Partners, Volume 13, Number 3, 2003

From Collaborations to Mergers: New Strategies for Lean Times

Confronted with a changing economic landscape, declining government funding and post 9/11 charitable funding priorities, a number of community organizations are questioning whether they can remain viable.

Nonprofits enjoyed increased resources during the strong economy of the 1990s. Existing organizations expanded, and new groups formed. Now they are having to tighten their belts. Increasingly, agencies that provide community development services and agencies’ funding sources are exploring formalized partnerships through strategic restructuring as a means of making the most of limited resources while continuing to deliver important community services.

Collaboration and partnership are widely applied approaches to community development. To address the myriad problems facing underserved communities, nonprofit community organizations have traditionally relied on partnerships with government, financial services and with other community service agencies. Strategic restructuring takes collaboration and partnership a step further.

Because the community development industry has grown tremendously in the past ten years, many cities now have multiple affordable housing developers, community development financial institutions (CDFIs) and small business programs. These organizations often serve similar communities and vie for the same resources provided by the various partners. Formalized partnerships — from collaborations to mergers — can help organizations maximize their effectiveness in the community while keeping costs down.

Strategic restructuring

What exactly is “strategic restructuring”? According to LaPiana Associates, a nonprofit management consulting firm, strategic restructuring is “a continuum of partnerships — including but not limited to mergers, joint ventures, administrative consolidations and joint programming — through which nonprofits attempt to anticipate or respond to environmental threats and opportunities.”

Collaboration defines one end of the continuum of partnerships, and mergers represent the opposite end. At each point along the continuum, strategic restructuring establishes a more complex relationship between the two organizations. For example, a partnership can be created simply to complete one specific project, or it can serve as an ongoing agreement to share resources such as space, administrative support or technical equipment.

Further along this continuum, organizations may agree to consolidate certain programs to ensure the same level of service to the community while cutting the cost of operating two similar programs. In its ultimate form, strategic restructuring is the merger of two entire organizations into one entity, united through a shared mission.

Although this kind of restructuring is commonplace with for-profit businesses, it represents a new approach for nonprofits. Corporations often consider restructuring as a means to achieve economies of scale or expand their customer base. Whether a corporation acquires another company or opts to blend the operations of two organizations, restructuring is ultimately designed to yield some benefit to each organization.

Unlike commercial corporations, nonprofit organizations have typically avoided restructurings, particularly mergers, unless an organization is on the verge of failure and another organization is willing and able to absorb its program and clients. In this situation, the two organizations are not equal partners in the merger, nor is the first priority to provide benefit to both organizations; rather, the goal of such a merger is simply to maintain the delivery of services to a community. The stronger organization tends to retain its original mission, staff, board and culture, incorporating the programs or clients of the failed organization into its existing structure.

Leading reasons for strategic restructuring

In the world of nonprofit organizations, strategic restructuring has tended to be a solution for organizations that struggle with capacity or funding. Groups no longer able to meet the needs of the community or lacking the appropriate financial and administrative infrastructure to adapt to changing economic or political times have resorted to restructuring to help maintain services in their communities.

However, strong organizations might benefit from the example of commercial corporations in considering restructuring as a proactive approach to improving services. Restructuring need not be only an option for nonprofits in crisis; it can also be an opportunity for continued growth and sustainability.

Benefits of restructuring

Financial support for community development has been declining, and funders are now focused more on funding specific programs and less on providing operational support. Thus, nonprofits are being asked to provide more programs without additional financial support. Competition for operational assistance is significant, and the absence of this support can threaten an organization’s survival. Nonprofits that have developed alternative revenue sources are better positioned to adapt to this change. Nonetheless, it is becoming evident that the current number of organizations cannot be sustained and that some restructuring in the industry is needed.

Strategic restructuring can be a creative response to the challenge of reduced funding. Whether the partnership involves simply a cost-saving collaboration, a complete merger or something between these two extremes, restructuring can help nonprofits to reduce overhead expenses and improve efficiency. Formalized partnerships can eliminate duplication of efforts and help nonprofits develop economies of scale by operating more programs and serving more customers. Organizations can also learn from working together, leveraging the expertise of their individual organizations to offer more services or reach a broader geographic area. Finally, partnership efforts are attractive to funders, which are now demanding better results and rewarding organizations that maximize the benefit of their funding.

Challenges

Despite the potential benefits of restructuring, creating a new partnership of any kind can also be challenging. First and foremost, community development corporations by their very nature are accountable to a community. Often it is the community that resists new partnerships out of concern that important resources may be diverted or that the identity of the community will be compromised.

Blending organizational cultures is also difficult. Even a joint venture for a particular project may require that two organizations shift their existing individual cultures to pursue a shared purpose.

A full merger of two organizations is the most complicated form of restructuring. While this kind of restructuring provides the greatest potential for efficiency, through the elimination of duplication, mergers often require cutting staff positions as well. Mergers can be a very demanding, expensive and time-consuming process. One side effect can be the loss of important community development activity while organizations are tied up in merger-related work.

Finally, the merger of organizations requires full integration of two individual organizational cultures. Joining organizations can be particularly challenging when the two groups have traditionally seen each other as competitors. A successful merger demands strong leadership that promotes trust, honesty and communication. The participating organizations and their community constituents must be convinced that the merged organization is better than the sum of its parts.

What’s next for community development?

Joint ventures for specific projects now represent the most common type of restructuring among community development organizations. Formalized partnerships are still a new idea, and only a limited number of organizations have proactively pursued full mergers. Nonetheless, most community development organizations recognize the need for some form of restructuring to help them maintain operations as funding resources continue to decline. Each organization will have to determine the type of partnership that will work best to improve efficiency and maximize the use of resources. Nonprofits need to be creative and proactive in identifying new partners.

Strategic restructuring alone will not generate sufficient savings to offset the reduced resources of the current economic climate. But ultimately, the synergy of working partnerships should allow nonprofit organizations to pursue new opportunities to enhance services in their communities.

By Jessica LeVeen, regional community development manager in the Atlanta Fed’s Nashville Branch.

Partnerships Work for Atlanta CDCs

In 2001, two neighborhood-based organizations merged in Atlanta to form the Community Alliance of Metropolitan Parkway (CAMP). Serving combined neighborhoods has provided the new organization with a stronger voice in the community. The merger has eliminated duplication in staffing and office space, resulting in substantial savings. CAMP also receives recognition from funding agencies for being a stronger and more productive force in the community.

At a recent workshop on collaboration, the chair of CAMP pointed out the importance of trust, vision and leadership in moving forward with a merger. Since its creation, CAMP has demonstrated its leadership capacity by undertaking two other strategic partnerships. First, it created a joint venture with a more experienced developer, Cooperative Resource Center. Together the organizations rehabilitated a 240-unit multifamily rental housing in CAMP’s neighborhood. The project, which is currently under construction, has been successful in receiving low-income housing tax credits.

In another joint venture, CAMP made the bold move of creating a strategic alliance with the Historic District Development Corporation (HDDC), working with the more mature community development organization to build single-family houses in CAMP’s neighborhood. The collaboration allowed HDDC to develop a new revenue source, and it enabled CAMP to create a new product and increase the capacity of its existing staff.

“We are always looking for ways to increase and leverage our capacity without increasing our overhead, and this works well for us,” says Bonnie Johnson, executive director of CAMP.

The idea of strategic partnerships between CDCs is catching on. In the nearby community of Mechanicsville, SUMMECH CDC recently entered into a contract with the more experienced Reynoldstown Revitalization Corporation (RRC) to act as project managers for construction of new single-family houses. The contract allows RRC to make the most of its existing staff capacity while it enables SUMMECH to address the pressing need for new single-family houses in the community without having to hire additional staff.

By Protip Biswas, Senior Program Director, The Enterprise Foundation.

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