Community Collaboration Funds Define Critical Juncture Financing

March 6, 2012       Thomas McLaughlin      

When the board and management of a for-profit company decide that it is time for a merger, they can easily learn about the applicable laws and regulations and the pool of advisors available to them. If they begin the process, they expect to pay for any related services out of current earnings or, in some cases, from future proceeds.

When the board and management of a nonprofit decide that it’s time for a merger or an alliance, they are on their own.

This imbalance of resources is especially harsh since nonprofits don’t typically have extra earnings or future vehicles to tap for the inevitable additional costs of a serious collaborative effort. This is why local collaboration funds for nonprofits are beginning to sprout all around the country.

These funds — which rarely have similar names — might not even be designed similarly but all share the same goal of making it easier to facilitate collaborations among nonprofits. With the lingering effects of the recession and the plentiful state and city budget crises, it is safe to assume that the demand for such assistance is only going to increase in the coming years.

What is less well understood but ultimately perhaps more important is that funding for collaborations is only the most immediate aspect of what is needed. The other missing aspect is an infrastructure robust enough to support collaborating organizations in ways other than financing. That infrastructure should consist of widely proven practices, experienced advisors, and well-tested laws and regulatory policies. Financing local collaborations is a way to jumpstart that process, too.

Financing collaborations is not a new idea. The concept was written about in The NonProfit Times, Exempt’s sister publication, as far back as 1999. (See “Critical Juncture Financing,” The NonProfit Times, December 1999). At that time, it was noted that critical juncture financing “would be any kind of financial resource provided by a third party … to facilitate the successful transition of two or more nonprofit organizations to the next stage of their development.” This remains a durable definition of critical juncture financing. And today, the evolution of nonprofit collaboration allows building even further on that foundation.

A good starting point for community financing of collaborations is for the funders to model the behavior themselves. While not essential, if two or more funders can agree to pool resources it sends a powerful message that collaboration is good for everyone. Funder collaboration also offers two other important benefits: the funding pool will be larger, and the administrative costs can be lower. Engaging multiple funders can lengthen the pool development time, of course, but the benefits should outweigh the costs.

Collaborations typically go through three distinct stages. The first stage is feasibility determination, in which the partners analyze their respective operations in the context of a possible mutually beneficial collaboration. The second is implementation planning, where the willing parties create a work plan for the collaboration. And the third is integration, the much longer stage when the newly linked organizations work out the day-to-day details of their relationship.

Collaborating nonprofits tend to prefer grants during the first or second stage of their work together. Collaboration activity normally is seen as discretionary, because most available funds are put to everyday essentials. Also, collaboration tends to be seen as a new or one-time only event, although this will probably be less true in the future.

In the integration stage, the commitment has been made and acted upon and the organizations are planning a joint future, so there might be more of an appetite for loans and Program Related Investments (PRIs), especially because capital might be needed for property acquisition or different information technology systems.

Grants also make more sense in the beginning stages because the organizations typically are not comfortable enough to risk their own capital on the process. This parallels another logical tendency of collaborating organizations. Since formal collaborations, especially mergers, are so new to most organizations, they are more willing to entrust the work to outsiders.

As the parties develop trust and the pro­cess grows more and more operations-oriented, the nature of the tasks grow so similar to what the organizations are already doing every day that the participants often feel more comfortable doing that in-house.

Once the funding is in place and the fund has been designed, some funds might wish to simply process the applications. But the stronger argument is that community collaboration funds have a responsibility to help build ongoing local capacity for restructuring activities. There are many ways of doing this, and here are a few of the stronger ones.

Record the basics: Simply recording the basic information in consistent manner will help a community. What types of organizations apply for the funding (use their NTEE code for this)? For what purpose (merger or alliance) will it be used? What stage are they in when they apply? In a short time, this simple data will likely show significant trends that could be useful in the participating funders’ other work.

Require a success metric: Collaborations should be carried out primarily to strengthen programming. This objective often gets obscured by those experienced in mergers of publicly-held companies who assume that nonprofit collaborations should produce cost savings. What they should produce is a community benefit. And since that benefit will be different in different situations, the important metric of collaboration will be whatever the participants settle on.

Record the metric: Most mergers take several years to become operational. By requiring a success metric (or metrics) and recording it as part of the funding process, community collaboration funders can begin to build a record of what collaboration approaches work and which ones do not.

The local advisor base: There are many different types of nonprofit advisors in every community, but until recently few had had any experience in nonprofit collaborations. Many of today’s collaboration advisors were yesterday’s strategy or development consultants whose experience is still thin. A community collaboration fund can have a lasting impact just in the way it defines collaboration-related services.

Share the knowledge: Community collaboration funds, singly and collectively, will produce valuable information about what works, what doesn’t, and why. This is a good resource for local nonprofits, their funders, policy makers, and academics.

Creating the fund: In concept, a community collaboration fund is simple to set up and administer. One or more organizations sets aside a designated pool of funds, solicits applications, and distributes the money. Three things are likely to surprise funders interested in such a vehicle.

First, the administration can be time-consuming. This is partly because the fund is a start-up operation and partly because many of the normal files and tools of a funder either will not apply or will need to be modified for the collaborative approach.

Second, the fund must be marketed. This might seem counter-intuitive, but even “free” resources need to be marketed. Further, the fund could need to “sell” the idea of collaboration before being able to “sell” itself. These are not difficult steps, but they can be time-consuming.

The trickiest difficulty is both cultural and administrative. Community collaboration funds, especially multi-party efforts, are not a common approach for most funders. Even more difficult, a community collaboration fund tries to build capacity among grantees in lieu of funding programs and services. While building capacity has been more popular among funders in recent years, the two inherent differences can be formidable barriers to execution.

Community-based collaboration funding is one of the most promising ways of strengthening programs and services. The nonprofit sector does not need to build the intricate patchwork of laws, regulations, and advisors that characterize for-profit mergers, but the sector does need support systems that help collaborating nonprofits avoid wasting their time in re-creating the wheel. Providing local capital for local collaborative solutions accomplishes all of these goals.

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Thomas A. McLaughlin is a principal in consulting services at CCR, LLP, a large Boston-based accounting and consulting firm. He is also a member of the faculty at the Heller School for Social Policy and Management at Brandeis University. His most recent book is ‘Nonprofit Mergers & Alliances’ 2nd ed., from John Wiley & Sons. His email address is TMcLaughlin@ccrllp.com