David La Piana

Following up my recent Merging Wisely article in Stanford Social Innovation Review, I will be discussing the practical issues involved in merging nonprofit organizations at the next SSIR Live! webinar. From Nonprofit Partnerships to Mergers: How to Restructure for Success will take place Tuesday, April 6, 2010, from 11:00am – Noon PT. I plan to leave plenty of time for questions, so bring yours and join us. Register today!

A few months ago, Janet Camarena of the Foundation Center’s San Francisco office asked me to join her for a podcast interview on strategic restructuring.  I have known Janet for many years and always find her to be an astute observer of the sector, so it was no surprise that she is a very good interviewer.  We talked about the current land-rush mentality around nonprofit mergers, some of the cautions the sector should consider, and many other things.

More recently, my colleague Bob Harrington, Director of our firm’s Strategic Restructuring practice was invited to blog about the role strategic restructuring can play in arts organizations.  Bob’s blog highlights our recent case study on administrative consolidations.

I recently did a workshop for funders in New York City, hosted by Philanthropy New York, on the current state of nonprofit mergers. The group included about 20 foundation and corporate philanthropy staff.

In addition to my presentation, the workshop featured a panel with Don Crocker discussing a failed merger attempt the Support Center for Nonprofit Management undertook and Ralph Rogers describing a successful one the Food Bank of New York City engineered.

Presenting a balance of examples was a great way to stimulate good discussion. Too often we focus just on the success stories but it is just as critical for us to understand why sometimes a merger is not the right move.

As promised, here’s a follow-up post on the Stanford Social Innovation Review and Association of Fundraising Professional’s 2009 Nonprofit Management Institute conference.

First, despite my initial reservations around the format – 8 plenary sessions over 2 days, no breakouts – it really worked.  The presentations were high quality and the speakers offered diverse perspectives. It also helped that there were generous break periods, where the real work of any conference – networking – gets done. Plus, the venue and weather cooperated very nicely.

The event was a huge success for me because of the fantastic speakers the Institute had recruited. I usually cannot sit through an entire hour-long conference session, call it ADHD or boring speaker overload, but I surely didn’t have that problem the past two days.

What most struck me was the entirely cross-sector conceptualization of social innovation.  Peter Hero, the former community foundation CEO, spoke about the future of philanthropy both capital P foundation philanthropy and small p individual giving. Stanford’s distinguished Professor Hayagreeva Rao discussed interventions in a hospital setting that ultimately saved over 122,000 lives. I spoke to the nonprofit sector about partnerships, mergers, and collaborations. You don’t get that mix at most conferences.

I appreciate that SSIR thinks across sectors, in the nonprofit sector we are far too often sector-bound in our approach to problem-solving. I also found the mix of people in attendance fascinating. There was a strong and diverse international contingent and a great variety of size and type among the American nonprofits present. That mix made for great discussion during the breaks, and I learned quite a bit from several younger nonprofit leaders who shared their perspectives.

I am sure there will be more as I digest the sessions, but that’s the quick download.

One of the many joys of my job is to have a regular opportunity to meet lots of interesting and creative people who are trying to change the world. This week is typical.

Ben Paul of Communiteach. He is creating a forum for people to both sign up for learning opportunities and offer to teach others the special skills they possess. It is a kind of barter system for education and a very cool idea.

Linda Raybin, Managing Director of Community Foundation Services for The Council on Foundations. She has an exciting initiative she is starting in order to help community foundations to be as strategic as possible as they move through the recession.

Jeff Malloy, Director of Finance and Administration at the James Irvine Foundation. We spoke regarding a new initiative the foundation has launched to help its grantees with financial restructuring. We have been invited to serve as the Foundation’s consulting partner in this endeavor and are very excited about the possibilities this presents for real change among some key nonprofits in California.

Shiree Teng of the David and Lucile Packard Foundation. She is doing a retrospective of the organizational effectiveness movement. It turns out, by complete happenstance, that I was there at the inception, or is it conception, of the concept. In fact my firm was born out of the first stirrings of the OE movement, with Irvine, Packard and Hewlett as the original investors.

Eleanor Clement Glass, Chief of Donor Engagement and Giving at the Silicon Valley Community Foundation. She is a long time colleague of probably twenty years. We spoke about the state of affairs in her community’s nonprofits and a variety of ideas for helping them through this difficult time.

Exciting conversations with dynamic people. Like I said, I have many joys in my job!

We agree with Emmett Carson’s sentiments, published the San Francisco Chronicle Open Forum, that merging two weak nonprofits will not per se result in the creation of a single stronger organization. However, mergers provide a realistic mechanism for strengthening nonprofit infrastructure and enhancing community impact while utilizing public and private funds most efficiently.

Should some nonprofits be allowed to fail during the current economic crisis? Probably. Still, many struggling nonprofits provide essential services to the most vulnerable in our society. Some may be able to continue their work by consolidating their programs under a stronger organization. We need to seize this time to support nonprofits as they trade their autonomy for a partnership that will allow them to continue to provide desperately needed services.

Nonprofits that close their doors leave communities without services. But a more basic point struck us on reading Mr. Carson’s piece: most nonprofits don’t really live in a “marketplace,” subject to market forces much like businesses. Instead, they fill in gaps created by the marketplace.

When providing an essential service simply cannot generate a profit (e.g. homeless services) it’s done by a nonprofit. If nonprofits lived in a true marketplace, their budgets would actually grow in 2009, since demand from increasing numbers of customers, particularly in the human services, is growing dramatically.

Mr. Carson argues to let the market do its work, but it has already done that, creating economic collapse and rise in social problems we face today. Rather than leave the fate of our community to fate, we must salvage as much as possible of vital community services from this economic train wreck.

Nonprofit mergers are a vehicle for saving valuable programs from the sinking administrative ships of which they are a part. Many of these programs serve people who would be left with no other choice to turn to. It is not like letting Lehman Brothers go down, knowing other banks are ready to step in to meet their clients’ needs. When a major homeless shelter closes, there are no others waiting to take in its clients. It is fashionable to use the rhetoric of the market as a context to describe the problems of the nonprofit sector, but our “marketplace” is filled with “customers” who, while exhibiting a growing demand for services, have an ever-shrinking ability to pay.

At this critical time, nonprofits need to create viable new structures. Not all will survive; indeed, many thousands of nonprofits will close their doors this year. But communities deserve the opportunity to save what services they can, and mergers provide one path to achieve this.

In my experience, there are nonprofit mergers but not acquisitions. Yet with the economy in a tailspin, everyone, from local law firms and CPA firms to national consultancies, is suddenly interested in nonprofit mergers, or as they uniformly, and erroneously, refer to this phenomenon: Nonprofit M&A.

Granted, there may be some appeal to this term. It is easily recognizable and being borrowed from the corporate sector, it may convey some false sense of legitimacy or soothe the nonprofit sector’s inferiority complex.

It’s been nearly 10 years since I wrote the first Nonprofit Mergers Workbook, and in working with hundreds of nonprofit organizations, we’ve found there are two key conceptual problems with the term “Nonprofit M&A.”

First, nonprofits have no “ownership,” instead, they are held in trust for the public by a volunteer board. The board is a steward, not a group of owners. This suggests you cannot buy or “acquire” a nonprofit organization. You can buy some of its assets, but not the organization itself.

Which leads to the second problem with the term: it scares the heck out of the leaders of nonprofits who might enter into merger negotiations thinking they are “acquisition targets.” We constantly reassure concerned clients that there are no “hostile takeovers” in the nonprofit sector.

We need to push forward with exploring our sector’s options for collaboration, but we should not adopt a potentially loaded corporate term that doesn’t reflect the true nature of nonprofit partnerships.

The last few weeks have brought a flurry of requests for speaking engagements all over the country on this timely topic. At last count we have about 20 such efforts underway, in locations ranging from California, Washington, New Mexico, to Colorado, Connecticut, Washington D.C., and Ontario, Canada.

At the same time requests for consulting services on strategic restructuring are have tripled compared to lat year. What’s up? Well, the general wisdom around here is that the economy is bringing the nonprofit sector to a moment of profound reflection. Some are predicting 10% of all nonprofits will go out of business in this recession, while others are viewing the worsening economic storm as an opportunity to restructure the sector.

Recently I spoke to a capacity crowd at the World Affairs Council in San Francisco, as part of the “Power of Partnership” series, co-presented by the Craigslist Foundation, the Foundation Center, Northern California Grantmakers, and CompassPoint Nonprofit Services. For 90 minutes a room full of engaged nonprofit leaders and I discussed the options they face going forward – collaborate, merge, compete, or retrench – as well as the real possibility that some groups will grow and thrive in this climate.

How can you be one of the thriving organizations and not an organization that suffers? For an increasing number of nonprofits, part of the answer seems to be strategic restructuring and evaluating the sector’s spectrum of partnership options.

This fall, I contributed to CausePlanet.org, a great web resource for busy nonprofit professionals and leaders. The site features a range of customized information for the nonprofit leader: interpreted books, articles from thought leaders, worldwide news and resources. The new year will begin a series of articles by La Piana Associates. Once a month, we will present a topic related to our consulting work in nonprofit leadership, strategy, and organizational management. Read the articles at www.causeplanet.org and let us know what you think.

When a nonprofit leader calls me to ask for help merging two or more entities, as happened recently, one of my first questions is whether this effort is being driven by a funder.

Mergers are tough, emotional, and high-risk, so it is helpful if the parties are at least interested in making it work, rather than simply trying to follow the behest—spoken or intuited—of a major funder.

Right up-front I like to see nonprofits that can imagine a better future by merging with one another, as opposed to groups that are following orders from a third party.

On the funder side, it is tough to offer any opinion, even a casual comment, “It would be interesting to see what you and the other group could do together,” without it being perceived as an imperative or as holding out an offer of funds.

As always, nonprofit leaders need to be open to new, even radical ideas, such as merger, but they also need to use their mission as the litmus test, asking: “Will this help us do more and/or do our work better?”

It is hard to go wrong by following the answer to that question.