Three Hidden Challenges of Nonprofit Mergers
Mergers, sometimes referred to as strategic restructurings, can be a very effective inter-organizational tool to leverage limited resources for maximum impact in the nonprofit sector. Mergers are increasingly explored during times of economic scarcity but are also a viable option for capacity building regardless of the economic landscape.
That being said, there are considerable hurdles that must be overcome for a successful merger between two or more nonprofit organizations. Some of these obstacles might not always be apparent at the start of a merger exploration, especially if you are participating in a merger for the first time. Reflecting on my first merger experience I can recall three challenges that surprised me in their significance to the merger process.
1) Mission-focused Motivations
The need to understand why you are pursuing a merger should be obvious. The most effective nonprofit mergers are ones that remain primarily mission-focused in their motivations. You want to pursue a merger not just to get bigger, not just to create efficiencies through streamlining, synergy and scale, but because it is necessary for your mission—this merger is imperative because the problem of Xdesperately needs a better solution.
Mergers require a large investment of money. Yes there is a financial incentive behind mergers but realize that it could take years after the restructuring process before you see the cost savings. Therefore, if your desire to pursue a merger with another organization is primarily rooted in financial considerations, you are likely to find yourself frustrated in this process. If you pursue a merger exploration with a mutual focus on mission benefit, however, your chances of success are greater as that motivation will buoy you through the hard work ahead.
Finally, be aware that mergers are merely one option for nonprofit collaboration along a continuum of possibilities that may be more appropriate for your organization at the time; indeed mergers are the most complicated, time-consuming and investment-heavy of all these options. Other options for nonprofit collaboration include sharing best practices with your peer organizations, programmatic partnerships, creating a consolidated list and schedule of complementary services available in your community, or group purchasing and back office consolidation. Each of these options can increase organizational efficiency and sustainability while maintaining focus on your mission. Perhaps look to dip your toes into the waters of formal organizational affiliations through one or more of those options before jumping into the deep-end with a merger proposition.
2) Data Alignment
If the two organizations do not track the same data, even if they provide identical services, you have a major uphill battle with any potential merger. For the purposes of grant proposals, measuring outcomes consistently, and having a shared understanding of the impact the two organizations have, maintaining the same data and utilizing the same metrics of evaluation is very important.
One common vetting criterion for merger partners is the strength of the organization you are considering merging with. Even when the organization in question has a stellar reputation for delivering great mission outcomes if that organization measures its successes using different data than your organization uses, then you cannot make a true apples-to-apples comparison.
The need of standardizing data collection and data analysis where there is no pre-existing alignment adds yet another layer of work to be completed in what already is a complex, lengthy and costly endeavor. This is true whether aligning previously unaligned data occurs during pre-merger due diligence or post-merger integration. Finally, data alignment is essential to determining accurate benchmarks for sustained delivery of quality services after the merger—outcome measurements you will need because your funders will require it.
3) Leadership Transition
When two organizations merge the question of leadership transition goes far deeper than which of the two current CEOs becomes the CEO of the merged organization. Of course this question needs to be addressed – there aren’t many Co-CEO roles out there! – but don’t take this transition lightly in either the due diligence or implementation stage.
Once a new leader for the combined organization has been selected, you must carefully plan out this transition. Normally this involves some variation on giving the CEO who will not be continuing in the Chief Executive role post-merger the proverbial “China assignment”: keeping him or her mostly out of sight and out of mind in an attempt to prevent confusion in staff ranks about the combined organization’s leadership.
How do you select a CEO between the two current CEOs? Well in certain cases it may be clear cut: say one organization is significantly larger than its merger partner, or perhaps one of the CEOs has been underperforming and the Board has been looking for an excuse for a change in leadership. Of course, circumstances are rarely so fortuitous. The strategy, reduced to its simplest form, is to assess what will be required of the CEO of the combined organization and then determine who best fits the role, assuming both CEOs are interested in the position.
Nonprofit mergers are complex endeavors and should not be pursued haphazardly or with a limited field of vision. Mergers are important tools for a stronger nonprofit landscape whether pursued in a time of economic downturn or not.
I had the amazing experience to play an integral role in a major human services merger while working at The Centers for Families and Children. The challenges and deliverables specific to my charge in that process – merging the governance protocols and operations of two Associate Boards – will be covered in a future column. While I was initially surprised by the aforementioned challenges to the merger process at the organizational level, further experience and research in the area of nonprofit collaboration has helped me better understand what a nonprofit merger can entail.
Have you experienced at nonprofit merger as an organizational leader, employee, Board member, funder or consultant? Please share your experiences in the comments section below!
© John G. Lynch