Dear Friend,

Welcome to the second issue of La Piana Associates, Inc.’s newsletter, The Learning Link.

At La Piana Associates, we place high value on learning—our own and the sector’s—and on sharing what we learn with others. Our objective in creating The Learning Link is to share with you things we’ve learned in our capacity-building work with nonprofits.

Bob Harrington

The first article in this issue, More Mergers, highlights the increased interest in mergers that we are witnessing in the nonprofit sector. A key factor in this trend is the desire for increased effectiveness in advancing a shared mission. Senior Manager Bob Harrington, who leads our practice in this area, contributed to this article.

(Note: For related thoughts on this trend, please check out my blog at www.lapiana.org/blog.)

Bill Coy

Vance Yoshida

We have also observed a growing interest in increasing administrative efficiencies and effectiveness through other types of partnerships, including administrative collaboration and consolidation, as well as through developing management service organizations (MSOs). These types of partnerships are discussed in our most recent briefing paper, written by Senior Associates Bill Coy and Vance Yoshida.

Our second newsletter article, Supporting Innovation in the Nonprofit Sector, profiles another approach to achieving administrative efficiencies: outsourcing these to a separate entity. This model is similar to an MSO, but in this case the entity is not related to the contracting organizations.

The article describes Community Links Hawaii (CLH), a new nonprofit organization established to address the needs of small- and medium-sized nonprofits for basic administrative support. Input for this article was provided by Vance Yoshida, our Senior Associate who developed CLH under contract to the Hawaii Community Foundation.

For those wanting a quick scan of the two articles in this issue, we provide a brief summary within this email message. To read the full articles, click on the link after each summary.

Please also check out the sidebar for updates on La Piana Associates, Inc., including upcoming presentations and workshops by our staff.

Yours in learning,

David La Piana

P.S. We are sending you this issue of our newsletter because you signed up for it on our website, were on our Strategic Solutions Initiative mailing list, or are in our contact database and receive other mailings from us. If you do not want to receive further issues of this newsletter, please send an email to publications@lapiana.org with the word “Unsubscribe” in the subject line.

Also, please feel free to forward this newsletter to a friend. If you know someone who would like to subscribe, please tell them to go to our website to sign-up.

More Mergers

Overview

Mergers are once again on the rise across the nonprofit sector. At least weekly in recent months we have received either a call from a nonprofit interested in exploring the potential of merging with another nonprofit or a request from a reporter writing a story on this trend.

At first, we believed that this interest in mergers might be specific to our firm, which was formed almost 10 years ago by funders wanting to develop resources for nonprofits interested in partnership opportunities, and for consultants and funders seeking to support organizations in exploring partnerships.

However, this recent level of interest is a widespread phenomenon; there appears to be a clear trend toward a greater use of merger as a strategy for enhancing organizational effectiveness and improving mission-related outcomes.

Here, we share our current experiences in working with nonprofits that are pursuing merger, and examine the factors behind the growth in merger activity in the sector. The information for this article is largely drawn from insights provided by Bob Harrington, Senior Manager with La Piana Associates. Bob had significant experience in this area prior to coming to La Piana Associates, having served as an ED of an organization that underwent merger, as well as being on the board of another organization that went through this process. Since joining the firm in 1999, Bob has consulted with many of our clients in the areas of merger negotiations and post-merger integration.

Background

La Piana Associates, Inc. was formed in 1997 to manage a five-year initiative, the Strategic Solutions Project. The Project was funded by three major foundations: the James Irvine Foundation, the David and Lucile Packard Foundation, and the William and Flora Hewlett Foundation. It focused on developing tools and resources for the nonprofit sector to use to learn about, facilitate, and implement partnerships, including mergers.

Over the course of the project, interest in, and incidence of, partnerships between nonprofits grew, due to greater knowledge and understanding of these options, combined with factors which predispose organizations to consider them, such as the downturn in the economy and increasingly frequent leadership transitions.

Our consulting practice has expanded significantly over the years since the Strategic Solutions Project ended and now encompasses the broad field of organizational capacity building; however, a large portion, perhaps a third, of our work continues to be in the area of partnerships. In the past year, we have noted another spike in interest in partnerships, and specifically, merger.

Is the increased interest widespread geographically?

Yes, it appears to be. At the beginning of the Strategic Solutions project and in its initial years, mergers were most common, when they did occur, in major urban areas on the East and West coasts, and in the Northeast—such as in New York, San Francisco, and Pittsburgh. Now, we get calls from all over the country. In fact, a significant amount of merger activity is occurring in the Central portion of the country, in states such as Michigan, Minnesota, and Wisconsin.

Recent newspaper articles and our own experience also highlight increased activity along the coasts, in major cities including Boston and Los Angeles. In the past month alone, David La Piana has been cited on this topic in the Sacramento Bee and Bob Harrington has been quoted in the Boston Globe. Reporters from two additional newspapers and two journals recently interviewed Bob for upcoming articles on nonprofit mergers.

Some recent headlines

Is the interest limited to certain subsectors?
No. While the reasons may vary somewhat, mergers are occurring in all nonprofit subsectors. In a recent week, for example, Bob noted calls from interested organizations in the arts, environment, education, health services, human services, and social services. We are even witnessing consideration of foundation mergers, such as the planned one between Community Foundation Silicon Valley and the Peninsula Community Foundation; and, there is talk of the potential of more such mergers to come.

What factors underlie this trend?

A variety of factors is associated with the increased interest in merger. Compared to when we began our work on the Strategic Solutions project, much more is now known about how to negotiate and implement mergers. More organizations have been through it, and the process and benefits are better understood.

Our books and studies, as well as hundreds of workshops and speeches, and our website—which now averages more than 17,000 visits per month—have, we hope, contributed to the greater awareness and availability of tools to help nonprofits, and the consultants and funders who serve them, to evaluate this and other partnership options.

Increased efficiency
For a long time there was a misconception that the primary benefit of merger would be the ability to save money. Our research and work with more than 200 mergers have found that mergers typically do not result in immediate cost savings. There are, of course, some savings—such as those related to reduction in duplication (for example, from two executive directors to one).

Generally, however, the efficiencies are not related to cost, but to greater operational and programmatic reach, improved quality, and the ability to have a greater impact. These benefits often mean higher costs. Further, the work to negotiate a merger and to integrate organizations has costs associated with it, since a significant amount of the executive’s and the board’s time must be spent on activities related to negotiation and integration, as opposed to day-to-day programmatic and operational work. Often a consultant, and sometimes an attorney, is hired by the organizations, representing additional costs.

Retirement of executive directors
Sometimes mergers occur when one organization, providing a needed community service, is faced with a major change in its situation—such as the retirement of a long-term executive director—that causes it to consider merger as an option. Currently, the retirement of many Baby Boom generation executive directors is contributing to the increased consideration of merger; and demographic trends indicate that this pressure will not ease up any time soon.

Increased competition
Competition is increasing across the sector. Organizations faced with increased competition may consider merger as a strategy to compete more effectively. For example, two nonprofit health clinics in an area—initially competitors—may consider joining forces to counter the threat of a for-profit health care provider that is considering expanding to the area.

Donor fatigue
In a slow economy, individual donors—the backbone of the nonprofit sector, contributing the large majority of funding for nonprofits—are faced with increasing demands on their charitable contributions. For some nonprofits, this may translate into greater difficulty securing needed funding.

Increased scrutiny
Additionally, donors are becoming more astute regarding their contributions, perceiving them as investments. With recent widely-publicized scandals related to major nonprofits, donors are asking for more information on nonprofit operations and outcomes. This, and the increased emphasis of foundations on organizational effectiveness, is resulting in nonprofits considering partnerships as a way to strengthen their capacity, accountability, and effectiveness.

For example, the need for greater technological sophistication places pressure on many nonprofits; and marketing and communications, along with human resources, once not considered essential, are now viewed as critical functions for nonprofits. It can be costly to develop these functions from scratch; however, partnering with a like nonprofit that already has invested in these capabilities can be a win-win, as the costs are spread over a greater volume, yielding important efficiencies.

Funding capacity
Contrary to all of our wishes, the resource pie isn’t getting bigger fast enough to keep up with the growth in the number of nonprofits and their cumulative demand for funds. And, everyone is being hit by higher costs of doing business, energy costs being one that comes to mind most readily. The war in Iraq and other global concerns are also draining resources and attention from domestic problems.

The health and human services subsector, which is dependent on government contracts for significant portions of funding, has been particularly hard-hit by these trends. And, like other funders, government agencies have become more sophisticated in their contract requirements; this translates to higher expectations and more stringent requirements being placed on contracting agencies.

Often larger agencies, operating on a regional or statewide scale, have greater capacity, thus making it difficult for smaller, local agencies to compete. On the other hand, governments realize that local agencies, having the trust and confidence of their communities, are often the best qualified to deliver services to residents.

The seeming conflict between the desire for greater sophistication in administrative services and the desire for local competence has created a situation conducive to merger. For example, mergers between large mental health providers and local, independent agencies have also increased in the past year.

Merger is not the only option

In some cases, organizations do not want to make the commitment to merger. They may test the waters through program and/or administrative collaboration or consolidation of one or more functions, or through a longer-term commitment, such as creating a separate management service organization (MSO). They may find it most useful to maintain this form of partnership for the long term or they may decide to use it as a stepping stone to the long-term commitment of merger. Conversely, some organizations that initially consider merger may find it to be inappropriate for their situation, and determine that another form of partnership, such as administrative consolidation, is more suitable to their needs.

Summary

Over the past 10 years, an average of 33,200 new nonprofits has been formed each year. These organizations enter a sector beset by increased pressures from private and public funders, and individual donors, to demonstrate effectiveness and measurable outcomes; increased scarcity of resources (including human resources: staff, board members, and volunteers, as well as funding); and increased competition for these resources, as well as for customers (or clients).

Supporting Innovation in the Nonprofit Sector

Responding to a significant community need

Community Links Hawaii (CLH) was conceived in December 2004 by a group of community leaders. They had spent the previous four years exploring various options to address the needs of new and small-to-medium sized nonprofits to more effectively and efficiently handle their back-office administrative support functions including day-to-day financial, human resources, contract and grant compliance, and procurement functions.

However, the mission of CLH, as conceived by these leaders, is far broader. In Hawaii, just as is true on the mainland, there is a preponderance of small nonprofits. Many of these do not have 501(c)(3) status. These nonprofits are typically established by an innovative and inspired leader or group to meet a specific community need not being addressed successfully (or at all) by existing organizations. Despite their passion, these fledgling organizations soon find themselves stretched between doing the program work they care so deeply about and addressing necessary administrative functions. Unable to do both, one area typically suffers, causing a drain on the entire organization.

Those lucky enough to survive start-up find that these challenges don’t go away; in fact, they usually increase over time and expand in magnitude. Additionally, organizations may further divert themselves from their core work by trying to obtain their 501(c)(3). All too often, they find that the innovative program becomes compromised, the outcomes are not what everyone had hoped for, the founding individual or group is burned out, and the funders are frustrated and wonder if their money was well spent. Further, if the organization has gone to the effort of incorporating, it finds that the task of dissolving also requires effort and funds.

Finding an innovative solution

These organizations could potentially be quite successful if they could focus on their program work, and leave the administrative functions to someone else. Organizations such as CLH are the “someone else.”

Fiscal sponsorship
The majority of nonprofits in Hawaii (75%) do not have 501(c)(3) status. In order to receive financial support from a private foundation or government entity, and to receive tax-deductible donations from individuals or corporations, these nonprofits need a fiscal sponsor.

Most fiscal sponsors act only as a “pass through,” allowing the nonprofit without a 501(c)(3) to use the fiscal sponsor’s 501(c)(3) status to receive funding in exchange for a small administrative fee, usually a percentage of the grant funds. Thus, they most often do not offer the compliance oversight and other responsibilities associated with fulfilling the grant/contract requirements of the funders. Nor do they offer administrative support. Moreover, fiscal sponsorship is not their primary function; rather, their main focus is on their own programs.

Compliance oversight
In contrast, CLH is designed to fill this gap by providing the needed compliance oversight and assuming all legal responsibilities for all grant activities. This helps assure funders that their funds will be used appropriately and effectively.

This service will also be offered to incorporated nonprofits (those with their 501(c)(3) designation). Many such nonprofits do not accept government contracts and grants because they do not have the infrastructure and expertise to deal with complex regulations and compliance issues. CLH will offer administrative support and technical assistance to help organizations address these issues, and will also act as the fiscal sponsor for such contracts/grants.

Back-office administrative support services
In year 2 or 3 of its operation, CLH plans to expand its services to provide basic back-office administrative support services, including those related to finance/accounting, human resources, and purchasing. These will be offered not only to non-501(c)(3) organizations, but also to small- and medium-sized organizations that have a 501(c)(3) designation, but which want to avoid the cost and time associated with developing the internal infrastructure for these functions, preferring to focus on their programmatic work. Additionally, because they are pooled with other organizations under CLH’s umbrella, these nonprofits can obtain group rates for health benefits and other needed insurance.

Capacity-building services
CLH’s strategic plan calls for it to offer capacity-building services to help organizations that are seeking to achieve long-term sustainability. These services will be offered in CLH’s second year of operation and will include fundraising/fund development planning and grant writing, management coaching, board development, and systems development.

Community initiatives
Often nonprofits join together to obtain funding to address a community issue or need, but they are constrained by the lack of ability of any one of the partners to take on the tasks of managing and coordinating the funding. CLH will meet this need by serving as the fiscal sponsor for the necessary back-office administrative and project management support.

Launching CLH

For the past 15 months, Vance Yoshida, Senior Associate, has served as the founding executive director for CLH, charged with launching CLH. This was Vance’s first and primary engagement when he joined La Piana Associates. Vance was ideally suited for this, having served for 6 ½ years in a variety of leadership positions with The Tides Center (Tides) in San Francisco, an organization whose mission is very similar to that of CLH. During his tenure at Tides, Vance launched the Pittsburgh, PA and Washington, DC offices of Tides.

In his position with CLH, Vance has worked with the lead funders—the Hawaii Community Foundation (HCF) and the Harold K.L. Castle Foundation—to secure additional funding, develop the services to be provided by CLH, recruit and develop the board, and recruit and hire an executive director to implement CLH.

Securing funding

To date, in addition to the lead funders, the foundations supporting CLH include the James and Abigail Campbell Foundation and the Walter Alexander Gerbode Foundation. Several corporate funders are involved, as well, making this a true cross-sector partnership. These include Alexander & Baldwin Foundation, American Savings Bank, Bank of Hawaii, Hawaiian Electric, and Island Insurance Companies. Over time, it is expected that CLH will become largely self-supporting, funded through the fees generated from its services.

Turning over the reins

In April 2006, Kathryn Matayoshi was hired as ED. Prior to this, Kathryn was the Chief of Staff of the Board of Water Supply for the City and County of Honolulu, and also served as a member of Governor Benjamin Cayetano’s cabinet as Director of Commerce and Consumer Affairs. Kathryn has served as a board member of a variety of organizations including the YWCA of O’ahu, Good Beginnings Alliance, Hawaii High Performance Partnership Board, and the Japanese Cultural Center.

Kathryn takes the helm just as CLH undertakes its first project, serving as fiscal sponsor for a three-million dollar collaborative initiative, supported by a grant from the W.K. Kellogg Foundation. The Wai’anae Coast Community-Based Youth Education, Entrepreneurship, and Economic Development Initiative is the expansion of an ongoing multi-partner and multi-year effort involving multiple outreach and educational programs. These programs seek to engage the most vulnerable youth in one of Oahu’s most economically distressed neighborhoods through involvement in new and innovative learning programs. The purpose is to give these youth the chance to discover and pursue meaningful social and economic development opportunities in their home communities.

This project might not have come to fruition had it not been for the existence of CLH.

Ka Leo O Wai’anae, "The Voice of Wai’anae," is the print news publication of Wai’anae High School, produced by Searider Productions, one of the partners in the Wai’anae collaborative. On the left: The student editor-in-chief wins an award for Best High School newspaper in the StateofHawaii.

With Kathryn’s coming on board to lead CLH, Vance will now turn his focus to other consulting engagements, knowing that CLH is in good hands.

Conclusion

Clearly, there are many creative solutions available to nonprofits to support them in being more efficient and effective. Support organizations, like CLH, offer a way for innovative ideas to be tested, allowing important community needs to be met more quickly than would otherwise be possible, and giving organizations a chance to determine whether they need to be, and are able to be, sustainable in the long-term. This approach gives funders an opportunity to reduce their risks in funding these new ideas, and to efficiently channel funds to individuals and groups.

La Piana Associates, Inc. is a management consulting firm that helps nonprofit organizations and philanthropic foundations effectively address the strategic issues they face. We are dedicated to improving the capacity of the nonprofit sector, and specifically to helping nonprofits become stronger, more effective, and sustainable for the long-term. Our mission is to transform the way nonprofits are led and managed so that they have a more powerful impact on society. For further information, please visit our website at www.lapiana.org or contact us at info@lapiana.org.

Please feel free to forward this email to friends and colleagues.

If you do not want to receive future issues of this newsletter, please send an email to publications@lapiana.org with Unsubscribe in the subject line.

Read our latest briefing paper
Administrative Collaborations, Consolidations, and MSOs, by Bill Coy and Vance Yoshida, Senior Associates.

Check out David La Piana's blog
For a discussion of a variety of current issues facing the nonprofit sector, read David’s blog, The Next Big Thing—Musings on the future of nonprofit management and governance. Please comment, as well. We want to hear your thoughts!

Welcome new staff
We are pleased to announce our two newest staff members: Luis Vergara, Senior Associate, and Melissa Mendes Campos, Associate. Please check out their bios on our website.

La Piana Associates is on the move!
We’ve grown out of our current administrative office and meeting space, so we’re moving down the hall to a larger office. The only change you need to make in your address book is our suite #: it’s changing from #5 to #15. As a reminder, our headquarters address is 6400 Hollis Street Suite 15, Emeryville, CA 94608.

Upcoming Speaking Engagements by La Piana Associates’ team members

Bill Coy, Senior Associate (coy@lapiana.org):
In mid-June, Bill will be at the Hartford Community Foundation in Connecticut to conduct a training for consultants on the consultant’s role in facilitating partnerships and collaborations. Bill will discuss how nonprofits can effectively pursue administrative consolidation and alliances.

Jo DeBolt, Senior Associate (debolt@lapiana.org):
On June 6, Jo will be one of six panelists at the 2nd annual Insider Look program presented by Executive Minds for Social Innovation (EMSI) in Boston and sponsored by United Way of Massachusetts Bay. The panel will discuss and field questions on the subject of “Nonprofit M&A: Why? What? How?”

Visit our “Recent and Upcoming Presentations” section on our website for more information.

Recent publications and articles
Click here to view recent publications and articles written by La Piana Associates.

Visit our website

Contact us