Nonprofit Mergers and Alliances E-Book

Thomas A. McLaughlin

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 428

Veröffentlichungsjahr: 2010

Beschreibung

Clear, practical, step-by-step guidance through the nonprofit merger process Using real-world examples, case studies, and enduring frameworks, Nonprofit Mergers and Alliances, Second Edition offers clear, practical, step-by-step guidance through the merger and alliance development process. From assessing feasibility and planning for implementation to post-merger integration, this ground-breaking work points out pitfalls and offers insightful commentary in every chapter. * Provides a comprehensive framework for designing and implementing effective collaborations of all kinds * Offers the tools needed to effectively collaborate with potential partners * Shows how nonprofit mergers are fundamentally different from for-profit mergers-and why board members need to know this * Focuses on the needs of the nonprofit sector, including cultural compatibility and compassionate management practices * Shows nonprofit managers and board members how to make their way through the merger process without repeating Wall Street's mistakes Insightful and realistic, Nonprofit Mergers and Alliances, Second Edition equips you with the tools and knowledge you need to create effective collaborations.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Acknowledgements

Introduction

CHAPTER 1 - A Valid Strategic Option for the Future

Government’s Retreat

CHAPTER 2 - The Freestanding Nonprofit and Other Rugged Individualists

Why Nonprofit Services Are Fragmented: A Story

A Nonprofit’s Economics Are Part of Its Strategy

CHAPTER 3 - Logic of Integrated Service Delivery

Applications of Integrated Service Delivery

Elements of Integration

CHAPTER 4 - Deciding to Collaborate

Rescue Mergers

Merger from Strength

Deciding to Collaborate as a Function of Larger Forces

CHAPTER 5 - Preserving Identity

Nonphysical Components of Organizational Identity

What Is Not Part of “Identity”—and What Is

CHAPTER 6 - The Role of Funders

What Funders Can Do

Funding Collaborations

Models for Funding Collaborations

CHAPTER 7 - C.O.R.E. Continuum of Collaboration

Our Model

Applying the C.O.R.E.

CHAPTER 8 - Economic-Level Collaboration

Sharing Information

Bidding Jointly

Joint Purchasing

CHAPTER 9 - Responsibility-Level Collaboration

“Circuit Riders”

High-Integration Collaboration Models

A Cautionary Note

CHAPTER 10 - Operations-Level Collaboration

Shared Training

Joint Programming

Joint Quality Standards

CHAPTER 11 - Corporate-Level Collaboration: Merger

Authority Is Concentrated

Official Start Dates May Be Anticlimactic

What It Means to Merge

The Essence of a Nonprofit Merger

Advantages and Disadvantages of a Merger

CHAPTER 12 - Models of Collaboration: Merger by Management Company

Structure

Control and Governance

Advantages of a Management Company

Disadvantages of a Management Company

Faulty Integration in a Management Company Model

CHAPTER 13 - Models of Collaboration: Alliances

Structure

CHAPTER 14 - Models of Collaboration: Partnerships with and between Nonprofits

Structure

Control and Governance

Special Considerations

Partnerships with For-Profit Companies

Limited Liability Companies

CHAPTER 15 - Merger Myths

We Will Save Administrative Costs

There Will Be Massive Job Cuts

We Will Lose Our Identity

Let Us Figure Out the Structure First

Shhhh

Only Failing Organizations Merge

Increase in Mergers Is a Product of an Economic Downturn

CHAPTER 16 - First Steps

Geographic Proximity

Absence of a Permanent CEO

Nonoverlapping Markets

Industrializers and Prototypers

Compatibility of Services

Special Assets

Quick Culture Check

Building Trust

Seeds of Trust: Disclosure, Consultation, and Collaboration

CHAPTER 17 - Merger or Alliance? How to Decide

Corporate Control

CHAPTER 18 - First Phase of a Merger: Feasibility Assessment

Informal Phase of a Collaboration

Role of Consultants

Form a Collaboration Committee

Why Due Diligence?

What Is a Due Diligence Investigation?

Governance

Finances

Assets

Liabilities and Obligations

Some Financial Red Flags

Valuations

Carrying Out the Valuation

Pro Forma Financials, Including Cash Flows

Regulatory Filings

Human Resources Information

Assess the Feasibility

CHAPTER 19 - Second Phase of a Merger: Implementation Planning

Form Subcommittees of the Collaboration Committee

Internal Communication

External Communication

Some Sample Collaboration Committee Structures

Who Will Be the Boss?

Some Tools to Accomplish a Leadership Transition

Once the Selection Is Made . . .

Merger Announcement (Create a Splash)

CHAPTER 20 - Third Phase of a Merger: Integration

Time Required for Integration

Common Sources of Resistance

Board Members

CHAPTER 21 - The Seven Stages of Alliance Development

Categories of Alliances

Seven Tasks of Alliance Development

Task One: Initiate, Explore, and Analyze

Task Two: Synthesize and Plan

Task Three: Establish Shared Objectives

Task Four: Develop Working Committee Structure

Task Five: Gain Quick Victories

Task Six: Secure Institutionalize Buy-in

Task Seven: Implement and Evaluate

CHAPTER 22 - Postscript and Conclusion

About the Author

Index

Copyright © 2010 by Thomas A. McLaughlin. All rights reserved.

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Published simultaneously in Canada.

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ISBN-13 978-0-470-601631

To Gail, Paul, and Emily

Acknowledgments

Even more than the first edition, this version has benefited tremendously from the contributions of many individuals. Since that first edition was published, I have consulted to more than two hundred nonprofit mergers and alliances, and virtually every single one provided an important insight or a fresh perspective.

I carried out my first mergers for Dr. Yitzhak Bakal at what is now known as the North American Family Institute, although I would not have said that’s what I was doing at the time. It was on this initial base of experience that I later built a successful consulting practice in nonprofit collaborations. I applied some of my early methodologies on behalf of Punky Pleten-Cross, Kathy Wilson, Dianne McCarthy, Geri Dorr, and Deb Ekstrom. Early on, a handful of individuals made valuable suggestions, challenged my concepts, or helped clarify parts of my thinking. Ginny Purcell, Jim Boles, Kitty Small, Bill Taylor, Jim Heller, Rob Hallister, and Sue Stubbs are among these.

I have had the benefit of working with many talented colleagues. For nearly a decade, Stacey Zelbow has supported and challenged me as we worked with various nonprofit collaboration clients too numerous to count. Her steady presence has been an enormous benefit, and her detailed comments on an early draft of this edition helped improve it far beyond what I could have achieved on my own.

Over the years, literally dozens of leaders in foundations, associations, nonprofit federations, government agencies, and academic institutions have given me the opportunity to speak to their members and constituents about collaborations in one way or another. I deeply appreciate these opportunities to hone a message that resonates with large numbers of nonprofit leaders.

My colleagues at the Nonprofit Finance Fund have been wonderfully receptive and accepting of this new kind of consulting capability that I have recently begun building on the excellent foundation they laid over the last twenty- nine years. Clara Miller, our founder and CEO, has been consistently supportive in many ways, as has Leon Wilson. Kate Saliba has become an indispensable part of most of my collaboration consulting teams, and Rodney Christopher has regularly shown me how one can blend compassion with clear-eyed business savvy. Bill Pinakiewiciz “got it” very early on and has been a valuable partner in many different ways. Kristin Giantris has ably cleared away countless administrative roadblocks, while Renee Jacob, Linshuang Lu, and Jenn McVetty have made major contributions to our collaboration analytical capacities.

At John Wiley & Sons, Marla Bobowick first signed onto this project at a time when for many people the tems “merger” and “nonprofit” didn’t belong in the same sentence. Susan McDermott has competently taken over responsibility for this edition.

Most important of all, I must thank my wife, Gail Sendecke, for the time and attention from me that she sacrificed to help make this second edition a reality.

Introduction

It is time for systematic, structural innovation in the nonprofit sector. For decades, innovation in this field has almost always been synonymous with innovation in programs and services. Changes in society, the economy, and government have meant that nonprofits have had to spend much of their organizational energies on new and innovative forms of services. Today, much of that demand has subsided. For better or worse, we have established most of the major models of service that the nonprofit sector will supply for the foreseeable future. Programs and services that were once considered alternatives have become mainstream. And now the demand for innovation is shifting to the way those programs are managed.

This is why, for nonprofit organizations of all kinds, considering mergers and alliances will be the new strategic planning for the twenty- first century. Nonprofit service systems in areas ranging from the arts and health care to social services and advocacy are on the verge of significant change. Nonprofits in many parts of the country have already entered into a period of rapid change in the way they are structured and managed. Most others will follow. This book is an attempt to explore the choice that many of them will be making.

To some in the nonprofit field, the idea of mergers is scandalous and distasteful.

Decades of media coverage of Wall Street mergers have permanently linked the idea to images of human suffering caused by heartless downsizers whose designer suits are more valuable than their ethics. Inflicting the same fate on nonprofits seems cruel and unnecessary.

Yet the same restructuring is occurring in newspapers, banking, financial services, retailing, bookselling, and many other fields. There is no reason to think that nonprofits will—or should—be immune from it simply because of their tax status. The reality is that mergers among nonprofits are necessary. In many parts of the country today, there are simply too many nonprofits. This situation is caused by many factors, including the best of intentions, but the plain fact is that having an excessive number of nonprofit organizations actually weakens the collective power of the entire field. Organizations that should be serving a mission must instead spend disproportionate amounts of resources worrying about how they are going to fund it, manage it, and perpetuate it.

That said, we must emphasize that nonprofit mergers are different from those in the for-profit sector. A fair amount has been written about the latter. Very little has been written about nonprofit mergers, probably because the widespread adoption of the technique is relatively recent. Consequently, board members and nonprofit executives considering a merger or some form of strategic alliance often can find little specific guidance. More insidiously, transposing the for-profit merger experience and related techniques to the nonprofit sector is often frustrating and ineffective. Nonprofit collaboration of this kind requires different expectations, processes, and techniques. We hope that this book will help fill that gap.

Encouragingly enough, nonprofits have many structural advantages that can allow them to enter into mergers without repeating the same behaviors as some of their Wall Street counterparts. We will cover these in some depth, because managers and board members who understand these dynamics will be able to make the process work for their missions and their consumers, and it is to them among others that this book is addressed.

We have two goals for this book. The first is to describe a context for nonprofit mergers and alliances, including a discussion of the forces helping to shape nonprofits’ use of mergers and alliances. It is important that nonprofit managers and board leaders be aware of both the similarities and the differences in their sector’s merger patterns and techniques. Ultimately, a nonprofit sector that knows well how to collaborate will be far more effective in the pursuit of its public-spirited mission.

The second goal is to provide concrete guidance based on actual nonprofit collaborations. Ultimately, the information presented here will become common knowledge among some nonprofit managers and the inevitable cadre of merger specialists that the trend will create. Some of it will likely be proven wrong, while undoubtedly a few strategies and tactics that no one has even thought about yet will become routine. For the present, it is hoped that this material will be a creditable start.

The book includes a discussion of reasons to collaborate; a description of the C.O.R.E.™ model, a merger/alliance analysis framework; partner selection; structure choice analyses; and a section each on the processes of mergers and alliances.

It is worth noting that, while the author has worked in nonprofit collaborations virtually across the board, many of the examples in the book are drawn from a handful of fields, such as hospitals, arts organizations, and social services. The reason for this is twofold. First, most people are likely to be at least somewhat aware of mergers and alliances involving hospitals because they are large, highly visible nonprofits. Second, thanks to earlier waves of change, there have already been a significant number of mergers and alliances in these three fields. In ten years, this situation may very well be different. For instance, as the book was going to print, there was a sharp spike in interest in collaboration among community development corporations. If sustained, this spike may produce greater familiarity with collaborations with this type of organization.

Similarly, the attentive reader will notice more references to mergers than alliances. There is a disarmingly simple reason for this tendency too—there are far more mergers than alliances. A secondary reason is that many people equate a brand name with a corporate entity and they conclude, wrongly, that if a merger occurs, it means at least one brand name will go away. Therefore, if a brand name persists after some form of collaboration occurs, it must have been an alliance or, at least in their view, a “nonmerger.” Truth be told, it also derives partly from a personal preference for the definitiveness and coherence of a well-done merger over the inherently fragmented alliance approach. Still, let it be said that either mergers or alliances can be perfectly valid forms of collaboration. Thus, the title.

Different readers will treat this book differently. All readers can be expected to gain something from the first few chapters. Board members, executives, funders, government officials, nonprofit advisors, and academics can profit from all sections, while managers may wish to concentrate primarily on Chapter 15 onward.

As prevalent as they are likely to become, collaborations are not a panacea for all the challenges facing the nonprofit sector. Carried out poorly, they can create as many problems as they solve. Nor do they always work. There is much we must all learn about both the process of merger and alliance development and how to manage the new entities that they create. But there is no doubt that it is time to begin this grand restructuring of society’s most under-recognized and underappreciated sector. Let the rebirth begin.

CHAPTER 1

A Valid Strategic Option for the Future

The best time to consider a merger or an alliance is before it is necessary, when coming together with another organization will mean combining strength with strength, and when the collective energies and creativity of the two or more entities can be used proactively instead of being sapped by the demands of crisis management. Without an external market mechanism to prod and enforce these kinds of strategic decisions, many nonprofits wait until the time comes when an alliance is not viable and they must choose between merging or going out of business. At that point, it is too late. An alliance will be a waste of time, and a rescue merger will be far more difficult and probably less effective than a merger made in less desperate circumstances. One of the primary objectives of this book is to make the case for nonprofit mergers and alliances as a preferred strategic option, not as a last- minute decision made in despair.

The single most compelling reason to merge nonprofits or to consider developing an alliance is to tap into complementary strengths. Many times, two different organizations come together and in the process discover unexpected sources of strength in the other: the ballet company with excellent administrative systems merges with a dance troupe with high public recognition; a small clinic that owns its own building merges with a larger set of clinics that needs to diversify its asset base; a chief executive with good “outside” skills brings her organization together with another whose chief executive officer is excellent at overseeing operations; and so on.

Note: Why Mergers Have a Bad Name

One of the reasons why mergers may have a negative connotation for nonprofit board members and managers, aside from the botched for-profit mergers the media have covered so thoroughly, is because of when they occur. In any industry experiencing consolidation, weaker players will always be the first to merge or go out of business. What the casual observer does not realize is that whatever bad things may happen to such an organization after a merger, such as services being shut down or people losing jobs, would almost certainly have happened without a merger, and probably worse would have occurred.

Good leaders read the signals of their environment, and nonprofit leaders are no exception. For many decades, nonprofit board members and senior managers have been astutely reading the messages sent by funding sources, government regulators, and social leaders. Universally, these signals said, “Grow. Expand your services. Create more organizations. Innovate and grow.”

Nonprofits responded. Beginning in the mid-nineteenth century with voluntary child welfare and mental health organizations and continuing throughout the past century with the modern hospital, symphony orchestras, economic development groups, museums, civic leagues, associations, and charter schools, the nonprofit form of organization has witnessed a tremendous growth in scope and application. Today, the voluntary sector is a crucial—and increasingly acknowledged—element of the American economy.

Along the way, something subtle but very important occurred. Nonprofits by nature are intermediary organizations, serving as private buffers between the individual and government. While acting as an intermediary for a particular part of society, they serve as the proving grounds for social values and as vehicles for interpreting potential changes in those values. Consequently, nonprofits as a class invariably reflect the times in which they were created. On a practical level, this happens because they must solve most of the same economic challenges that any business must solve: assuring a demand for their service or product, selecting and hiring staff, overseeing operations. At a higher level, it happens because nonprofits represent one way in which society attempts to prevent or mitigate what could be a major dysfunction.

Thus, the mayor of an early-twentieth-century mill town invited an order of nuns to create an orphanage for children whose parents were killed or maimed by unsafe manufacturing processes; a major national advocacy organization mobilized an unprecedented campaign of fundraising and research to eradicate polio; and nonprofits have joined the burgeoning effort to find environmentally responsible answers to the fossil fuel dilemma. What all of these and countless other programs had in common is that they were the product of a unique mix of social, economic, cultural, political, legal, and other forces.

The individuals who lead these programs must negotiate an individualized balance of all these forces in order to be successful. It is an underlying theme of this book that the way that balance is achieved is on the verge of changing dramatically. Put simply, the way to be successful as a nonprofit organization will be very different in the twenty-first century than it was in the past 50 years.

Government’s Retreat

The starting point for this difference is a central reality. For nearly 30 years, government at all levels of our society has taken a step back from its traditional role in responding to social needs. The New Deal and the Great Society were two vivid examples of government taking unprecedented initiative in key areas of society’s needs, and the 2010 passage of the health care law was notable for its uniqueness.

In the meantime, as government was shrinking its area of responsibility, nonprofits were growing both in size and numbers. The growth trajectory over the past 20 years has been more consistent and more positive than that in many for-profit industries. As a result, in many areas, the nonprofit sector now has both the opportunity and the responsibility to assume some of that leadership role. It is well positioned and well experienced to do so.

In recent years, there has been a steady stream of messages from business leaders and others that there are “too many nonprofits.” In this view, nonprofits have proliferated to the point where there are costly redundancies and overlapping services. Funders grumble that more and more nonprofits are pursuing the same philanthropic dollars, and civic leaders have begun to wish out loud that there would be what they delicately term “consolidations.”

These are well-intended observations, but they miss the point. The reason that there is a surplus of nonprofits is not because there has been mindless growth but because for many years the prevailing philosophy of funders and government officials has been “Let a thousand flowers bloom.” In the 1960s, certain kinds of foundation funding was implicitly based on the notion that if a human services program could produce three to five years’ worth of success, the federal government would fund it permanently thereafter. For two or three decades, there was widespread innovation and experimentation, so it made sense to try many different approaches to see what works.

Today, however, in most parts of the nonprofit sector, we cannot sustain a thousand flowers anymore. Instead, we need a few dozen oak trees. We now know what works as a response to most dysfunctions, and the task is to set about doing it on as large a scale as is necessary and sustainable. The problem is not with the effort and the public spiritedness and the energy that lies within those hundreds of thousands of nonprofits; the problem lies in the way they are structured, particularly their capital structure. But after years of growth, those mature parts of the nonprofit sector now have substantial resources locked up in aging program models and out-of-date corporate structures. Those resources are both financial and human, and we must find a way to tap into them as never before. Nonprofit collaboration through mergers and alliances is a crucial means to make this happen.

For many parts of the nonprofit sector, mergers and alliances must be one of the primary strategic choices of the future.

CHAPTER 2

The Freestanding Nonprofit and Other Rugged Individualists

It may not have seemed so at the time, but IBM symbolized the true beginning of the Information Age in the mid- 1980s with a simple change in its advertising. For the first few years of its existence, the IBM personal computer (PC) had used the lovable tramp created by silent movie star Charlie Chaplin as its logo. In many ways this was a good choice. Charming and funny, the little tramp was designed to be as engaging in print and television advertising as the company needed its personal computers to be.

But with the introduction of newer and more powerful versions of the PC designed to be linked together in networks, the company had a problem. The lovable tramp, for all his endearing and nonthreatening qualities, was the ultimate individualist. If the future was in networking, as IBM correctly foresaw, the company needed a completely different theme. And what better way to bring alive the idea of computers in a team than to appropriate the single best- known team in America at the time—the medics of M*A*S*H, the wildly popular movie and television series. Did IBM make this switch with as much deliberation and foresight as we have implied? Perhaps it did. Perhaps not. It really does not matter. The point is that the changeover from stand-alone to team has been planted in our collective public consciousness for longer than we realize.

Why Nonprofit Services Are Fragmented: A Story

The three youth-serving organizations, part of the same name-brand nonprofit federation, were each located in different large cities within 15 miles of each other. Surrounding the cluster of cities was an expanded ring of suburbs and exurbs. Each organization had been founded within a few years of each other, and together they covered a sizable percentage of the metropolitan area. Each city was notoriously culturally isolated from the other. None of those cities liked each other very much, and the sniping was legendary.

Were it not for the imperatives of twenty- first-century electronic communications, the story might well have ended there. But those three cities and their related suburbs were all part of the same media market. The bits and bytes of data sharing and high-definition television had reduced the friction and mixed interests of those separate municipalities to a story of second-order magnitude. When business needed to be done, when the region needed representation in the state capital, when the economy needed some help—those rivalries faded in the face of the overriding common interests of the locations.

A parallel story was unfolding among the three organizations. Their carefully drawn turf based on county lines was increasingly meaningless because volunteers from one city wanted to volunteer in the other. Donors routinely mailed checks to the wrong organization, while corporations and foundations were frustrated by not being able to support the cause more readily. A merger seemed in order.

The resulting organization was among the largest of its kind in the nation. Carefully, it drew up plans to keep fundraising resolutely local—except when targeting region-wide givers—and service provision coordinated centrally with heavy local volunteer recruitment. After only two years, fundraising and number of youths served had increased substantially, and costs were cut by a double-figure percentage.

This story illustrates the barriers that must be overcome among nonprofit board members and their executives if they are to position their organizations for maximum effectiveness in the twenty-first century. The natural tendency to focus services in a narrowly defined geographic area, the lack of an inherent motive to spur growth, and the inability to raise large amounts of capital are powerful elements that tend to keep nonprofits isolated from each other and fragmented in service delivery.

Yet the rise of globalization (and its cousin, regionalization) is pushing nonprofits together, like it or not. Mergers and alliances lower those self-defined barriers that tend to make services fragmented and inefficient. Some of those barriers are institutionalized through revenue sources. Nonprofits generally are forced to spend a lot of time focusing on their revenues and expenses and virtually no time streamlining their economics. Funding sources give money as if it were a stack of wood that they insist on being burned in a stove of their own specifications. The result is that a growing nonprofit is like a multistory building heated entirely by a basement filled with stoves, each dedicated to a room or two, instead of a single central heating system.

Competition, the Mother of Collaboration

There is a wonderful irony in matters of competition, and it can be summed up in a single observation:

The more competitive an industry’s participants are, the more collaborative they have to be.

This is an ironclad rule that applies to for-profits as well as nonprofits. As the companies in a given industry compete with each other, over time they will be forced to find ways of collaborating with each other as well. Often a level of government takes the role of indirectly forcing collaborative action through regulations and standard setting, but in the American economy, competitors themselves are forced to find ways to compete on one level while collaborating on another. This is how trade associations get formed, and it is why large software companies routinely participate in thousands of business alliances. Rugged individualism may work for cowboys, but it does not work for companies.

An Illustration

Immigrants typically require a variety of types of assistance, including language instruction, job search, housing support, legal advice, adjustment counseling, and so forth. Most immigrants need at least one of these services over a period of time, and many need more than one. Foreign Neighbors Institute (FNI) is a $2.3 million recently merged nonprofit organization dedicated to helping its city’s Vietnamese immigrants. Its revenues come from a variety of sources, including state and city government, a legal services corporation, private and public English-language classes, and a small amount of special-events fundraising. Its single largest revenue source is private English-language instruction services.

FNI’s smorgasbord of services is paid for by a comparable smorgasbord of funding sources. City and state education monies pay for language instruction, legal funding sources pay for legal advice, mental health and social service funders pay for adjustment counseling, and so on. The private instruction classes, however, are paid for by immigrants in their twenties and thirties who hold some type of job in the nearby urban area. These are Vietnamese immigrants who are moving up the socioeconomic ladder. They need the instruction not for basic activities of everyday life but to polish their social skills as they make their way through corporate America.

In the traditional view, FNI presides over a dizzying array of programs and services, or stovepipes, each of which must stand on its own with respect to its funders. But immigrants using these services do not compartmentalize their needs in the same way, so usually FNI staff act as de facto case managers to ensure that the immigrant in need gets the appropriate services. In effect, FNI’s real value is as a provider of a modest continuum of services to a carefully drawn market. What makes all of these programs work is the unrestricted income from the private classes’ revenue that funds a significant part of its infrastructure.

Note: The Nature of Nonprofit Competition

Culturally, nonprofit executives can now speak more readily of competition between their organizations. Externally, the media and the general public are beginning to realize that the absence of a profit motive does not mean the absence of competition. And since competition is the bedrock of our economic system, the increased sense of competitiveness among nonprofits is generally applauded. Yet it still confuses and annoys many people who equate competition with wastefulness or unsavory business practices.

Part of the answer lies in the nature of competition in the nonprofit sector. When major consumer product companies compete, it is for millions of buyers. Companies that make cars and refrigerators and flat-screen TVs compete in the consumer market where a small number of suppliers are all that are needed for millions of buyers. By contrast, when 40 nonprofit child service organizations of all sizes and sophistication levels compete in the same geographic area for program funding that comes largely from one or two government agencies, they represent a large number of suppliers to a very small number of buyers.

Competition in this type of setting—which is typical of most nonprofit situations around the country—is not competition as in a consumer setting. Rather, it is more like competition between different mom-and-pop-size departments of the same large company: possibly intense, but ultimately having more common interests than differences.

FNI’s chief strategic vulnerability is the always-present possibility that a for-profit language instruction provider would cut into its private language instruction market. With each program having a dedicated revenue stream but equal or greater costs associated with it, the broad-based language program is the only thing providing unrestricted funds and a bit of capital for the larger organization.

In FNI’s case, its solution to the stovepipe problem is entrepreneurial. Not all organizations are lucky enough to be in this position. To be sure, there are strategic weaknesses in its model, but via its merger, FNI found a way to partially overcome the stovepipe problem.

A Nonprofit’s Economics Are Part of Its Strategy

Board members, nonprofit managers, and advocates all must begin making nonprofit economics part of their long-term planning processes, and one of the simplest ways of doing that is to consider the role of economic size in its field. Let us begin with a threshold definition:

An organization has achieved its economic size when it can operate over a period of years without substantially reducing its net assets.

There will probably never be a statistically reliable way of predicting economic size for any given organization because the factors that determine it are so particular and not always under the nonprofit’s direct control. Still, it is possible to identify some of the elements that combine to determine the economic size. Here are some of the more common ones:

• Industry

• Government regulation

• Labor markets

• Geography

• Use of capital

Net assets are the nonprofit organization’s equivalent of net worth, or accumulated surplus. When an organization incurs a deficit in any given year, it reduces its net assets by the amount of the deficit. Over time, a string of deficits will reduce net assets to zero or below, and the organization will be functionally bankrupt. As with a for-profit company, successive yearly deficits in a nonprofit mean that current management is using the built-up net assets of previous managers to stay afloat—in short, it is spending its future.

At base, economic size has to do with the ability of the organization to cover its fixed costs, which are expenses that will be incurred regardless of the volume of service the nonprofit provides. Fixed costs typically are things such as a chief executive’s salary, occupancy costs, accounting services, depreciation on assets, and interest payments. For labor-intensive operations such as nonprofits, compensation and benefits often act very much like fixed costs, since labor is such an essential element in providing services.

Put all of these costs in a budget and there is not much room left—most of the remaining costs that will go up or down depending on the volume of service are small amounts. Fixed costs simply limit a manager’s discretionary spending, and when they get to an unsupportable level, the organization either finds outside funders to pick up the difference or eventually goes out of business. As the demands on nonprofits continue to increase and funding continues to be cut or restricted, more and more will experience a financial crunch. In fact, a failure to achieve economic size is already one of the primary reasons for nonprofits merging or restructuring in the early part of the twenty- first century.

Industry

The nature of the nonprofit’s field determines a great deal about its economic size. The economic size for a museum is considerably different from the economic size of an assisted-living facility for elders. Furthermore, the distinctions between certain types of organizations can blur over time, thereby altering the nature of the economic size. For instance, most hospitals were stand-alone facilities until at least the 1980s. Whereas the term “hospital” in the last century meant a stately looking brick building, today the word has effectively been replaced in business contexts by more conceptual phrases, such as “health care system” or “health provider networks.”

Government Regulation

Next to industry type, the single greatest determinant of economic size of most nonprofits is the degree and nature of its governmental regulatory environment. The formula is simple: The greater the degree of governmental regulation, the lower the economic size. This phenomenon has occurred in industries as diverse as airlines and public utilities. An obscure but elegant example of government regulation in the nonprofit field is in antitrust policy. Antitrust actions are the responsibility of the Department of Justice and the Federal Trade Commission. As hospitals merged in the 1990s and into the next decade, federal interventions in proposed mergers roughly paralleled the dominant ideology of the party holding the presidency. Antitrust actions brought by the government to prevent mergers were more prevalent in the Clinton years, much less so in the George W. Bush era.

Government as regulator is not the same thing as government as payer. Government actions as a payer only influence the transactions with which they are involved, while government action as a regulator influences all transactions over which the government has jurisdiction.

Labor Markets

As mentioned briefly, labor expense in most nonprofits is a fixed cost over short spans of time. Any service that is open 24 hours a day or that must meet minimum staffing standards of some kind has to deal with costs that are predetermined within a relatively narrow range, no matter what the revenue may be.

Another aspect of labor that cements it as a fixed cost is collective bargaining. Labor cost is particularly intractable because of the nature of the collective bargaining process but also because the “political” characteristics of nonprofits (see Chapter 3) can easily become political in the electoral politics sense of the term. One major nonprofit institution trying to merge with a public entity needed more than two years to make the idea work because neither labor nor management could agree on terms for a very long time.

The changing nature of labor markets also complicates this aspect of economic size. Not only do segments of nonprofit service delivery have natural life cycles—mental health clinics are a mature type of entity, for example, while most environmental groups are still very young in their cycle—but local labor markets can fluctuate widely too. During recessions, nonprofits typically face soft labor markets (i.e., it is easy to hire employees), while prosperity brings hard labor markets because the labor force has other options.

Note: Life Cycles of Nonprofit Organizations

Nonprofit organizations can be said to have distinct life stages just like any type of business organization, and the place where each type of nonprofit finds itself says a lot about its readiness to collaborate. Here is one framework for analyzing the life stage of groups of nonprofits:

Formless. In this stage, there are not enough comparable nonprofits to constitute a recognizable type. Different groups respond to similar social needs and economic realities in similar ways without necessarily understanding why or even communicating with each other. Affiliations of any kind are virtually out of the question.

Growing. There is at least a general recognition that the particular nonprofit service is needed but most energies are devoted to building capacity and solving operational problems.

Consolidating. At this stage, the general type of organization is recognized and accepted by society and the nonprofit sector itself. Some organizations take on a leadership role while others struggle to come into being in order to cover geographic gaps left by the early types. The groups create formal associations and other support entities, and a recognizable national identity begins to emerge.

Peaking. As a field and as individuals, these nonprofits enjoy newfound acceptance and growing influence. The pace of new entrants slows, but those already in existence experience previously unimagined success in areas such as operations, public relations, financial, and political. Mergers occur for strategic purposes when strong players take over the few weak ones, which falter.

Maturing. Maturing nonprofits have long ago hit their peak and are beginning to lose some of the strategic momentum they had earlier. The services they offer are now being offered at least in part by others or are no longer perceived as necessary. No one can doubt their collective influence, but some are beginning to doubt their future.

Refocusing. Once past maturity, some nonprofits find they must reinvent themselves in order to survive. Some do; others fade gradually away or merge what is left of their services with compatible groups at an earlier stage of development.

Hard labor markets can force employers to pay proportionately more for staff, which can increase the pressure on agencies’ fixed costs. This is what happened during the dot-com recession.

Geography

Geography shapes economic size. When an organization must cover the entire nation, a physically large state, or just a sizable rural area, travel costs are inescapable. Rural groups that must do any kind of outreach inevitably find that it takes longer and therefore is costlier than the same service in an urban area. In some instances, it simply may not be feasible to deliver a service. Service providers that depend on a certain volume or cultural organizations that need a concentrated market are examples here.

Use of Capital

Any time a nonprofit has to invest in capital assets to provide a service—typically buildings and equipment—it increases its fixed costs. Not only does it commit to paying back loans it may have obtained to buy the asset in the first place—a classic fixed cost—but large assets require upkeep and specialized staff to maintain. These things all raise the minimum economic size for the acquiring organization.

Tip: How to Know if You Are Keeping Up Your Capital Investment

To find out if your nonprofit is keeping up its capital investment level, try this test. Find the organization’s total accumulated depreciation and divide it by the depreciation charge for that year. The result will give you your “accounting age” of all property, plant, and equipment measured in units called “accounting years.” The higher this number, the lower your investment in replacing old assets. See whether the number of years makes sense in the context of your overall strategic direction. Better yet, calculate the same ratio for a handful of comparable nonprofits.

Capital requirements are some of the most important forces determining economic size for nonprofits. Especially because nonprofit corporations cannot raise capital through selling shares, an increased need to make major investments in new buildings and equipment puts greater pressure on management. If the minimum investment level rises high enough, some nonprofits are forced to exit the field. High capital requirements are also the reason why, at extreme points, for-profit companies with their far greater access to low-cost capital will have a distinct advantage. This is what happened when Blue Cross/Blue Shield plans and certain hospitals sold their assets to publicly held companies and instead became private foundations (also known as conversion foundations).

Note: Need More Benefits?

Sometimes it is helpful to be able to cite other potential benefits of a merger or alliance. Here is a laundry list. Some may apply in your circumstances, others will not. Take the ones that fit.

• Acquire intangible assets (e.g., a prized board member or a brand name).

• Acquire tangible assets (e.g., a building).

• Add breadth and depth of services to meet consumer need.

• Assist in repairing a damaged brand.

• Capitalize on a chief executive’s departure.

• Change the organization’s name.

• Change staff compensation patterns.

• Create more varied career options for employees.

• Create operational efficiencies.

• Ease the transition from a founder-led organization.

• Expand the programming continuum.

• Gain cost savings in order to add program resources.

• Gain greater visibility in the community.

• Gain market share.

• Gain more clout with the national office (federated organizations only).

• Improve fundraising.

• Improve prospects for a new service.

• Increase political clout.

• Rejuvenate the organization.

• Make it easier to satisfy lender requirements.

Economic size often increases faster than the rate of inflation. As a consequence, nonprofits may have to increase profitability a bit faster than the rate of inflation just to stay ahead. With governmental and many private sources of funding plateauing or declining in many service sectors, growth is no longer just a matter of hiring the right proposal writer or making contact with a foundation or two. In fact, significant growth in most mature or near-mature nonprofit sectors will be virtually impossible for the foreseeable future except through mergers and alliances.

A word about growth. There is a prevailing sentiment against bigness in much of the nonprofit community, and for good reason. A great deal of what nonprofits have done well in the past has been firmly rooted in local areas with all the responsiveness and grassroots characteristics that that entails. Many nonprofit leaders reject growth itself, arguing that it will dilute the culture of the organization. For some types of nonprofits, they are undoubtedly right. But there is no intrinsic reason why the majority of organizations could not grow significantly larger and still maintain faithfulness to their mission and their roots. Moreover, the absence of growth can lead to the kind of stagnation and tiredness that society cannot afford in its intermediary organizations. A component of achieving economic size is, therefore, learning how to grow strategically and not simply quantitatively.

Mostly, it would appear that opposition to “bigness” in the nonprofit sector is a function of comfort level with one’s immediate social environment. There is some literature to support this notion, particularly Dunbar’s Number, sometimes known as the Rule of 150. This anthropological concept argues that the maximum comfort level of human beings is in groups of approximately 150 or fewer, the premise being that physiological characteristics of the human brain bias us in favor of such a size. Whether the number is larger or smaller is literally academic because there is functionally a predisposition on many people’s part in favor of limited size.

What most researchers do not recognize, however, is that this notion refers to social immediacy and is reliably linked to physical communities. The takeaway here is that the physical setting in which most people work is what determines their most immediate social connections, not the size of the sponsoring corporation. Since most nonprofit programming takes place in small physical sites, the bigness question tends to be more about inferences and fears than the actual day-to-day realities of a service-providing organization. Bigness should be measured in immediate people-related, client service factors, not corporate terms.

CHAPTER 3

Logic of Integrated Service Delivery

Consider a common scenario. A new homeowner receives a property tax bill she considers to be based on an error by the assessor. She goes to the assessor’s office in town hall that is responsible for valuing real estate but is told that she must first speak with the tax office that sent out the bill. That office explains that they are powerless to change any entry on the tax rolls because the tax information is now more than 60 days old (notwithstanding the fact that she only received the bill 10 days ago). To begin a request for an abatement, she must first file a written request for an abatement form with the treasurer’s office. By the way, that office is now located across the courtyard. While standing in the treasurer’s office, she completes a form requesting the abatement document, only to learn that the form must be notarized by a notary public not connected with town government.

This mythical albeit plausible scenario is repeated many times in many industries around this country every day. In all likelihood our heroine would refer to her experience as “the runaround.” We will use the more exalted term “fragmented service delivery.”

Fragmented service delivery is so common that we barely even think about it. Yet it does not have to be that way. Services do not need to be broken up into artificial segments called departments or bureaus or divisions the way they used to be. Online information management technology and our refined knowledge of how systems work allow us to integrate services to a degree never before possible. Moreover, we cannot afford fragmented service delivery anyway. Breaking down a process or flow into small packages always costs more than keeping it all together. Most important of all, fragmentation impairs quality.

To be sure, reasons other than simple slowness to adapt or an inability to make investments in computerized technology create fragmented service delivery. For instance, in our small-town example, one incentive that might inhibit more streamlined service is a policy of holding onto cash as long as possible, even at the expense of a little voter discontent. And in the nonprofit world, there is less capital available for investing in things like information technology. Nevertheless, the movement toward more integrated service delivery is widespread, and it occurs on all levels of our economy.

Applications of Integrated Service Delivery

Integrated service delivery will be a central goal of the next generation of nonprofit managers. The drive toward integrated services is already under way, although it is not always called that. Most levels of governments have experimented to one degree or another with online information delivery in lieu of the old paper forms that could only be mailed or picked up in person. More important, whole areas of service are being consolidated. In health care and the social services, there is an increasing trend toward using intermediaries for administrative tasks. For instance, Medicare has always integrated much of its insurance and payment functions through private sector insurance companies and administrators. This intermediary level simplifies what otherwise would be a hugely fragmented task of dealing with literally hundreds of thousands of service providers.

Elements of Integration

Integrated service delivery has its own special logic. When a variety of services are put together in an integrated fashion, things happen differently. Crude analogies with the physical world are instructive. City planners, for instance, have long known that less is more when it comes to street design. In certain instances, adding more roads to a congested traffic pattern can actually worsen the flow. Fiber optic cable networks can add a fourth city to a planned three-city network and use fewer miles of cable.

The recession of 2008 prompted many nonprofits to examine how to increase productivity by getting together in networks and administrative service organizations. This will be a long and slow process lasting a generation or more. At the same time, it is possible to see the roughest of outlines appearing to guide us in the journey. Some of the elements that will be present include:

• Trust

• Information as a strategic tool

• Massive investments in information technology

• Standardized services

Trust

Trust is probably the least appreciated engine of economic success in the world, yet it has a profound impact on the way all organizations conduct their business. For quick evidence of its role, look no further than the difference between industrialized countries and non-industrialized societies. What is the rational response to the demands of doing business when trust is generally absent from the larger society? Make the family the prime business unit, not the corporation. Unfortunately, as an economic unit, the family is severely limited. There are a limited number of members, there is no good basis for ensuring their fitness for employment (let alone their ability to get along), and the amount of capital it can raise is constrained. A society that cannot figure out how to trust non-family members is doomed to a second rate economy at best.