While the Great Recession led corporations to pursue mergers and acquisitions at a fast pace, the rate of such unions in the nonprofit world didn’t budge.
Despite several years of reduced giving by private donors and continuing big cuts in government support, nonprofit mergers remained flat, even as the number of nonprofits keeps growing. America now averages nearly 40 nonprofits per ZIP code.
The reason nonprofit mergers continue to lag isn’t that they don’t make sense. Quite the contrary. Nonprofit alliances are often an effective way to deliver more and better services at lower cost.
But the barriers to creating such unions are too large. Chief among them: Too few organizations exist to make matches between likely prospects, and too little money is available to ensure that senior-level staff members have any financial incentive to take action that will cause their own jobs to go away.
A study we conducted with colleagues at Bridgespan showed some progress in overcoming a key shortage now that foundations are increasingly willing to play the role of matchmaker and pay for due diligence and integration.
But it’s tougher to deal with the challenges that often derail even strategically aligned mergers. These include the challenges of blending boards, brands, and key staff members.
When it comes to such emotionally charged issues, not all mergers are alike. A union designed to expand a program’s scope often involves a large organization (like a child-welfare agency) acquiring a smaller one with specific expertise (like early-childhood development). The small organization gains administrative expertise and efficiencies, and the larger gains skills and knowledge from new staff members (such as social workers who can help the entire organization grow stronger).
The CEO of the small organization may become a unit leader in the merged entity, bring one board member with him or her, and make the acquired organization’s brand a distinct part of the family (like Tostitos are to parent company PepsiCo) but won’t need to worry about a job loss.
If, however, the merger is supposed to expand the reach of an organization or streamline regional affiliates of a national network, inevitably preserving brands becomes trickier, more board members tend to migrate with the merger, and some roles become redundant. For certain, in such mergers, it’s simply harder to find justified and satisfying roles for all senior staff members, as you’ll need only one where once there were two (think COO, CFO, CEO, and the heads of other administrative departments).
Indeed, one of the most important questions that nonprofit leaders face in planning a merger—especially a merger of equals—is that of their own futures. Nonprofits typically don’t offer golden parachutes, nor can they provide stock options to cash in for a healthy post-merger profit. Unless senior staff members are looking to retire or move on or are amenable to a subordinate position in the merged organization, the risk to their own future can kill merger talks.
Consider two experiences that veteran nonprofit leader Michael Coughlin had.
When Mr. Coughlin was CEO of Goodwill Industries of Northern New England, he completed two mergers, in 2007 and 2010, to broaden Goodwill’s scope of programs, and he found space at Goodwill for key senior staff members of the acquired organizations.
The small groups Goodwill acquired brought new expertise, clients, and potential access to funding. Said Mr. Coughlin of his $40-million Goodwill chapter’s merger with Training Resource Center, a $4-million job-skills nonprofit: “We became able to compete for contracts that neither one of us could before, and the combined organization grew to $60-million.”
Flash forward to 2012, when Mr. Coughlin became CEO of Arizona’s Children Association, a $40-million organization. He approached his board of directors about a possible merger with Child & Family Resources.
The association, one of the state’s largest child-welfare and behavioral-health nonprofit agencies, had already undergone a series of mergers to broaden its services. But the deal Mr. Coughlin was considering would be much larger than any before, bringing two leading organizations in child welfare together under one CEO. Clearly, this alliance had different implications for staff members.
The board hired a merger consultant to advise on the process. Merger talks proceeded and focused on matters like alignment of mission, values, and culture. The board’s merger task force was brought into the conversation. But then something happened that broke trust.
The two groups had just begun to share financial data and prepare a pro forma budget for a merged organization when several members of the association’s senior management team brought concerns about the viability of the merger to the board. Given these mixed signals from the CEO, who supported the merger, and dissenters on his team, the association’s board ended the merger talks. Mr. Coughlin subsequently left the agency.
Looking back, Mr. Coughlin, now CEO of Tri-County Community Action Program, in New Hampshire, says he learned a lot. He faults himself for taking on a big merger too soon into his tenure at the Arizona group, well before he had time to fully earn the trust of his 26-member board and his senior staff members.
“If I were to do anything over again,” says Mr. Coughlin, ”I would be relentless in going back to people and saying, How do you feel? What’s bothering you? If you don’t have your senior management team with you, you are dead in the water.”
Elisabeth Babcock, CEO of Crittenton Women’s Union, a Boston group, would agree. She feels fortunate to have taken the merger challenge with a board that engaged all senior staff members early.
Both merging groups, Crittenton Inc. and the Women’s Union, were helping women in poverty. The rationale for the merger was to transform their ability to achieve their missions.
“At the very outset of thinking through the pros and cons of the merger, the board members decided to do something rather unusual,” says Ms. Babcock, who was hired to fill vacancies at the top of both organizations, with a mandate to merge them.
“They sought input from the senior leadership at Crittenton and the Women’s Union for their thoughts on a potential merger. It turned out to be a great move. The two staffs jumped at the opportunity to share their opinions on the potential merger’s opportunities and challenges. And along the way, staff continued to share their knowledge, insights, and experiences.”
Eight years in, the staff at Crittenton Women’s Union is driving innovation and financial growth and running award-winning programs that demonstrably move women from poverty to financial independence.
Such strikingly different experiences make it clear that if we believe mergers are smart, we need to pay more attention to making sure the well-being of staff members is a key consideration. Involving them from the earliest stages becomes just as high a priority as thinking about finances.
They may not like every aspect of an alliance, but they should see the plan for dealing with staff members as fair and as in the best interest of the organization. After all, no nonprofit can work well if not fueled by the best talent.
Katie Smith Milway is a partner at the Bridgespan Group and Maria Orozco is a Bridgespan manager.