Mark Howard
Managing Director
Alvarez & Marsal
Given the headlines we all see almost daily, it’s easy to overgeneralize and simply say, “The government needs to operate more like a business.” That platitude ignores the fact that public sector and non-profit organizations exist to serve entirely different purposes than business. Still, turnaround companies can offer valuable assistance to public sector and non-profit organizations, but with important caveats.

Turnaround “Management” vs. Turnaround “Skills”

While turnaround professionals can help public sector and non-profit organizations, we need to differentiate between turnaround “management” and turnaround “skills.” Turnaround “management” is perceived as fixing the burning building as quickly as possible. It can often result in significant and disruptive organizational changes. While this type of management is necessary and appropriate in private sector settings, it is not appropriate in public sector. Turnaround “skills,” on the other hand, are highly applicable, but only if used in a manner more fitting to the context of public sector and non-profit organizations. It’s the “skills” that government and non-profit organizations can use most.

Public sector organizations were created to meet a need in the community. Service continuity and stability, effectiveness, equity, and public engagement are coins of the realm. It’s not about watching the bottom line. So it is reasonable that elected officials may give higher priority to maintaining a service or making a slow transition toward improved services to a vulnerable population rather than focus on how much this service costs. Imagine disrupting services like police and fire or child protection due to a sudden and significant overhaul of an organization and its finances. Citizens and elected officials would very rightly be angry, and real harm might result to the community.

Applicable Turnaround “Skills”

Turnaround firms generally focus on quickly fixing operations and improving customer service. They bring an openness to innovation when considering financial restructuring strategies. These firms understand how to leverage all the assets that an organization has, from balance sheets to untapped revenue streams to underutilized talent in the workforce.

Public sector and non-profit organizations can benefit from all of those skills. Most of the public sector and non-profit clients I have worked with are appropriately focused on their missions and serving their stakeholders. They seem to assume the routine operations that maintain an organization will just magically occur. Constantly improving operations to gain competitive advantage is not their primary goal. As long as there is no crisis, they concentrate on the aspect of public service they are mandated to provide.

Although some of my clients are skilled in financial analysis, innovation in public sector finance is generally frowned upon. Wringing every ounce of value from available resources, while certainly desirable, is not as critical as service stability, equity, or meeting goals. And, while leveraging assets is a reasonable goal, it can be complex and time consuming. Therefore, it easily loses executive attention in the face of more urgent issues.

How to Apply Turnaround “Skills” in Non-Profit and Public Sectors

The challenge for turnaround firms working with public sector and non-profit organizations is applying those skills while toning down the urgent “burning building” management approach. To be successful, the turnaround firms need to soften their normal approach, and the public sector and non-profit organizations need to be willing to consider and apply some of the new ideas. In effect, if both sides are willing to listen and learn from each other, everyone (especially citizens) can benefit hugely.

Turnaround firms need to recognize the public and non-profit sectors’ context is completely different from private sector. For example, in only 24 states are local governments legally allowed to file for bankruptcy. Between 2010 and 2017, there were only 64 bankruptcies of municipal organizations across the U.S. (not 64 bankruptcies per year but 64 bankruptcies total in those eight years). While in the past, Detroit, Orange County, CA, and New York City have filed for bankruptcy, they are the exceptions that prove the rule, not examples of how widespread the problem is. Since 1970, there have been fewer than 100 bond defaults by any U.S. government organization.

Public sector organizations are usually financially conservative, and that’s generally a good thing. As members of the public, it is “our money” they are using, and taking the same risks as private sector organizations would generally not be desirable for organizations using public funds.

But this conservative approach means public sector and non-profit organizations lack the incentive to be more focused on streamlining operations and are not encouraged to push the envelope on financial management techniques as the economy changes. For example, consider the uproar we hear about building toll roads with public/private partnerships; I have had conversations with clients who do not want to consider such innovative partnerships because it is “too hot politically.” This means that public sector and non-profit organizations may be missing opportunities to be creative and to use every resource possible, but that’s generally OK in their environment. Fully taking advantage of opportunities and running the leanest operation possible often requires taking some risk of financial loss or some sort of service disruption. Such risks are generally not rewarded in the public sector.

Best Ways to Work Together

The key to turnaround firms working effectively with public sector and non-profit organizations is to:

• Maintain their focus on improving operations and be willing to be financially creative (while also being more patient and conservative).

• Push the envelope in their advice but not get frustrated when the client needs more time.

• Engage in a lengthy public dialogue when bringing new ideas as the engagement process is critical to public sector and non-profit organizations. It’s how these organizations gain their credibility and effectiveness.

The key to public sector and non-profit organizations getting the most from working with turnaround firms is to:

• Be open to the perspective and ideas a turnaround firm can bring.

• Don’t be fearful of the intense focus turnaround firms bring to improving routine operations. Avoid rejecting an idea because “it isn’t how we’ve worked before” or because it might entail reassigning employees. Work with the firms to modify ideas so they can work best within the public sector or non-profit environment.

• Avoid thinking operations can be reviewed only once per year (or even less frequently) during the budget process. The world is changing at a faster rate, and companies need to be willing to consider changes rapidly and continuously as service demands, new financial tools, and economic opportunities emerge and change.

• Push the envelope and recognize how vital operational effectiveness and efficiency is to meeting specific public policy goals. And doing it rapidly matters.

Bringing in a turnaround firm to work with a private or public sector company is not just about fixing a broken organization. It’s all about moving them from good to excellent. I feel very strongly that the capabilities of turnaround firms can benefit public sector and non-profit organizations. But both sides need to adapt and learn in order to make everyone successful. •