May 2003

A recent front-page article in The Washington Post highlighted the very tough times facing nonprofit organizations in the National Capital Region. Many nonprofits are cutting programs or shutting down altogether, and two rather large organizations, the Metropolitan Police Boys and Girls Clubs and the Boys and Girls Club of Greater Washington, have decided to merge in an effort to survive.

The merger decision is particularly striking because it’s not often that we hear about consolidations in the nonprofit sector. But because the severe funding crisis is not going away soon, funders concerned for the very survival of their grantees and frustrated by their own reductions in available money may increasingly encourage or even demand that their grantees collaborate or consolidate.

In theory, mergers, joint ventures, and consolidation of operations make a great deal of sense. Bringing organizations together—whether for-profit, governmental, or nonprofit—can be a powerful way to build stronger organizations with increased impact and reach, offering the tactical benefits of eliminating duplication, achieving greater efficiencies, coordinating services, and reducing turf battles. But in practice, consolidations can be more difficult and costly than they appear. The corporate world is rife with failed mergers and acquisitions.

The nonprofit sector faces many of the same challenges as the for-profit world and then some. Nonprofit organizations are often less driven by earnings and revenue than by values and mission. For many nonprofit executives and board members, the risk of losing control of mission and of their organization in a merger or consolidation far outweighs their concern for financial and operational efficiencies.

David LaPiana, a San Francisco-based consultant specializing in nonprofit mergers and consolidations, points out in the report Beyond Collaboration: Strategic Restructuring of Nonprofit Organizations that nonprofit executives will do almost anything—deplete their reserves, defer facilities upkeep, and reduce services and salaries—before considering a merger or consolidation. When they do consider some kind of restructuring, it is usually because their financial situation is desperate and the organization is on the brink of collapse. But the time to think about a merger is well before the point of desperation is reached. Restructuring should be considered from a position of strength, when an organization is capable of expansion and has the potential to absorb such change.

However, nonprofit leaders’ fears regarding mergers and consolidations are justified. Although mergers and acquisitions are commonplace in business, they present formidable challenges, often having higher than expected costs, proposed synergies that are never realized, and ill-conceived, ineffective integration of products or services, to say nothing of the likelihood of layoffs and damaged employee trust at the newly merged company.

Funders can be helpful in providing information about partnerships, mergers, consolidations, and resource-sharing models. They can help nonprofits think through the pros and cons of such an action, the implications it has for the organization, and what would be involved in negotiating and implementing it. Throughout this process, the underlying question must be: Does this action advance our mission? Funders can also help by pointing the nonprofits to specialists in the field who understand the issues related to nonprofit consolidations and asset transfers.

Funders must be careful not to force such actions, however. The parties involved have to see value in coming together, and the impetus for the consolidation or partnership has to come from the organizations themselves. If there is a lesson to be learned from business, it is that forced mergers do not fare well.

Nonprofits would be wise to keep an open mind regarding mergers, consolidations, and other restructuring options and consider them as a path to create stronger organizations and accelerate mission achievement. Organizations should spend time assessing their strengths and weaknesses. They should carefully examine the assets of their organization and of potential partners—boards, management, products/services, channels to funders, real estate, and so on—to see what might complement their operations and vice versa. And nonprofits should focus on what new opportunities would be made possible by a larger, stronger organization.

In this time of shrinking resources and increasing need, it’s getting harder and harder to go it alone. Under the right conditions, mergers and consolidations can be effective strategic growth tools. And just as in business, the creation of a stronger organization could actually change the dynamics in a region or field.

—Mario Morino