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.

Part Two of this interview will post tomorrow morning.

"I had to unfollow because..."

From time to time I've used this space to encourage nonprofit organizations to use social media to help get their message out, connect with supporters and community, and engage in conversation. A good social media strategy can include all or any of blogging, Facebook, YouTube, Twitter, or any number of other platforms.

Last year, to the question of "Should Your Nonprofit be on Twitter?" I answered an enthusiastic, "Yes!" But in that posting, I emphasized that "Twitter requires listening, as well as frequent posting," and that ignoring that warning could cause your social media strategy to backfire. Yesterday, it did backfire for an organization I was following.

This organization had always had a habit of tweeting in spurts, posting five to ten links or comments at a time, then nothing for 24 hours. I understood this, as the person doing the tweeting has many other duties as well, and she did a good job of listening and responding to others.

But what happened yesterday was a spurt of several hundred tweets within a three hour period before I had to click "Unfollow."

Regardless of how useful and valuable the information in a tweet might be, and regardless of what other benefits such a promotion might bring, she forgot to consider the effect it would have on those who are already their supporters and followers.

For me, it rendered Twitter useless for those several hours before I pulled the plug. Within the hundreds of messages from that organization, I lost messages from other groups and individuals, and there was no possible way to read all the tweets this one group was sending - nor could they have been paying any attention to replies during this period.

Overwhelming is not informing, and drowning out is not communication. Even well-intentioned tweets or emails can become spam when the tools are abused.

This morning, they have posted an apology and explanation, promised a return to "normal tweeting," and I have re-followed. But if my loyalty to this person and this organization had not been so strong, I would have un-followed quicker, and not come back.

So, how often should you tweet? As far as spurts, I'd say that if you need to tweet more than five times in a 30 minute period, or more than twenty tweets per day (not counting replies), you should have written a blog post instead.

A handful of useful tweets each day, plus responding to supporters tweets, keeps you part of the conversation and relevant, and - most important here - not annoying.

How Many Board Members?

This is a question that came up in a conversation last week, and from time to time; "What is the appropriate size for a nonprofit board of directors?" Related to that question is, "Does it need to be an odd number?" and "Is it okay if we run on fewer for a while?"

The generally accepted number for most small- to mid-sized nonprofits is 9-14 members. Any fewer and you will burn out your members quickly with multiple duties, have difficulty making a quorum when even a couple of people are ill or out-of-town, and you will fail to build in new leadership development into your regular board activities. Many more than that and meetings can get bogged down in side conversations, factionalization, and members will begin to feel that they're no longer contributing or making a difference.

Many larger nonprofits do have large, 30-member boards, but upon closer examination, they're not typically the true governing body. These larger boards serve more in an advisory or fundraising or even just a visibility function, with the real work being done by a more manageable governing or executive board.

Another typical bit of generally accepted knowledge is to keep your board to an odd number of members. This is supposed to help you avoid repeated tied votes on important issues. Personally, however, I feel this is ridiculous advice that misses potentially much larger issues.

First of all, having an odd number of members is no guarantee of how many people are at any given meeting, as there's almost always going to be at least one absence. And, seriously, how many times has your nonprofit board been stuck in a tied vote on an important issue? If it is more than once, I'd say your problems run far deeper than simply having an even number of board members.

Not that every vote should be unanimous - that's an equally dangerous situation to be in, good decisions are made after examining an issue from all sides, and dissent on a board should be welcome. But a board that's so divided as to have frequent stand-offs, preventing decisions from being made, is clearly lacking a strategic direction. And if the board has no agreed upon direction, how is staff accomplishing the mission, if a mission is even agreed on?

The final part of the question usually comes up when the bylaws of an organization specify a number of board members (usually a range, say 10-15), but they currently are either down to four or up to fifteen.

The higher-than-allowed figure may have resulted from a merger, bringing two boards together, or, occasionally, from considerable good luck in recruiting several talented people all at once. The new larger number is okay, if it is recognized. It is important to be operating within your bylaws. To fail to do so could bring trouble later, if board decisions are questioned on legal grounds.

A temporary resolution recognizing the larger number for a specific period of time should do the trick. Or, if you are comfortable with the new number, a permanent change in the by-laws might be warranted.

A lower-than-allowed figure is far more problematic, and like the board with repeated tied votes, likely a sign of far deeper problems that require immediate attention. This board needs to take an honest look at what they're doing wrong. Has the mission become irrelevant? Are the expectations placed on board members too onerous? Is the board leadership out-of-control and chasing good people away? Are other unaddressed issues (poor finances, staff trouble) scaring away the liability conscious? Is the current board simply too overwhelmed with other issues to do any recruiting?

The bottom line here? The rule of thumb is that 9-14 members make a manageable board, just be sure you are operating within your by-laws. Beyond that, large fluctuations in the number, factionalization that impedes progress, and inability to recruit new members are all signs of deeper trouble that needs to be addressed before you will ever accomplish your mission.

Interim Executive Director Cost Savings Question

I love it when I get a good question in my email that results in a good blog post. This is one of those situations.

If you're a regular reader of this blog, you know that one of the main things I do as a nonprofit consultant is serve organizations as an Interim Executive Director (IED).  When an organization is between leaders, and perhaps facing other problems, fiscal, strategic, or otherwise, they'll bring me in to run the agency for a limited term as kind of temporary CEO and on-site consultant.

Well, today I received a question from a colleague asking about hiring an IED. In part, the email asked:

... For an organization thinking of bringing in an interim executive before hiring a full-time executive, do you think there are any real cost savings to be had? My thinking is not really, it would be more to give time or focus to the organization and its next steps or to bring in a specific expertise to help move things forward? ...

My reply was:

The safest answer is to say that you're right, cost savings are not the reason to go with an interim; time to review, assess, plan, strategize, and hire the right person (or, more and more these days, merger) is.

If it's up to dollars and cents, you could really spin it either way, an IED costing more or less than a permanent ED. Let's say the organization's paying $70-85,000/year for a full-time ED [based on the type of organization the question related to]. An interim, depending on who they get and how they set their rates, might charge anywhere from $75-100/hour for their time.

On the surface, the Interim rate comes out much more than the permanent ED, but is the interim working 40 hours/week? I usually put in an average of 25-30 hours/week as an Interim. Also, the Interim's rate is the full cost. As an independent contractor, the organization is not paying the payroll taxes, health care costs, etc., associated with a "real" employee.

The bottom line is that the bottom line is not an argument for or against hiring an Interim. Getting things right is. And I'm available ;^)

Interviewed on "The Vault"

I've recently been interviewed by The Vault - an online career information and research site - about how I got into nonprofit consulting. The interview, conducted by Alex Tuttle, can be found by clicking Career Paths: Nonprofit Consultant.

I enjoyed doing the interview, and thought the questions were well thought out and helpful to others considering a career in nonprofit consulting, or just wondering what a nonprofit consultant does.