The Urge To Merge

February 1, 2009       Tom Pope      

Merrill Ringold went through a period thinking he might be sitting on the floor of his nonprofit with no chairs or desk as the end came from a merger around the day before Christmas.

The organization Ringold ran as executive director, the Multiple Sclerosis (MS) Association of King County in Seattle, Wash. found a need to link with the larger Greater Washington Chapter of the National MS Society.

“This has been a very difficult time for the staff,” he said. “At the same time, we know we’re changing for the right reasons.”

Because the merger focused on program and service rather than infrastructure, the client files, donor base, and financial history left Ringold’s confines. One social worker on staff also moved while the other two found different jobs.

“The rest of us lost our jobs,” he said. “We’re closing down our office and the Washington chapter doesn’t have room to take any of our resource library.”

Despite the loss of 3,000 files on MS ideology, medications, costs, and dosage, the move comes with a sense of accomplishment.

The two groups each serve patients with MS to increase efficiency to serve thousands of clients in a more complete way, the merger had to occur.

The Greater Washington Chapter covered more than 20 counties in Western Washington while King County assisted King County and the majority of people in Seattle, Tacoma, and Everett. “We were getting people from those three areas so there was some overlap,” he said. While the current economic downturn did not influence the decision to merge, the act puts the new organization in a better position to deal with the present economy, according to Ringold. “Otherwise we would now have had to plan a dinner or auction for the second half this year,” he said. “That could have been one of the largest fundraisers ever.”

Major factors prompted the merger process early this spring. “Deep down we’ve been stuck doing the same thing without growing,” he said. “We ran a successful campaign and balanced the budget at the $500,000 level for years while they have gone from $2 to $6 million.”

Mergers could become a trend with other nonprofits and, for some, a merger might be the only way to survive. “We rely on fee for service, partnerships, fundraising, and grant writing,” he said. “Nonprofits will see less money going around due to the downturn.”

“That’s an example of someone losing a job by framing the merger as an improvement to the mission,” said Linda Schotthoefer, executive director of the Center On Nonprofit Effectiveness (C-One) in Miami, Fla.

More interest now exists for mergers. The center injected topics into training conferences about mergers five years ago without attracting interest. “Then two years ago, the interest has been growing,” she said. “When you see your budget hurt and your program being cut, you want to raise more money.”

Mergers aren’t the only options. Sharing back office functions could become a simple solution. Making programs more effective or sharing program components are another. Sharing staff or coming together with one accounting firm might solve the issue of reducing some costs without requiring structural changes.

“The fundamental questions to ask about whether to merge could focus on the population,” Schotthoefer said. “What impact are the organizations making now, is another question.” What is the strength of the organization? How are the programs analyzed to see if they are effective? Some organizations aim to look at outcomes measurements.

“At one session, a nonprofit mentioned that they wanted to merge,” she said. “Despite being strong, they worried about how they would avoid the perception of being weak.”

Many nonprofits are calling the center to talk to executives about establishing collaborations of various forms. “The economy of the day drives the curiosity for this,” she said. “The minute you have to lay off a staff member, the worry makes you want to deal with costs.”

This year the center, “dusted off the M word,” according to Schotthoefer. “The more we can get CEOs and board members thinking about the issues, the better,” she said.

Mergers also work with organizations that perform the same function but with different populations. In Dorchester, Mass., the America SCORES – New England after-school soccer and literacy program merged with CityKicks, an after-school developmental soccer program for girls.

“They had a soccer and enrichment program aimed for middle school girls,” said Dennis Wright, the executive director of SCORES. “We were in elementary schools and began to expand.”

The decision to compliment rather than compete led to the merger in September. The new, larger America SCORES New England aims to reach 880 Boston public school students in 23 elementary and middle schools.

“The focus in soccer made the partnering with CityKicks possible,” he said. “Other organizations in the collaborative umbrella we’re in are more community oriented instead of school based.”

The action came as the last element of a five-year plan to look for a partner. Wright’s plans came before the economy dipped. “You don’t go into a merger looking for cost savings,” he said. “You’re looking for efficiency and how to serve more people.”

CityKicks came into SCORES because of the larger national organization. Such a move could benefit the smaller organization with technical support and assistance along with a branding. Joining in a merger can produce increased funding from donors if the donor streams are from separate populations. “We had very little overlap in funding,” he said. “Our main donor was a joint donor and as a result of the merger, they gave us a 25 percent increase over what they gave us individually.”

SCORES didn’t have to change much infrastructure. The two offices just moved some people around a wall that divided the organization in the same building.

Boards were combined. “They had a small board and we wanted our board to grow,” he said. “We’re electing new officers, so the whole shape of the board will change.”

The merger avoided layoffs. “Knowing this was going to happen, we allowed a natural attrition to occur instead of filling those spots.”

A good model for a merger is to find a complement to the goals of the organizations, according to Wright. SCORES knew the growth strategy would place the nonprofit into a competition with CityKicks if the two failed to work together.

“We would end up competing for scarce funds so the logic meant operating from a position of strength rather than weakness,” he said.

While the merger was well in swing before the economic crisis, the new direction put both nonprofits into a better position because of cash reserves, according to Wright.

SCORES shows some examples of the dos and don’ts, according to Allen J. Proctor, principal of Proctor Consulting in Worthington, Ohio. “Never look for a rescuer,” he said. “The other organization has to see a benefit, as with the SCORES example.”

Often financial trouble makes an entity seek a deeper balance sheet, he explained. The other partner may see a new service, constituency, or donor pool to become more effective.

“While the numbers may benefit you, you’ll succeed based on how well the services meld,” he said. “If there’s trouble from not having the perceptive value in the community, then the merger will not appeal to a partner.”

In examining your service, ask whether the demand for the mission still exists. If different services exist with the same geography, then being in the same building might make sense. Look for what the two have in common. What could the two combine? If one agency deals with housing foreclosure and another treats employment and training issues, the two might have different approaches with a similar clientele.

“It might be better to have one stop with clients or systems so the two organizations could offer services together,” he said. “The SCORES example shows how joining with a partner can benefit both.”

Often the need arrives because of a sense to reinvent the mission. Proctor sees this as a way to view merging. He gave an example of a settlement house in New York City existing beyond the original goal. With no more settlements, they reinvented themselves. An alternative would have been to merge with the New York Urban league rather than recast the mission.

“The existence of so many nonprofits helping with housing doesn’t necessarily mean reinventing,” he said. “The question should be, ‘What’s the population being served,’ and, ‘How can they be served better.'”

In the example of the MS organizations, the purpose had to be re-examined, according to Proctor. Was the purpose that the national wanted to have a similar approach to King County? Will the new approach have a message or model of improving services? Will the merger help both organizations?

King County’s Ringold explained how the merger developed because the missions had actually blended into one. King County emerged from a local woman who had MS in 1966 and thought of a support service to patients and families with MS. “She had a niche focus that wasn’t being addressed,” he said. “The national focused on research.”

Since then, the national has altered the mission from just raising money for cures to giving direct support. “They’ve come to our direction and spent time and money for that,” he said. “For a few years, there’s been a duplication.”

More people will be looking beyond their own “silos” according to Gordon Campbell, the president and CEO of the United Way of New York City (UWNYC).

“Mergers will do better if the organizations have experience working with the other leaders and missions before,” he said. “You have to ask, ‘What is the goal of the merger?”

Are the goals to cut costs, have economy of scale, or growth and opportunity?

The United Way is in the process of designing a Human Services Restructuring Fund that Campbell believes will be patterned after a private equity offering. The aim will be to allow investors to focus on the social returns of an investment and provide funding pro bono for assistance and guidance.

“This would be funding not usually associated with foundations or corporations,” he said. Campbell explained that interest in a merger often is not enough in dollars to support the effort. “We want to encourage the administrative support and service parts of such an effort in this economic period,” he said.

The United Way is still putting together the concept by finding individuals, corporations, and foundations for this private equity-type of fund.

“We want to look at the social return on an investment through the value of any back office or merger,” he said. “The process could show the need to evolve into something different like an alliance, joint venture, or consolidation — the merger is just one tool in the tool box.” Part of the effort is a Human Services Resiliency Initiative that looks at technical assistance to expand the reach of online technology, seeking to evaluate how to think differently about the ways nonprofits operate.

“We can’t go back to business as usual,” he said. “To get through this period, we have be innovative and that means continuing beyond the crisis.”

What does MS’s Ringold think about most with the bittersweet prospect of losing his job while helping the organization? “We want the organization to continue at a higher level and only time will tell whether we’re going with the right reasons,” he said. “The decision seems obvious because we’re strengthening people with services.”

The organization his nonprofit is joining has shown a capability to raise more funds with a, “sounder board,” so that the merger avoids a duplication of efforts.

“This merger reminds us of the need to make the most efficient use of funds,” he said. “The merger makes sense so that instead of two agencies marketing and using the same volunteer pool, one will operate more smoothly.” NPT

Tom Pope, a New York City-based journalist, writes about management issues.