As the economy worsens, grant makers are likely to put pressure on nonprofit groups to look into mergers and acquisitions. While nonprofit groups frequently resist such overtures, it is time for donors, nonprofit executives and trustees — especially those with corporate expertise in mergers — to work together to achieve the long-term,strategic benefits of uniting complementary nonprofit groups into single, more sustainable, and more successful operations.
Already, nonprofit mergers are happening at a far faster pace than most people in the nonprofit world realize. We recently examined 3,400 nonprofit groups engaged in mergers across four states over 10 years and found that nonprofit groups pursue mergers and acquisitions roughly as often as their for-profit peers. And the most common reasons would be familiar to for-profit executives: to deal with issues of financial distress or leadership departures.
However, the mergers do not attract much attention, largely because they occur at small nonprofit groups; for the nation’s biggest organizations, those exceeding $50-million annually in revenue, such consolidations occur at just one-tenth of the rate of mergers among similar-size for-profit companies.
Furthermore, mergers in the nonprofit world are almost always pursued for the opportunistic reasons cited above, not strategic ones. When an organization is in financial distress, or its executive director is about to retire, merging becomes the rescue plan or succession scheme.
It should not be surprising that mergers are pursued less deliberately in the nonprofit world than in business. First, and quite obviously, the profit motive that drives business decisions to acquire a competitor or to sell valuable assets does not apply. But the other key obstacle is the dearth of matchmakers to bring potential nonprofit allies together, and who have the expertise to make mutually beneficial deals happen.
That is something that needs to change soon, because when mergers are pursued for strategic purposes and carried out well, they can increase the ability of nonprofit groups to reach more clients and serve them better, and even at a lower cost.
In the late 1990s, for example, Fred Chaffee, chief executive of the Arizona’s Children Association, began to realize the limitations of his residential treatment center’s efforts to make long-lasting changes in the lives of troubled youths largely in Tucson. Mr. Chaffee says that “from a mission perspective of protecting kids and preserving families, we needed to be serving kids [earlier] to give families the tools and [reach] kids before they arrived at residential services.”
But the association didn’t have the staff expertise, relationships with donors, or “brand” simply to build a new effort to serve families. So the association acquired an organization that did. Ten years later, and after five acquisitions, the association has grown from a $4.5-million organization that operated primarily in Tucson to a $40-million statewide group with a broad continuum of care for children and their families.
The advantages of this are not just in efficiencies from size and ability to meet the fuller needs of young people, but also in the sharing of expertise from the people who worked at each organization. Says Mr. Chaffee: “We now train adolescent therapists in lessons from our early-childhood acquisition, and all of a sudden, they can see where a teenager got stuck because of a trauma at age 2, and are better able to figure out what to do about it. ... We trained 3,000 people before the acquisition and 6,000 afterward.”
With this trained cadre of therapists and new procedures for taking early action to help troubled families, the association not only has gained wide-scale expertise, but also has cut costs by 11 percent to 40 percent per client, while each merger led to doubling, or even tripling, the number of clients served.
In our study, child-welfare groups are among the organizations that are moving more frequently to merge because they feel under financial pressure, plus they face increased scrutiny of their performance and competition for the most talented workers. In addition, such groups face high barriers to growing in ways other than through mergers. Other segments of the nonprofit world with similar characteristics also may be prime candidates to take a new look at mergers.
So where could the expertise and wherewithal come to make the right matches in tough times, in the absence of a CEO like Mr. Chaffee, who has a nose for the right deal and an experienced team to conduct due diligence and manage the merger?
Business-trained board members and philanthropists can help widen the scope and impact of mergers. They could tackle forming an intermediary market — the nonprofit equivalent of corporate acquisitions departments or external merger advisers (serving both large and small organizations) — that needs to emerge as a catalyst.
Indeed, for the growing ranks of philanthropists looking to reinvest their business talents and money in an effort to aid society, the act of creating a mechanism for nonprofit groups to combine to increase their impact may be its own reward.
William Foster and Katie Smith Milway are partners in Boston at the Bridgespan Group, a nonprofit organization that provides management consulting to charities and foundations. Alex Cortez is a Bridgespan manager.