Resisting the Pressure to Merger

A couple of years ago, I wrote a post here about when it makes sense to take an existing partnership and explore a merger. In that posting, I wrote that

the reality is that it is increasingly difficult for small organizations (budgets under $750,000) to operate successfully, and create sustainable funding. As much as I love small, grassroots organizations, sometimes they can better serve their communities as part of a mid-sized agency.

Today, that is truer than ever, and many of the small agencies that I love so much are in major trouble as their funding dries up, while clients are still lining up at their doors. Also true right now is that there is growing pressure on these small organizations to merge coming from the funding community (foundations and local governments).

In the long term, many of the mergers they envision may indeed make sense. But the savings they imagine will not occur anywhere near soon enough to be a solution to this year's budget problems. In fact, to make mergers truly work for the betterment of the organizations (and their clients), will actually require an additional investment for FY 2009-10 - an investment that doesn't seem likely to come from any of the sources promoting the mergers.

"Quick and easy" mergers really only exist when one of the partners is in such deep trouble that their only other option is shutting their doors and the other partner has plenty of resources to invest in salvaging the best of what the defunct organization has to offer.

When two small- to mid-sized organizations, who are each struggling but surviving, come to the table together, there's much to discuss and agree upon before any mergers occur. From deciding on what name the resulting organization will be called, to which Executive Director stays on (and what to do with the one that doesn't), to how to merge the boards (and elect new officers), to going through and reconciling each line of the two different sets of by-laws, this is a process that can take at least several months to over a year to settle. And once that's done, it's time for the lawyers to review what's been decided and put it into a legal form.

Here's a sample, simplified merger budget:



As you can see, while mergers may save money in the long run (and even that is often questionable if the deposed ED is needed to stay on to manage a second site), there are considerable upfront costs, and a major time investment required to make them work. And, bringing us back to the start of this post, the partnership has to make sense.

To partner or to merge...

If you've been working in nonprofit management for any amount of time, you should already be fairly adept at recognizing good partnership opportunities. Whether it's working with a local office supplies retailer to put together back-to-school packages for the low-income children you serve, or joining with other social service agencies that provide complimentary, but different, services in a public outreach campaign, there are a million reasons to work in partnership with other nonprofit agencies and businesses.

But when does the partnership get to the point where you should consider a merger?

A quick checklist might include:

• The existence of ongoing partnerships (or potential for ongoing arrangements) that cover multiple program areas,
  
• Essentially aligned missions (ie: desire to serve the same population or cause),
  
• Similar organizations in adjacent regions,
  
• There's the potential to strengthen organizational capacity (ie: instead of two Executive Directors trying to do it all, one ED and one Development Director),
  
• When you have few funders in common, or your common funder(s) would view you as stronger for having joined forces,
  
• When the new agency will lead to economies of scale, not a bloated bureaucracy,
  
• When your clients will view the merger in a positive light,
  
• When the merger will result in expanded services to your clients,
  
• When one of the organizations is facing a change in leadership (ie: a longtime Executive Director retiring),
  
• When a merger is the best way to achieve the goals in your Strategic Plan,
  
• When the merger can be accomplished without leaving any constituencies behind, and
  
• When the new organization will be stronger and more sustainable than either of the predecessor organizations.

I am not one who regularly pushes merging for the sake of merging. Nor am I one who talks about there being "too many nonprofits." And I certainly am not a proponent of having huge, bureaucratic behemoths attempting community work.

But, the reality is that it is increasingly difficult for small organizations (budgets under $750,000) to operate successfully, and create sustainable funding. As much as I love small, grassroots organizations, sometimes they can better serve their communities as part of a mid-sized agency.

The list above is just a place to start your discussions and soul searching within your nonprofit. You may not meet all of the conditions, and you may have other conditions of your own that lead you to decide to pursue a merger. A merger is the ultimate partnership. It's not to be entered into lightly or without great thought and purpose. But it's not to be feared either.

Too Many Nonprofits?

The Where Most Needed blog has an excellent posting on Charity Mergers Booming on Both Coasts. There are plenty of references to recent articles about particular mergers, and some of the issues involved. The author also points out that one of the best times for such a move is when the chief executive of one of the partners has just left, or is planning on transitioning out.

I read the posting with great interest and agreed with most everything being said, until the last paragraph, which opened with, "Mergers may be the best solution to the excessive number of nonprofit organizations." There was no evidence given, or data to back this statement up. It was just given as a fact: there are too many nonprofits.

I take great exception to this comment. This is not to say that I am anti-merger. I am all for it, when it makes sense for both organizations and their clients. Right now I am involved in a very positive merger negotiation as an interim executive director. I have also had to shut down a bankrupt nonprofit as part of my consulting practice. Nothing about either of these experiences, however, would lead me to believe that they were the result of a glut of nonprofit organizations.

In the current situation, the two organizations are complimentary. They each serve a similar clientele, but with a different program solution. Bringing the two together will give clients the choice of which solution is best for their family. Neither agency "has to merge" - they are each financially strong and healthy. The strategic relationship we are creating, however, will be better for both organizations, their staff members, the funders, and the children served.

The agency I had to close down had come to rely on a single government funding stream. When that funding suddenly ended, the agency was not ready to diversify quickly enough. That, combined with a bit of arrogance and basic bad management, is what shut the doors, not competition from "too many" other nonprofits. In fact, a great hole is still felt in the community where that organization once stood.

I do not see duplicative services as a problem, so long as each agency serves a particular niche. Mass produced solutions may be fine for selling shoes, but often the very nature of the services nonprofits provide require narrowly tailored solutions.

Why does one city need five different women's health clinics? Perhaps one has expertise in reaching recent Asian immigrants. Perhaps another has strong ties to the African-American community. Had these all been replaced by one, large women's health clinic some of the clients may have stayed away and not been served at all. Trust is so essential in the provision of personal human services that I do not think there can be too many grassroots nonprofits with similar offerings.

The funders are complaining about too many grant applications? They have too many tough choices to make? That's wonderful! What a great problem to have. I enjoy working with funders and appreciate the difficulty of their positions. But making their life a little easier is no reason to merge organizations that are just fine on their own.

Again, I am realistic. I will assist in mergers and shut-downs when they make sense. But I will not get so caught up in our quest for efficiency and "operating like a business" that I will make decisions that leave clients un-served or missions unfulfilled.