Nonprofits should consider teaming up, one way or another, to survive the current economic downturn and keep their missions alive. That was one of the main conclusions that came out of a riveting discussion last week in Washington, DC led by two nonprofit CEO’s who have participated in several mergers and strategic alliances in recent years. But don't expect it to be easy, they said.
The speakers were Guidestar CEO Bob Ottenhoff and Network for Good CEO Bill Strathmann, 
and the occasion was the Wharton Nonprofit Roundtable, a group that has met monthly at Care2’s offices for the past three years, mainly consisting of graduates of the Wharton Business School who work in the nonprofit sector. Last Friday’s timely discussion started with Ottenhoff’s reporting the sobering statistic that 8 percent (about 240) of the 3,000 nonprofits that Guidestar surveyed recently said they were in “imminent danger” of having to shut down for financial reasons. He also pointed out that the financial crisis has eliminated about 40 percent of the wealth of foundation endowments that many nonprofits have depended on, and that this wealth may take many years to be restored. A surge in individual and foundation philanthropy in 2008 actually softened the impact of the economic crisis for many nonprofits, but this kind of surge is unlikely to be repeated in 2009, Ottenhoff predicted.
Next Bill Strathmann of Network for Good told how his organization carried out one major merger – with Groundspring in 2005 – and conducted several smaller acquisitions, including last summer’s absorption of the ePhilanthropy Foundation. Each event brought its own set of challenges, Strathmann said, usually relating to personalities. As experts who carry out such mergers often say: “Mergers are made for financial reasons but fail for people reasons,” he said. For example, nonprofits do not like layoffs, and yet layoffs are one of the primary ways to realize cost savings as part of a merger, he said. By contrast, displaced for-profit executives are often happy to exit after a merger because they can cash out their company shares or take their exit bonus and go buy a boat, he said. That's not the case with nonprofit executives, who don't have any shares, and who may not have any financial cushion if they are forced out after a merger. For that matter, a member of the nonprofit's Board of Directors may object to a merger because it may diminish his or her pet project.
Similar post-merger challenges stem from the difficulty of joining two company cultures together or – as in the case of the NFG merger with Groundspring – in uniting different technologies, Strathmann said. As an example, he cited the open source software that underpins Groundspring's fundraising pages, which he said is very different from the software on which Network for Good's technology was built, with its familiar "Donate Now" buttons. And yet NFG has some nonprofit clients that are very attached to the Groundspring product, so NFG has kept both platforms available.
One factor that can help a lot in helping mergers succeed is a third party, often a charitable foundation, which can help foster trust and cooperation -- and provide bridge funding -- during the negotiations and “due diligence” phase, as two nonprofits are warily gearing up to merge. Strathmann and Ottenhoff cited the Surdna Foundation for repeatedly playing this pivotal role, and particularly praised the foundation’s Program Director for Nonprofit Sector Support, Vince Stehle (who actually had been scheduled to speak at the Roundtable, but was forced to cancel at the last minute due to illness).
Strathmann endorsed the general idea of nonprofit mergers, but added that he actually is a bigger fan of strategic alliances between nonprofits. Such team-ups deliver most of the benefits that a merger would deliver – but fewer of the hassles, he said. “Mergers should almost be the tool of last resort,” Strathmann said. As an example of a strategic alliance between nonprofits that works well, both men cited their own organizations’ longtime partnership, under which the tools provided by Network for Good and Guidestar are often bundled together for social networking websites that want to enable visitors to solicit charitable donations on personal fundraising pages (NFG’s service) as well as a way to verify that the charities selected to receive the funds are bona fide 501(c)(3) organizations (Guidestar’s service).
You can read more about the Nonprofit Roundtable session, and Bob Ottenhoff’s observations on the topic, over on Bob’s blog on the Guidestar site.
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