While Jan Masaoka was executive director at CompassPoint Nonprofit Services, the organization completed two mergers, rejected four merger offers, and was rejected by the other party in two other merger explorations. In addition to consulting to many nonprofit mergers, she co-authored The M Word: A Board Member’s Guide to Nonprofit Mergers, and is currently the Editor-in-Chief of Blue Avocado.
My response to the rhetorical question, “Are there too many nonprofits?” is: Actually, there are not enough good nonprofits.
Some people in our sector are indignant that there are too many nonprofits. They sound like an established Italian restaurant owner complaining that there are too many new Italian restaurants, or a plumber complaining that it’s too easy to become a plumber nowadays. The frustration with competition is completely understandable, but we need to be careful that we don’t inadvertently reinforce misconceptions about nonprofits as a result.
Certainly nonprofit mergers often make sense in the right situations. At the same time, the creation of new nonprofits and the spinning off of new nonprofits make sense in the right situations, too. We shouldn’t tell the idealistic, ambitious young cook with ideas for great affordable food that he or she should go work at an existing Italian restaurant. Do we imagine that Olive Garden wants to hire or listen to this eager young chef?
So let’s consider a few of the arguments for merger in a different light:
1. Reduced competition.
As aggravating as competition is, it also drives innovation and excellence.Â We know a group of parents whose children had cancer who started a new organization, despite the indignant snorts from the American Cancer Society (ACS) and other entrenched cancer organizations. In addition to providing services not available before, these parents succeeded in doing two important things: they created a community of people supporting one another (rather than individual families getting services), and their success prodded ACS into providing these services themselves. In fact, several years later, the parents closed their organization and turned it over to ACS.
2. Cost efficiencies.
My experience at CompassPoint and that of CompassPoint’s clients is that while cost efficiencies do take place in a technical sense, mergers actually increase costs in a broader sense. As an illustration, consider a larger organization with audit costs of $10,000 merging with a smaller organization that doesn’t have audits. The new organization may have audit costs of $13,000. Yes, there is a cost efficiency of audit costs per total expense, but the costs are actually higher. The newly larger organization will also need new staff positions, new infrastructure staff and meeting time expenses that were unnecessary in either of the other organizations. Expectations about salaries, benefits, and workplace amenities rise dramatically after mergers. (And speaking of cost efficiencies, is the best school the most cost-efficient school . . . that is, the school with the lowest expenditures per student?)
3. Increased services.
When cost savings are made, they are often made by cutting services — often the opposite of hoped-for benefits of the merger. When it looked like Midwest Airlines would be acquired by another company, residents of many midwest cities knew that a merger would be good for shareholders, but largely because the less-profitable flights to smaller midwest locations would be sharply curtailed. When a two-clinic nonprofit we know merged with a larger affiliate of the same national organization, one of the clinics was closed. One argument is that the merger resulted in reduced services to the area; a counter argument is that both clinics would have gone under if the merger hadn’t happened. There’s no alternate universe we can use as a control group; the lesson is that we always need to weigh the sustainability of important but financially problematic services.
4. Funders and donors
Funders and donors don’t want to have to choose among organizations. One reason funders are so pro-merger is that it can help them reduce funding demands. For instance, in one CompassPoint merger, of the nine funders that funded both pre-merger organizations, seven reduced their combined funding by 50% or more . . . in other words, the merger was a success for them. I admit it’s irritating when yet another pizza menu shows up on my doorknob, but I don’t complain that there are too many pizza places. I just go to the ones I like.
What are some legitimate reasons for nonprofit mergers? The reality is that most nonprofit mergers occur when one of the organizations is in financial trouble; sometimes a merger brings in talented management that can straighten out problems and attract new funding. Some mergers position the post-merger organization for funding that was out of reach for either of the pre-merger groups, perhaps for a funder that wants to fund on a larger geographic scope. Some mergers are a way for an organization to “hire” the terrific executive at the other organization. Some mergers are an appropriate way for a founder to exit gracefully.
Some mergers are actually closures in disguise. When I expressed my regret to a Bay Area executive that they had closed their Oakland office, she said, without even a tinge of irony, that “We didn’t close the Oakland office; we relocated it to San Francisco.”
Starting a new nonprofit is a type of free speech, says arts grantmaker John Kreidler: It’s an essential right, but we should only volunteer for and donate to the ones we like. Through the competition and sorting in the “marketplace of ideas,” some innovative ideas and organizations will drive change, and others will fade out and close.
A vibrant, rough-and-tumble ecosystem of nonprofits serves our society best — rather than bemoan its complexity, we should treasure our marketplace of ideas-embodied-as-organizations. It’s one marketplace constantly bringing new ideas to “market,” and one where we can still confidently invest our dollars, our hands, and our hearts.
See also in this issue: