Wednesday, July 21, 2010
Nonprofit Mergers & Alliances: An interview with Thomas A. McLaughlin (part one)
Regular readers of this blog know that I've been involved in two successful nonprofit mergers, as well as a third attempt that was never consummated, and I've written several blog posts on my feelings about nonprofit mergers. So, when I received a message asking if I was interested in speaking with Tom McLaughlin, author of Nonprofit Mergers & Alliances, I jumped at the chance.
McLaughlin's book is a must read for anybody interested in the topic, or any nonprofit leaders (board or staff) who are considering any sort of merger or alliance. I found myself nodding my head and saying, "Yes, yes," throughout reading the book, and wish I'd had it during my three sets of merger negotiations. The following is part one of our talk:
Ken Goldstein: You certainly make a strong case for mergers and alliances as a strategy for growth, cost containment, reaching a sustainable size, and simply surviving in these times. Are there any times when you advise against a merger or alliance?
Tom McLaughlin: Oh, sure, absolutely. Here's the starting point... the two reasons that are most cited as reasons why organizations don't get together or it falls apart and doesn't work are, ironically, the same in both the nonprofit and for-profit sectors, and that is, that they can't decide who the CEO is going to be and culture clash. I'll give you an example of what I mean by culture clash, it's rooted in what the organization does and how it does it. Years ago I was working on a merger between a VNA (Visiting Nurses Association) and a hospice. I was working with the VNA, and they had had a number of conversations with the hospice down the street, part of the community, and it never worked. Never any animosity, it just didn't happen for different reasons, and the primary one was that they were just different cultures, two very different models for how they do their missions. With a VNA, it's a health care model; death is failure. With Hospice, it's a social care model; death is part of life. I believe that was at the heart of why they couldn't get together.
That was a specific example of why a particular merger didn't work, but is there a time in the life cycle of a nonprofit when a merger not advisable?
Yes, probably a small handful of those situations. The one that's most common is when one, or both, of the organizations is so financially stressed, that they are only paying attention to getting cash in the door and not brining in enough of it. The value of their programming is likely to be similarly stressed and declining. At some point an organization in a downward spiral like that, the programs become too much of a risk, just too neglected to be salvaged by another organization. An example of decision delayed tragically. In those cases, it would have been preferable to think about this a lot earlier.
While the main thing people are interested in, and the book focuses on, are mergers, you make the case for alliances at several levels below the full merger, with your CORE (Corporate, Operations, Responsibility, Economic) model. Does lower level collaboration always have to lead to full merger, or can it be an end in itself?
It certainly can be an end in itself, and that is what I try to communicate with the CORE model. You don't enter an alliance and then ask why. You have the question and build the alliance around that. It its whether it's a question of how to strengthen services or how to save money (etc.) that leads to the appropriate level of alliance or merger. It's entirely possible that organizations would create some kind of alliance first and move on to a merger; it's a nice progression if it does happen that way, but it doesn't have to.
Related to organizations entering mergers and alliances, there are organizations that come into being as pseudo-independent nonprofits, but they're under the fiscal sponsorship of another group and enjoy many of the benefits of an alliance. In the past, this was seen more as a "nonprofit incubator" approach, and the organizations were expected to eventually blossom and go out on their own, but I see that more and more, they'll embrace fiscal sponsorship and alliance as a permanent ideal for single-program nonprofits. Do you have any comments on this?
That's a relatively rare phenomenon, but it does happen. It takes a long time to incubate an organization, in any case, the fiscal sponsorship model has some characteristics similar to a management company or management services organization (which I have written about), where there is 501(c)3 that provide management services to others that are, effectively, subsidiaries. The most effective way is to lock the boards together, and it's kind of a merger under a different name. And I think that is one of the least understood models in the nonprofit sector. Why I say that, one of the attractive features of that generic kind of model is that both entities retain their brands and the connection occurs mostly in the backroom area, if that's the case, and there's not a board interlock, then you've got two separate entities with separate brands. You can have the same situation in the management company model, where if you have three subsidiaries you can three different brands, plus the brand of the parent corporation. I think we need to get out of the one corporation, one program, one site model. I think there are shades of gray here that quickly become black and white when we talk about changing corporate structures.
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