This is a guest post authored by Eric Kessler, founder of Arabella Philanthropic Investment Advisors.
By Eric Kessler
Nonprofit mergers and alliances (M&A) are a hot topic these days among philanthropists and nonprofits alike. Both the Association of Small Foundations and the Council on Foundations are hosting teleconferences on the subject later this month. And at Arabella Advisors, we’re releasing an issue brief this week, “Investing in Nonprofit M&A.” (You can download a copy here.)
What’s behind all this interest? And what should philanthropists know about how nonprofit mergers and alliances work (and don’t)? Let’s start with a look at some key statistics.
First, the nonprofit sector has recently undergone a period of remarkable growth. In just 10 years, between 1996 and 2006, the number of U.S. nonprofits grew by more than 36%, from one million to nearly 1.5 million. Over roughly the same period, the sector nearly doubled its revenues.
Then came the economic downturn. Foundations’ endowments fell, philanthropists’ portfolios shrank, and giving to nonprofits contracted: Giving USA’s latest numbers show total giving falling by 5.7% between 2007 and 2008, on an inflation-adjusted basis.
So we now have a large number of nonprofits in the field and a shrinking pool of resources. Meanwhile, we’re also seeing an increase in demand for many nonprofits’ services, as the population at large feels the effects of the downturn. In this context, any solution that holds the potential to cut costs without undercutting impact looks especially attractive, and M&A holds just that potential.
Done well, nonprofit mergers and alliances can be powerful tools for success, enabling merged or allied groups to realize economies of scale, expand their reach, tap into new funding options and achieve greater impact. But only if they’re done well, and doing them well isn’t easy.
Nonprofit M&A efforts often face significant barriers. With personal and institutional egos on the line, nonprofit leaders sometimes find it hard even to talk about mergers and alliances. And upfront costs and third-party expenses–from feasibility studies to new IT and back-office programs–sometimes undercut even the best-laid M&A plans.
Meanwhile, unrealistic expectations can cloud the entire process. Fears of M&A often stem from worst-case horror stories from the for-profit world, and hopes that M&A will produce significant short-term savings often have little grounding in reality. In fact, successful M&A usually requires significant upfront investments of time, money and patience. The returns on those investments can be huge, but they are mostly realized over the long term, not in the next few months.
It should come as no surprise, then, that M&A efforts that begin by focusing narrowly on the bottom line often go awry. Nonprofit mergers and alliances are far more likely to succeed when forward-thinking organizations put mission first and think strategically about how they can most effectively work together to achieve shared goals.
Philanthropists can help them do that in a variety of ways. They can bring together grantees working in the same geographic or program areas to discuss shared objectives, common problems and strategies for addressing them. They can sponsor educational activities that raise awareness about M&A possibilities among grantees or that help to develop knowledge within the field. They can also directly fund the costs of M&A, from initial feasibility analyses to final assessments.
A handful of foundations have already established funds to help groups defray the costs of restructuring, including the San Francisco Foundation, Dayton Foundation and Toledo Community Foundation. Meanwhile, the Lodestar Foundation has identified a variety of model cases for mergers and alliances through its Collaboration Prize.
Used effectively, such funds and tools have the potential to improve the nonprofit sector for the future–even in the midst of the current downturn.