Posts Tagged ‘mergers’

Mergers: A cautionary note in difficult times

The current economic climate has everyone scrambling – looking for ideas that will help them weather hard times. Many in the nonprofit sector are looking to mergers as one solution. Mergers are often a good strategic move for nonprofits. This is especially true when the merged organization is able to more fully realize its purpose – greater social good. However, there are also ill-conceived mergers that represent setbacks for those the nonprofit exists to serve; in the midst of this heightened interest in mergers, nonprofit leaders should weigh both the motivation for pursuing a merger and the expectations regarding what a merger should accomplish.

What can we learn from the for-profit sector?

Nearly all of us have experience with mergers. In the financial sector, small local banks have been gobbled up by ever bigger banking systems now stretching coast to coast; Macy’s has become the ubiquitous department store in the United States.; US Airways and America West Airlines (AWA) merged as they and other legacy carriers were being challenged by new low-cost airlines. These mergers have brought some advantages – it is likely that US Airways would not have survived without the merger with AWA. Macy’s has greater “buying power” than the smaller retailers that it absorbed, and that may translate into better prices for consumers. For a time, bank mergers boosted the value of bank stocks, providing a benefit to many individual investors. However, there have also been some significant trade-offs as a result.

Most of these trade-offs relate to the underlying reason for nearly any for-profit merger. It’s a strategic move to enhance the financial value to the owner or shareholder. This is often accomplished through gaining market share by eliminating a competitor. When competition is eliminated, customer service can be compromised. For example, in the post-merger period, there may be some opportunities to reduce redundancy in staffing, but employees are often cut – sometimes to the point at which there is direct impact on the consumer – in an effort to trim costs in order to boost the bottom line. The shareholder’s or investor’s interests are being served even if the consumer’s experience isn’t better – and with fewer competitors for customers to turn to, there may be little downside for the merged corporation. As a consumer, you have probably experienced some of this firsthand.

What’s different about mergers in the nonprofit sector?

Nonprofit corporations exist to serve a very different kind of bottom line. They are in business to provide a social good – to feed the hungry, protect the environment, seek social justice or protect human rights. Nonprofit organizations that are better able than others in their field or community to deliver on their social goals should pursue any legitimate path to position themselves to do more good – including mergers or other forms of partnerships.

Merger is often a wise move that accomplishes both greater impact and achieves greater efficiency when the underlying motivation is to better protect the environment or provide a stronger social safety net. We have repeatedly seen that merged organizations are ultimately more stable; they have larger staffs with more diverse skills and greater sophistication in management; they are able to access more sources of funding and are able to attract the most talented board members. Much of their greater effectiveness and efficiency comes as they reach a scale of operation that allows specialization and more robust administrative systems.

However, we have also seen organizations approach a merger with no goal beyond survival. The organization may accomplish this goal, but it is at times done through cuts in programs and services or through a geographic expansion that simply spreads the same level of programs/services over a larger area. Just as there are exceptions in the for-profit sector – especially when a business is foundering, but a single unit remains viable – there are exceptions in the nonprofit sector. There are mergers that are the nonprofit equivalent of the “friendly takeover” in order to preserve a much needed and successful program in an organization that is otherwise not viable.

Questions to consider

There are a number of questions that nonprofit leaders can ask themselves in contemplating whether a merger or some other form of strategic partnership is a good move for their organization. Is there an overlap in consumers, funders, geographic area served and programs between your organization and others? Who are those organizations and do any share your mission and hold similar values? You may think you know the answer to these questions – and perhaps you do – but this is a good time to take a more thorough and perhaps more objective look at other organizations in your “market.” Talk to your funders and others in the community – what do they think of these organizations and can they imagine you working with any of them? Consider ways you might better serve your shared constituencies by working together. Would a merger allow you to provide administrative services in a more cost-effective manner that will allow you to channel more resources to programs and services?

Ultimately, the measure of success in a nonprofit merger is not whether the organization simply cut costs and survived (as it might be in the for-profit sector), but whether the merger resulted in its mission being better served. For us, that’s the bottom line.

See also:

Nonprofit Mergers & Alliances

The Nonprofit Business Plan

The Nonprofit Strategy Revolution

Image credit: wagemakerlaw.com, communitypartners.org, comstocksmag.com

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Is your nonprofit worth saving unconditionally?

 

I can only think of one time you promise for richer or poorer, in sickness and in health. And it’s never applied to a nonprofit organization, let alone a business. If your nonprofit has sickly or feeble programs and is in a poor financial state, is it worth saving unconditionally? Should nonprofits rise above our treatment of failing businesses simply because they have a worthy mission?

This week’s article by Raylene Decatur, called “Should we strive for sustainable organizations?” is a must read. She and I recently discussed the occasionally misguided goal of sustainability, and I’m delighted she put pen to paper for a larger discussion. Raylene addresses the issue we as nonprofit leaders continue to orbit but rarely touch. Decatur says,

“Rather than investing so much energy in discussing and developing sustainable nonprofits, we should instead have a more animated dialogue about the best way for nonprofits to go out of business. Why should there be an aura of perpetuity around nonprofit endeavors? In 2010, 824,920 nonprofit organizations filed reports with the Internal Revenue Service. What percentage of these organizations is making documentable progress on their missions? Some may have made a real and permanent difference, and their mission can now be retired. Why is it acceptable to open a restaurant that might fail, but not acknowledge that a new nonprofit may not succeed?”

I would suspect that you agree with this statement but are you willing to accept the reality? Perhaps the collective conscience of our nonprofit sector is already tracking this logic as we watch the stage of mergers grow to a cast of thousands. There are a lot of different reasons mergers and alliances have grown as a popular alternative.

Two in particular are the fall of the subprime market in 2008 and the explosion of nonprofits in the last 10 years. In fact, The End of Fundraising author, Jason Saul, claims there are approximately 1,000 nonprofits for every type of cause. These systemic events have exposed feeble nonprofits and prompted them to look at integrating service delivery or tapping into peer organization’s strengths, says Tom McLaughlin, author of Nonprofit Mergers & Alliances.

Perhaps mergers or alliances at their worst are the palatable alternative to failure in our sector. Furthermore, self preservation could be more insidious than we think because it’s veiled as doing the greater good.

In contrast, Tom McLaughlin says the best time to consider an alliance or a merger is before it’s necessary. For the healthy organizations truly investigating mergers for the exchange of mutually beneficial gains, I give you McLaughlin’s Life Cycles of Nonprofit Organizations. Examine the stages below to discover your readiness for collaboration:

Formless: In this stage, there are not enough comparable nonprofits to constitute a recognizable type. Different groups respond to similar social needs and economic realities in similar ways without necessarily understanding why or even communicating with each other. Affiliations of any kind are virtually out of the question.

Growing: There is at least a general recognition that the particular nonprofit service is needed but most energies are devoted to building capacity and solving operational problems.

Consolidating: At this stage, the general type of organization is recognized and accepted by society and the nonprofit sector itself. Some organizations take on a leadership role while others struggle to come into being in order to cover geographic gaps left by the early types. The groups create formal associations and other support entities, and a recognizable national identity begins to emerge.

Peaking: As a field and as individuals, these nonprofits enjoy newfound acceptance and growing influences. The pace of new entrants slows, but those already in existence experience previously unimagined success in areas such as operations, public relations, financial and political. Mergers occur for strategic purposes when strong players take over the few weak ones, which falter.

Maturing: Maturing nonprofits have long ago hit their peak and are beginning to lose some of the strategic momentum they had earlier. The services they offer are now being offered at least in part by others or are no longer perceived as necessary. No one can doubt their collective influence, but some are beginning to doubt their future.

Refocusing: Once past maturity, some nonprofits find they must reinvent themselves in order to survive. Some do; others fade gradually away or merge what is left of their services with compatible groups at an earlier stage of development.

Is your cause worth sustaining in perpetuity? If you say, “Sure it is,” I would add, “But to what end?” What measurable and incremental results are you accomplishing? Are your efforts truly addressing the upstream systemic causes? And finally, ask yourself if your nonprofit would be saved by a merger or would it be strengthened by a merger. The ideal union is when both parties share their compatible strengths. If your nonprofit is looking for a savior in its merger, perhaps you should call off the wedding.

See also:

Why Charities Should Have an Expiration Date

Nonprofit Sustainability: Making Strategic Decisions for Financial Viability

Nonprofit Mergers & Alliances

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Mergers and alliances: Check your culture at the door

So often, you find yourself asking why things transpire they way they do in your organization and 9 times out of ten, you can point to culture. No, we’re not discussing pop culture or arts and culture. This culture is the underlying and invisible fabric of how your nonprofit behaves, what the underlying assumptions are and what the organization values. Thankfully, we all are given a free pass on striving for a perfect culture because the truth is, there is no perfect culture. With perfectionism out the way, we can go about factoring organizational culture into one of the more important roles it has to play, which is in an alliance or merger.

With our Page to Practice feature of The Nonprofit Organizational Culture Guide this summer, we learned about the importance of organizational culture and how pervasive it is with everything you do as a nonprofit leader—from hiring decisions and board training to marketing and strategic planning, organizational culture, as the authors Teegarden, Hinden and Sturm say, “reveals hidden truths that impact performance.”

That’s why it comes as no surprise that our currently featured author, Tom McLaughlin, spends some time in his book, Nonprofit Mergers & Alliances, on the importance of taking a “culture check” as one of the preliminary steps for considering collaboration. “Culture is stronger than strategy, so it is crucial to understand and be comfortable with a potential partner’s organizational culture,” says McLaughlin.

He further adds that since people take action and demonstrate behavior every day using underlying values, blended cultures translates into blended value systems that don’t always complement one another. In fact, 75 percent of hospital mergers fail if cultural issues are not taken into consideration, according to McLaughlin.

Ultimately, “one of the most reliable rules of thumb for post merger implementation is that the tighter culture always prevails,” says Tom, and the larger organization doesn’t automatically dominate, nor will the loudest or flashiest. So, how do we go about identifying one another’s culture before engaging formally in an alliance? McLaughlin has provided a list of good places to look for evidence of nonprofit culture that we reviewed at the beginning of the month:

  • Composition of board and management team
  • Degree of centralization versus decentralization
  • Demographics of clients
  • Demographics of staff
  • Financial investment policies
  • Financial performance
  • Geographic location
  • Management compensation policies
  • Marketing materials
  • Number and type of management meetings
  • Number of board meetings per year
  • Philosophy regarding staff turnover
  • Process for recruiting and selecting new board members
  • Requirements of major funding sources
  • Size of board
  • Size of management team (especially versus comparable nonprofits)
  • Unwritten/unspoken hiring preferences

Not every item on the list will yield insight and some will produce contradicting impressions. However, if taken together, these areas can help you create a composite of your potential partner’s culture.

See also:

Do More Than Give: The Six Practices of Donors Who Change the World

The Necessary Revolution: Working Together to Create a Sustainable World

Leveraging Good Will: Strengthening Nonprofits by Leveraging Businesses

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What’s your return on effort?

When considering a nonprofit merger or alliance, we tend to agonize over identifying all of the joint possibilities, which is a task in of itself. While it’s important to consider what you bring to the table as well as what your potential collaborator can offer, Nonprofit Mergers & Alliances author, Thomas McLaughlin, would add that sometimes it’s helpful to draw upon a laundry list of benefits and take the ones that fit.
See McLaughlin’s list below:
  • Acquire intangible assets (e.g., a prized board member or brand name)
  • Acquire tangible assets (e.g., a building)
  • Add breadth and depth of services to meet consumer need.
  • Assist in repairing a damaged brand.
  • Capitalize on a chief executive’s departure.
  • Change the organization’s name.
  • Change staff compensation patterns.
  • Create more varied career options for employees.
  • Create operational efficiencies.
  • Ease the transition from a founder-led organization.
  • Expand the programming continuum.
  • Gain cost savings in order to add program resources.
  • Gain greater visibility in the community.
  • Gain market share.
  • Gain more clout with the national office (federated organizations only).
  • Improve fundraising.
  • Improve prospects for a new service.
  • Increase political clout.
  • Rejuvenate the organization.
  • Make it easier to satisfy lender requirements.

Having just read this list, you’re saying, “You’ve forgotten the most important benefit!” If you haven’t guessed already, “saving money” was left off of McLaughlin’s list. McLaughlin cautions readers who contemplate this savings logic. Here’s why: The first blush response to the 2008 recession among nonprofit leaders was to seek out administrative collaborations where two or more charities could find savings in the least painful way, which usually meant administrative spending cuts. He notes that the problem with this strategy is “that it is guaranteed to fall short of the desired outcome” because of the mathematics behind administrative budgeting.

When two or more organizations find ways to cut expenses in an administrative line, it’s likely to be modest—let’s use a respectable 10 percent savings, for example. “A 10 percent savings on a line item that itself is likely to be no more than 10 percent of the total administrative spending amounts to a fraction of a fraction, says the author. While every amount of savings helps, this is a small win for a big effort. McLaughlin reminds us that collaboration is a powerful tool, but the return should match the effort.

Email us at Mail@CausePlanet.org for a free article by author Thomas McLaughlin, “The Cost of A Merger.”

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What’s in a name? Everything.

Having recently finished Tom McLaughlin’s terrific second edition of Nonprofit Mergers & Alliances, I find myself looking at collaborations with the benefit of his helpful lexicon. And now that I have an improved working knowledge of the many shapes, sizes and formalities in which collaboration can be formed, according to his C.O.R.E. model, I have a greater respect for the robust effort behind them. What’s more, this book gave me clarity on the existing partnerships I have. If you have ever considered a collaboration or are currently in one or more, I encourage you to read on. You’ll find it very interesting to see how your personal definitions are realigned by McLaughlin’s perspective. Before we take a look at McLaughlin’s mini-glossary, let’s take a brief look at his model.

The C.O.R.E. Continuum

According to McLaughlin, the C.O.R.E. model is based on the premise that different forms of collaboration affect different aspects of the nonprofit. The four aspects affected are: 1) Corporate, 2) Operations, 3) Responsibility, 4) Economics. By corporate, the author means the legal entity of the nonprofit corporation or the business structure that has an official purpose: board of directors, officers, bylaws, etc. Many collaborations affect the operations, or the heart of the nonprofit’s unique reason for being, often referred to as programming. Responsibility in this model means the backbone that makes the organization run or oversight of program activity such as paychecks, paying bills, etc. Lastly, economics can be affected by collaborations and can be as simple as bartering free office rent for services or as complicated as establishing a jointly owned company.

Applying the model is best explained by stacking the acronym vertically with “C” at the top and “E” at the bottom. This silo of letters, representing each affected aspect in collaboration, shows the earliest and easiest area of impact at the bottom (Economics) and highest, most powerful choice that takes the longest to achieve, a single entity in the marketplace (Corporate). Collaborations involving any or all three of the O, R and E levels are alliances. Those involving all four levels of the C.O.R.E.™ Continuum are mergers.

What each level of collaboration on the C.O.R.E.™ Continuum looks like

Economic-level collaboration is characterized by sharing information or bidding jointly, for example. Sharing information is quick, easy and inexpensive. However, disadvantages include: there are no guarantees of gain, there are no structured means of following up on any gains and any gains are hard to document. Responsibility-level collaboration means sharing management and administrative chores, and it requires standardization, replicability and scale. For example, United Way standardized and centralized their campaign pledge forms through a national electronic system. Another example is referred to as “circuit riders” or professionals who travel from one partner to the next, performing the same task for everyone, such as accounting. Operations-level collaboration is the level of integration that ultimately means the most for any merger or alliance of nonprofits because without success here, nothing else matters. This level of cooperation looks like shared training, joint programming and/or joint quality standards. McLaughlin notes that, “Good programmatic collaboration requires excellent planning, patience, and time.” Corporate-level mergers experience the most profound level of change. It carries the identity that our programs use in their interactions with the outside world. It is also the basis of accountability and the reconciler of conflicting demands on resources. And, it is the level at which partners will integrate at the structural, governance, and board levels, including ancillary boards and committees.

McLaughlin’s Mini-Glossary further illustrates the different points of collaboration along his continuum:

Affiliation. The lowest level of collaboration. Requires little more than meetings and good faith.

Alliance. Collaborations that entail change on any one or all three of the C.O.R.E. levels.

Collaboration. Our generic term for what happens any time two or more nonprofits work together in some formalized way.

Merger. A collaboration that entails change on all four C.O.R.E. levels.

Network. Another name for alliance, or a shortened reference to integrated service network.

Partnership. A legally binding agreement between two or more entities that is intended to produce economic benefit for both that is to be shared in some predetermined fashion. Partnerships can operate at any level of the C.O.R.E. continuum because they are simply legal vehicles for collaboration.

Email us at Mail@CausePlanet.org for a free article by author Thomas McLaughlin, “Management Company Model: It’s a Nonprofit Merger by Another Name”

For more information about Nonprofit Mergers & Alliances, visit Jossey-Bass Publishing or our Page to Practice book summary library.

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Mergers and alliances: Are your cultures compatible?

We recently spent some time focusing on organizational culture in June with the Page to Practice feature of The Nonprofit Organizational Culture Guide: Revealing the Hidden Truths that Impact Performance by Teegarden, Hinden and Sturm. The value of knowing your organizational culture cannot be overstated when you realize the impact it has on everyday management decisions, as well as important benchmarks such as executive transitions, restructuring, organizational alignment and mergers.

By choosing to reveal your organization’s culture, the authors say you will be better able to orient new staff and board members, find better leadership matches, better understand and define your theory of change, develop more effective strategies, market and communicate more effectively and make successful choices about restructuring or mergers. In other words, cultural awareness increases your effectiveness in almost every leadership choice you make.

The importance of culture couldn’t be more evident when considering compatibility during a merger or alliance. “There are many good places to look for evidence of a nonprofit’s culture. The key is to look in as many as possible and to assemble what you find into a coherent portrait of the organization,” says Nonprofit Mergers & Alliances author Thomas McLaughlin. McLaughlin further says that not everything listed below will yield insight, and some will contradict others, but overall the list represents a usable roadmap to the nature of culture.

Where to see culture at work, according to McLaughlin:

•         Composition of board and management team

•         Degree of centralization versus decentralization

•         Demographics of clients

•         Demographics of staff

•         Financial investment policies

•         Financial performance

•         Geographic location

•         Management compensation policies

•         Marketing materials

•         Number and type of management meetings

•         Number of board meetings per year

•         Philosophy regarding staff turnover

•         Process for recruiting and selecting new board members

•         Requirements of major funding sources

•         Size of board

•         Size of management team (especially vs. comparable nonprofits)

•         Unwritten/unspoken hiring preferences

Our upcoming feature this month, the second edition of Nonprofit Mergers & Alliances by Thomas McLaughlin was completed when the nonprofit sector witnessed the largest and most spontaneous burst of collaboration interest in our social sector history, according to McLaughlin. This focus on collaboration is the result of the nonprofit sector’s typical two-year lag on economic downturns, pointing upstream to the recession in 2007 and the fall of the subprime mortgage market in 2008.

McLaughlin notes that the more specific reason collaborations are in the spotlight is that the recession was the means for revealing which nonprofits had a weak financial or programmatic structure. Systemic results of the economy coupled with the explosive growth of the number of nonprofits in the last decade have compelled nonprofit leaders to examine the benefits of collaborating. No longer will strategic planning sessions be focused on programs and services; rather mergers and alliances will be the strategic planning of the 21st century.

Email us at Mail@CausePlanet.org for a free article by author Thomas McLaughlin, “Merger Myths: 6 Reason the Package Really Is On the Truck”

For more information about Nonprofit Mergers & Alliances, visit www.JosseyBass.com or our Page to Practice™ book summary library.

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Perfect cultures and paired cultures

“There is no ‘perfect culture’ that all nonprofits should try to achieve. Each organization’s culture must be understood on its own terms, including its strengths and challenges. What is effective for each organization will be unique to its culture.”

This quote was pulled from our Page to Practice feature this month, The Nonprofit Organizational Culture Guide: Revealing Hidden Truths that Impact Performance by Paige Teegarden, Denice Hinden and Paul Sturm.

Here’s what the authors had to say when asked about “perfect cultures:”

CausePlanet: Most of us follow or model best practices when we want to improve something. If there is no “perfect culture,” how do managers go about improving it?

Authors: Every organization’s culture is unique, made from its own history and the groups of people who have been at the heart of the organization. Our research tells us this work is less about ‘improving’ culture than about honoring the culture that ‘is’ by revealing it, so that culture informs key decisions made by the organization’s leadership. Although there are likely to be elements of an organization’s culture that are unhealthy or unintentionally hinder the organization’s work, the culture in and of itself is not something that can be improved in the literal sense. However, understanding the unique elements of an organization’s culture – both positive and negative – can help leaders develop more effective strategies to improve systems, procedures, hiring practices, working environment, etc. in ways that enable the organization to more effectively make its intended difference.

When you consider that the U.S. nonprofit sector represents nearly two million organizations and employs nearly eleven million people, the social sector plays a critical role in America’s cultural fabric. Because nonprofits have such a large part to play in the economy, there has been a larger push from funders and community volunteers to better understand the impact nonprofits are making. Culture has become part of this sectorwide conversation.

Although culture is an ever-present term used throughout leadership and management literature and commonly identified as responsible for powerful outcomes, it’s rarely defined and specifically analyzed. The Nonprofit Organizational Culture Guide provides a simple process for gleaning organizational truths about culture that helps you define your culture and develop a summary statement with which you can guide all your important management decisions.

This week at CausePlanet, Vance Yoshida of La Piana Consulting wrote about why nonprofit should explore sharing administrative services, which in many cases can be the beginning of more formalized alliances or collaborations. Consequently, culture becomes a consideration. In our interview with the Culture Guide authors, we also asked:

CausePlanet: Talk to us about culture and merger considerations. How much are cultural differences a sticking point when examining two organizations as potential partners?

Authors: We think it’s critical for organizations to understand their unique cultures before consummating a merger. Remember AOL/Time Warner? Virtually every analysis written about the merger’s failure mentioned the merged organization’s inability to meld the two original organizational cultures. We believe this is no different for nonprofit organizations. Undertaking a merger is challenging under the best of circumstances. Attempting to merge two organizations with conscious knowledge of the different organizational cultures increases the potential for everyone involved to make better judgments about what will facilitate a successful merger and create a cohesive, integrated organization.

We also recommend that both organizations separately undertake the ROC process, and then come together to talk about areas where the cultures overlap or are complementary – as well as areas where there are likely to be problems. Then delve into areas of potential conflict, seeking to understand how deeply held these elements of culture are, and what aspects of organizational process and structure reinforce them. With this information, the merger team (representatives from both organizations) can have frank and open discussions about whether or not the two organizational cultures can be integrated over time or not. If the answer is ‘not,’ then depending on the circumstances and reason for merger discussions, one organization may simply agree to its programs being spun off, without it being a true merger.

Whether you are seeking “to perfect” your individual workplace culture or make two cultures compatible, the authors argue that defining it to begin with is a critical step in improving every aspect of your management decisions—be they hiring, board training, strategy development or alliances.

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