Special to the Philanthropy Journal
By William McAndrews
It’s getting tough out there . . .
Most every nonprofit leader knows from experience that there is ever increasing pressure on nonprofit organizations to become more effective, efficient and to improve outcomes.
As pointed out in the articled “Evolve or Die” by Evans and Grantham “. . . nonprofits must find new ways to organize and do things or they will die.” Also, the authors noted, nonprofit funding is moving from one of “government and a little bit” to “some government, some philanthropic, some earned revenue / social enterprise, some individual and corporate support.”[1]
Social service providers, in particular, are under increasing pressure to undertake fundamental changes in how they provide services – moving from a fee for service model to a managed care construct – with the idea that this will improve outcomes and lower cost.
Once an organization has cut costs as deep as possible without hurting programs, they need to find new creative ways to survive and provide services.
So what to do
Responding to the increasing pressure to do more with less, nonprofit leaders are asking themselves:
- Are there ways to assure the sustainability of the organization and achieve our mission while improving outcomes?
- Can we collaborate and work together differently to become more effective and efficient?
- In a time of change with limited resources maybe we should merge, yet we are unique and we do not want to lose our autonomy?
In addition to a merger, there are several ways nonprofits can work together. A nonprofit collaboration can be as simple as a one-time administrative alliance or a more formal collaboration that sets up and employs an External Service Provider (ESP) to deliver specific administrative services such as payroll, human resources or marketing.
Some nonprofits have found success creating a standalone Management Service Organization (MSO) that is created by a number of nonprofit agencies to provide specific services to and for the participating agencies.
Finally, there is the merger that requires creating a new combined entity out of the merging organizations. Here entities must wed cultures, blend work processes and realign organizational strategic initiatives.
Collaboration can be beneficial, but as shown in the chart to the left, each form of collaboration brings their own complexity and risks, time commitment and costs.
Moreover, it takes a willingness for individuals from different cultures to effectively work together.
In one example[2], Chicago Youth Centers (CYC), – a children’s services provider to underserved children from age 3 to through school years, – had made all the “inside the building” cuts they could without harming the quality of their programs. They chose to partner with Family Focus who provides services in the same area to children from birth to age 3. This relationship benefited both organizations in that they were able to share infrastructure and administrative costs and continue to strengthen their programs.
While CYC and Family Services chose the more complex merger as a form of collaboration, the less complex forms of collaboration are more prevalent. “. . .Nonprofits reported the most activity in the less integrated forms of collaboration: associations and joint programs. Both lend themselves to multiple engagements in a three-year period versus more integrated collaborations, like shared support functions and mergers, which have longer cycles. Overwhelmingly, joint programs emerged the most prevalent: a full 78 percent of nonprofits and 82 percent of foundations cited involvement.”[3]
But, as discussed by David La Pana in the Stanford Review article Merging Wisely[4]
“Despite conventional wisdom, mergers themselves do not generate revenue or reduce expenses. In the short term, they actually require new money for onetime transactional and integration costs. Even in the long term, the act of merging itself did not lead to substantial cost savings for the vast majority of the mergers . . . Merged nonprofits can roll together annual audits, combine insurance programs, and consolidate staffs and boards. But they are also bigger and more complex and require more and better management—a cost that often exceeds the savings from combined operations.”
While a merger, or any collaborative effort cannot guarantee cost savings they do, however, have the potential to create more effective and efficient organizations. As noted in Merging Wisely:
“Casual observers often perceive cost savings after mergers. But a closer inspection usually reveals that the merger itself did not save the money. Instead, it created a structure within which management was able to make the tough decisions that ultimately led to better financial footing—decisions such as instituting layoffs, restructuring contracts, and launching new fundraising programs, any of which could also have been undertaken without a merger had the organizations’ leadership been willing or able to do so.” (Emphasis added)
Where should I start?
Many nonprofit leaders recognize that they do not have necessary skills, expertise and time to successfully lead a complex collaborative undertaking. Enlisting a third-party, or consultant, with no affiliation to any of the organizations can greatly help facilitate the process. They can engage in an honest conversation about each organization’s capacity, commitment, concerns and responsibilities about a shared service undertaking.
Moreover, they can help a nonprofit determine how best to combine corporate legal structures, provide joint programs or share back office infrastructure. An outside expert can help you think through the options and recommend solutions that have worked for other nonprofit organizations.
1 Charity Village – Evolve or Die: Why and how nonprofits are thinking differently about our organizations, Written by: Patricia Evans and Barbara Grantham August 6, 2012
2 Forbes Online – Nonprofit Collaborations: Why Teaming Up Can Make Sense, by Geri Stengel, April 9, 2013
3 The Bridgespan Group – Making Sense of Nonprofit Collaborations 2014
4 Stanford SOCIAL INNOVATION Review – Merging Wisely; By David La Piana, Spring 2010
William McAndrews is the Senior VP & Regional Director for the National Executive Service Corps (NESC). NESC is a 501(c)3 nonprofit consultancy that in the past three decades has helped the leaders of more than 2,000 nonprofits in metro-New York area with guidance in organizational leadership, strategic and business planning as well as planning implementation, shared services and collaborative efforts.
