Deloitte Tells BBG to Move Quickly with Consolidation

Deloitte BBG Grantee Consolidation Assessment

“If VOA constitutes communications essential to national security, privatization may not be feasible,” – Deloitte

“If VOA constitutes communications essential to national security, privatization may not be feasible,” is a conclusion of a consolidation study done by Deloitte, but the consulting firm recommends a quick action on the BBG plan to merge grantee broadcasters. Free Media Online has obtained a copy of the Grantee Consolidation Assessment done for the Broadcasting Board of Governors by Deloitte. It was announced at today’s BBG open meeting that the report will be posted on the BBG Strategy website. The report makes references to “language duplication” between VOA and the Grantees, which implies that there are no differences in mission between VOA and the Grantees. If VOA and the Grantees have different missions, then “language duplication” is a non-issue. If they have the same mission — which evidently they do not — then the logical step would be to combine VOA and the Grantees. Deloitte, however, did discover that VOA broadcasts may have a national security and foreign policy mission and is advocating a further study of the BBG’s de-Federalization proposal.

Here are some of the main elements of the report:

Key Findings:

Today RFE/RL, RFA and MBN are three separate private 501(c)(3) organizations with combined resources of approximately $240 million and approximately 2,000 full time employees and contractors. All have a common mission to act as a surrogate media outlet in countries that do not have an open media environment; additionally, unlike RFE/RL and RFA, MBN is charged with providing context about America, its people, and policies.

Aside from Arabic services to Iraq, there is no overlap in language services among the Grantees, or in bureau locations. With just a merger of the Grantees, there is no potential to eliminate duplication of language services beyond that already planned. A combined entity framework can set the foundation for achieving substantial synergies with respect to the large overlap with VOA language services, which is unanimously supported by all Grantee Presidents.

There are several potential benefits of a merger of the three grantee corporations:

- It would serve as a first step in the execution of the Board’s Strategic Plan that calls for consolidating and streamlining management and administrative infrastructure. A merger would create a single grantee management team which would facilitate
coordination with the BBG in pursuit of its strategic objectives.

- It creates more financial transparency and demonstrates to stakeholders that BBG leadership is committed to allocating resources as efficiently as possible and eliminating waste – potentially garnering support and trust.

- It creates an enforceable structure for more formalized content sharing, advancing the Board’s strategy to harness original reporting from across the language services to create a global news service with rich programming.

- It creates resource savings over time with the elimination of duplicative administrative and technical infrastructures and pooled purchasing power (e.g., for equipment, services, and insurance). This is a key benefit in our current economic environment.

- Positive reaction from Congress if new services, technologies and broadcast medium can be achieved without an increase to the top line.

- Annual run rate savings of $9M, or about 10% can be achieved on approximately $90M of addressable spend which is approximately 38% of the aggregate Grantee budget.

Savings could expand to nearly $14M annually with aggressive facilities consolidation.

Risks of integrating the Grantee corporations include:

- Possible negative reaction from Congress if a merger of the Grantees impedes the flow of content to audiences.

- Uncertain result of merging a partially unionized workforce with non-unionized staff.

- A potentially broader impact of digital and physical security threats in a merged environment if not mitigated.

- Potential disruption to current foreign business licenses and relationships in host countries.

Over five years, the cumulative net savings from merging the Grantee organizations is estimated to be approximately $30M to $40M. There are cumulative savings of $35M to $50M available with one-time costs of $8M to $12M. The savings result from a small headcount reduction of approximately 45-50 resources, plus non-headcount savings related to sourcing efficiencies, and facilities and technology infrastructure consolidation. Longer term, there are opportunities for additional headcount reduction if facilities are more aggressively consolidated.

Conclusions:

Deloitte believes that the merging of the Grantees does have merit, and does make sense strategically and economically. We heard in numerous discussions with leaders across the Grantees that current structure is a product of the evolution of the Agency, is not ideal, and would not be the logical approach if one were starting fresh. We agree with that perspective. The current siloed structure is not an optimal foundation for the new strategic direction envisioned by the Board.

From an operational perspective, we see no roadblocks that cannot be overcome. The vast majority (around 75%) of the resources of the Grantees are devoted to content and programming, so their day to day roles will not change. Merging the administrative processes, policies, and supporting systems will be no more complicated here than in any other merger of a similar scale.

In the current economic environment, continuing to operate three separate organizations with redundant executive management teams, administrative infrastructures, audits, etc. seems to be an
inefficient use of taxpayer resources. The potential annual savings of $9M to $14M could be redeployed toward journalistic initiatives that advance the Board strategic vision.

As with any merger there are risks associated with the potential decline in employee morale. These can be mitigated by swift decision-making and a strong change management program.

Delaying a decision about the path forward will create uncertainty which can dampen employee morale. In addition, delays will stall the advancement of the Board’s strategic plan and cause the organization to miss out on significant potential savings.

Recommendations and Next Steps:

We recommend that the Board approve the merger of the Grantees, and proceed with the design of the new organization and the implementation planning. Based on a typical merger timeframe of about 6 months from a decision, we believe that the Board should target a “Day 1” in July 2012.

To pursue the larger savings available by reducing duplication of language services, as noted earlier and broadly supported by Grantee leadership, we recommend commencing a study on the feasibility, benefits and costs of VOA/OCB de-federalization, reportable at the Board’s March 2012 meeting to explore 3 items:

1. The “quick hit” opportunities available from partially integrating some VOA/OCB operations into the Grantee structure without de-federalization. The objective of this study would be to identify initiatives that could be implemented in parallel with the Day
1 of the Grantee merger in July 2012.

2. The next tranche of opportunities that would become feasible in FY13 without de-federalization.

3. The feasibility of VOA/OCB de-federalization, including benefits, risks, and financial implications.

Key Principles:

There were several key principles that were consistently articulated throughout the visioning discussions with the Grantees. These are things that all believed should be the ‘guard rails’ of any potential integration.

There should be no change in the journalistic mission of the organizations – the current markets and audiences should continue to be served with the content appropriate for them.

The existing market-facing brands should remain intact as they are critical to success. The relationship between the brands and the grantee entity is different across the three organizations. For MBN, the brands (Alhurra, Radio Sawa, Afia Darfur) are the externally known identities, while for Radio Free Asia the brand and the organization are one in the same across its market. RFE/RL has individual brands by service that will be critical to maintain.

The new organization should maintain an entrepreneurial spirit and ability to remain nimble; avoiding bureaucracy.

Risks:

There are five primary potential risks that were identified from discussions with the Grantees.

Congressional reaction:

There is uncertainty as to reaction from Congress. The proposed merger has positive actions in doing more with less, but has the potential to disrupt content if not managed carefully.

Cultural differences:

The three organizations have cultural differences. MBN is a primarily a television focused entity and produces content in a single language , Arabic. RFE/RL and RFA are primarily radio entities (though expanding into other media) and produce content in many languages. Because RFA is much smaller in employee count and budget, it sees itself as a more tightly knit community than the others. It also operates with the least sophisticated resources of the three (e.g. production facilities, technical resources). Bringing together the cultures of these three organizations will require a focused change management effort. Mergers bring uncertainty and change, so there is a possibility that employee morale could suffer resulting in an increased risk of employee turnover. Decision-making delays can exacerbate this situation; employees who are uncertain of the path forward and their role (or lack thereof) in the new organization may be more likely to seek other opportunities.

Unions:

A significant portion of RFA’s workforce is unionized, while RFE/RL has 8 unionized employees and MBN has no unions. A deliberate plan is required to ensure that all parties’ interests are represented in the planning.

Security:

Because of the nature of their work, each organization comes under threat (both physical and digital). Today, when one organization is attacked, the others are unaffected. If the organizations are combined, a threat could affect the scope of the entire operation. For example, if systems are combined and there is a digital attack inspired by RFA’s content, programming and employees in the Middle East and Europe could be affected as well. That said, there are mitigation strategies that could be employed to address this risk.

Staff Reductions:

Management Staff Reductions – Grantee consolidation could eliminate an estimated 13-14 high-level management staff positions, including two Presidents, several VPs and other management support roles. These savings could begin to be as soon as the new leadership structure is executed, and fully realized in the first full fiscal year after merging.

Finance/Admin Staff Reductions – Grantee consolidation could eliminate an estimated 14-15 finance/admin staff positions, including finance management, accounting, and procurement personnel. These savings could begin to be as soon as the new finance organization structure is executed, and fully realized in the first full fiscal year after merging.

HR Staff Reductions – Grantee consolidation is not estimated to reduce overall headcount for HR in the near term, however would likely result in a different mix of positions required -eliminating for example two Director Roles, but increasing the staff at various locations should no facility changes be assumed. The consolidation is likely to require job roles and benefits plans to be redefined and broadly, and HR policy will need to be revisited. If facilities consolidation occurs, there may be an opportunity to reduce 1-2 HR positions.

Facilities Staff Reductions – Real estate consolidation could yield approximately 3-5 facilities staff headcount reductions. In the near term for example, savings would result from offices in the Washington, DC metro area being consolidated. These savings could be realized quickly if existing space is subleased and facilities consolidation begins upon execution of the merger. If facilities consolidation is delayed until the nearest term leases expire, savings will begin to be realized in FY14 and fully realized in FY15.

Communications – Grantee consolidation could eliminate 2-3 communications positions. These savings could begin to be as soon as the new communications organization structure is executed, and fully realized in the first full fiscal year after merging.

Technology Staff Reductions – Grantee consolidation could eliminate an estimated 13 technology staff positions . These savings could begin to be realized as soon as the new technology organization structure is executed, and fully realized in the first full fiscal year after merging. The location/facilities strategy will affect the degree of opportunity in this area. On-site technical resources are required in facilities where production takes place and where there are significant groups of users. Because of the 24×7 nature of some of the operations, shifts are also required which increases overall staffing needs. With fewer locations, it may be possible to streamline the technical staff by up to 25 resources.

Costs to Achieve Staff Reductions – Estimated costs to achieve the identified headcount reduction savings is approximately $2.1M to $2.8M in severance costs. The timing of the severance costs will depend on the execution date of the merger and how aggressively the organization chooses to reduce headcount.

Observations on De-federalization of VOA/OCB and on TSI

VOA, OCB, and BBG/IBB make up approximately $500M (about 66%) of the overall spend on US International Broadcasting, or more than double the spend of the Grantee organizations combined. A full view of synergies opportunities across US International Broadcasting cannot be understood until these organizations are reviewed as well.

Throughout the assessment period, several themes emerged from the discussion regarding VOA, OCB and BBG/IBB:

While there are almost no content overlaps among the Grantees, there are significant overlaps with VOA. The Grantees believe that magnitude of the synergies available by addressing this overlap is greater than the benefits to be gained by just integrating the three Grantees.

All senior Grantee leadership indicated that the merger of the Grantees had merit if VOA was included due to the potential savings resulting from elimination of language service duplication.

It is unclear whether de-federalizing VOA is actually feasible or even desirable. Additional work is required to determine the pros and cons, and financial impact. Issues that must be included in the study are:

Potential loss of major backers:

BBG funding is for a Voice of America that could be perceived as a governmental, rather than an NGO function.

National security:

If VOA constitutes communications essential to national security,
privatization may not be feasible.

In the near term, there are opportunities to find efficiencies with VOA, such as co-location to reduce costs. These opportunities are being addressed on an ad hoc basis.

The Grantees have an interest in taking on some of the distribution functions of TSI, especially if TSI is considering outsourcing them to a 3rd party. The Grantees would like to have the opportunity to ‘bid’ on this work before it goes to a 3rd party as they believe they can offer more cost effective solutions. They also would prefer to have great control over the distribution function to ensure their market needs are met.

There is question of whether the TSI backbone transmission infrastructure could be more efficiently operated by a grantee, rather than federal, organization. A reversal of the client/provider relationship between the federal and non-federal organizations could be explored in terms of efficiencies.

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