When Will the Bubble Burst?
More than a decade ago, David La Piana, founder of La Piana Associates, a management consulting firm in northern California, published a study on the need for nonprofits to consider new structuring options. Published in 1997 for the James Irvine Foundation, Beyond Collaboration presented the following observations:
- 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 member self-interest, 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, to develop best practice guidelines and to 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.
Unfortunately, not much restructuring has happened since that report was issued. The primary audience for the paper was funders, but they have continued their long-held tradition of funding anything “new,” such as new programs and organizations. Funders did not encourage nonprofits to face this new reality by thinking differently or by offering strategic incentives. So as a follow up, La Piana tried again in 1999 with his book The Nonprofit Mergers Handbook, in which he better defined restructuring options. Most everyone understands merger – but the other terms included:
- Back-office consolidations – where multiple organizations combine internal support services like finance or human resources.
- Joint ventures – where multiple nonprofits formally cooperate to provide a new or enhanced service.
- Fiscal sponsorships – where a nonprofit with a broad mission serves as the fiscal agent for a new initiative or nonprofit.
After the book was published, the message was delivered to a new audience – nonprofit leaders – encouraging increased collaboration and presenting a case for these new ways of doing business. Time passed—
Then in 2006, Tom Tierney of Bridgespan Group published a paper in Stanford Social Innovation Review called “The Leadership Deficit.” His point: “One of the biggest challenges facing nonprofits today is their dearth of strong leaders – a problem that’s only going to get worse as the sector expands and baby boom executives retire. Over the next decade nonprofits will need to find some 640,000 new executives, nearly two and a half times the number currently employed. To meet the growing demand for talent, the author offers creative ways of finding and recruiting new leaders from a wide range of groups, including business, the military, and the growing pool of retirees.”
Sound familiar? After their paper was published, and even with financial support from enlightened foundations in the Northeast to encourage consolidations, Bridgespan’s information and that funding did little to create momentum for change. Some national nonprofits like Big Brothers Big Sisters and Girl Scouts developed initiatives to reduce the number of affiliates, merging into regional or statewide organizations. Their efforts resulted in mergers, but often met resistance from local communities.
The conservation sub-sector is also promoting collaborations and mergers. The Institute for Conservation Leadership (ICL) published a study in 2010 called Mergers and Other Partnership Structures for Environmental Nonprofits, which focused on four successful collaborations to mergers – but also wondered if their sub-sector was truly ready and willing to look at such options. Even with these and many more calls for restructuring for more than a decade, only a few enlightened leaders or those of organizations in distress have heeded the call.
At Foraker we find that none of the sub-sectors seem to be any more willing than others when it comes to restructuring, especially opting for merger.
Even with encouragement for mergers or back-room integrations, these studies point out a more perplexing issue – what to do about the ever growing number of nonprofits. For us at Foraker, the endless stream of enthusiastic founder want-to-be’s come to us to learn how they can start yet another nonprofit. This is an ever-present reality. Each founder has a “brilliant” idea, and each believes that if only people knew about it, they would fill bucket loads of money for them to do great work. Our first reaction is to just say no. However, who are we to determine what great idea may be needed or could become sustainable? What we can do is to question if a logical partner already exists for this proposed entity to work with so they don’t have to create another nonprofit in Alaska.
The latest estimate for the number of nonprofits in Alaska is 6,600 – if that’s true, it represents a 10% increase since 2007! The national nonprofit sector is five times larger that it was three decades ago. Many of these nonprofits in Alaska and the nation are not active or have no staff – proving that some organizations may be able to maintain minimal operations for many years. However, for the 20% with staff, all signs indicate that they will have difficulty finding the people to serve on their staffs, not to mention all those boards. We already have both problems with the nonprofits that exist today.
However, new alternatives are available for nonprofit start-ups. One of the most promising is fiscal sponsorship – where an existing nonprofit, (or dare we say a new one?) with a broad mission or a mission of sponsoring or incubating new initiatives becomes a fiscal agent for new programs. The Tides Foundation created the Tides Center in the Bay Area that serves as a Fiscal Sponsorship Organization (FSO), currently with more than 200 projects. Since its inception, Tides Center has worked with over 800 nonprofits. Some have filed for tax status and are independent nonprofits – others are virtual organizations and use the Center’s tax status. The benefits of such an approach is that founders get to do what they want – provide a mission-based service – and the fiscal sponsor supplies the back-office business support and a tax status. Often times, employees of these entities can be on the payroll of the fiscal sponsor and receive work place benefits which might not be attainable if they were working for a stand-alone nonprofit.
The only potential drawback to the approach is that some see it as a short-term solution. In the end, many want to “graduate” and become independent. With a short history of fiscal sponsorship, we don’t have good data yet on how long such a relationship could endure.
Such collaborations are not just a national trend, some Alaska nonprofits have been doing this for years. One of the most noteworthy is Coast Alaska. Twelve years ago the public radio stations in Southeast Alaska founded Coast to serve as their fiscal sponsor. Each station remained autonomous for local programming and staff selection, but their payroll, benefits, finances and even underwriting and membership are housed in Coast. It is a national model.
In the mid-1990’s, The United Way of Anchorage became the fiscal sponsor for a Weed and Seed Initiative. That partnership continues. United Way also hosts Best Beginnings, 211, and for its first three years, The Foraker Group itself. Foraker has likewise hosted the Alaska Community Foundation and continues to host The Alaska Children’s Trust and Living Earth Foundation. It is conceivable that such relationships could be maintained for decades and, according to La Piana and ICL, may be one of the better new strategies to reduce the number of new nonprofits.
Still, Bridgespan found that just reducing the growth of the sector’s nonprofits is not enough. Even if no new nonprofits open their doors, 60,000 new CEO’s will be needed each year over the next decade just to maintain the current organizations. This is caused, as we know, by the encroaching retirement of the baby boom leaders.
In its July meeting, the Foraker Governance Board discussed this issue. Members were clear that it was our role to assist any individual or group with questions about starting a new nonprofit. It was also our role to provide the best information possible – including the hard realities of sustainability for new organizations. They asked us to be helpful to all, but at the same time be frank about the difficulties people will face as they start down this path. They also asked us to continue to hone our skills in assisting nonprofits when they seek to merge. We have worked with numerous groups in recent years on a range of merger options and are glad to say that most were satisfied with the process. Most of these mergers were forced by the economy or by their national organization. Now we are working on a first – a group of what I earlier referred to as “enlightened leaders,” – or those making this decision before they are in crisis.
KUAC (Fairbanks public radio and TV), KTOO (Juneau public radio and TV), KYUK (Bethel public radio and TV), APTI (Anchorage public radio and TV) and Coast Alaska have been working for two years on a vision that should increase their ability to provide better service and address their mission. We commend those leaders, board and staff, for doing this hard and important work. Their effort does not just focus on the obvious reason for consolidation – efficiency. By restructuring, their plan allows them to move into a new, more sustainable model – one for the 21st century.
While attending a recent conference on collaborations sponsored by the Alaska Conservation Foundation, I learned that many nonprofits founded 30 or 40 years ago still embrace structures that are obsolete in our hi-tech world. True, those old structures may work for certain organizations, however, for others (and likely for most) it’s time to trade the old model for a new one. The lesson here is that when nonprofit leaders truly focus on their mission, they learn that what they really care about is the mission – not the organization. And we believe that when they maintain this focus, they’ll find the structure that’s appropriate to their mission.
In 1997, La Piana and Associates began to define why and how nonprofits could reorganize and have more impact. Everyone thought it was a good idea – for someone else.
- In 2006, Bridgespan warned of an eventual shortage of nonprofit leadership and predicted that without immediate action to both slow the growth of new organizations and engage existing ones to consider reorganization, a “crash of the herd” would happen sooner than later. UAA’s Institute for Social and Economic Research (ISER) estimates that since 2007 the Alaska nonprofit sector has grown 10% — indicating, we believe, that mergers have been rare and new founders continue to start new organizations.
- Most national experts and our experience in Alaska finds that only two groups of nonprofits consider merger – those in crisis and about to go out of business and those forced by their national association (or a major funder) to merge. Few leaders embrace the brutal facts and restructure based on those facts.
- While we try to encourage founders to look for an existing home for their great new idea in lieu of forming another nonprofit, most of the time this advice falls on deaf ears. They are certain that we can’t really be talking about them and their great vision, could we?
Maybe we can find ways to combine the best of organizations with similar missions and values, so together they become better at serving their purpose – like the leaders in Alaska public broadcasting are doing. With support from institutional funders, we may be able to stem the tide of new incorporations. Let’s seriously consider creating organizations for the 21st century. The data says we either need to make this happen while we have the time to do it right, or external forces will demand the change when we can not adequately prepare to do it in a way that supports our missons.