Merge Wisely

The Stanford Social Innovation Review published a paper called “Merging Wisely” that I found really interesting (I came across it on twitter, sorry I can’t remember who tweeted the link)

Author of the paper David La Piana notes that:

Now 2010 is upon us, and the urge to merge shows no signs of abating. Underlying this trend are two core beliefs:

  1. The nonprofit sector has too many organizations, and most nonprofits are too small and are therefore inefficient. Mergers, the thinking goes, would reduce the intense competition for scarce funding.
  2. Consolidating organizations would also introduce economies of scale to the sector, increasing efficiency and improving effectiveness.

But he warns that this thinking is simplistic and mergers are risky business, they cost more than anticipated, and interestingly he suggests that the problem they aim to solve (too many small non profits) may not actually be a problem arguing that compared to business the non profit sector is in fact tiny.

In the paper La Piana gives some case studies that are useful in highlighting his points. He certainly doesnt argue against mergers, but he urges caution, as in this example:

Casual observers often perceive cost savings after mergers. But a closer inspection usually reveals that the merger itself did not save the money. Instead, it created a structure within which management was able to make the tough decisions that ultimately led to better financial footing—decisions such as instituting layoffs, restructuring contracts, and launching new fundraising programs, any of which could also have been undertaken without a merger had the organizations’ leadership been willing or able to do so.

In 2004, for instance, Easter Seals and United Cerebral Palsy (UCP) affiliates in North Carolina merged. Headquartered in Raleigh and with offices and programs throughout the state, the combined organization undertook a series of calculated risks that neither party would have attempted alone, including a second merger and the purchase of a for-profit organization, which was then converted into a nonprofit. Easter Seals-UCP North Carolina has since grown from an operating budget of $33 million at the time of merger to a budget of $80 million for fiscal year 2009, through both additional mergers and its own organic growth.

If two merging organizations under financial stress do not make the difficult but necessary decisions that will resolve major challenges after their union, they will experience a crisis just as surely as if they had remained separate. In other words, a merger may provide the right context for good leadership, decision making, and execution, but it cannot replace them.

He also offers some alternatives like joint ventures, parent-subsidiary partnerships  (all realistic under US law, but what can we realistically do here?). Other options include Strategic Alliances, Collabortaions, Partnerships.

Certainly worth a read, you can find the full article here


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