Research & Resources
Grantmakers for Effective Organizations
Discussion Questions on Strategic Restructuring

In March 2002, Strategic Solutions hosted a pre-conference seminar at the biennial national conference of Grantmakers for Effective Organizations (GEO). Barbara Kibbe of the David and Lucile Packard Foundation moderated a Q&A session where David La Piana fielded questions submitted on note cards by an audience of funders. Participants later asked if David could provide answers to some of the questions that time did not allow him to address during the session. We culled the note cards and here provide some of the most interesting questions and David’s responses.

Funder-related questions

1. How are funders broaching the subject of strategic restructuring with their grantees and nonprofits in general? How are funders supporting them?

Funders can play a vital role in helping grantees understand strategic restructuring and to consider it as an option, where appropriate. They can provide expert advice, a neutral place to meet, and even suggest potential partners. They can provide grant support to pay the out-of-pocket costs of consultants, travel, and meetings. We suggest that, in the early stages, they stop there — funders should not provide core funding for staff salaries so that people are “freed up” to negotiate a collaboration or restructuring. But funders should be open to supporting implementation of a partnership if the parties decide to form one and have a solid rationale and plan.

More and more, funders are in fact suggesting to nonprofits that they consider partnering with others. Traditionally, this has been dicey territory. Funders often do not want to be perceived as forcing a consolidation or partnership, but on the other hand, sometimes their encouragement is just what is needed. One trend we’re seeing is funders who suggest discussions that might lead to a partnership, offer the assistance of a consultant, and then take a step back to let the parties work it out on their own.

In assessing which potential partnership efforts to support, it is important for funders to look for factors that influence and/or demonstrate “readiness” for strategic restructuring. These efforts are likely to hold the most promise of success and thus would most benefit from outside support. For more information on readiness and success factors, see the question below on this topic (#6).

2. Do nonprofit strategic alliances evolve organically, before funders put money on the table?

Sometimes they do, but often money provides an incentive to get together, particularly in the case of collaboration (i.e., partnerships where there is no permanent organizational commitment) versus more “formal” alliances. We have found that many collaboratives form not because the parties suddenly “see the light” around working together, but rather because a funding opportunity has presented itself. In Real Collaboration, we lay out in greater detail why and how this can be problematic, and present a developmental model of collaboration that can help funders to better understand and work to develop successful grantee collaboration. Our rule of thumb: never fund a collaborative that has not been in existence — without external funding — for at least a year.

3. How do you get funders (government and foundation) on board to support a merger while not penalizing or reducing the overall funding that is being given to these agencies (especially government, which has statutory limits on per agency funding)?

Funders are often quite excited to hear that two or more of their grantees are consolidating. They can ususally see the benefits. Only rarely do they oppose a merger. Unfortunately for grantees, funders also often see a merger as an opportunity to reduce their grant commitments. If they were previously funding two groups at $10,000 each, they may reason that they should be able to fund the newly merged group with just one $10,000 grant.

It is important for funders to consider why it can be disadvantageous to reduce funding, however, especially in the initial stages of integration. Ideally, the goals of strategic restructuring are capacity building, greater organizational efficiency, and increased ability to achieve the shared mission. The goal isn’t to save money, especially in the short-term, since SR includes certain front-end costs that may counterbalance any savings in staff and administrative economies of scale. For more information on this, see the response to the question “Will restructuring save us money?” posted in the Answers to Your Questions section of our website.

Our advice to organizations undergoing a strategic restructuring is to seek a larger initial grant for the transition and implementation costs of the merger, then be open to a phase-out of the “duplicated” grant over a longer time period, perhaps three years. When government funding limits are the issue, it is sometimes necessary to set up a parent-subsidiary model to execute a merger-in-spirit. In this way, two separate corporations can be maintained for funding purposes, but both administrative and program functions can be essentially “merged.”

4. How are the results of strategic restructuring evaluated?

Evaluation is key to letting management and the board(s) know if the restructuring created any real value for the organizations involved. The overriding objective in a strategic restructuring is increased ability to achieve the organizations’ shared mission. This ultimate objective should be quantified in order for success to be measured. This is achieved by identifying short-, mid-, and long-term objectives related to improved ability to advance the shared mission.

We encourage nonprofits to start thinking about evaluation early in the negotiation process. We ask them to state as clearly and realistically as possible their desired outcomes for the partnership. They must also identify the indicators (how will they know when this outcome is achieved?) and measures (what data will be used to measure progress/success?) of these outcomes. Then, once the partnership is put into effect, the organization should try to track its progress on those outcomes. To the extent possible, desired outcomes should be stated quantitatively. Examples include “increasing service provision by 50%” or “increasing cash reserves by 25%.” The more the partners can quantify the desired outcomes, the better able they will be to evaluate the outcome years later. Additionally, the organization needs to have the capacity to capture the data necessary for evaluation, and must put the mechanisms in place to analyze and report this data on a regular basis. Having the ability to quantify desired outcomes, and to measure progress towards achieving these, is important information to provide in requests for funding.

Other interesting questions

5. Is it possible that “real collaboration” is a necessary prerequisite for truly consolidated strategic alliances, since it builds relationships (boards, leaders, EDs, staff) through “collaboration” prior to consolidation?

We have found that collaboration does not necessarily precede a merger. Parties come directly to the level of engagement they think best at the moment. Those in a collaborative situation may later desire a closer relationship, but are just as likely to stay at the original level for a long time. Nonetheless, we have found that one of the most important success factors in an attempt at strategic restructuring is positive past experiences with partnering with other organizations. (Strategic Restructuring: Findings from a Study of Integrations and Alliances, page 2).

In The Nonprofit Mergers Workbook, we state (on pg. 58) that, “If you know and trust each other, chances are you have a history of working together, either in a collaborative service provision arrangement or on an advocacy level. . . .Obviously, a positive history will serve you well as you plan a closer relationship.” Hence, two key questions in the section on “Assessing a Potential Partner” are: 1) “Do you trust your potential partner?” and 2) “Do you know your partner and have a history of working successfully with them?”

6. What are the factors that influence “readiness” for SR? How do they relate to factors that “contribute to success”?

Those nonprofits that are more “ready” for strategic restructuring will likely display a definite mission-focus, a strong relationship between with their board and 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 an organization’s readiness and chances for success. Additional readiness factors we have found 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 SR is not necessarily to save money, but rather to make the organization more effective.

In our national study of strategic restructuring, the most important success factors were found to be: a staff or board member who championed the partnership, positive past experiences in partnering with other organizations, board support and encouragement, and organizational risk taking and/or growth orientation. Our experience would add to this list:

• Clear, honest, open, frequent, respectful, and two-way communication throughout the organization
• Leadership focused on mission and vision
• Moving quickly; making difficult decisions and moving ahead; making staffing cuts and other changes all at once so people don’t constantly worry “what next?”
• Culture: honoring the past histories and cultures of the merging organizations, and creating a new “shared” culture (as appropriate)
• Celebrating success early on, and on an ongoing basis
• Acknowledging the “people issues” and addressing them head-on

How do these success factors relate to the factors influencing readiness? They are correlated to a certain extent, but they are not the same. The factors influencing readiness set the stage for successful negotiations. The factors related to success are what makes the integration successful.

7. What do you do when there is not alignment between board and staff regarding a merger?

Per The Nonprofit Mergers Workbook, the key to a successfully functioning nonprofit is a smooth working relationship between the board and management and, most importantly, between the board president and the ED. The leadership, especially the ED, sets the tone for the rest of the staff. If there are differences, these should be uncovered and addressed before moving ahead. If conflict is not dealt with and, instead, is suppressed, it will come out eventually, and the consequences can be catastrophic. In these situations, it can be useful to have an outside consultant to help facilitate the discussion and resolution of the disagreements.

8. How do you deal with inevitable egos in supporting strategic alliances?

Nonprofit leaders often have a healthy sense of their own worth, and especially value their independence. Fortunately, they also most often are driven by accomplishment of the organization’s mission. Reminding leaders of the importance of the proposed partnership to the mission is usually helpful. When it is not, staff leaders may need a “tune up” from the board about their responsibilities. As a consultant, I occasionally remind a reluctant executive in a potential partnership that all eyes are on him/her and that his/her self-interest is best served by taming the ego, at least temporarily.

9. Is the success of a strategic alliance based on the hard side (financial, efficient delivery of mission) or the soft side (did people get along)?

You will seldom see a partnership occur if the “hard” stuff doesn’t make sense. Nonprofits are typically very good at figuring that part out. The problems come with the “soft” or human side of the deal. Nonprofit cultures are so strong that it is easy for misunderstandings and conflicts to arise when they are combined. Our advice is to make sure early on that there is a solid value proposition to the deal. That is, make sure that the organizations are in agreement that the strategic restructuring will be beneficial to both of them, and that it will advance their shared mission. If the deal is not grounded in a solid rationale, do not go forward. If, however, you determine that the deal will provide the outcomes the organizations want, you should focus most of your energy from that point forward on the people issues. Successful integration of the organization is largely dependent on the successful handling of the people issues.

10. How do you decide who gets cut (staff) during a merger?

Mergers seldom result in job losses in the nonprofit sector, with the exception of a duplicated executive director position and perhaps some administrative staff. Front line staff are least likely to be laid off. Where there is duplication among the management teams of merging entities, the usual process is to appoint the executive director, then tell him/her how much money is available for administrative or management staff. Let him/her take care of it from there. Of course, a wise executive would not hire only the former members of his/her own staff, as that would appear to the partner organization(s) to be bad faith, and would make life extremely unpleasant for all. A balanced approach makes the most sense, with senior managers coming from both (or all) parties, and chosen primarily for competence and the ability to lead within the merged entity.