Thursday, July 22, 2010
Nonprofit Mergers & Alliances: An interview with Thomas A. McLaughlin (part two)
the excellent and indispensable volume Nonprofit Mergers & Alliances, now in its second edition.
I recently had the opportunity to speak with Mr. McLaughlin about his book and his experiences with nonprofit mergers and alliances. What follows is part two of our discussion:
Ken Goldstein: I've heard that, on average, only 1/3 of organizations that enter merger negotiations actually wind up merged. In my own experience, I've been successful in 2 out of 3 rounds of merger negotiations. What do you find are the most important factors in beating the odds and having a successful set of merger talks?
Tom McLaughlin: I don't know whether it's 1/3, 2/3, or 1/2... because we don't have standardized reporting, or any reporting at all, whereas with the FTC for-profit companies have all sorts of reporting to do. How do you define success? If you're talking about the very beginning, and just talking and exploring, that might be 1/3 successful, if people are sincere in the discussion, but there are many things that can intervene... if you start the clock ticking when organizations "get serious" and start to plan something, enter the implementation planning stage, I think the percentage goes up to 75%. Until that point it's just discussion, once you commit, things start to fall into place and you start making decisions that have lasting effects and consequences. In the future this activity will be frequent enough that organizations will say "we're always talking" but that doesn't mean we're always "getting serious." I would say that once you get over that first hurdle of the feasibility stage, your chances are quite high. Because there's something in it for both organizations. These are voluntary organizations; organizations in this sector cannot and should not be forced to merge. This should be a voluntary process from the ground up and should not be somebody else's grand plan. I think it's stronger when two organizations choose to put their groups together and follow through.
Given what you've just said about mergers needing to be voluntary, is it right for United Ways or Community Foundations or other funders to be cheerleaders for the trend, and to be encouraging mergers?
I think funders should be advocating collaboration, but not forcing any particular merger. They're independent voluntary organizations. Outside matchmakers don't have the inside knowledge and could push for a potentially bad result for all the right reasons. Funders can create an atmosphere that encourages talking, fund it... one of the best things they can do is provide Critical Juncture Financing; external financing provided to defray the cost of collaboration between two or more organizations. Those two parts are essential: collaborating organizations - to facilitate the process, not to ordain it. In Boston they call it a catalyst fund, these are efforts on the part of forward thinking foundations to provide what otherwise might be a pretty heavy lift for organizations to come up with on their own. One thing worth noting here, this is asking foundations and funders to do two things they're not used to doing: one is to pay for collaborative activities, not a strategic plan for one organization... the second is that this is not funding for programs, it's funding for management and infrastructure, and that's okay, it's the only way to get some of these going.
I really appreciated that in your book, you're clear about the differences between nonprofit and for-profit mergers, including issues of ownership, motivation, and the lessoned need for absolute secrecy around the talks. Do you find that a lot of board members, whose main lives are in the corporate world, are surprised or uncomfortable at these differences?
Yes, absolutely. For-profit board members who are bankers tend look at the nonprofit sector and see a lot of little banks. For-profit board members who are manufacturers see a lot of little factories. That is a problem because the incentives, the processes, the reasons for doing things, are very different in the for-profit and nonprofit sectors. The vast majority of public organizations tend to focus more on doing back-room collaborations for savings, but we already keep our overhead as low as possible for a lot of reasons. Say you have overhead costs of 8%, which is very low. If you can save 10% of 8% you're a genius. If you go into a nonprofit merger to save money, you will be disappointed. At some point you'll say, "We're doing all this to save $25,000? And we might not even come up with that kind of savings?" A sliver of a sliver is not a major savings.
You also do a bit of "myth busting" in the book - particularly around unrealistic expectations of immediate administrative saving, as you've just said, and that "only failing organizations merge" - How do you convince strong organizations that mergers or alliances are to their advantage with lowered expectations of quick payoffs?
It ultimately has to be strategic in nature. Everybody talks about strategic alliance. Strategic is a popular label to apply to things, but it really does need to be strategic. You may or may not regard 2% savings to be a lot of money. But if two dance troupes get together and they talk strategically about the ability for having bigger shows, to attract more media, to produce original shows... I can't put a value on that, if its' worth 2% or 5% or 10%. But if you can put a strategic vision like that on it, it's hard to say, "Eh, not worth it."
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