Beyond Collaboration Strategic Restructuring of Nonprofit Organizations

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Beyond Collaboration Strategic Restructuring of Nonprofit Organizations R e v i s e d E d i t i o n NCNB Funder Briefing A publication of THE JAMES IRVINE FOUNDATION and the NATIONAL CENTER FOR NONPROFIT
Beyond Collaboration Strategic Restructuring of Nonprofit Organizations R e v i s e d E d i t i o n NCNB Funder Briefing A publication of THE JAMES IRVINE FOUNDATION and the NATIONAL CENTER FOR NONPROFIT BOARDS By David La Piana The National Center for Nonprofit Boards (NCNB) is dedicated to increasing the effectiveness of nonprofit organizations by strengthening their boards of directors. Through its programs and services, NCNB: provides solutions and tools to improve board performance acts as convener and facilitator in the development of knowledge about boards promotes change and innovation to strengthen governance serves as an advocate for the value of board service and the importance of effective governance. NCNB is a 501(c)(3) nonprofit organization. To learn more about NCNB s publications, workshops, and consulting services, contact us at: National Center for Nonprofit Boards (as of January 15, 1999) 1828 L Street, NW Washington, DC (800) (202) fax (202) The James Irvine Foundation is dedicated to enhancing the social, economic, and physical quality of life throughout California, and to enriching the State s intellectual and cultural environment. Within these broad purposes, the Foundation supports programs in the arts, children, youth and families, civic culture, health, higher education, sustainable communities, and workforce development. Additional copies of this report may be obtained by contacting the Foundation. The James Irvine Foundation One Market, Steuart Tower Suite 2500, CA (415) South Figueroa Street Suite 740 Los Angeles, CA (213) The James Irvine Foundation Revised Edition First Printing, November 1998 Foreword The James Irvine Foundation supports programs to improve the management, governance, and operations of nonprofit organizations. In this context, we undertook an exploration in 1996 to determine whether we could be helpful in supporting or encouraging strategic restructuring among nonprofits in California. As nonprofit organizations face mounting challenges and new opportunities occasioned by federal devolution and an increased emphasis on accountability, issues of mission, strategy, and market must be reexamined. Such assessments have already resulted in several high-profile and many lowerprofile mergers among nonprofits in California. Given this reality, a study of sectoral activity in this regard seemed timely. We are pleased to share with both other funders and nonprofit leaders the results of this inquiry on strategic restructuring, conducted by David La Piana. The study offers an analysis of restructuring efforts among nonprofits and describes several strategies that funders might develop to support further activity in this arena. Though the report is addressed to funders, many of the findings will be of interest also to nonprofit executives and board members. In the spirit of sharing lessons learned, we encourage readers to request additional copies of the report from the foundation or to pass the report along to others. We are grateful to the many funders and nonprofit leaders in California and beyond who contributed to our inquiry, and I especially wish to thank David La Piana for his thoughtful analysis. I would also like to acknowledge the National Center for Nonprofit Boards (NCNB), which not only served as publisher of the report, but also provided additional perspective and rigor in the editorial review process. NCNB will assist in distributing the report beyond the foundation community. We hope this report contributes to the conversation within philanthropy and the nonprofit sector on these issues, and we welcome your thoughts about how the Irvine Foundation might support nonprofit organizations as they engage in strategic restructuring activity. Dennis A. Collins President The James Irvine Foundation Preface to the Second Edition The first edition of Beyond Collaboration appeared in April It was mailed to a select group of funders and others around the nation. These readers in turn recommended it to their colleagues and grantees. The first 5,000 copies disappeared quickly. Callers to The James Irvine Foundation, which distributed the report, also quickly consumed a second printing of 5,000. In mid-1997 the National Center for Nonprofit Boards added Beyond Collaboration to its web site (, where thousands more have read, downloaded and reproduced it. The report has found its way into registration packets at numerous conference programs, onto the shelves of nonprofit and community foundation libraries, and onto at least two university course required reading lists. From its origins as an effort to look into the future role of mergers in the nonprofit sector, the study that became Beyond Collaboration grew into an investigation of the possibilities for partnering across multiple entities, using many structures. The original publication of this report marked the beginning of a heightened consideration of organizational structures, collaboration, and partnering in the sector. The state of knowledge in the field has advanced considerably since 1997, a fact reflected in the expanded reference section. We are heartened that so much attention has been drawn to these critical issues, and hope that the re-publication of Beyond Collaboration will spur further debate and inquiry. Executive Summary Strategic restructuring including mergers, back-office consolidations, and joint ventures is an increasingly popular option for nonprofit organizations facing stiff competition, rising community needs, and decreasing federal funds. The James Irvine Foundation recognized the potential role funders might play as nonprofits grapple with fundamental changes in the way they operate. Thus, the foundation commissioned a study to develop an approach through which foundations might assist nonprofits in strategic restructuring. This report, intended to encourage funders to become involved in strategic restructuring, outlines that approach. The study attempted to answer five questions: 1. How can we best define and describe the options for strategic restructuring? 2. Is the climate right for strategic restructuring? Will successful restructuring improve the functioning of nonprofits? 3. What pressures lead nonprofits to consider mergers, consolidations, and joint ventures, and what difficulties prevent bringing these efforts to fruition? 4. How can funders encourage nonprofits to undertake strategic restructuring without being perceived as applying pressure to do so? 5. What educational activities can funders promote to encourage strategic restructuring activities such as mergers, consolidations, and joint ventures? Findings in Brief Many nonprofits are considering a fundamental change in organizational structure because of economic pressures such as increased competition from business, government, and other nonprofits; a shrinking supply of experienced leaders willing to remain in the sector for inadequate wages; and increasingly urgent and complex community needs. Those interviewed for the study suggest that a heightened interest in strategic restructuring is natural as the nonprofit sector matures, but that nonprofit leaders need assistance as they undertake significant organizational change assistance that funders are well positioned to provide. Nonprofit organizations attempting to restructure through mergers, back-office consolidations, joint ventures, or fiscal sponsorships must overcome perceived threats to autonomy and board and staff members self-interests, as well as potential culture clashes. Since the concept of strategic restructuring is still evolving, additional research is needed to analyze factors leading to success or failure, develop best practice guidelines, and compile and disseminate information for chief executives and board members. By sponsoring educational activities intended to raise overall awareness in the sector, funders can introduce nonprofit organizations to strategic restructuring options, without requiring consideration as part of a grant agreement. Funders can provide direct assistance to organizations involved in strategic restructuring by sponsoring workshops, training consultants, or providing direct financial support. National Center for Nonprofit Boards PAGE 1 Introduction FFoundations are faced with an overwhelming task. Their finite resources cannot meet the unlimited needs grant seekers present, and they make up only a small fraction of the total support Americans provide to the nonprofit sector each year. Nonetheless, these funders play a critical role in developing new ideas, addressing emergent needs, initiating partnerships, and focusing the public s attention on important issues. Economic and political pressures, competition, taxpayer revolts, and a few high-visibility scandals have all hurt the nonprofit sector. As a result, nonprofits face critical decisions about their future and perhaps their very survival. Funders recognize that new ideas will flow and that promising partnerships will grow only as long as the nonprofit sector is strong and vibrant. Thus, they have a vested interest in the health of the sector. This report, based on a study commissioned by The James Irvine Foundation, reviews the challenges facing nonprofit boards and chief executives. It also examines the motivations and inhibitions that encourage or discourage these leaders in considering nontraditional alternatives such as mergers, consolidations, and joint ventures. Frustrated by overlapping programs, service gaps, turf battles, and a lack of coordination, funders have begun to encourage, and in some cases to demand, closer collaboration between nonprofit organizations in return for new or continued funding. Unfortunately, despite some notable exceptions, this push for collaboration has led primarily to joint grant writing rather than collaborative action and sustainable partnerships: nonprofit leaders work together on the proposal, but continue to work separately after the grant is made. Yet the need for closer coordination remains, as does a need for creative, strategic solutions in response to an accelerating economic squeeze. The challenge confronting nonprofits is to look beyond collaboration to build sustainable, long-term relationships that fundamentally change the way they function as organizations. Anecdotal evidence indicates that nonprofits are exploring mergers, consolidations, and joint ventures with increasing frequency. Each of these options goes beyond the current definition of collaboration. Where collaboration implies coordination of service, strategic restructuring requires changes to the corporate structure and, frequently, a change in the organization s locus of control. These undertakings are not easily achieved. They require nonprofit leaders to yield some of their autonomy, to make themselves vulnerable, and to open their organizational cultures to outside influences. In return, these efforts have saved essential nonprofit services (if not the organizations that originally delivered them) from extinction, resulted in an improved market position, and opened the door to new opportunities. This report may inspire funders to ask some difficult questions of their grantees. Ultimately, however, it is intended to help funders better understand the nature of strategic restructuring and the ways in which they can help their grantees develop meaningful partnerships with other nonprofits. These decisions among the most significant nonprofit leaders face have impacts that extend beyond the organizations involved to communities that rely on the nonprofit sector for a host of programs and services. National Center for Nonprofit Boards PAGE 3 Background &Assumptions A nonprofit merger or consolidation will only be successful in the long run if the leaders involved can place achieving improved community outcomes ahead of both advancing their organizational mission and maintaining organizational structures. Michael Howe Executive Director East Bay Community Foundation EEarly in 1996, The James Irvine Foundation identified a need to encourage increased integration of nonprofit organizations, thereby leading to greater efficiency and an increased chance of survival. The Foundation commissioned this study to develop organizing principles for this effort; to investigate the attitudes of nonprofit leaders toward mergers, consolidations, and joint ventures, among other options; to develop and test ideas for promoting these arrangements; and, ultimately, to propose an approach through which the Foundation might assist nonprofits as they strategically restructure their organizations for increased effectiveness. This report attempts to develop a fuller understanding of the range of strategic restructuring options available and the motivations, inhibitions, and environmental factors affecting nonprofit leaders attitudes toward change. Mergers, consolidations, and joint ventures can help nonprofit organizations address structural weaknesses. This report addresses both specific strategic restructuring options and the broader ends toward which they are employed. Ultimately, strategic restructuring should better position nonprofits to advance their missions. The quest for organizational survival in a hostile environment should be secondary to the goal of advancing a useful social mission. The nonprofit sector needs a keen market focus and an ethic of responsibility to mission over empire-building or organizational self-preservation. By integrating nonprofit organizations into fewer, stronger, more flexible and effective structures, resources and focus can be redirected to strengthening and advancing missions that, as Michael Howe states, result in improved community outcomes. All studies, and ensuing reports, are molded by a set of assumptions. This work assumes that: Improved quality of service, enhanced market position or market share, political advantage, and similar strategic benefits are the most significant outcomes of successful restructuring efforts. Although a major motivator, cost reduction is seldom a shortterm outcome of mergers and consolidations. Traditional philanthropy (the giving of grants) has a limited ability to help nonprofits through structural difficulties. Funders are called to take a more active role in guiding nonprofits as nonprofit organizational structures evolve and change. PAGE 4 National Center for Nonprofit Boards Study Questions The questions articulated at the study s outset and addressed in this report are: 1. How can we best define and describe the options for nonprofit strategic restructuring? 2. Is the climate right for strategic restructuring? Will successful restructuring improve the functioning of nonprofits? 4. How can funders encourage nonprofits to undertake strategic restructuring without being perceived as applying pressure to do so? 5. What educational activities can funders promote to encourage strategic restructuring activities such as mergers, consolidations, and joint ventures? 3. What pressures lead nonprofits to consider mergers, consolidations, and joint ventures, and what difficulties prevent them from bringing these efforts to fruition? Problems facing nonprofit organizations are at their core the same across all subsectors: motivating and leading board members, staff, and volunteers; earning and raising sufficient funds; managing the organization; developing and articulating a vision for the future; and continuously analyzing and acting upon environmental pressures. Board and staff leaders likely to benefit from strategic restructuring already possess, at a minimum, a basic level of strategic sophistication that they bring to their thinking about the organization s future. If they lack this perspective, and cannot gain it quickly, the strategic restructuring effort is doomed to failure. Likely nonprofit candidates for strategic restructuring are analogous to businesses with undervalued stock: the necessary elements for success are present, but the organization needs outside help to move it forward. When a business s restructuring is successful, its stock value rises dramatically. When a nonprofit s restructuring is successful, its ability to fulfill its social mission rises dramatically. National Center for Nonprofit Boards PAGE 5 Findings Findings Q PAGE 6 Q U E S T I O N 1 How can we best define and describe the options for nonprofit strategic restructuring? T The nonprofit sector is highly interdependent. Nonprofit organizations join trade associations and coalitions. They form shared purchasing clubs and insurance cooperatives. Professional staff members belong to guilds and advocacy organizations. This associative process builds indefinitely, creating a web of interrelationships throughout the sector. Virtually all of the organizations with which nonprofits affiliate are themselves nonprofits. No nonprofit organization can long survive and succeed in advancing its mission while living independent of other nonprofits. Nonprofits gain information, political power, and personal and professional support from and in concert with other nonprofits. Thus, close working relationships, partnerships, and even joint ventures between nonprofit organizations are a fairly natural occurrence. Definitions and Legal Forms Some confusion exists when distinguishing strategic restructuring from strategic planning and reengineering. Strategic planning is an effort to define an organization s purpose and scout a path for the years ahead; strategic restructuring is a set of options helpful in implementing the plan. Reengineering refers to large-scale productivity-enhancing process change, whereas strategic restructuring describes an evolving form of structural change. Legally, only a merger effects change in a nonprofit s corporate status, producing a higher level of integration than any other transaction. No matter how it is implemented, a merger means a change of control, involving a great deal of risk and emotion. A variety of legal inventions can be employed in executing a merger or other affiliation. The most common options are described below; variations are constantly being invented and tested in the field. Merger is the generic term for a full and final coming together of two previously separate corporations. Legally, mergers often entail one nonprofit closing (the dissolving corporation) and leaving its assets and liabilities to another nonprofit (the surviving corporation). This tactic is often employed for technical reasons. For example, if ABC and XYZ wish to merge but ABC is in debt, it may be best for XYZ to dissolve. To do otherwise could trigger a call for repayment of the debt prior to dissolution. Although the merger may be a joining of equals, the legal partnership will preserve only one corporation. Roughly eight out of ten mergers are executed as dissolutions, for reasons similar to the example above and because it is simpler and less expensive. A true merger in the legal sense occurs when both nonprofits National Center for Nonprofit Boards dissolve and fold their assets and liabilities into a newly created third entity. Since this entails the creation of a new corporation and application for a new IRS tax exemption, it is usually not the method of choice. Acquisition is the same, legally, as merger. Since nonprofits have no identifiable owners, nonprofit corporations cannot be bought or acquired. Certainly no legal maneuver among nonprofits corresponds to the acquisition of a publicly traded corporation. Nonetheless, many mergers, perhaps the majority, feel to participants very much like acquisitions. Use of the term is widespread, usually in reference to a merger in which one party is considerably larger or stronger than the other. Back-Office Consolidation is an increasingly common arrangement for sharing core administrative functions among nonprofits involved in similar work. A consortium of communitybased p
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