Merger Myths

Posted by Laura Otten, Ph.D., Director on April 15th, 2016 in Thoughts & Commentary

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While I frequently rail against the proliferation of nonprofits organizations, the automatic solution to this problem is not mergers.   Consideration of a merger should give everyone who cares about the clients of their nonprofit pause—literally.  Pause and think about who will truly benefit from a merger?

You’re a struggling nonprofit?  Find an organization with which you can merge.  Retiring executive director and no internal candidate to promote to avoid a search?  Merge.   Add in that both of these situations are occurring in high numbers and that we have a merger happy funder community.  If we take a step back, we need to ask, who are the real winners and losers in a merger?

Mergers in the nonprofit sector seem to share a similar motivation to those in the for-profit sector.  It is all about money.  (Not to be confused with empire building, which also motivates in both worlds.)  Certainly, the companies sought as the merger targets bring something beyond the potential to increase the bottom line of the dominant corporation, as well:  production of a part that will now allow the final product to be built totally within one organization (saving money), a product that will offer a corporation desired diversification into a totally different or perhaps complementary market than current products (expanding market share brings in more money).  So, too, should the nonprofit merger targets bring some value-add beyond an assumed improvement to the bottom line:  allow for a continuum of total care in one locus, add a new facet to the fulfillment of mission promises, etc.

If nonprofits aren’t clear about the non-financial value-add a merger will accomplish, they may well be greatly disappointed.  Nonprofits believe that a merger will, if nothing else, bring an economy of scale and, in so doing, save money.  Yet the data is not there to support this outcome.  It is simply a “merger myth.”   The savings that might accrue from having only one executive director and one development staff, for examples, are offset by a larger staff, a more complex audit, greater insurance costs, as a few examples.

And if a merged organization were to add into their financial projections the recouping of money (and human resources) spent on the two-year process (if done carefully and well, this seems to be the timeline norm) leading up to a merger, the legal fees to do the actual corporate merger and the associated costs involved in establishing the merged new organization, it would be quite some time, if ever, before any increased profits were realized and true improved financial footing achieved.

Maybe, eventually (and the eventuality, should it happen, is much, much further into the future for the vast majority of nonprofits due to the size of their pre-merger budgets), a merger might help a bottom line.  But that cannot ever be our only concern, as we are not simply businesses, we are mission-driven businesses, meaning we must see benefit to both—our bottom line and our mission.  Which brings us to the more important question:  will a merger really improve the merged organization’s ability to deliver on the new, co-joined missions and the clients who benefit from that mission?  Or, do we just tell ourselves that to make us feel better and justify the merger?

The slippage in care and attention to our mission and clients begins at the point merger talk gets serious.  We can try to fool ourselves that no slippage occurs, but that doesn’t change the reality.  From the moment the rallying cry to pursue a merger is sounded, the board, executive director and, depending upon staff size, perhaps a few other senior managers, split their time, energy and attention between the “routine” things their positions require and the things the merger process demands.

Over a two-year period, that’s a lot of diverted attention.  And since so many mergers die in the 11th hour, that’s a diversion never to be recouped.  The slippage continues when the attention turns to building the new organizational culture, moving from two to one, working out the kinks, learning new ways of doing things, etc.

But the real answer to the question of “will our clients benefit?” happens in the new way the merged organization executes its mission.  In looking for those economies of scale, does it merge staff into one location, thereby moving out of the community?  What happens when a community-based, or even community-serving, nonprofit loses touch with its community, something easy to do from a distance, easy to do when you become a visitor instead of a neighbor?  In looking to achieve economies of scale, does it reduce staff and increase the workload of those who remain?  What happens to the quality of product and service we are delivering to clients when staff is stretched too thin?  In looking for economies of scale, does the nonprofit remove altogether necessary resources from of the reach of (former) clients?  Do we create a situation where some clients are winners and others losers?

No nonprofit can afford to forsake its clients for the zeal of funders and continue to call itself a real nonprofit, one that is truly working on behalf of the public good, as opposed to some other master.
And it does appear to be funders who are driving this craze.  But why?  For whose benefit?  Some say it is to reduce the size of a sector that has grown larger than it might need to be.  Some say it is because there are too many struggling nonprofits and funders, understandably, want to prove a good bang for their bucks.  But let us not abandon our purpose to prove impact.  Fortunately, in this case, we can have it all.

Struggling is exhausting, but it is not necessarily bad.  Just getting by financially while engaging in hard, diligent work to deliver a quality and needed product in a manner that is accessible in every way to the intended clients is far better than settling for a potentially fiscally stronger organization delivering mediocrity.




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