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Funders urged to improve strategy on mergers

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While funders increasingly have pushed nonprofits to merge to cope with the ailing economy, that strategy may not work best for nonprofits that are hurting financially, and funders should look at a range of other options, a new article says.

“Mergers are risky business,” consultant David La Piana writes in Merging Wisely in the spring issue of the Stanford Social Innovation Review.

“They sometimes fail, although not so frequently as in the corporate world,” he says. “They usually cost more than anticipated. They sometimes create more problems than they solve. And the problems that they allegedly solve – to many nonprofits, too small in size – may not be problems after all.”

Despite conventional wisdom that bad economic times highlight a root problem that too many nonprofits compete for too few dollars, the article says, the real problem in tough times is a pullback in government and private funding that has enabled nonprofits to provide much-needed services to clients who cannot afford to pay full cost.

That pullback leaves nonprofits with inadequate funding, “often as the very moment that they are experiencing increased demand for their services,” the article says.

“Mergers cannot counter this dynamic, which is played out in every recession,” the article says. “When third-party funders curtail their support, nonprofits whose business models depend upon periodic infusions of cash from these sources are at risk of failure.”

The article calls “simplistic” the idea that many nonprofits are “too small and too inefficient” and that the sector is inefficient because “too many groups provide the same services.”

The real problem, it says, is “not the duplication of services, but the duplication of service provider infrastructures.”

Merging nonprofits to combine their infrastructures often makes sense, the article says.

But mergers, despite what many people believe, do not generate revenue or reduce expenses, the article says.

“In the short term, they actually require new money for one-time transactional and integration costs,” it says.” Even in the long term, the act of merging itself did not lead to substantial costs savings” for most of the mergers facilitated by La Piana’s consulting firm.

While nonprofits can combine annual audits, insurance programs, staffs and boards, the article says, “they are also bigger and more complex and require more and better management — a cost that often exceeds the savings from combined operations.”

Still, the article says, while mergers on their own may not solve financial problems, they can offer “a stronger, more sustainable structure with which to weather an economic storm.”

Two volunteer boards, for example, can “cast a wider net of donor contacts than one,” while a combined leadership team can provide more perspectives and experience to solving problems, and merging  can spur nonprofits to cut costs and improve revenues.”

So nonprofits should treat merger “as a means to implement other strategies, not as a strategic end in itself.”

The article also looks at the plusses and minuses of other combination strategies, including combining only the administrative functions of the partner groups, combining a subset of their programmatic functions, and combining both administration and programs, “usually when a merger is desired but not technically possible.”

And it examines strategic alliances, which “let organizations unite programs and cut costs while remaining somewhat independent,” as well as administrative consolidation or joint programming that let nonprofits share administrative services or combine programs while keeping their organizational independence.’

The article says “collaboration” is the least intense but likely the most common form of nonprofit partnership.

Collaboration, which is informal and does not change the parties’ corporate, legal and governance setup or require a written agreement, usually are developer for a specific occasion or limited purpose, the article says.

The article also calls on foundation to “work to create a climate where mergers and other partnerships can succeed.”

Foundations can do that, it says, by advertising their support for partnerships; letting failing nonprofits fail and investing instead in a partnership that could save some of the failing nonprofit’s services or support an “orderly dissolution;” moving quickly when nonprofits are talking about teaming up; help address nonprofit executives’ concerns about mergers; and “model partnership, not just preach it.”

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