Standing Beside Alaska's Non-Profits

Mergers?

It has come to our attention that The Foraker Group is advocating nonprofit mergers (after all, Alaska is like a small town and people talk).

We understand how people may have that impression. We have been saying that the nonprofit sector in Alaska and around the country may not be sustainable in its current form. Many nonprofit leaders have predicted an inevitable shift in how our sector does business. And today, there are many indicators that change has begun. Just a few trends emphasize this point:

  • During the recession, from 2007-2010, the number of nonprofits in Alaska grew by 18% — so the rapid expansion of Alaska’s sector continues. Still, at the same time-.
  • The largest number of requests Foraker receives from its Partners is how to attract and retain board members (Crash of the Herd), and-.
  • If (when) sequestration occurs January 2, 2013, many Alaska’s nonprofits stand to lose significant revenue since we depend twice as much on government funding as other states, and if that’s not enough-.
  • The charitable deduction for contributions may be eliminated as a result of tax reform (Funding Crisis).

La Piana and Associates, supported by the James Irvine Foundation, wrote an article published by the National Center for Nonprofit Boards in 1997 (second edition in 1998). Based on research, they predicted the sector had been growing too quickly for three decades and must, at some point, restructure. They suggested that unfortunately many nonprofits would go out of business. However, they hoped that enlightened sector leaders would be pro-active and create new business models and engage in strategic alliances before the inevitable occurs. They also suggested that at least four strategies exist that may be useful: (1) joint ventures, (2) fiscal sponsorship, (3) back-room consolidation and (4) possibly merger. Since then literally hundreds of articles have been written on the subject. They all agree that strategic alliances are beneficial because when done well they can create the opportunity for more impact. If developing alliances better supports your mission, then it may be worthwhile to look into options.

Restructuring is more than mergers. La Piana’s first option was for nonprofits to increase their impact by creating joint ventures with nonprofits with similar missions and values. This is the easiest and least intrusive way to embrace strategic restructuring. One local example of effective joint ventures resulted from a long process between Alaska’s United Ways. Through their participation on Foraker’s Operations Board, the CEO’s of United Ways have been able to consistently meet to discuss opportunities to build trust and eventually collaborate around common issues. Many years ago these conversations grew into the 211 (information and referral) System. In the past year, one of their longest-term discussions paid off. Several have now joined a collaborative effort for pledge processing and others may join.

Another option mentioned was fiscal sponsorship, which involves a host organization providing integrated back-room support for typically small or start-up nonprofits or initiatives. This could include sharing a charitable tax status with the host organization. In the beginning, Foraker itself was hosted by its fiscal sponsor, the United Way of Anchorage. The Alaska Community Foundation was the first organization that Foraker hosted as a fiscal sponsor. Today, the Alaska Children’s Trust, Best Beginnings, Living Earth, and the Alaska Salmon Initiative all use this service. Fiscal sponsorship has inherent issues for the host and the client. Before Foraker expands this service, our board wants to better understand the implications. We will keep you posted on what, if anything more, we can provide in this arena. However, we are aware of other nonprofits that serve as fiscal sponsors. So if this option interests you, please let us know and we can connect you to potential partners.

The first business model at Foraker was based on another La Piana option, back-room consolidation. We were among the first organizations to offer back-room financial services and according to a report published by Third Sector and the Tides Foundation in 2009, one of the few in the country with a sustainable, non-subsidized service. Today, over 60 nonprofits use our financial back-room services. We mentioned in last month’s newsletter that we are in the final phase of implementing a human resource shared service. We continue to look for additional ways we can leverage other back-room services for our Partners at affordable prices.

So that leaves the last option – the “M” word. Merger-acquisition. This option certainly creates the most discussion. The fact is that mergers work for some organizations, but it is not the answer for others. Foraker has worked with a growing number of nonprofits that for many reasons decided this might be a viable option for them to explore. Some dipped their toe in the water and backed away. Others completed a merger. We offer support for both outcomes. If merger does not make sense, then it’s not your option.

So far, we have seen that mergers work best when one or more organizations have concern about their long-term capacity to thrive. This is typically based on revenue. Therefore, they identify a partner with similar purpose and values to start a discussion on how to better support their missions. We have seen strong organizations acting like La Piana had hoped – more interested in their mission than their independent status. They learned that by combining efforts with another, they could increase their collective capacity.

One example of this approach just paid off in Alaska.

With the support of the Alaska Conservation Foundation, a number of conservation groups began meeting two years ago to identify ways to work together. They started by discussing their common need, which was increased impact. Then they studied different models to increase their capacity. As a result, two independent nonprofits and one supported initiative (fiscal-sponsored initiative) have now merged. They actually created a new entity and dissolved the existing ones. Other conservation groups involved in this dialog decided not to merge, but still expect to use potential back-room support from this stronger new entity.

We think that over time other leaders will seek solutions to an increasingly complex environment. If so, we will be there to assist.

Still, many people have a misconception about mergers. A recent study conducted by our sister organization in Minnesota, MAP for Nonprofits, found that while many see mergers as a way to save money, few mergers decreased costs, at least for the first 4-5 years. Therefore, the best reason to merge is mission impact – not financial efficiency. While money may be eventually saved, those nonprofits surveyed did find an almost immediate increased capacity to better serve their constituents.

If your organization finds it difficult to generate sufficient financial resources, or to find competent staff or board, you may be in a temporary situation. However, it may be time to have a serious reflection about how you can either turn the tide – raise more money, get the right staff, and board – or you may consider one of the four options outlined 16 years ago by La Piana.

If your problem is the right staff, consider back-room consolidation. If you identify a need to increase your financial and/or mission impact, you may want to look at a joint venture. If you have a great idea but have not yet incorporated, you also may want to join with an existing nonprofit in a joint venture or in fiscal sponsorship.

If you find yourself with declining resources and few options, your only course may be to find a host for merger. Or, if you are OK today but have concerns about long-term sustainability, then merger may also work.

The bottom line is that restructuring has many faces – merger is only one of those options. What Foraker has declared is that our sector will likely restructure. Too many nonprofit thought leaders are on the same page on this issue for it not to be a valid trend. What a newly structured sector will look like may surprise us all. Perhaps the four options outlined by La Piana will not be the direction we head. But if not, what?

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