthier organization with which to partner, but in the vast majority of cases, they would simply liquidate rather than reorganize. According to Nonprofit Quarterly, nonprofit organizations represent 30 percent of all corporations but only 1 percent of corporate bankruptcy cases, perhaps because nonprofit management teams would prefer to liquidate rather than admit to financial distress.^[168]

Nonprofits that do file for Chapter 11 enjoy all of the same pros and cons of bankruptcy explained in Chapter Six of this book. While there can be no debt-for-equity swap, as nonprofits lack equity holders to begin with, organizations can use the automatic stay to work out payment plans with their creditors and make strategic and operational changes. The downside of the cost of paying professional fees is particularly difficult for nonprofits, as such fees must be paid upon emergence as administrative claims, and the filing will make it difficult to raise funding in such situations when DIP financing is out of the question.

Multiple bankruptcies exist for nonprofits. One of the biggest was St. Vincent's Hospital in New York. The causes and warning signs were well chronicled, including mismanagement and over-aggressive expansion. St Vincent's went into bankruptcy in 2005, with $250 million in debt, caused partly by earlier decisions to form a network with other hospitals, many of which were failing themselves. It emerged from bankruptcy in 2007, with an incredible $700 million in obligations, which included liabilities for medical malpractice, pension obligations, and the debt of the networked hospitals. It still had bloated administrative costs, was paying too many consultants, had 120 different IT systems, and needed to cut back from its forty shelters, 500 housing units for the mentally-ill, fifty-four outreach clinics, and 50 percent over capacity at the main hospital.^[169] All these things took money, and donors were scarce. Turning to the government didn't help because there were problems in the governor's office and the city of New York had budget problems of its own. The hospital closed in 2010 under the weight of massive operating losses and its crushing debt. The lawsuits, however, live on.

The payer is often not the customer in nonprofits. Doctors and hospitals are often paid by insurance companies. Public school systems get their revenues from taxes, not from the pupils. Donations keep most charities functioning, not money from the people they are trying to help.

There are clearly different sources of capital for nonprofits. They cannot raise equity or avail themselves of the stock market to raise funds if needed. They can sell bonds or take out loans, often to build new facilities. There are numerous municipal bonds that default every year, when projects such as the Las Vegas monorail cannot make payments.

They cannot change their mission easily. Whereas a board of directors of a for-profit company can go into new lines of business or reinvent themselves if needed, it is problematic for a nonprofit. If a large university were to lose its nonprofit status because it used significant donations for unrelated for-profit businesses, all those prime acres of land would become subject to property taxes. Any donations to a charity that loses its nonprofit status would no longer be tax deductible to the donors.

In general, there is a mission versus margin tension that does not officially exist in a for-profit company. Although many public company CEOs believe their shareholders are better off if all stakeholders are well treated, they are in a minority. Nonprofit CEOs have a more delicate balancing act to all their stakeholders.

As discussed earlier, nonprofit boards take on many of the same fiduciary duties in nonprofits as in for-profits, but they play a very different role. In for-profit corporations, the board has little involvement in the company's operations, but rather serves as an overseer of management's actions on behalf of the shareholders. In nonprofit situations, the board often takes a far more active role as the organization's major revenue generator.^[170] In addition, all but the largest, most professionally run nonprofits tend to have less savvy boards with limited financial or management experience. While this is obviously a generalization, the very nature of nonprofit culture can make governance challenging, as board members can rise to their positions less through an efficient, merit-based search process and more because they happen to share a passion for that organization's particular mission.

The nonprofit world typically moves much slower, due to many stakeholders weighing in which can make it very difficult to impart a sense of urgency to its employees. Overcoming the inertia of the status quo is already challenging at for-profit companies, but nonprofit employees tend to be even more resistant to change.

As a result, in nonprofit turnarounds, morale is even more important, but motivation to change is more difficult because many of the usual motivational levers are unavailable. Nonprofit managers rarely have the ability to offer performance-based compensation because it often rankles employees preferring a more egalitarian atmosphere, and granting stock options is impossible in the absence of equity in the organization. Even in the rare situations where nonprofit turnaround managers can offer the possibility of pay raises, such offers are less effective in nonprofit environments, where employees generally derive far less of their job satisfaction from pecuniary rewards. Because they often accept lower pay than they might earn in the private sector in exchange for a feeling that they are doing good rather than doing well, nonprofit employees sometimes demand greater autonomy, with an implicit bargain of "I'll take less money to work for a cause I believe in, but if I wanted to get bossed around, I would work for a corporation." This attitude can make it very difficult to inspire the kind of radical thinking necessary to reengineer a company from a blank sheet of paper. If their passion can be reignited by the right leadership, however, the employees can be a powerful force to make changes.

Nonprofits are overseen by the attorney general of each state where first licensed rather than the typical secretary of state's office. Attorneys general often seek involuntary dissolution of charities who fail to live up to their missions. Such charities are accused of conspiracy to defraud donors, distributing funds to directors, failure to use contributions for the purpose stated, illegal distribution, and other breach of fiduciary duty charges. For example, the California attorney general targeted a long list of charities, including one that used aggressive telemarketing techniques to raise funds supposedly to help police, firefighters, and veterans. Almost all the millions went to bloated overhead and expenses such as sailboats for directors of the charity.^[171] The fundraisers and directors were sued by the state as well as the donors.

It is often difficult to fire customers of a nonprofit. A nonprofit hospital is not supposed to turn away emergency cases even if they cannot pay. Public school systems must take on all children that live in their district even if it overburdens their facilities.

Nonprofits also lack the singular metric of success offered by bottom-line profitability, so measuring performance can be very challenging. Sales and gross and net margins make it easy to monitor corporations' performance, but the success of a nonprofit is more nebulous, particularly for nonprofits with broad, ambitious social missions. Consider a church, whose success might be measured by the average weekly attendance at services, the number of new official members (to the extent such a designation exists), or value of total donations received; all of these measure success, but they are imperfect proxies for determining the extent to which the church has accomplished its mission of spreading the gospel. This lack of measurability also extends to trend and benchmarking analyses, such as the Z-score, which currently has no widely accepted nonprofit analogue. One accounting firm has promoted a twelve-factor model that purports to measure the financial stability of nonprofit organizations, but this so-called "A-Score" lacks the statistical rigor that produced Altman's Z-score because it did not regress a large data set of nonprofits' financial information against a binary variable of whether they filed for bankruptcy or liquidated. Instead, it represents more of a commonsense approach to nonprofit financial management; organizations with high levels of cash and low debt have high A-scores, and so on.^[172]

Board composition is often a weakness in nonprofit organizations, as many directors may join for the same reason, such as having lost a loved one to a particular disease for organizations devoted to finding a cure, or a love of hunting for organizations devoted to defending the Second Amendment. While this can create passionate, committed boards, it can also lead to homogeneity, with executive teams lacking the complementary skill sets necessary for effective management. The Joffrey Ballet found itself suffering from an unusual governance problem, as its two locations (Los Angeles and New York City) each had its own board with separate fundraising responsibilities. This decentralized approach bred dissension, as each board felt that the other city's ballet received a disproportionate share of attention and resources.^[173] Such infighting can prove all too typical of nonprofit companies, where the absence of a uniting goal like share price increases can lead to highly politicized decision making, with board members pursuing their own conflicting agendas.

In the case of the Joffrey Ballet, fewer people seemed to be interested in seeing ballet in person, as cable television became a cheaper alternative for ballet connoisseurs in other cities to experience it. The organization decided to move all operations to Chicago in 1995, a faulty action that only exacerbated the organization's problems. They left behind their New York and Los Angeles donors and had to build a whole new audience. In its struggles to establish itself as a Chicago company, problems were magnified by the fact that the company did not have a home performance location, and without one it was hard to sell season tickets. They bounced from the Opera House to various theaters, fitting around each one's schedules. Finally, the mayor stepped in and convinced Commonwealth Edison to donate a building to the Joffrey in 1999. After raising almost $1.4 million to renovate the building, they discovered their CFO had left their books in disarray.

By the time the accountants could make sense of the books, they had to inform the board that the Joffrey wouldn't make payroll that month. The campaign changed from a capital campaign to a "save the Joffrey" campaign. When the board tried to convert the building renovation pledges into operating funds, this infuriated some supporters who believed that the company was mismanaging their operations and misrepresenting their pledge drives. Joffrey mortgaged everything they could and had amassed $3 million in debt by mid 2001 and still did not have a turnaround plan or renovated the building, which aggravated donors even more. Management and the board finally took action. They first targeted strategic solutions to identify their target audience. Previously, the Joffrey had focused their dance and advertising campaign on their more athletic performance than most ballet companies; their belief was to attract men who would then bring their families. It didn't work, and only through an insightful marketing research study did management finally realize that their main customer base was the thirty-five-to fifty-five-year-old woman who had lost touch with her inner ballerina. To attract that profile, they realigned the marketing and production efforts toward a more graceful and beautiful traditional aspect of their ballet performance. To create local buzz and support from the Chicago community, management invited local heavyweights, such as CEOs from several local companies, to join the board.

As part of the company's restructured operations, Executive Director Jon Teeuwissea realized they couldn't play taped music on some of their performances and persuaded several foundations to underwrite a switch to live music by a professional orchestra. Analysis of weekday and weekend ticket sales showed that just 21 percent of customers came to shows on weekdays, versus 79 percent on weekends. He cut to a sole weekday performance on Wednesday, which then became a high subscription request, cutting out historically unprofitable shows on other weekdays. The financial reorganization was carried out on multiple fronts—reduction in costs and an increase in grants and subscriptions for a steady income. The company was small by any standards but had bloated operating costs, largely due to a unionized workforce of fifty artists, six artistic staff, eight production staff, and thirty administrative staff. Based on the new strategy, Jon successfully renegotiated labor contracts with unions representing the artists and the production specialists. Jon altered touring activities to reduce costs. In 2005, at the peak of the real estate boom, they sold the building they had acquired free from Commonwealth Edison, for $6.5 million, which paid off debt as well as gave them remaining money as operating cash going forward. Although the building was originally donated to use as a home for the Joffrey, it was deemed cost prohibitive to convert the building into the necessary open space, free of structural support pillars for studios or performances. They increased fundraising efforts by reaching across three influential pillars of the Chicago community—large foundations, large corporations, and political contributions. To create buzz toward subscriptions and ticket sales in the target audience, a women's board was started, led by socialite philanthropists. These women would have fundraising parties and invite all their friends and became the largest single donor group to the Joffrey Ballet. The company's new home, the Joffrey Tower, was soon built as a mixed-use building right in the heart of the theater district in downtown Chicago.

Politics often gets in the way of trying to turn around not-for-profits, particularly quasigovernment agencies.

The New Orleans Parish School Board (OPSB) deteriorated rapidly in the late twentieth century, decimated by budget shortfalls, constant staff turnover (the parish had nine different superintendents between 1996 and 2005 alone), and woefully lax financial controls. By 2005, the district's budget hadn't been balanced in five years, and 65 percent of its schools failed to meet the state's performance standards; in fact, one high school valedictorian in 2003 needed seven tries to pass the state's tenth-grade math test.^[178] Clearly, the organization was failing to accomplish its mission or preserve its margin, and so despite exhibiting the very common reluctance to hire outside advisors, the parish's board voted 4–3 in May 2005 to hire turnaround consultancy Alvarez & Marsal to fix the financial and administrative elements of the school system. Alvarez managing director Bill Roberti took on the role of chief restructuring officer, while managing director Sajan George served as interim COO.

Roberti's team began conducting the same forensic accounting it would have conducted at a for-profit company, and quickly identified dozens of examples of outrageously poor cash management. Several employees had been receiving fifty hours of overtime pay, fifty weeks a year, while another had been on paid leave for three decades. An FBI investigation of the district's accounting department had resulted in twenty-six indictments and twenty guilty pleas, one of which involved a payroll employee who began writing herself checks that totaled nearly one-quarter of a million dollars.^[179] The Alvarez team had won the engagement on the strength of their performance in turning around the St. Louis Public Schools, but George found New Orleans so much further down the organizational distress curve that he claimed it made "St. Louis look like a Fortune 100 company."^[180]

The team quickly developed a 13-Week Cash Flow Model, which determined that the OPSB's purported cash balance of $29 million was significantly overstated because its accounting staff was incapable of identifying which payables checks had been issued and remained outstanding. Instead, this apparent cash cushion would turn negative by September, requiring immediate financing to continue the board's operations in face of a newly predicted $48 million deficit. The team seized control of OPSB's cash disbursement processes to limit cash outflows, and used its 13WCFM to convince JP Morgan Chase to fund a short-term $50 million revenue anticipation note (RAN) just days before the start of the 2005-2006 school year.

Having made the necessary financial changes to ease the OPSB's liquidity crisis, the consulting team then accepted as a given its strategic mission of educating the children of the Orleans Parish and set about making operational changes to support that strategy. Just as in a for-profit turnaround, the team reengineered various processes at the organization by rejecting the status quo and starting from scratch on its procurement, HR, payroll, and information technology departments, thereby leading to the following operational changes:

Just six weeks into their engagement at the OPSB, Roberti's team had stopped the bleeding, raised emergency financing, and begun to make the operational changes necessary to return the school district to health.

And then, the levees broke.

On August 29, three days after the closing of the RAN transaction, Hurricane Katrina smashed through the state of Louisiana, precipitating "the worst engineering disaster in U.S. history." Within forty-eight hours, 80 percent of New Orleans had flooded, with some areas under fifteen feet of water. As with the rest of the city, the school system was shattered; buildings ruined, financial records destroyed, and students and teachers scattered across the southeastern United States. An organization that had previously found itself slowly but surely enacting a turnaround from the crisis phase suddenly found itself on the precipice of dissolution.

Although it is hard to consider New Orleans and its school system in any way fortunate after suffering the most concentrated destruction of an American city in history, its prior engagement with A&M meant that trained crisis managers were already on the ground and involved in the school system. Recognizing that the engagement had just become vastly more complicated, the state revised its contract with the consultants, and the school system began the long process of rebuilding.

However, the catastrophe did give the turnaround team two additional tools. First, its almost total devastation meant that the status quo no longer existed, and as such, the school districts could be started over from scratch, without legacy infrastructure serving as an obstacle to progress. Second, the frenzy of emergency activity following Katrina prompted the state legislature to hand control of the districts' schools over to the Louisiana Recovery School District (RSD), an organization created in 2003 to allow the state to take over failing schools and operate them according to accountability metrics established by the Louisiana Board on Elementary and Secondary Education (BESE) as mandated by the No Child Left Behind federal law.

RSD stated its mission as creating a world-class public education system in New Orleans in which every decision focuses on the best interest of the children, but the destruction of records and scattering of institutional knowledge meant it had to do so in a situation with much uncertainty and missing information.^[182] Officials reported that forty-seven of the 128 New Orleans public schools had suffered severe damage and thirty-eight more had moderate damage, prompting many to predict that schools would not reopen for at least a year. Furthermore, officials had no idea how to estimate the number of students that would return to the system, as Katrina had created a sudden, violent diaspora the likes of which had never been seen in the United States.

In conjunction with RSD's takeover, the executive team had to help lay off the vast majority of existing school district staff, requiring sophisticated HR policies to mitigate the threat of lawsuits and preserve morale. They set up telephone hotlines, posted information on the RSD Web site, and provided information through the media regarding the changes that would take place. That served as a precursor to a new three-stage turnaround plan, which focused first on stabilizing the crisis with a twenty-person crisis call center and teams that examined facilities to determine the extent of the destruction. Second, the team developed an emergency restructuring plan to gain governmental approval to open up to eight new schools and execute all the necessary hiring and procurement of related janitorial, food, and transportation services. Finally, they executed this plan, and also received permission to expand their focus to include a real estate footprint rationalization analysis and an insurance claims and recovery management strategy to ensure that the necessary federal and state funding was procured to finance the restructuring plan along with insurance proceeds.

Because the OPSB could no longer rely on the previous $50 million RAN because its local revenue was materially and adversely affected, making its collection uncertain, they needed to secure alternative financing sources. They began by petitioning the much-maligned Federal Emergency Management Agency's (FEMA) Community Disaster Loan (CDL) program, and followed up by securing a Community Development Block Grant (CDBG) from the state of Louisiana. Lastly, the school board sought to use the Gulf Opportunity Zone Tax Credit Bonds as a source of relief. By filing timely and compelling appeals to these financing sources, the turnaround consultants managed to assist the OPSB in securing more than $320 million to fund the restructuring.

A&M's strong work prior to the hurricane eased the district through the post-Katrina turnaround, as it allowed them to update their previous forecasts and get an understanding of the financial situation quickly. From there, it was a matter of obtaining the capital necessary to fund the revamped 13WCFM and identifying the needed operational changes to improve the organization's performance. In September of 2007, the Louisiana Department of Education issued a press release thanking the turnaround consultants (as well as numerous other service providers) for their help in returning New Orleans schools to fully operational, with eighty schools serving 34,000 children.^[183]

In the process, the New Orleans schools' turnaround demonstrates many of the similarities and differences between for-profit and nonprofit turnarounds, while its unique circumstances create an interesting parallel to the for-profit bankruptcy process. Although the school district could have filed for Chapter 9 bankruptcy proceedings (see Box 9 regarding Chapter 9 bankruptcies and how they compare to Chapter 11), it managed to avoid such a filing despite its almost impossibly dire situation. However, Katrina threw the entire system so out of whack that the A&M team had options not usually available to nonprofits outside of bankruptcy. For example, union rules providing for tenure make terminating underperforming teachers incredibly challenging, so blatantly poor teachers often end up getting shuffled to low-performing schools rather than fired, while skilled teachers tend towards schools in richer areas with already high-performing students. Therefore, the post-hurricane chaos in a sense simulated a bankruptcy proceeding in that it allowed the school district to reject executory contracts with teachers that it otherwise could not have. Similarly, an organization in bankruptcy would have had the opportunity to raise DIP financing to fund its operations; the New Orleans schools instead enjoyed the unusual opportunity to raise emergency funding from a variety of other governmental sources. The post-Katrina frenzy imparted the same sense of urgency in the company that a bankruptcy filing typically does, and the disarray into which the entire region had been thrust acted as a de facto automatic stay, since so many of the district's creditors were slow to demand payment because they were scattered around the southern United States. Finally, the disaster allowed the creation of a system of charter schools, something that politics and union contracts prevented previously. Only time will tell if all those turnaround efforts will pay off in full, but so far, so good.