Putting good will to the test: Nonprofits find mergers can be a messy business at times

Jan McDaniel, chief executive officer for the combined Twin Cities Red Cross, says the first year was spent "just running around trying to clean up mistakes."
MinnPost photo by Daniel Corrigan
Jan McDaniel, chief executive officer for the combined Twin Cities Red Cross, says the first year was spent “just running around trying to clean up mistakes.”

When nonprofit organizations face mounting service demands and tight budgets, an oft-offered solution from funders and academics is: “think merger.”

Mergers might well be the answer to improving efficiency and comprehensive services, yet the American Red Cross Twin Cities Area Chapter offers a cautionary tale.

The moral of this story isn’t: “Don’t merge.” The moral is, mergers are harder and take longer than people think.

Jan McDaniel, chief executive officer for Twin Cities Red Cross, is blunt in assessing the 2006 merger of the Minneapolis and St. Paul chapters.

“It was pretty awful. It was messy,” said McDaniel. “Frankly, the first year was just running around trying to clean up mistakes.”

While the Red Cross merger got some media attention, nonprofit mergers tend to fly under the radar. These are not the $3 billion Northwest and Delta blockbusters. Indeed, the combined Red Cross chapter’s 2007 budget was about $12.8 million, according to its 2007 financial statement.

But with funding pressures in the slowing economy, expect more nonprofit mergers to come.

No one has tracked local nonprofit mergers. But Frank Forsberg, the Greater Twin Cities United Way‘s senior vice president for community impact, said he believes such mergers started picking up 10 years ago and accelerated a little during the economic downturn following the Sept. 11, 2001, attacks.

The United Way has supported approximately two-dozen nonprofit mergers since 2003, through planning and/or implementation grants. Examples include the Red Cross, the disaster relief organization, and the merger of Tubman Family Alliance and Chrysalis, A Center for Women Inc.

“We have been out actively encouraging nonprofits affiliated with United Way to at least seriously assess and consider these kinds of changes,” Forsberg said.

At the Red Cross roads
As McDaniel tells it, Red Cross funders, particularly corporate funders, long had encouraged the Minneapolis and St. Paul chapters to merge. The chapters resisted. While only 10 miles apart, neither chapter wanted to lose its identity.

But once the national umbrella organization approved the merger in December 2005, it happened quickly. Too quickly, McDaniel says, explaining the merger was completed by July 2006. She joined the operation in spring of that year.

Big challenges included deciding whether the headquarters would be in Minneapolis or St. Paul, and determining the new board structure and who would chair the board of directors.

Leaders put the two boards together, creating a board of 60. They created a succession plan for first chair and second board chairs (St. Paul chapter member first, Minneapolis chapter member second). They decided to be based in Minneapolis, which had the newer headquarters building.

That was a start.

But merging two very different administrative systems — human resources, accounting and donations tracking — was a nightmare. “We had to do a lot of what we called ‘forensic accounting,’ ” or trying to figure out which bills to pay, McDaniel said.

More challenging yet was merging organizational cultures. The St. Paul chapter was smaller and had a family feel, a place where volunteers and staff mingled. The Minneapolis chapter had a more corporate structure.

The St. Paul chapter had been more financially challenged of the two, but the merger was supposed to be a merger of equals. It didn’t work that way. “I think there was a little too much Minneapolis overlay,” McDaniel said.

Just like mergers of for-profit operations, Red Cross leaders had a difficult time managing when staff didn’t know if they would have jobs. Out of the two chapters’ 130 combined staff, approximately 30 jobs were cut initially. The total staff reduction now is roughly 50.

The Red Cross also lost volunteers during the merger, including key disaster response leaders, McDaniel said. She blames poor communication for the losses but notes that through conversations, some have returned.

What are the lessons for nonprofits considering a merger? McDaniel said it’s critical to involve volunteers in the process, and to communicate openly with everyone about how difficult the merger will be.

“The communications has to be five times what you consider normal,” says McDaniel, a former general manager for WCCO-TV. “It has to be often and it has to be consistent. It has to be written and it has to be face to face.”

Emerging issue
Jodi Sandfort, associate professor at the University of Minnesota’s Humphrey Institute and a nonprofit management expert, thinks nonprofit mergers are becoming more of an issue in the arena. But information is lacking on merger frequency, outcomes and how they compare to for-profit mergers.

“It was shocking to me to realize — particularly because of how important it is on the private sector side — how little is understood on the nonprofit side,” she said.

The Stanford Social Innovation Review (Summer 2007) ran a series of articles on nonprofit mergers, exploring the pros and cons.

An article titled “Before you say ‘I do’ “ recounted the merger of HOPE Services of San Jose, Calif., and Skills Center of Santa Cruz. One unexpected result was that nine of 10 foundations that had funded both agencies dropped their total support for the merged agency, a loss of tens of thousands of dollars.

That merger eventually worked. Not so for the 1997 merger of the University of California-San Francisco and Stanford medical centers. The subsequent 2000 breakup cost millions of dollars, the article said.

The Stanford Project on the Evolution of Nonprofits (SPEN) interviewed 200 nonprofit leaders from a 10-county area around San Francisco. Its findings suggest that nonprofits “need to save a lot more money, budget a lot more time, and get to know each other a lot better before walking down the aisle.”

A roller coaster ride
Financial necessity often drives nonprofit mergers, but the ultimate goal isn’t market share or share price — the goal is client services. Getting to and through mergers isn’t easy.
 
Institutional leaders have to give up some institutional pride and control to make them work. Merger veteran Ron Reed calls negotiations “a roller coaster ride.” Common struggles include agreeing on a new board structure, leadership, a headquarters site and even the merged organization’s name.

Reed, former chief executive officer of Family Service Inc., went through numerous mergers, including the final one with Children’s Home Society of Minnesota. The board structure was one potential deal-breaker, he recalled: “Our board members had to join their board in order for this to work.”

Madonna King, president and CEO of the merged Children’s Home Society & Family Services, said at the time her board shot from 30 to 46. In retrospect, she would have looked for an interim step, either board members voluntarily stepping down or at least more discussion about how a 46-member board would function.

Reed retired after the 2003 merger. He now heads MAP for Nonprofits Project ReDesign, which promotes mergers as an option. MAP is in its second year of a three-year pilot. Reed and attorney Suzanne Pearl provide nonprofits free 90-minute assessments. For a fee, they also facilitate mergers.

Unlike for-profit mergers, Reed said nonprofits typically create a joint board to negotiate. The joint board fashions a shared vision and common understandings. The vision could include an agreement that no staff members lose their jobs through the merger.
 
Mergers create one-time costs, everything from legal fees and letterhead to computer integration. Reed encourages larger agencies to budget for mergers, because the smaller organizations typically are cash-strapped.

“I think there are going to be more agencies looking for partners,” he said.

Matchmakers
Reed said business leaders in some communities will push for nonprofit mergers, but Twin Cities-area funders are reluctant to enter that debate.

José González, program officer for the St. Paul-based Bush Foundation, said there might be situations where Bush would encourage a merger, but there is nothing wrong if several nonprofits replicate services if only to increase access.

Bush might encourage partnerships, but González notes: “It is bad for foundations to be so directive to nonprofits that we say, ‘Do it this way or we won’t fund you.’ “

The Humphrey Institute’s Sandfort is also a former director of the McKnight Foundation’s children and families program. She said foundations encourage mergers but rarely succeed.

When nonprofits do decide to merge, each merger has its own wrinkles. Two local examples follow.

PPL: Hesitancy, then …
As 2006 came to a close, Minneapolis-based Loring Nicollet-Bethlehem Community Centers had a $104,611 deficit, its third red-ink year out of four. Though it still had healthy reserves, its annual revenue ($2 million-plus) was slowly shrinking.

The centers — which include alternative high schools, day care, adult basic-education and employment programs — approached Project for Pride and Living (PPL) about merging. PPL, known for its housing programs, also runs self-sufficiency programs that dovetailed with LNB’s work. Talks took a year. The two merged Jan. 1.

LNB was a ‘tweener agency, stuck because of its size, say those familiar with the merger: too big for a niche, scrappy, everybody-does-everything organization, too small to have adequate volunteer coordination and other key administrative supports.

Though its education programs were strong, the employment programs struggled, recalled former LNB board member Walter Rockenstein. It lost a couple of city employment contracts because it couldn’t compete with larger organizations.

Steve Cramer, PPL’s executive director, said his board wasn’t predisposed to a merger. The tipping point came in summer 2007 as PPL developed its own strategic plan, independent of merger talks. Leaders wanted to broaden and deepen the education and employment programs.

Then the light bulb went on. People thought, “we probably would jump three years ahead in implementing our plan by having these agencies come together,” Cramer said.

Some parts of mergers can go smoothly. In this case, LNB Executive Director Brad Englund planned to retire, so the duplicate leadership issue was moot.

Money concerned leaders from both agencies. Would key funders back the merged agency at the same levels at which they had supported the two separate agencies?

Agency leaders talked to their funders early in the process and felt comfortable enough with the responses to move ahead with the merger.

Girl Scouts: Merger mandate

Last Oct. 1, five Girl Scout councils became one. The Cannon Valley, Greater Minneapolis, Peacepipe, River Trails and St. Croix Valley councils merged into the Girl Scouts of Minnesota and Wisconsin River Valleys. It was part of a broader effort by Girl Scouts of the USA to consolidate 312 councils into 109.

Linda Keene, chief executive officer of the new organization, and Board Second Vice Chairwoman Chris Kuhn said the consolidation creates higher-capacity councils across the nation. Under the old model, girls in a small council with limited resources would have few options. Or, if a girl’s family moved to a new town, she might have to adjust to a different scouting program.

The goals of the mergers and other reforms were to make scouting more uniform — and uniformly better.

Further, some councils around the country faced financial problems, even bankruptcy, Kuhn said. “The movement needed to do something.”

Girl Scouts of the USA required the area merger. While the goals were laudable, the road has been bumpy. Local councils have had limited say over who merged with whom.

While each council was under the national scouting umbrella, each had deeply held traditions.

The councils all worked toward the same goal of serving girls but did it in their own idiosyncratic ways, Keene said. “And as you try to merge the organizations, you would have this friction.”

Kuhn said urban-rural tension surfaced in the process. The merger meant several communities didn’t have senior Girl Scout leadership in town anymore. Smaller councils with less staff had more active, hands-on boards. Pulling five councils together changed the balance between board and staff roles and responsibilities.

The merger is still a work in progress. Keene, Kuhn and other board members are working to establish advisory networks to strengthen community ties.

“We did an awful lot of work and we didn’t always do it right,” Kuhn said. “What we were able to do from the very beginning is — and it helped to sustain us — we were able to say: ‘We are doing this for the girls.'”

Note: MAP’s Ron Reed is compiling a list of local nonprofit mergers. Got names? Email him at rreed@mapfornonprofits.org.

Scott Russell, who covers nonprofits for MinnPost, is a former reporter for The Capital Times in Madison, Wis., and the Southwest Journal/Downtown Journal in Minneapolis. He can be reached at srussell [at] minnpost.com.

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Comments (1)

  1. Anonymous Submitted by Anonymous on 06/24/2008 - 12:01 pm.

    How did the merger of Family Service with Children’s Home every look good on paper, as it has from all reports, it has not looked good in reality.

    What resulted is a watered down porfolio of services that are very local (some only serving a small population and one location, to some that are metro-wide, some statewide and some in ASIA, S. America, E. Europe and Africa.

    How focused can an organization like that be? According to chsfs.org, here are the services offered:

    Parent support (formally Crisis Nursery)
    Early childhood education
    Adoption
    Mental Health Counseling
    Learning Disabilities
    Programming for Youth
    Youth Diversion & Resitution
    Financial Counseling and Home Ownership
    Domestic Violence programs
    Post-adoption Services
    International Child Welfare

    Everything and the kitchen sink. Might I suggest tightening the focus? Serving 33,000 people a year is one thing, but do they serve them well? As a business-minded donor looking at organizations to support, I want one that has a concise mission and one that can adequantely serve clients and not try to be all things to all people.

    Who brokered this merger? Someone with a Masters in Social Work, not an MBA I suspect. Typical nonprofit manuever, trying to be all things to all people and attempting to apply sound business practices in a misguided way.

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