Deciding to Restructure

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Why Merge? Keeping the Motivators in Mind

Why merge? Mergers occur for a variety of reasons - economics, social opportunities, leadership challenges, a tired board, to better serve the community or for reasons specific to the organizations involved. All these reasons are valid reasons to merge two (or more) organizations. However, no one motivator makes the process any easier. Bringing two organizations together, no matter how similar they might think they are, is not simple. The negotiations process can be long and arduous and at times seem hopeless. It is at this time that the reason for merging is most important.

More often then not, the participants in a merger hope for benefits that are immediate and quantifiable. That is, they hope it will save money and bring down the fundraising goals. However, this is usually not the case. It costs money to merge (lawyers, consultants, printing, moving and other start up costs) and any savings from a merged organization will quickly be used by other needs. The real benefits of a merger are not short-term but medium- to long-term and strategic. Whether it be better market positions, a larger market share, a higher public profile, greater political influence, more strategic fund raising, or a larger staff, which allows for specialization of functions, all these reasons take time, money and planning to implement.

Because the real reasons to merge are harder to visualize, it is easy to forget them as you go through the negotiation process. As you hash through the details of what the new organization will look like, the participants at the table may find themselves getting petty about the small issues. At this point, it is good to take a break and have everyone restate the reasons for the merger. We have found it very useful to have the reasons up on a poster or easel paper, where they may be easily pointed at. Or, print them on a sheet of colored paper and distribute them when needed. This should help bring clarity to the discussion and help the participants navigate through the negotiation process.

Ally to Compete?

We usually think of alliances - whether low level collaborations or full scale mergers - as tools for helping nonprofits to work more closely together. But it is also possible for nonprofits to form alliances primarily for competitive purposes.

For example, if your nonprofit fears the entrance of a new competitor into your market – perhaps a well-funded larger nonprofit or even a for-profit company – one option is to form an alliance with others in your community aimed at protecting your collective market share against the newcomer. Where previously you may have competed with these other organizations, now you might see a greater threat from the outside, and decide to work together.

You might decide to pool marketing dollars, as with arts organizations that advertise their seasons in the same mailers and print ads. You could decide to integrate services, so that clients can move from one level of care to another seamlessly. You could decide to centralize your client intake process for all the partners. A popular move in some fields is to develop a single billing or client tracking system that meets government requirements but might be too expensive for any one group to develop for itself.

Remember, when you are faced with a competitive threat, you do not need to face it alone. Chances are others in your field or community are facing the same threat, and working together could strengthen you all.

How does a Merger Unfold?

Excerpted from The Nonprofit Mergers Workbook II, Exhibit 2 Key Issue Areas by Stage of the Merger Process, illustrates the various issues that arise in each phase of a merger. Across the top of the chart (the column headings) are the six discrete stages of the merger process. These are, in general, time sequenced; that is, one follows the other, and any successful merger will probably move through all six. In fact, in appraising the success of a merger, it is useful to review whether and how well the organizations addressed and passed through these stages. The leftmost column in the chart identifies the areas that those leading the merger process will need to attend to. The checks within the chart indicate which areas need to be most closely considered at each stage.

Assessment and Readiness

This phase, addressed in detail in The Nonprofitt Mergers Workbook Part I—Considering, Negotiating, and Executing a Merger, is where each party first assesses its own suitability for merger and its assets and liabilities as a partner, and then examines itself in light of a potential partner or partners. While many factors must be considered, even at this early stage attention must be paid to the concerns of (at a minimum) the board and management, and how the culture and program mix of the organization would affect and be affected by the negotiation process. The need for effective communication—primarily internal at this point—begins here.

Negotiation

This phase, also treated in depth in The Nonprofit Mergers Workbook Part I, is where the entities come together to determine if, and under what circumstances, a merger will occur. At this point some questions are likely to be raised in each issue area. There will be a need to communicate with both internal and external constituents about the process.

Immediate Pre-Merger

This is the often uncomfortable period between the point at which the merger decision is ratified by the boards, and the day on which the merger legally takes effect. It can often last several months, and is unique in that the organizations’ futures are joined but their present identities are still separate. It is crucial to pay attention to the concerns and anxieties of the staff, management, and board during this stage, as well as the impact of these concerns on the overall culture. Many organizations get a head start on integration at this point, and begin planning for, and to a small degree implementing, the necessary changes. Announcements to the public about the merger are typically made at this stage as well. A proactive stance can often help alleviate the natural anxiety felt by many in this stage.

Legal Merger

This is a moment in time—the date the merger becomes legally effective. It is significant as a legal event, but it is not an actual span of time.

Immediate Post-Merger

Immediately after the merger legally takes effect there are many changes, often great confusion, and usually high emotion. New ways of doing things have yet to be established, and true integration is just beginning. Many a merger begins to go off track in this stage, and, once again, the first priority needs to be attending to the "people" issues.

Integration

This is the process, often lasting years, through which the entities truly become one. Full integration involves the people, programs, and systems of the entire (merged) organization. The process also involves considerable attention to communication, both internal and external.

The goal of The Nonprofit Mergers Workbook Part II: Unifying the Organization after a Merger is to prepare and support you as you lead your organization through the unstable post-merger phase and into and through the later stages of formal integration as quickly and successfully as possible.

It is important not to consider these stages as completely discrete. Be aware that it is not necessary to complete one stage before you can begin work on the next. Successful leaders often look far ahead when moving through the merger process. For example, during the immediate pre-merger stage, some organizations are hard at work on staff and systems integration, developing a cohesive board, and reviewing how programs can work together. In other mergers, nearly all progress stops when the negotiations are complete and does not resume until the immediate post-merger stage begins. While both paths are common, successful merger-makers tend to move seamlessly from negotiations to approval by the boards to integration activities, without a hiatus between immediate pre-merger and immediate post-merger.

Excerpted from The Nonprofit Mergers Workbook Part II: Unifying the Organization after a Merger, by La Piana Associates. Copyright 2004 by La Piana Associates, Inc. Used with permission. For more information on Fieldstone Alliance publications, call 1-800-274-6024. To order the Workbook, go to http://www.fieldstonealliance.org/productdetails.cfm?SKU=069415.

What is the Funder’s Role in Strategic Restructuring?

Over much of the course of the Strategic Solutions project, we have focused our attention on those most directly involved in strategic restructuring: nonprofit organizations and the consultants who serve them. Beginning in 2001, we expanded our focus to include funders. This shift occurred in recognition of the important role that funders can, and do, play in helping nonprofits to become more effective. Because strategic restructuring is essentially a tool to help nonprofits improve their effectiveness, it is important for funders to have sound knowledge and understanding of it. They should know when strategic restructuring is appropriate and what the process entails. They should also know about the tools and resources that exist to support nonprofits in considering and undertaking strategic restructuring. This can help funders perform their role in acting as a resource to nonprofits for information and funding, as appropriate.

The funder-nonprofit relationship

While funders are often best-positioned to share information with nonprofits — helping them know about the tools and resources available to support improved organizational effectiveness — this can be a difficult role for them. Because the relationship between funder and grantee is inherently one of unequal power, a funder’s well-meaning suggestion that a nonprofit should consider strategic restructuring may be misunderstood as a mandate to restructure. This can result in strategic restructuring being undertaken unwillingly, which is far less likely to be successful than that which results from a thoughtful and honest process of assessing the internal and external situation, potential partners, and possible benefits and challenges.

The role of the funder

Funders must tread a delicate line between providing information and support, and tipping the balance of power, making nonprofits feel that they must embark on a given course of action because funding is dependent on it. Knowledge and understanding of strategic restructuring — the potential outcomes, success factors, challenges, costs, and tools and resources available to support it — will help funders determine when and how to discuss it, and the type of support to provide to grantees. (See our Best Practices for Funders for practical ideas on how to work with your grantees.)

Realistic goals and costs of strategic restructuring

First, it is important to set realistic expectations. Often organizations turn to strategic restructuring in times of financial hardship, looking to it as a way to save money. While strategic restructuring frequently yields savings in terms of reduced staff and administrative costs, organizations that undertake strategic restructuring with the primary goal of saving money may be disappointed. A more realistic goal of strategic restructuring is to increase an organization’s ability to advance its mission.

Often organizations embark on strategic restructuring to save money. However, strategic restructuring generally costs money the first year – looking for short-term savings will generally not bear out. For example, there are one-time costs associated with integrating organizations. The cost efficiencies are more likely to be realized over time. Thus, though organizations come to strategic restructuring with the expectation that there will be cost benefits, there must be a bigger picture that is driving the effort – stronger services to the community, for example.

As noted above, while there are savings in some areas, there are typically significant costs involved. These include costs related to:

Time and energy diverted from other work
Consultant to facilitate the negotiations and/or integration
Travel and meetings
Implementation/integration
Severance for the ED/CEO and/or other departing staff
Human resources
Integration of programs and systems
Communication and marketing
Design and printing
Moving

For more information on the cost of strategic restructuring, see our FAQs on Understanding the Cost of Strategic Restructuring.

Benefits/outcomes of strategic restructuring

Research and first-hand experience — both our own and that of others who have worked in this area — reveal that there are many potential benefits of strategic restructuring. These include a greater ability to pursue mission, increased stability, reduced duplication, and less inappropriate competition. This can translate into measurable, positive outcomes, such as increases in services provided, administrative capacity and quality of services, and market share. When the necessary readiness and success factors (described below) are in evidence, and a sound process is in place, outcomes such as these are more likely to be realized.

Risks and roadblocks

There are also risks involved. Strategic restructuring is not always successful. Organizations that are not truly ready to engage in the negotiation process, and/or those that do not have the necessary structure and processes in place to undertake integration, are less likely to be successful. A failed strategic restructuring effort can have devastating outcomes including negative publicity, lost time and money, and/or damaged relationships. This can sometimes reflect poorly on a funder, depending on their role in and closeness to the process.

Pre-negotiations: readiness assessment

How can funders help nonprofits determine whether the benefits will outweigh the risks in any particular situation? Over the years, La Piana Associates has helped hundreds of nonprofits explore strategic restructuring as a tool for improving their organizational effectiveness. Through this experience and our extensive research in this area, we have identified a handful of factors indicating “readiness” to engage in strategic restructuring. The greatest potential for success is found when organizations evidence these readiness factors on their own. However, funders can play a role in educating nonprofits about the importance of these factors. This may prove helpful to nonprofits in developing the mindset necessary for success. Among the most important factors are:

A strong mission-focus;
A strong relationship between the board and the executive team, especially between the board and the Executive Director;
A deliberate growth and risk-taking orientation; and
Flexibility in the way the mission is pursued — e.g., an understanding that the mission is more than a specific program or service.

Additional readiness factors include:

A history of successfully collaborating in some fashion and/or an understanding of the value of strategic restructuring;
An understanding that the process is long, arduous, and time-consuming; and
An understanding that the outcome of strategic restructuring is not necessarily to save money, but rather to make the organization more effective.

Assessing a partner

A precursor to entering into negotiations is the selection of a potential partner. This is a critical decision. Unfortunately, it is not possible to truly know what it will be like to work with an organization before actually doing so. Realistically, this understanding often cannot develop until the negotiations are underway. However, before embarking on negotiations, nonprofits should ask themselves the following questions about the potential partner organization:

Do we trust them?
Do we know them, and have we had a history of working successfully with them?

If the nonprofit can answer these questions in the affirmative, the negotiation process is more likely to be successful.

Given the time and energy that must be devoted to the negotiation process, it is also helpful if the nonprofits involved are not in an immediate crisis. This can detract from a realistic assessment of the partners and of the potential outcomes. While the strategic restructuring may appear to solve an immediate problem, a poorly and hastily designed partnership can do more damage than good.

The reality, however, is that some organizations are chronically in crisis, and many of these organizations may be strong candidates for strategic restructuring. Such an organization may need to jump at an obviously good opportunity, even if it is not currently able to put its best foot forward.

Challenges of the integration process

As consuming as the negotiation process is — in terms of time, costs, and energy — it is just the precursor to the integration process. Organizations should enter this phase well aware of the challenges they face, and of the tools and resources that can help them succeed. Just as in the assessment and negotiation phases, funders can play a key role in helping organizations understand the challenges. They can help nonprofits have the knowledge, resources, and tools to meet and overcome the challenges. With this support, it is more likely that the integration will be successful.

The main challenges involve:

Cultural integration;
Board integration; and,
"People" issues.

The people issues are often the most challenging. Strategic restructuring involves significant change. Regardless of whether the outcomes are positive or negative, change causes fear and anxiety. The leadership of the new organization should take the time to address and resolve the people issues. Otherwise, they will fester and detract from the organization’s ability to move forward.

Success factors

Just are there are factors that predispose nonprofits to have successful negotiations, there are factors that are conducive to a smooth integration process. Funders should be aware of these and help nonprofits understand their importance. Funders should also keep these factors in mind when evaluating proposals from nonprofits for funding of the integration process.

In addition to the factors that indicate readiness to pursue negotiations (see above), the following factors are important in the integration process:

A champion, whether a staff or board member, who is a cheerleader for the process and helps motivate others. Optimally, this individual is an excellent communicator, keeps the focus on the mission, and models a positive and forward-looking attitude;
Leadership focused on mission and vision, and able to move quickly, making difficult decisions and keeping the forward momentum. This includes making staffing cuts and other changes all at once so people don’t constantly worry “what next?,” and instead are able to focus on the mission;
Focus on creating a new organization: honoring the past histories and cultures of the organizations, and creating new "shared" culture;
Clear, honest, open, frequent, respectful, and two-way communication throughout the organization;
Celebrating success early on, and on an ongoing basis;
Having a consultant to facilitate the process and keep it on track; and
Having a plan and an integration team.

Funders have a critical role to play in helping nonprofits improve their organizational effectiveness. Because strategic restructuring is a tool for improving effectiveness, it is important for funders to be aware of its potential benefits, and the challenges and costs involved. They need to draw on this understanding and knowledge in serving as a resource for nonprofits, while avoiding the suggestion that they are mandating it.

What are some success factors in strategic restructuring?

Through the work we have done, we have found that if several factors are in place before two (or more) organizations undertake some form of restructuring, the chance of success is much greater. These factors include:

Mission Focus

This is essential. If an organization can clearly and succinctly define its mission and the enhancement of its mission is the goal of the strategic restructuring, then the completion of the restructuring will be much easier.

Flexibility in pursuing mission

An organization must be willing to consider new ways of doing business or the restructuring process will be very difficult.

Strong Board-management partnership

Strategic restructuring needs the full support of the board and management of all the organizations involved. The stronger and healthier this relationship is, the easier the process will be.

Growth orientation

An organization that was developed to provide a singular service at a static size and does not see itself in a growth or expansion mode may have a very difficult time making the required commitment to the restructuring process.

A lack of divisiveness within the nonprofit

The restructuring process itself generates differences of opinion within an organization so it helps if the organization can be relatively cohesive at the beginning of the process. However, an agency that has endured poor funding for some time with low morale may also find the process rejuvenating as it signals a major initiative toward resolving some of the financial obstacles with which the organization has been dealing.

No immediate crisis

If an organization is not in an immediate crisis, it has the opportunity to selectively consider partners and what form of restructuring best suits its strategic plan, and thus any restructuring effort is bound to be more successful. If the organization is struggling with an acute cash shortage, coping with huge growth, recovering from a recent public relations fiasco, or engaged in a major internal power struggle, it may not have the energy to focus on a new and challenging opportunity such as that represented by a restructuring effort. It might be better to wait until the crisis is resolved before embarking on anything so time and energy consuming. An exception is the chronically-in-crisis agency that may just need to jump at a good opportunity, even if it knows it is currently not able to put its best foot forward.

Clarity regarding desired outcomes

If board leaders and senior managers are clear on what they expect from the restructuring process and these can be stated in a way that success can be measured, it will be much easier to recognize success and identify problems as the effort moves forward.

Positive relations with potential partners

The restructuring process is difficult. If there is a good rapport and trust and between the organizations, this can only help.

Able to bridge differences, both within each organization and across multiple organizations

If an organization can demonstrate the ability to bridge differences within and across the organizations involved, this will again ease the restructuring process.

We participated in a landmark study of organizations that have gone through a strategic restructuring process. The report on this study is called "Strategic Restructuring: Findings from a Study of Integrations and Alliances among Nonprofit Social Service and Cultural Organizations in the United States." Findings in this study support our prior work, showing that the most important success factors have been:

A staff or board member who championed the process
Board support and encouragement
Positive board-executive relations
Organizational risk taking and growth orientation
Positive past relations with other organizations involved

What are the roadblocks in Strategic Restructuring?

We have identified three primary factors that can threaten the success of a strategic restructuring effort.

Autonomy

Autonomy is very valued in the nonprofit sector. In organizations where there is too much work and too little compensation, independence is key. A restructuring effort can threaten the independence of an organization as it faces the possibility of new staff and board members. Additionally, most organizations are founded and often continue to be managed by a small group of people who may feel threatened by the thought of losing control if they undertake some form of restructuring.

Self Interest

Staff and board members will feel threatened by a strategic restructuring effort, whether they feel that their jobs are at risk or the cause they have personally championed will no longer be theirs. This is neither inappropriate nor unethical, but it will have to be addressed, so as to ensure that the effort is not undermined in anyway.

Culture Clash

Often underestimated, organizational cultural differences can destroy a restructuring effort. Great pains will have to be taken to make sure that staff and board members do not feel that their values and ways of doing things are not being overlooked in the restructuring process.

Is Your Board Ready for Strategic Restructuring?

You just attended a presentation on strategic restructuring, and learned lots of good information and are excited about the new concepts. So, you want to present it to your board or to a nonprofit group with whom you work. Will they be interested in the topic? Will they find the thought of consolidation a scary one? What should you do?

Strategic restructuring can be an anxiety-provoking topic; after all, nonprofit boards involved in partnership/merger negotiations typically react to conflict in the areas of autonomy, self-interest, and culture clash. It's only natural: we like our autonomy to make decisions; we want to protect our interests as board members; and we are hesitant about whether "our" culture and "theirs" will complement or clash with each other in a partnership effort.

In our experience working with a range of nonprofit boards, we have found that some groups are less ready to consider strategic restructuring than are others. This may be related to board development issues, as some groups struggle with different concerns based on where they are in their organizational evolution. Those boards that are more "ready" will likely display a definite mission-focus, a strong relation with their executive team, a deliberate growth orientation, and flexibility in the way they pursue their mission. All four of these factors don't have to be fully present for successful strategic restructuring, but a good dose of a majority of them will certainly increase your board's readiness and chances for success.

If you wish to initiate a strategic restructuring discussion at the board level, your first step might be to assess how well the organization is doing with regard to each of the success factors mentioned above. Talk about this assessment with individual board members and executives. If you find that the group is significantly strong in any number of them, you might ask if the group would like to have you present some strategic restructuring ideas for 20-30 minutes at a board meeting. When you introduce your topic, make sure you reference where and when you learned about it, and highlight why you think it is important for boards to know about partnership options.

As we often tell those with whom we consult, the current environment of scarcity and privatization surrounding nonprofit organizations in the U.S. is forcing organizations to consider partnering with each other at increasing rates in order to keep up with steep competition, to reduce duplication, to head off unnecessary competition, and to create economies of scale. Hearing this might just peak your board's interest enough to begin the learning process, which is valuable in and of itself.

Hints and sources of information for your board:

Frame your presentation as being about additional "planning tools" your board colleagues can use in their governance of the organization
Print out and distribute any information from this website (www.lapiana.org)
Read and/or distribute any of the publications cited in the website
Have strategic restructuring documents translated to other languages if needed
Organize several local nonprofit boards for a morning or afternoon presentation on strategic restructuring

How should you introduce Strategic Restructuring to Your Board?

Every nonprofit board has its own culture and its own style of learning; hence, no one approach to introducing new ideas can possibly work well for all boards. So, what can you do when you have learned about strategic restructuring and want to share your newly acquired knowledge and skills with your fellow board members?

Below are some suggestions on how to proceed.

Include ideas about strategic restructuring in your board discussions and retreats. More than new knowledge and skills, strategic restructuring is a way of thinking and acting. Beyond promoting more effective ways to serve your clients, encourage your board colleagues to constantly think about with whom their agency can partner to be more effective.
Let your board colleagues know about strategic restructuring and ask if they would like to have a discussion on the topic at a future meeting. Once a time for discussion is set, request brochures and other materials from the Strategic Solutions project and distribute them to your board members prior to the meeting. Also, encourage them to visit this site prior to the discussion, so that they can get a better understanding of the general concepts and a more productive discussion can take place.
Strategic Restructuring is a good topic on which to have an expert speak to your board. La Piana Associates may be able to refer you to someone in your area.
Share your ideas on Strategic Restructuring with individual board members with whom you interact regularly. These one-on-one conversations can be very productive, and can really help in developing a better understanding of Strategic Restructuring at the board level.

By sharing information on Strategic Restructuring with your board colleagues, you will initiate a discussion that may prove timely for your organization.

What are some considerations for organizations contemplating dissolution?

When a nonprofit reaches the point where its leaders feel it can no longer operate, several added challenges arise. Whether the problem is the sudden loss of a major contract or donor, malfeasance, or the gradual wearing away of viability by year after year of operating losses, a nonprofit should not simply close its doors and go away. Since a nonprofit is governed for the public benefit, its leaders must determine a way of closing down that preserves any possible services or funds for its mission.

Here are some ideas to consider when contemplating dissolution of your nonprofit:

Difficult as it might seem, frank discussions about dissolution are necessary. Board and staff should be involved in the discussion, but the board should ultimately chart the best course it can.
Avoiding this discussion will only bring the organization to a point where, when it can no longer ignore reality, it has fewer options.
A valuable and sound program could be salvaged from a failing nonprofit by transferring it to another organization through some form of strategic restructuring, where it might continue to provide service under a more stable umbrella.
Creditors are often willing to take less than full payment in exchange for actually getting paid; some will even write off the debt as a donation. Don’t be afraid to negotiate.
Board members may start to flee as the situation seems hopeless. Steps must be taken to keep the board together and working on the problem. Engage every board member in the process.
Staff should be kept apprised of every development. Often they will stick with the organization to the end if they are kept informed and involved in the problem.
Speak frankly with major funders. Some may be willing to help out with transition funding.