Mergers, affiliations becoming way to survive
My May column in Columbus Business First was prompted by the announcement of another merger of nonprofits in Columbus and a swath of combinations in Cleveland. There are two points I wanted to emphasize.
The first is that nonprofits are a major employer in Ohio (an average of 10% of employees work for nonprofits) and they are a major economic engine through their payroll and spending. We see plenty of government subsidy programs to for-profit companies under the rubric of “economic development.” It is time we recognize that a nonprofit job and nonprofit expansion has just as much juice as a for-profit expansion. Actually probably more because nonprofits are required to plow their profits back into the business while for-profits can send their profits off to executives and shareholders located around the world.
The second and more complex point is that mergers involve decisions between one partner’s mix of approach, efficiency, and program and the other’s. Finance should not be the only factor used to determine which partner gets its way on a particular program. The best guidance is to know each partner’s “key mission”: that service or approach that is strongly needed by the community and which is unique to that partner. In knowing the key mission of each partner, one begins by acknowledging what must be preserved for each partner. Everything else is open to modification or elimination.
Nonprofit mergers can produce economic development benefits for the local economy. For example, one Cleveland merger resulted in a combined $32 million business that preserved 457 jobs in the city. And as a much larger provider of services, the combined entity may be better able to negotiate more economic contract terms that can free up resources to further support the needs of the community.
It is time to realize that devoting community resources to nonprofit mergers can have the same economic development benefit as the better publicized tax credit programs used to encourage for-profit companies to remain in the community. While the Cleveland merger was facilitated by a group of foundations, it would also have made sense for it to be supported by any of the Cleveland area economic development agencies. It would be wise to put this type of activity on the agenda of the Columbus 2020 economic development effort as well.
Some nonprofits may be hesitant to merge because they fear a loss of control over what services are provided or how they are provided. It is true that more nonprofits likely result in more service variety and innovation. What is not necessarily true is that the variety more usefully or more reliably addresses the needs of the community.
Useful community need is an essential concept to guide decision-making. It is the nonprofit equivalent of a market test. In the for-profit sector, there are likely thousands of products created every year and society is comfortable that the ability to sell the product at a profit is the proper criterion for survival or elimination of the product. This sorting rule is not so straightforward for nonprofits. Community need is something that the for-profit sector cannot or will not provide. Its usefulness is communicated by the community. Simple tests are ease of recruiting board members, breadth of donor support, and utilization of its services. Offering a program that few attend, difficulty in recruiting board members or getting them to attend meetings, and limited donor support should be warning signs that the community does not view the service as highly useful or necessary.
In any collaboration or merger, the major choices are which services to combine into one, which to keep as supplementing one another, which to create as a result of newly freed resources, and which to drop as no longer closely tied to the mission of the combined effort. The factor that must be used to make these choices is the uniqueness of each service whether by type of client, method of delivery, cost effectiveness, or profile of supporters in the community.
To do this beneficially, each nonprofit should know what is its key mission service. A nonprofit’s key mission is that service it provides that, if it stopped providing it, the community would view it as a significant loss. Alternatively, the key mission is the last thing you would throw overboard if your ship were sinking. In any merger or collaboration, the key mission of each organization is what must be preserved or enhanced. Everything else is open to compromise.
In discussions with potential partners a nonprofit should critically ask itself whether its way of performing a service is truly its key mission or just a variant that the community does not really want or need. If it is key, this variety must be preserved. If it is the latter, this variety can be responsibly combined or dropped in the merger.
If done this way, collaborations and mergers are a path to strengthen the nonprofit sector, enhance its value to the community, and assure those it serves that they can rely on its being there in good times and bad.
Here is the argument I made. If you have thoughts on what you believe is the path to knowing “key mission,” send them to me in the comment area.