Mergers and Alliances: Should More Charities Consolidate Operations?

Tuesday, December 2, at 12 noon, U.S. Eastern time

William Foster is a partner at the Bridgespan Group, a Boston organization that advises charities on management issues. Mr. Foster works with charities planning reorganizations, mergers, and expansions.

Lois Savage is president of the Lodestar Foundation, in Phoenix. The Lodestar Foundation has been working to promote collaboration among nonprofit groups by offering a cash award of $250,000 to the most successful collaboration in the nonprofit world. The foundation has received more than 600 nominations from organizations that have planned successful collaborative efforts.

A transcript of the chat follows.

Peter Panepento (Moderator):
    Hello, and welcome to today's live discussion on collaborations and mergers. This is a very timely topic, as many organizations are exploring partnerships as a way to deliver more effective services during what is becoming a painful recession. Some groups are exploring ways to share resources or plan collaborative special events. Others are exploring full-scale mergers.

Peter Panepento (Moderator):
    When do these arrangements make sense? What are some common pitfalls? How can groups partner in ways where both organizations -- as well as those they serve -- share the benefits?

Peter Panepento (Moderator):
    To answer these questions, as well as many others on this topic, we've enlisted a panel of experts.

Lois Savage is president of the Lodestar Foundation, in Phoenix. The Lodestar Foundation has been working to promote collaboration among nonprofit groups by offering a cash award of $250,000 to the most successful collaboration in the nonprofit world. The foundation has received more than 600 nominations from organizations that have planned successful collaborative efforts.

She is joined by William Foster and Alex Cortez of the Bridgespan Group in Boston -- both of whom have worked extensively with charities that are taken part in reorganizations, mergers, and expansions. Mr. Foster and Mr. Cortez will be answering questions together from Boston.

Peter Panepento (Moderator):
    We'll get started with a brief intro from Ms. Savage. In the meantime, I'd like to invite participants to submit their questions for our panel by clicking on the "ask a question" link on this page.

Lois Savage:
    Hi everyone. My name is Lois Savage and I am president of The Lodestar Foundation, based in Phoenix, Arizona. Let me introduce you to Lodestar.

The Lodestar Foundation seeks to maximize the growth and impact of philanthropy through the pursuit of two strategies: (1) to encourage philanthropy, public service and volunteerism; and (2) to encourage and support collaborations, consolidations, mergers and other long-term cooperative activities among nonprofits working in the same area, and to encourage other business practices, in order to increase efficiency and eliminate duplication of efforts.

While we recognize that certain types of collaboration are difficult to achieve and not always appropriate, we have provided financial and technical assistance to a number of organizations that have made the decision on their own to collaborate on an ongoing basis. The collaborative activities we have supported range from joint programming (breast cancer groups seeking to join forces to create a single website) to administrative consolidations (youth-serving groups co-locating and sharing back-office functions) to structured coalitions (worldwide independent media support organizations creating regional and global forums) to mergers (family community center merged into larger child-serving agency).

In our efforts to support long-term collaborations among nonprofits, a continuing frustration has been the lack of broad-based knowledge about nonprofit collaborations, especially working models, to inspire and grow the concept in the sector. In the spring of 2008, we launched an initiative called The Collaboration Prize, a $250,000 award to the best collaboration between otherwise competitor nonprofit organizations, as a way to uncover successful models that could be utilized to inform and educate the sector. We received a total of 644 nominations and uncovered a rich treasure trove of information that we are in the process of analyzing and categorizing , with the goal of making it easily available to the public.

I look forward to your questions.

Peter Panepento (Moderator):
    A quick note to those who are new to this feature: The discussion is presented in text form. The page will update automatically every minute with the latest content. Thanks for joining us.

Question from Donna, Gillroy & Associates, Inc.:
    Often one of the most challenging issue in a merger (less so in collaborations), is the entrenchment and defensiveness of long-time, personally-invested, powerful board members or donors who have a real difficulty seeing the advantages and advisability of a merger and choose to stall or "ambush" progress. Are there stategies you have used or can recommend for diffusing this situation? Thank you.

William Foster and Alex Cortez:
    Great question! The first thing to consider is that the board members are in fact the legally vested decision-makers. Rather than viewing them as a barrier after the decision has been made, they should be viewed as integral to the process. We have seen places where board member to board member discussions are effective in this regard, and encourage you to consider that avenue. Having a skeptical board member talk with a peer who has been through the process before can be useful in building confidence.

Question from Jane, mid-sized non-profit:
    We are close to moving into a shared services agreement with a similar non-profit. It requires a relocation to another state, building an addition to their facilities, leaving behind our support staff, and having all back office tasks (IT, receipting, accounting, etc.) being managed and staffed by a "third party" that is made up of mostly people from the shared services partner. The hope is savings in the long run. It requires a bridge loan from the shared services partner, the upfront cost will diminish our cash reserves, and we have adequate time to sell our local assets when the market is right. We are also going through a major change in management, including the president, vice president, and some directors. It seems workable in theory. What are we NOT thinking about?

William Foster and Alex Cortez:
    The questions we hope you are thinking about have to do with the ambitious nature of this series of changes! Do you actually have the time and plan that gives you confidence that it's all doable? Two particular aspects to consider: the nature of any one thing falling off track and its effect on the other(s); and how much will your attention to the operational changes detract from your program work?

Question from Richard Loyd, Brooklyn Bridge Park Conservancy:
    In order to reduce organizational costs and improve employee benefits, the Conservancy is considering engaging a Professional Employer Organization (PEO) to become a co-employer of our employees. In effect the PEO is the employer of record for payroll and benefits and the Conservancy is the common law employer. The Conservancy continues to manage the employees, setting salaries, making hiring and firing decisions. On the Conservancy books, salaries will be passed through the PEO for payment to the employee. Salary checks will be in the name of the PEO. The advantage is that our organization and employees will be able to benefit from the economy of scale of a large organization reduced costs and increased benefit. What do you think of this? The PEO model has been used in the for-profit world for some time. Do you think it is a good fit for a not-for-profit? Are there any negatives, in terms of fundraising, that we should consider? Thanks, Richard

William Foster and Alex Cortez:
    From our standpoint, the biggest question is a cultural one: will the employees still truly feel a part of the organization, and will they be invested in the outcomes of your programmatic activities?

Question from Kate Lee, Corphilis Consulting:
    Can you suggest some ways to open the discussion about mergers and/or more intensive collaborations with a founding executive director? I'm dealing with a foundering NPO, but the founding Ex.Dir. has a "proprietary" mindset! We need ways to get this conversation started that are not confrontational.

Lois Savage:
    One nonthreatening way to promote the concept of collaboration is to facilitate a meeting among several EDs working in the same area to discuss common problems/strategies. When addressing the common community focus, silos may start breaking down and working together becomes an option.

Another approach (more risky) is to determine whether there are board members who are concerned about the future of the NPO and can help move the process along.

Question from Ron Reed Management Assistance Program :
    1.In addition to the important works of LaPiana, Yankey and Mclaughlin what recent books, journal articles or study's on nonprofit mergers would you recommend?

Lois Savage:
    I tend to look to LaPiana for ongoing advice, through both the written word and through consultancy. One (not so recent) book I have found helpful is Collaboration: What Makes It Work (2nd Edition), published by Fieldstone Alliance.

Question from Ron Reed MAP St Paul MN:
    What are the major differences between nonprofit and for-profit mergers and what can each sector learn from the other? Who has created the best documentation about the value of nonprofit mergers?

William Foster and Alex Cortez:
    In many ways there are more similarities than differences. Both are most often pursued in response to immediate financial reasons or at the point of a leadership turnover or crisis. But in both sectors there is real long-term strategic potential.

The big differences are two-fold: there is no profit motive in the merging of two nonprofits, and the related but second difference is that there are no matchmakers putting together the "best" potential mergers. The consequence of this second difference is that there is a 10x gap in the rate of mergers amongst large nonprofits relative to their for-profit peers. We believe that there is missed potential in this fact. Our editorial, coming out in the Chronicle on Dec. 5, gets at this question and we hope you will read it. It will be followed by a larger research paper which we will publish in 2009.

In the meantime, LaPiana and Associates has a number of tools and case studies available.

Question from Scott, IdeaEncore Network:
    Although many individuals generously share their knowledge with other individuals (e.g.: through conferences and informal networking), most organizations seem reluctant to share ideas/tools with other similar organizations. It seems that practice would be a good step toward deeper collaboration. What incentives or practices have you seen work to encourage more cross-organization sharing?

William Foster and Alex Cortez:
    As you know, we at Bridgespan are privileged to be able to share our content with the entire sector. In our work with nonprofits, however, we have seen signficant barriers to the flow of information among nonprofits. Funders can play a very important role in facilitating the breakdown of barriers; for example, several of the foundations with which we work regularly convene their grantees to share information -- and in fact mandate it.

Question from Laura, ASC:
    What items are most overlooked or under considered in merging two organizations?

William Foster and Alex Cortez:
    There are examples, like Arizona's Children Association, that have successfully pursued multiple mergers to gain new programmatic skills and entry into new geographies; however, the vast majority of nonprofit mergers are pursued more haphazardly. We think that the up-front thinking through of the long-term strategic benefits (or downsides) to both parties need to be the focus of consideration.

Peter Panepento (Moderator):
    As we approach the halfway point in today's discussion, I'd like to invite you to pose questions to our experts. To do so, simply click on the "ask a question" link on this page and type away.

Peter Panepento (Moderator):
    For those who have already submitted questions, please stay tuned. We'll be getting the answers live as soon as our experts can answer them.

Question from Ron Reed MAP for nonprofits:
    Is nonprofit merger new or just geting more attention today?

William Foster and Alex Cortez:
    For a long time there have been more anecdotes than evidence of M&A activity in the nonprofit sector. We have recently completed a study of 3,400 nonprofits involved in at least one M&A transaction over the last 10 years and across four states. We found that the rate of M&A activity in the nonprofit sector is roughly equal to the rate in the for-profit sector if you look across the entire nonprofit sector (most nonprofits being smaller organizations). The rate has also remained fairly consistent over 10 years -- so M&A has always been there.

With changing econonic conditions, however, we may see significant pressure to increase activity in all sectors.

Question from Kimberley Fontaine, CT Health & Educational Facilities Authority:
    What should funders be doing to support these collaborating nonprofits and to increase the likelihood of a successful merger or alliance among its grantees? Should we create incentives to encourage nonprofits to consider a merger, thus creating some disincentive to those that continue to go it alone?

Lois Savage:
    One important lesson I have learned is that funder-mandated collaborations generally are not long-term successes. The most durable collaborations develop from the ground-up, not top-down - a courtship, not a shotgun wedding. That being said, there are a number of things funders can do to support an environment that encourages nonprofits to cooperate. In grant applications,by requiring applicants to list their peers/competitors, they Establishing/funding a periodic gathering of nonprofits working in the same issue area can lead to cooperative activities among them. Providing technical assistance grants to help nonprofits explore possible collaborations also can be productive.

Question from Gregory Smith, Community Outreach, a nonprofit providing homeless services:
    We are about to absorb another failing nonprofit that provides housing to the mentally ill. What are the best ways to address that entity's client and/or donor anxieties about having a new organization in charge?

William Foster and Alex Cortez:
    This is a very delicate situation, clearly. Assuming that the organizations have aligned missions, continuing to articulate the centrality of the mission and making decisions on the basis of mission impact should help alleviate some of the personal and political dimensions. One specific tactic that we have seen used effectively is to allow the acquired organization to retain its brand identity; this can help a great deal -- assuming that the brand is a strong one and not a deterrent to achieving the mission. There are ways to structure the relationship so that the brands can be separate but the governance and management unified.

Question from Kandy Ferree, President National AIDS Fund:
    The National AIDS Fund has been encouraging these discussion among our 400+ grantees for the past few years in an effort to get ahead of the curve. Now, the current financial crisis, has many organizations in our sector scrambling. I'm interested in knowing how other funders have encouraged and supported sensible collaborations or mergers without abusing the power differential in the funder-grantee relationship?

Lois Savage:
    We often provide technical assistance grants to help nonprofits explore collaboration options. That we, we are not dictating anything but rather helping to facilitate the process. We do not mandate collaboration.

Question from Sarah, long-standing nonprofit:
    My community-based social outreach agency has been around for more than 80 years. A neighboring agency, with similar mission, has also been around for almost as long. I think we may have opportunities for collaboration or even a merger, but how to you broach the subject when you are talking about 2 long-standing agencies in a tiny community?

William Foster and Alex Cortez:
    Very carefully! The question should never be "M&A or not?" but rather, what are your strategic goals and is collaboration/merger the best route? If you can articulate your reasons, you have the outline of a conversation. However, don't forget the personal dimension and also consider where the executive director of the other organization is in his/her career (which may influence your choice of collaboration vs merger conversation).

In terms of actually starting the dialogue, you may want an intermediary to broach it. Unofficial conversations between board members of the agencies (especially if there is overlap between the boards) are a good way to start, as eventually the board will need to be involved in any case.

Question from Najmah Thomas, The Cameron Foundation:
    In addition to offering a prize for the best collaboration, what are some ways that Foundations can encourage real collaborations and alliances among current and potential grantees?

Lois Savage:
    We initiated the Prize not as an incentive, but rather as a means of finding out what's been happening in the arena of nonprofit collaboration over the past 8 years. We have uncovered amazing information! (Please see my closing statement for more on that).

I think the two most helpful things foundations can do are (1) bring together (or provide funding for bringing together) on a periodic basis nonprofits working in the same area so they can discuss common issues/strategies. These meetings often can lead to collaborative activities; (2) provide technical assistance funding to nonprofits exploring long-term collaborations.

Question from Jeremy, capacity building project:
    In helping build capacity in small and struggling nonprofits, is there anything we should be doing to push these entities towards mergers or do they need to see this as an option on their own. I guess I wonder should we be doing more than promoting it as one of their options? Should the message be more forceful?

William Foster and Alex Cortez:
    Board members and funders may be in the best position to assess the situation -- and to be the most forceful in making a recommendation, because they have intimate knowledge of the organization (and in the case of board members, fiduciary responsibility). In the abstract, M&As are neither good nor bad; it depends on the situation and the environment.

Question from Christina, nonprofit consulting:
    What are some of the trends you have seen in alliances or mergers in terms of the types of partnerships nonprofits are selecting, who they are selecting as partners and the types of challenges they typically experience in the partner selection and planning stages?

Lois Savage:
    Please see my closing statement. From the data gathered from The Collaboration Prize, we soon will have a lot of information about the issues you raise. Generally, we are seeing the types of partnerships split among joint programming, administrative consolidation and mergers. There are many challenges but the common ones seem to be time, lack of resources to focus on collaboration, integration of staff and organizational cultures, and fear of diminished funding.

Question from Stephen Ives YMCA:
    How have non-profits been successful in moving their staff and volunteers beyond the fear of loss of identity or increased siloing of operating units that may result from joing two larger organizations together that each have several operating units?

William Foster and Alex Cortez:
    At its heart, this is a change management and org design question. Some of the major success factors are creation of clear understanding of why the change is happening; good decision-making (not ad hoc and one-off); having a transparent process and some early wins; and making sure that the new entity has a culture that people are proud to be part of.

Question from Jessi LaCosta, BlueRio Strategies:
    Good day, I am a board member, volunteer trainer as well consultant for and to several nonprofits across the country. A few organizations seem interested in pooling resources, and yet often I am told it would be too difficult to share the resources due to protocol or organizational structure. I was wondering if it made any sense then to initiate a NEW project or groups ( versus actually merging) that would have its own protocol and staff/volunteer structure to leverage the awareness of all? How has this been done in the past and is it usually started by the nonprofit internal staff, its board members, volunteers, sponsors or by a hired consultant? What good examples can we use when we approach the decision-makers concerning merging and collaborative projects?

William Foster and Alex Cortez:
    Kirsten Moi at the Aspen Institute has produced some great studies and literature on this topic, particularly drawing examples from for-profit cooperative organizations.

Question from Scott, IdeaEncore Network:
    Although many individuals generously share their knowledge with other individuals (e.g.: through conferences and informal networking), most organizations seem reluctant to share ideas/tools with other similar organizations. It seems that practice would be a good step toward deeper collaboration. What incentives or practices have you seen work to encourage more cross-organization sharing?

Lois Savage:
    I agree that information on nonprofit collaboration, unlike collaboration in the business world, is not readily available. We think that The Collaboration Prize data will go a long way to remedy that situation. Please see my closing statement for more information.

Question from Janie Walker, Robins Foundation :
    Adding to Kate Lee's questions - It seems that executive leadership is often the biggest barrier to merger considerations. A newly formed organization can't have two CEO's, financial execs, etc. How do you get organizations to the table in the first place, and get them through the negotiations without people sabotaging the process? How do you manage the "emotional" component?

William Foster and Alex Cortez:
    We agree with your assessment of the barrier. The way to approach this will really depend on what post-merger structure is likely to be successful. We have seen mergers where, literally, no employees of one of the two organizations are still in place a few years later; in other cases they organizations truly merge. Beginning the conversation at the board level removes some of the initial emotional barriers to a robust conversation. Once there is a clear sense of what general direction the merger might take, you can plan how to manage the emotional components. The one thing you can't have is a large group of employees theoretically making decisions for the organization when it's really not clear what their roles are likely to be in the new structure.

Question from Lauren, Yale School of Public Health:
    Do you believe the US has reached its saturation point in terms of non profits? What would you tell someone looking to start their own?

Lois Savage:
    I do think there are many nonprofits duplicating efforts. It is a mystery to me that I have never seen on a checklist for nonprofit startups a requirement (or even a suggestion) that the founder assess whether the proposed services are already being performed - no competitve analysis whatsoever! I would recommend to someone wishing to start a nonprofit to make that assessment and then evaluate whether another infrastructure is needed or whether it would be productive to find an existing nonprofit to provide the prospective program.

Question from Amie, health-related nonprofit:
    Have you seen many mergers between heath clinics or other nonprofits working in health care? What is likely to make it more difficult for our type of organization?

Lois Savage:
    Please see my closing statement.

Question from Ron Reed MAP ST Paul:
    Are funders going to increase their support to non profits considering mergers?

Lois Savage:
    I would assume so, especially given current economic conditions.

Question from Susan, small nonprofit:
    I'd like to know from Lois Savage what some of the findings are from the competition they've just completed.

Lois Savage:
    Please see my closing statement.

Question from Lee, New York:
    Do you know of situations where a merger occurs and the smaller org. takes over the leadership of the new entity?

William Foster and Alex Cortez:
    We can't think of many examples, although they probably exist. One case where this occurred is the National Council on Aging. The current executive director was the ED of a smaller nonprofit that was merged into the larger entity.

Peter Panepento (Moderator):
    We've hit 1 p.m. Eastern time and William Foster and Alex Cortez have to move on to another commitment. They have, however, agreed to respond to some of the unanswered questions offline and we will add them to the transcript of the discussion shortly.

Question from Ron Reed MAP ST Paul:
    If one reason that many nonprofits join forces is that it is in the best interest of those they serve. Perhaps funders should be more vocal about the need to merge?

William Foster and Alex Cortez:
    We don't disagree that there would be value in funders being vocal. If funders want to make a difference, though, they should use the bullypulpit -- but not be bullies. Where they could really make a difference is in being matchmakers that identify and introduce opportunities that are really good ones, and then underwrite the cost of due diligence and the transaction itself.

Peter Panepento (Moderator):
    We'll post the full transcript at http://philanthropy.com/live -- the same address where you can find transcripts of all of our previous discussions. We hold these live discussions every Tuesday at noon Eastern, so please keep that time in mind for future discussions, as well.

Question from Jeremy, capacity building project:
    What would a Technical Assistance grant for collaboration exploration actually pay for? Can you give examples of how that would work.

Lois Savage:
    A few examples: We have funded, generally over several years on a sliding-scale, coordinators for various alliances and coalitions. This type of assistance keeps the coalition going, because the participants have their day jobs and cannot devote adequate time to the coalition.

We have funded consultants to help prospective collaborators determine whether and how to move forward.

We have provided rent subsidies to co-locating groups.

Question from Kate Shirah, local private foundation:
    We've always encouraged collaboration in our grantmaking. What we can do beyond that to support nonprofits in our community in thinking about mergers and alliances? What should we avoid doing?

Lois Savage:
    Avoid mandating collaborations, as they generally fall apart when the funding stops.

Convening like-minded nonprofits on an ongoing basis creates an environment that fosters collaboration.

Providing technical assistance funding to nonprofits exploring collaboration is helpful, too.

Peter Panepento (Moderator):
    Thanks, everyone, for joining us today. We are out of time. As I mentioned earlier, we'll be posting answers to additional questions to the transcript of this discussion shortly. Please check http://philanthropy.com/live to find the transcript. I'll also be sure to post an announcement to our followers on Twitter and our friends on Facebook when the answers have been added.

We'll close with a closing statement from Lois Savage.

Lois Savage:
     As I mentioned in my opening statement, Lodestar initiated The Collaboration Prize earlier this year in order to build an information base of effective practice models that can be studied and used to inspire and advance knowledge about collaboration. At this point in time, the 644 nominations have been pared down to 30 semi-finalists (listed at www.thecollaborationprize.org). A distinguished Final Selection Panel is in the process of selecting the 8 finalists. The winner of the Prize will be announced on March 5, 2009, during a collaboration conference in Phoenix, sponsored by the Association of Small Foundations. At that time, the 120 quarter-finalists will be named as well.

We currently are focused on deciding how best to analyze and organize of all pertinent data obtained from The Collaboration Prize nomination forms. The Prize nomination form required the collaborations to address a number of substantive issues: motivation, organizational structure, management, operational benefits, impact on the participants, impact on the community, ability to be a model, challenges encountered, and financial and operating efficiencies achieved. In addition, each nomination included the formal agreement (most often an MOU, operating agreement or merger agreement) that provides the durable structure for the collaboration. All of this data has resulted in rich, deep and important information about nonprofit collaborations, information that must be organized and analyzed to maximize its value. The end goal is the design and implementation of a website that maximizes the resource value of the data so that all interested parties (nonprofits, consultants/other practitioners, donors, academics, the press, etc.) can readily access the information in multiple ways through a variety of categories and issue areas. Stay tuned!