2017 Collaboration Prize

collaboration

Applications for the 2017 Collaboration Prize, a national competition that recognizes and celebrates nonprofit organizations that collaborate effectively to create greater impact, open on Monday, October 3, and close at the end of Wednesday, November 16. The Collaboration Prize is a a project of The Lodestar Foundation whose mission to maximize the leverage of philanthropic resources is accomplished in part through pursuit of a strategy to encourage and support long-term collaborations among nonprofits working in the same or complementary areas in order to increase efficiency and/or impact and to reduce duplication of efforts.

The Collaboration Prize identifies and showcases models of permanent collaboration between two or more nonprofit organizations. Recognizing the impact that can result from working together, the Prize shines a spotlight on collaborations that demonstrate innovative and effective responses to challenges or opportunities. A grand prize of $150,000 will be awarded to the collaboration that best exemplifies the impact that can result from working together on a permanent basis. Each of the eight finalists will receive $10,000.

 

In addition to identifying and showcasing exceptional nonprofit collaboration efforts, the Collaboration Prize collects and shares models and best practices for the field through the [Foundation Center’s] Nonprofit Collaboration Database, a resource for everyone seeking real-life examples of how nonprofit organizations can work together.

Among the eligibility criteria:

  • A permanent collaboration must have been formed by at least two nonprofit organizations;
  • A written formal agreement must exist that addresses the critical elements of the collaboration;
  • The collaboration must have been in operation for at least 18 months; and
  • The collaboration must do most of its work in the United States and all parties to the collaboration must be located in the United States.

Additional Resources

Nonprofit Collaborations: The Structural Options

While there is no denying the importance of collaborations for many organizations, and particularly to tackle larger social problems, leaders of nonprofits should have a basic understanding of the legal structures possible before entering into these collaborations.

Collaboration Hub

The Collaboration Hub serves as a home to vast resources related to collaboration in the social sector. This Hub includes valuable publications, questions and answers, links to videos and podcasts, blog posts, and a comprehensive, searchable collection of 650+ profiles of vetted collaborations submitted for the Collaboration Prize in 2009 and 2011.

The Collaborative Map

Infographic and additional resources from La Piana Consulting, the national management and consulting firm providing oversight over the Collaboration Prize process.

 

Nonprofit Collaborations: The Structural Options

Unity is strength - teamwork concept

A recent article in The Nonprofit Quarterly titled “Collaborations: The Nonprofit Trend” discussed the movement towards collaborations and linkages of many kinds among nonprofits to combat a growing need for services with fewer resources. While there is no denying the importance of collaborations for many organizations, and particularly to tackle larger social problems, leaders of nonprofits should have a basic understanding of the legal structures possible before entering into these collaborations.

MOU or Contract

An organization should determine at the outset whether it wants to enter into an enforceable agreement with another party or just a mutual set of understandings where neither party is legally responsible for complying with the terms.

If an enforceable agreement is desired, the parties should enter into a written contract that clearly states each party’s obligations and promises to the other party. The contract should also address the term of the agreement and how the contract may be terminated.

A memorandum of understanding or MOU may be appropriate where the parties don’t want an enforceable agreement. But organizations must be very careful about the drafting of an MOU if they don’t want it to be legally binding. An MOU can easily turn into a contract by virtue of the words regardless of what the document is called. Adding to the confusion, it’s common among nonprofits to call a contract an MOU because it sounds more friendly and collaborative. Generally, this isn’t a good idea because it may result in misunderstandings between the parties about what each party wants in the event the other party doesn’t perform.

Service Agreement

A simple form of collaboration is one in which one party provides services to another party in exchange for money or some other form of consideration (value). For example, a nonprofit research firm might provide its research services to a nonprofit service provider in a way that benefits both parties and furthers their respective missions. The research firm gets paid to do research that may have valuable application the firm itself is not designed to pursue. The service provider gets to use the research it is not designed to conduct to better serve its intended beneficiaries.

Mutual Service Agreement

A service agreement may be a little more complicated and involve a deeper form of collaboration where each party commits to performing services without a transfer of money from one party to the other. The services may also be directed towards a common class of beneficiaries rather than to each other. For example, several nonprofits supporting healthy families but focused on different aspects (e.g., domestic violence, child abuse, mental health) may enter into an agreement to provide their respective services in a coordinated fashion or perhaps at a common center.

License Agreement

A license agreement generally provides for one party’s right to use certain intellectual property of another party. Intellectual property includes trademarks/service marks (e.g., names, logos), copyright (e.g., writings, music, art, film), patents (e.g., inventions, designs), and trade secrets (e.g., mailing lists). A nonprofit might license use of its name and logo in connection with its support of an event or use of its film to allow for broader viewership and revenue-generation.

Resource-Sharing Agreement

A resource-sharing agreement can facilitate the sharing of office space, equipment, and even employees for greater efficiencies. Such agreements are common with smaller affiliated nonprofits like a 501(c)(3) public charity and related 501(c)(4) social welfare organization but can involve otherwise unrelated organizations too. Resource-sharing agreements should specifically detail what resources are to be shared and how the costs will be allocated to each party. Generally, a 501(c)(3) organization party to such an agreement must ensure that it is not paying more than fair market value in the arrangement if it involves a non-501(c)(3) party, and particularly if it is making any form of payment to a for-profit. Resource-sharing agreements can trigger many issues involving leases, insurance, licenses, permits, employees, and independent contractors. So, nonprofits must enter into these agreements with great care.

Fiscally Sponsored Collaborative

Nonprofits seeking to create a deep collaboration but only on one particular program (and not their entire operations) may find it advantageous to use a third party fiscal sponsor. By establishing the collaborative within a fiscal sponsor, the parties may be able to collaborate without worrying as much about control and liability issues. The fiscal sponsor would own and ultimately be responsible for the project, but the parties could each assign individuals to collectively serve as the steering committee to the project. Such arrangements are quite common among funders who may look to pool their grants and leverage other resources to focus on a specific issue area while minimizing some of the administrative burdens of their grantees.

“Partnership”

For nonprofits pursuing a deep collaboration on one particular program that do not want to use a third party fiscal sponsor, creation of some form of “partnership” may be a viable alternative. A true partnership would be owned by the two parties, and each party would be jointly and severally liable for any liabilities of the partnership. A limited liability company (LLC), including a low-profit limited liability company (L3C), would be owned by the two parties but could be structured so that liabilities of the LLC would not normally ascend to the owners. A for-profit corporation, including a benefit corporation or social purpose corporation, would be owned by the two parties and would similarly provide its owners with the protection of limited liability. A nonprofit corporation, which has no owners, would be governed by a board appointed by the two parties, who might retain other rights (e.g., the rights of a voting member) with respect to the corporation. The choice of entity to house the collaborative effort should be made carefully and preferably with the assistance of appropriate counsel.

Cross-Sector Joint Venture

Nonprofits may want to enter into joint ventures with for-profits to raise capital, to access the expertise possessed by their for-profit co-venturers, and to take advantage of opportunities otherwise unavailable to them. For-profits may want to enter into joint ventures with nonprofits to access new sources of capital, to exploit specific assets owned by the nonprofit (such as intellectual property rights), to take advantage of available tax credits (such as the federal Low-Income Housing Tax Credit), and to acquire greater community or political support. As is the case with the “partnership” option discussed above, the choice of entity to house the joint venture should be made carefully. Among the issues to manage unique to nonprofits are:

  1. the operational test issues (e.g., substantial unrelated business activities attributed to the nonprofit co-venturer from a pass-through joint venture – like an LLC – could jeopardize its 501(c)(3) status); and
  2. the control issues (e.g., the nonprofit must retain control of the charitable activities of the joint venture and must have the right to appoint at least half of the board of a corporate joint venture entity).

Merger

A merger is sometimes referred to as the ultimate collaboration of two parties. In the most typical form of merger, the corporation that remains in existence is referred to as the surviving corporation and the corporation that is merged out of separate legal existence is referred to as the disappearing corporation. In a merger, the surviving corporation inherits not only all of the assets of the disappearing corporation(s), but also all of its liabilities and obligations. Accordingly, it becomes extremely important for the parties to engage in thorough due diligence prior to an agreement to merge.

Mergers are complex transactions that generally require negotiation over matters such as the addition of board members from the disappearing corporation to the board of the surviving corporation, preservation of certain programs previously run by the disappearing corporation, and decisions on which, if any, employees of the disappearing corporation will continue as employees of the surviving corporation. Particularly if the parties were not sufficiently prepared, a merger can result in many potentially unanticipated consequences such as real property transfer taxes, breaches of contracts (e.g., for failure to notify the other party of the merger), and loss of future planned gifts.

As for cost savings, don’t expect that at the outset and maybe not at all. The costs of a merger, including all of the due diligence, preparation, and integration activities, can be very substantial.

But a merger entered into thoughtfully and with diligence can result in tremendous benefits, most notably, an increase in the efficiency and effectiveness of advancing the missions of both organizations and a stronger organization to conduct the charitable activities that further the combined mission. More specifically, a merger may increase the ability of the organizations to expand their service area, their programs, and their internal capacity to create new and better ways to further their mission.

Concluding Thoughts

We often hear the expression – “Trust, but verify.” The same wisdom applies to collaborations. Verify, exercising reasonable care in the process, that your collaborator is trustworthy and is capable of pursuing your common goals and meeting all of its obligations. And protect yourself, to a reasonable extent, in the event your collaborator doesn’t meet its obligations.

Dissolution and Transfer of Remaining Assets: An Alternative to Merger

 

shaking hands and transfer briefcase

Organizations may decide to merge for multiple reasons, including to better advance a common purpose or to expand the range of services offered to common beneficiaries. In a merger of two nonprofit corporations, the surviving corporation assumes all of the assets and liabilities of the disappearing (merged out) corporation. But there is an alternative way for an organization to acquire the assets of a dissolving corporation – agreeing to be the recipient of certain remaining assets of the dissolving corporation upon its dissolution.

Merger

Merging allows two corporations to fully integrate their programs, functions, and assets. Generally, in a merger between A (the surviving corporation) and B (the disappearing corporation), A automatically assumes all of the assets and liabilities of B upon the merger. Thus, the debts of B become the debts of A, and A is automatically substituted for B in any lawsuit or legal proceeding. This may be problematic if B’s liabilities cannot be identified or if B’s liabilities are more than the value its assets.

Dissolution and Transfer

Alternatively, an organization may want to consider dissolving and transferring its assets to another entity. In this scenario, when B dissolves and distributes its remaining assets to A, A generally does not automatically assume B’s liabilities. Essentially, A is able to limit the risk it takes on when acquiring B’s assets. It is important to note that although the surviving organization does not automatically assume the dissolving organization’s liabilities, there is always some risk associated with a full transfer of assets. For example, in California, successor liability could extend to A if a court determines that A impliedly agreed to assume B’s liabilities when it acquired B’s assets, the transfer amounted to a consolidation or merger of the two organizations (de facto merger), A is “merely a continuation” of B, or if the transfer was entered into fraudulently to escape liability for debts (fraudulent transfer).

Here are some factors that would create risk of the assumption of the dissolving corporation’s liabilities:

  • The boards of the dissolving corporation and the acquiring corporation (post-transfer) are substantially similar.
  • The acquiring corporation carries on the same programs as the dissolving corporation with the same employees and pursuant to the same policies, practices, and procedures.
  • The acquiring corporation acquires an operation involving the sale of products and continues to sell them under the same trade name, pursuant to the same processes, and benefiting from the goodwill created by the dissolving corporation.
  • An agreement between the dissolving corporation and acquiring corporation refers to the transaction as a merger and/or evidences their mutual intention to have the acquiring corporation assume the dissolving corporation’s debts and obligations.
  • The result of the transfer is exactly that which would occur in a statutory merger, including (1) assumption of certain obligations of the dissolving corporation that allow for the acquiring corporation to continue operating the dissolving corporation’s programs/businesses; and (2) continuity of the management, personnel, locations and operations of the dissolving corporation.

Co-authored with Gene Takagi

Nonprofit Mergers & Alliances (2nd ed.)

I'm currently reading the recently published 2nd edition of Nonprofit Mergers & Alliances by Thomas A. McLaughlin and can already recommend it to nonprofit executives and board members thinking about collaborations and/or mergers.  Indeed, the book had me at "hello" or, rather, its first sentence:  "The best time to consider a merger or an alliance is before it is necessary, when coming together with another organization will mean combining strength with strength, and when the collective energies and the creativity of the two or more entities can be used proactively instead of being sapped by the demands of crisis management."  It's not that a weakened organization should not seek a merger; rather, the most benefits from a merger will result from a merger of strengths.

Nonprofit Mergers & Alliances

McLaughlin, Vice President for Consulting Services for the Nonprofit Finance Fund, discusses early in the book why nonprofit services are fragmented and how consolidation is part of a nonprofit's life cycle.  He devotes a chapter to integrated service delivery and why it will be "a central goal of the next generation of nonprofit managers."  Key to such integration is the use of information as a strategic tool and the consequent need to invest in expensive information technology.  And this will "boost the minimum economic size in virtually all fields, which in turn will put more pressure on groups to merge and find new ways of collaborating."

The book identifies four levels on which nonprofit collaborate:  Corporate, Operations, Responsibility, and Economics.  A merger is defined as a collaboration that entails change on all four levels.  An alliance is defined as a collaboration that entails change on one to three levels (not including the "Corporate" level).  

Mergers are more fully described with helpful discussions of pros and cons, myths, and common issues, including size of the board, composition of the board, and selection of officers.  McLaughlin further breaks down a merger into three phases:

  1. Feasibility Assessment.  "The objective is for planners to learn about each other's organization and to conduct some serious analyses of the major aspects of each.  The result of this stage should be an agreement to proceed – or not."
  2. Implementation Planning.  "During this stage, the participants carry out deeper analyses as necessary and formulate a plan for how to make the collaboration succeed."
  3. Integration.  "This is where the plain old day-to-day management work occurs.  Often the bulk of executing the integration plan falls on managers and staff support people who were not as intimately involved in the first two phases."

The final chapter in the book discusses "The Seven Stages of Alliance Development" and notes that "alliances are far more open-ended and inherently ambiguous than outright mergers."  McLaughlin emphasizes that "the thing that makes them even more difficult is that leadership in an alliance derives not from an assigned position or role but rather from a delicate mix of personality, organizational identity, and resources."  The seven stages of alliance development are:

  1. Initiate, explore, and analyze
  2. Synthesize and plan
  3. Establish shared objectives
  4. Develop a working committee structure
  5. Gain quick victories
  6. Institutionalize buy-in
  7. Implement and evaluate

Mergers are like marriages – they vary widely and there is no single formula or book to ensure a particular merger's success.  But Nonprofit Mergers & Alliances is a good primer (and reader-friendly, as claimed on the book jacket).  It covers a very complex area and contains many practical tips and common pitfalls.  And executives and board members of nonprofits would be wise to review a good resource on nonprofit mergers even if they should also retain a merger consultant and attorney (both highly recommended, resources permitting).

Mergers – Due Diligence Items

Make the Time for Due Diligence 3d Words Clock Business Obligati

 

I had a nice opportunity today to talk with the folks at La Piana Consulting, a national firm dedicated to strengthening nonprofits and foundations, about nonprofit mergers from a legal perspective.  La Piana Consulting was founded by David La Piana, a leading expert on strategic restructuring – including mergers, joint ventures, consolidations, and joint programming – and my former professor!

Below is a sample of the due diligence items we discussed (with some additions).  Due diligence generally refers to the performance of an investigation of an organization prior to entering into an agreement with such organization.  Thomas A. McLaughlin, author of Nonprofit Mergers & Alliances: A Strategic Planning Guide, prefers the term “mutual learning.”

Governance:

  • Articles/Certificate of Incorporation and all amendments
  • Bylaws and all amendments
  • Conflict of Interest Policy
  • Investment Policy
  • Whistleblower Policy
  • Document Retention/Destruction Policy
  • Form 990 Review Policy
  • Other governance-related policies
  • Minute book
  • Organizational chart
  • Membership roster (if voting membership organization)
  • Good standing certificate
  • Schedule of states where organization is doing business or raising funds, or owns property
  • Foreign qualifications
  • Charitable solicitation registrations
  • Annual reports

Tax:

  • Forms 990, 990-T
  • State tax returns
  • Local tax returns
  • Employment tax filings
  • Communications with IRS, State tax authorities
  • Tax liens

Real Property:

  • Schedule of all real property owned or leased
  • Title policies, deeds, mortgages, security agreements, guaranties
  • Leases
  • Surveys, zoning approvals, variances, use permits
  • Environmental reviews
  • Schedule of hazardous wastes used, disposal methods employed
  • Permits, licenses
  • Communications with EPA and other regulatory agencies
  • Schedules of related litigation, investigations
  • Schedule of contingent environmental liabilities

Physical Property:

  • Schedule of fixed assets and locations
  • UCC filings
  • Equipment leases

Intellectual Property:

  • Schedule of significant IP, including trade secrets (e.g., donor lists, fundraising plans)
  • Registrations and applications
  • “Work for hire” and consulting agreements, nondisclosure agreements

Financials:

  • Financials, audited (if available) – 3 years
  • Budgets, projections, strategic plans
  • Analyses of debt and contingent liabilities
  • Analyses of A/R and A/P
  • Analyses of fixed and variable expenses
  • Depreciation/amortization methods
  • Internal controls

Contracts:

  • Subsidiary, partnership, joint venture, affiliation agreements
  • Agreements with directors and officers
  • Loan agreements, lines of credit, promissory notes
  • Security agreements, mortgages, indentures, collateral pledges
  • Grant agreements, enforceable pledges
  • Restricted gift agreements
  • Sales and service agreements
  • Program-related agreements
  • Nondisclosure and noncompete agreements (applicable to the organization)
  • Letters of intent, memoranda of understanding

Human Resources:

  • Employee information – position, titles, compensation, benefits, years of service, contracts, background checks
  • Nondisclosure and noncompete agreements (applicable to the employees, contractors)
  • Key employee information – resumes
  • Workers’ compensation, unemployment, and other HR-related claims
  • Employment policies and handbooks
  • Retirement plans (qualified and nonqualified)
  • Collective bargaining agreements (if applicable)
  • Description of significant employee problems, including alleged wrongful termination, harassment, discrimination
  • Insurance policies (H/R-related)
  • Employee-independent contractor categorization

Risk Management:

  • Litigation – actual, pending, threatened
  • Settlement agreements
  • Injunctions, court orders, consent decrees
  • Unsatisfied judgments
  • Insurance policies
  • Schedule of claims
  • Risk management policies, practices, known violations

Other:

  • Licenses, permits, accreditations
  • Program-, service-, and product-related due diligence
  • Marketing-related information

2009 Western Conference on Tax-Exempt Organizations – Day One

I attended the 2009 WCTEO in Los Angeles last Thursday and
Friday. It’s always a great conference for professionals in the nonprofit and tax-exempt sector:   impressive and knowledgeable speakers, interesting topics, and a chance to meet
with peers and people you greatly admire.   My only and very minor criticism is that the scope of some of the programs is geared more toward people with little familiarity with the topics than those who are hoping to drill deeper.   As a result, for regular attendees of these EO (exempt organizations) conferences, a couple of the programs felt a little repetitive.

As is customary with EO conferences, the opening programs were presented by the regulators.  It was intriguing to hear Sara Hall Ingram, Commissioner of the Tax Exempt and Government Entities Division of the IRS, discuss her passion for governance.  Despite the vocal objection of many attorneys in field, it looks like the IRS intends to continue to lay down and enforce rules on governance, an area governed by state laws.  IRS reps also discussed the increase in user fees for exemption applications next year and the Cyber Assistant release, which will "guide" the preparation of exemption applications.  

Belinda Johns, Senior Assistant Attorney General of California, provided an update of the AG's charitable trusts section, including cuts affecting the division.  The AG's focus continues to be on diversion of assets, board failure, fundraising abuses, and governance.  One recent action that illustrates this focus is the complaint filed by the AG against L.B. Research & Education Foundation.  Johns also described the AG's new registry search, which indicates when a charity is suspended for being delinquent in its filings with the AG.  Presumably, when a charity is suspended, it is no longer able to engage in charitable solicitations in the state.  A failure to register initiative will be developed when the budget allows.

Philip Hackney of the IRS and EO attorney David Wheeler Newman discussed supporting organizations and donor-advised funds.  The focus of this program was on the proposed regulations regarding Type III supporting organizations released on September 24.  The comment period ends December 23.  Great session, highlighted by Newman's critical questions about the proposed regulations.  I would have liked to have heard more about donor-advised funds, but this may be a focus next year if proposed regulations come out by such time.

Connie Collingsworth, general counsel for the Bill and Melinda Gates Foundation, spoke during lunch about her enviable position and some of the strategies of the Gates Foundation.  One fascinating project funded by the Foundation:  the development of repellents that inhibit the olfactory senses of mosquitoes to detect humans.

Next was a program on mergers, dissolution, and other forms of restructuring presented by EO attorneys Lisa Runquist and LaVerne Woods. They provide four hypotheticals and
discussed how each might be approached.  Runquist described how a disappearing corporation in a merger might set up a "shell corporation" with minimal activity as part of a contingency plan if the merger doesn't work out.  Woods noted that in a dissolution, a private foundation need not always choose to terminate private foundation status.

Douglas Mancino and Nancy Shelmon discussed legal, accounting and financial issues triggered by the economic downturn.  Mancino cautioned against relying on the diversity provided by fund of funds alternative investments.  The speakers both discussed broken pledges, and the possible duty of boards to seek enforcement.  Reynolds Cafferata's article – Should Pledges Be Enforceable? – is a recommended resource. 

The final program on Thursday, Civil and Criminal Penalties Affecting Exempt Organization, was presented by panelists Michael Blumenfeld and Mark Weiner, both from the IRS, and Charles Rettig.  Failure to file a return and willful failure to collect and pay over employment taxes received particular attention.  The opinion in the American Friends of Yeshivat Ohr Yerushalayim, Inc. case earlier this year was included in the handouts (read also Charity Governance's description of the case here).

Read my post on Day Two of the WCTEO here.

Joining Forces in the Back Office – Lodestar Foundation Resources

Sharing Administrative Services, Part IV: Joining Forces in the Back Office – Lodestar Foundation Resources

The Lodestar Foundation’s mission is to maximize the growth and impact of philanthropy by encouraging philanthropy, public service and volunteerism; and by supporting long-term collaborations among nonprofits working in the same area in order to increase efficiency and eliminate duplication of efforts. It has been involved in nonprofit collaborations across the sector, a recent initiative being the Collaboration Prize.

Collaboration Prize. Instituted about four years ago, Lois Savage states the Collaboration Prize was designed with the hope it would find models of nonprofit collaborations so as to begin building the type of collaboration research that is often seen in the for-profit world. Although named the “Collaboration Prize,” the prize is not limited to simply administrative collaborations as defined by La Piana Associates. It instead covers collaborations generally (including mergers) but with “a spotlight on collaborations among two or more nonprofit organizations that each would otherwise provide the same or similar programs or services and compete for clients, financial resources, or staff.” It received an unexpected overwhelming response with 644 nominations from all 50 states and the District of Columbia.

Savage briefly discussed three findings. First, Savage states there is a vibrant collaboration environment in the nonprofit world, full of many creative and diverse collaboration activities across all segments of the nonprofit sector. Among the nominees, 50% were in the area of joint-programming, 20% mergers, 20% administrative consolidations, and the rest were hybrids. Second, most collaborations were initiated by staff and/or board members. Third, the motivation for collaboration was driven by five different desires: to improve the quality of services provided, to maximize financial resources, to expand the range of service, to serve more clients, and to improve program outcomes.

Lessons from an Unsuccessful Collaboration Project. Among the Lodestar Foundation’s activities, Nicole Wallace highlighted a collaboration project in which the Lodestar Foundation also underwrote the shared common space for a group of small youth serving organizations that co-located in a space in order to realize economies by negotiating as one unit (e.g., gain better amenities like conference rooms, board rooms, more sophisticated equipment, etc.). Although the project was ultimately unsuccessful, Savage provides three reasons for the project’s failure that can be learned from:

  • First, the high staff turnover at all but one of the small agencies caused a lack of institutional memory as to why the organizations had come there initially and what they had hoped to achieve. Ultimately, CEO buy-in was not possible without this educational process and the constant education of new executive directors eventually became too burdensome to carry out.
  • Second, the organizations faced the problem of an under-resourced project. Savage explains that with more common area comes additional costs and this problem was only compounded when trying to explain the benefits to a “revolving door of executive directors.”
  • Third, Savage states there was a lack of a mutual party to oversee the actual arrangement. While the collaboration was supposed to be a group of peers working together, ultimately, the one stable organization was burdened with trying to educate everyone and keep everything going. Savage explains “when one person has to assume [an] ownership role, it just kind of destroys the equity among the group and other people [become] resentful.”

Even after hearing the Hunter Museum, MACC, and Lodestar Foundation experiences, organizations may still be unsure as to what constitutes the right conditions for sharing administrative services. While there is no “perfect answer,” Stan Birbaum and Robert A. Kret leave some last words of advice. Regarding budget size, for a partnership like MACC, Birbaum suggests both large and small organizations are not always ideal. For example, a large organization may be easier to manage on its own and the costs paid to administer the collaboration may not reap sufficient rewards; and a small organization have may have such resource constraints that it is not enough to work with (Birbaum estimates less than $0.5 million in revenue) and the cost savings would be minimal because expenditures on services are so minimal to begin with. Kret adds that for partnerships like CMC, it is less about the numbers and more about having an organization with the capacity to do it, a willingness to work together, and a priority of the community ahead of the individual organizations.

More information on the Collaboration Prize is available here. (The results of the findings will be available soon.).

– Emily Chan

Joining Forces in the Back Office – Management Service Organizations

Sharing Administrative Services, Part III: Joining Forces in the Back Office – Management Service Organizations
 
Management Service Organization: MACC CommonWealth
 
MACC CommonWealth is an MSO that was created in January 2007 by five social services groups to provide finance, human resources, and technology. With a 20 employee staff comprised of the administrative employees of the five charities, MACC now provides administrative services for 13 groups (fees based on total revenue). MACC President Stan Birbaum discussed the following benefits of their MSO:

Improving Quality of Services and Reducing Risks. Birbaum explains the founding organizations of MACC were typically weak in one area (e.g., IT) but acceptable in another (e.g., HR). Birbaum states the biggest benefit resulting from MACC was an opportunity for all the organizations to have solid back room services across “the whole gamut” by giving the necessary quality at costs equal to or less than their historic costs so as to drive out risk at the same time. For example, a basic strategy to minimize financial risk is to separate the individuals in receivables from those in payable. Smaller members (which at best have one accountant or a part-time accountant) could not afford to implement this strategy: everything across the whole spectrum was managed by one person. And even the largest members “couldn’t get [it] right… [I]f they were fortunate enough to have two accountants or three accountants, [when] somebody was gone on vacation, somebody else did back up.” In contrast, MACC has a finance staff of 14 that not only separates the receivables from payables but also uses a third group responsible for review and release of statements, touching neither the receivables nor payables.
 
Economies of Scale and Purchasing Sophistication. Birbaum expressed a surprising and significant saving occurred for members one step removed from the service itself through economies of scale and purchasing sophistication. Birbaum states if the person or team involved in purchasing the benefits has a “deeper expertise in how purchase of benefits works, how the channels behave, and what the opportunities are, how to negotiate the contracts, how you work with the brokers, you have a chance of having lower costs for your organization.”

Challenges for the Member Organizations. Besides turf and ego issues, Birbaum discusses two other critical challenges. He states the first challenge is addressing service design issues to reach a standardized way of doing the work (e.g., MACC has a common auditor appointed by multiple boards at the same time, single approach to employee handbooks, and single chart of accounts): “Scale can save you some dollars; it can also cost you some dollars if you take on some complexity… [S]o our theme was always to reduce the complexity; variance we knew would increase costs.” The second challenge is this cannot be accomplished without high commitment from both the CEOs and the boards. Specifically, Birbaum says CEO mindset is a “make or break issue”: CEOs must think less about the greatest good for their organization and more about the greatest good for the collaboration, the common good; CEOs cannot compete for maximum organizational gain. Birbaum states that “[t]he critical groundwork of trust for MACC was built when the founding CEOs met every other week for 10 months before doing anything formal” and MACC continues to meet with their CEOs every quarter to address the common benefit and reinforce the spirit of working together. He credits much of MACC’s success to the “commitment of those CEOs and their personal and professional decisions to really keep faith with that collaborative covenant.”

Advice to Organizations Interested in Creating a MSO. Birbaum first advises organizations to be realistic about their expectations and what the outcome might be. For example, none of the founding MACC organizations had significant inefficiencies that could be driven out for easy “financial wins.” And while cost reduction was a hope, Birbaum states it was not the primary reason for forming MACC. Second, in order to foster a collaboration that will build a sustained success, he advises organizations to pay attention to organizational structure, governance, and more importantly, the culture and rules of engagement among the collaborators.

Capital. While establishing an MSO may create efficiencies in the long-run, it has initial costs that may take time to fund or recoup.  Accordingly, organizations in financial distress may not be in a position to create an MSO. Birbaum explained MACC ran a capital fund drive to help to cover the $800,000 – $900,000 needed to create MACC. It received tremendous support from local foundation interest and importantly, Birbaum credits the members’ prior relationships with these foundations as a main reason for the foundations’ willingness to take on the risk and have confidence in MACC.
Additionally, the individual annual campaigns have benefited as well from MACC. Birbaum states the foundations that helped organize MACC place high regard on organizations that are MACC members. The membership “is short of a ‘seal of approval,’ but it helps funders have confidence in the quality of back office services and the financial stewardship of those organizations.”

To read more about the history of MACC, please view Jean Butzen’s article, "Management Service Organizations" and the Humphrey Institute's paper, “Trust as an Asset: The MACC Alliance for Connected Communities (B).”

 - Emily Chan

Joining Forces in the Back Office – Administrative Collaboration and Consolidation

Sharing Administrative Services, Part II: Joining Forces in the Back Office – Administrative Collaboration and Consolidation

On June 3, 2009, The Chronicle of Philanthropy presented the webinar, “Joining Forces in the Back Office: How Collaboration Can Help Your Organization,” moderated by Nicole Wallace, Senior Writer at The Chronicle of Philanthropy, with three panelists, Robert A. Kret, Director at the Hunter Museum of American Art; Stan Birbaum, President of MACC CommonWealth Services; and Lois Savage, President of Lodestar.

As mentioned in the previous post,"Sharing Administrative Services, Part I: Administrative Consolidations and Management Service Organizations,” administrative partnerships can be thought of to fall into four categories: an administrative collaboration, administrative consolidation, management service organization (MSO), or external provider. According to La Piana Associates, Inc., an administrative collaboration is an informal, not necessarily enduring, arrangement to share services or expertise while each organization retains its individual decision-making power; an administrative consolidation is a more formal agreement that involves shared decision making (without changing the corporate structure) and the sharing of specific functions; an MSO is a newly created organization for the purpose of integrating administrative functions; and an external service providerinvolves the outsourcing of certain administrative elements. Although the webinar did not discuss the three organizations according to these categories, applying the La Piana framework to the panelists’ experiences helps to better illustrate examples of administrative collaborations and consolidations, and MSOs.

Administrative Collaboration and Consolidation: The Hunter Museum of American Art

The Hunter Museum of American Artis part of the Chattanooga Museums Collaboration (hereinafter referred to as “CMC”), a back-office partnership formalized in 2001 between the Hunter Museum, Tennessee Aquarium, and Creative Discovery Museum. Using a fee-for-service agreement, the Tennessee Aquarium is currently responsible for the finances, human resources, information technology (IT), and some marketing for the two smaller nearby institutions. It is important to note that the Tennessee Aquarium is not an MSO; although it provides most of the administrative services for CMC, this is not its primary purpose.

Prior to CMC, the Hunter Museum was facing a steep administrative hill – it only accomplished basic bookkeeping and most things were out of date such as the personnel policy, job descriptions, (few) employee benefits, appraisal system, and unsophisticated, limited dial-up computer network. Kret states the CMC relationship originally started with sharing back-office but has since evolved into much more, and while they work closely together, “[the] organizations haven’t merged and [have] actually worked very hard to maintain their separate identities.”

While Kret believes the biggest benefit of CMC has been allowing the Creative Discovery Museum and Hunter Museum to focus on their mission, the Hunter Museum has also improved productivity, generated additional income, and saved money.

  • Improving Productivity.The Hunter Museum improved productivity through administrative collaborations such as joint-staff training for areas such as security and first-aid, using the area expertise from other staff (e.g., early child development), and having active participation from the Tennessee Aquarium and Creative Discovery Museum in strategic planning. The Hunter Museum also benefits from administrative consolidations such as having a standardized HR managed by the Tennessee Aquarium; joining the Tennessee Aquarium’s retirement plan to get improved benefits; and having the same CFO for the three entities. Kret highlights that because of the CFO’s unique position, the CFO has intimate knowledge of each organization from which they can pull expertise, an informed third party opinion, and valuable business consulting.
  • Generating Additional Income.Importantly, Kret notes that CMC was more than just a defensive measure to fix administrative problems; it also allowed the entities “to play a little offense.” For example, CMC led the 21st Century Waterfront Plan, a joint capital campaign that raised $120 million with the city of Chattanooga – $40 million of which was raised through 75 fundraising meetings held by CMC with private foundations and individuals within a 6-week time period. Kret primarily credits the CMC administrative relationship already in place as building the foundation for this joint capital campaign.
  • Saving Money.Kret explains that at the outset, the Tennessee Aquarium saved the Hunter Museum money by charging half of Hunter’s previous administrative expenses (which accomplished just bookkeeping functions). Ultimately, because the Tennessee Aquarium added HR and IT, the Hunter Museum receives three times the services for about half the expense. CMC created additional savings through administrative consolidations such as joint purchasing for computer hardware and software, liability insurance, etc. More specifically, CMC bundles liability insurance – but keeps the insurance products separate – and “shop[s] it out every three years so it’s a bigger piece of business [and thus] the individual underwriters have really sharpened their pencils.” CMC also uses their partnership to save money through joint exhibitions and public programs. Overall, since CMC was formed in 2001, the Hunter Museum has saved about $1.7M, the Creative Discovery Museum has saved almost $2M, all while the Tennessee Aquarium has generated roughly over $1M in income.

Although the “immediate reaction is that it’s the smaller guys who are getting the benefit,” Kret corrects this misconception stating that through CMC, the Tennessee Aquarium benefits as well by generating revenue from typically nonrevenue places like accounting, increasing retention by offering key employees a higher level of compensation, and offering their employees a much more rewarding and challenging work environment.

The success of an administrative partnership like CMC is neither guaranteed nor easy. However, this should not necessarily be taken as a deterrent. Organizations can reap great benefits from such a partnership so long as they are committed to the time and effort necessary not only to establish a solid plan going into the partnership but also to maintain a continued “upkeep” of the partnership. Kret alludes to an overarching concern that the right attitude must be in place to overcome certain obstacles and challenges that may occur in opposition to a successful partnership such as conflicting priorities and turf battles.

  • Avoiding Conflict of Interests Among Institutions.To avoid conflicting priorities among the institutions, Kret advises partnerships to have good communication, common sense, and courtesy and respect for one another (i.e., an understanding that you might not get something right away). For example, CMC’s inter-office computer system (e.g., setting up meetings through Outlook) and physically close proximity (all institutions within three blocks) helps facilitate its good communication. CMC also helps inter-functioning by using different fiscal years to spread out the audits and auditors’ workload.
  • Overcoming Challenges to Successful Partnerships.Kret emphasizes critical factors for success are a positive attitude and an understanding the partnership is about relationships between people. It important to get over “traditional turf battles” and to recognize “that each of the CEOs at the organizations have different leadership styles.
  • Advice to Organizations Interested in Administrative Collaborations and Consolidations.Kret says as a preliminary matter, “people need to understand it’s not necessarily going to be something that solves all of the problems an institution may be confronted with.” Kret also says that the need for a strong spirit of cooperation and leadership by the board cannot be underscored enough – “sometimes it’s not enough for the CEOs to be interested in doing something like this, I think there needs to be active participation by the board.” The attitude cannot be “we’ve always done it this way” – the organizations must open their thinking to being “more imaginative, creative, and inspired.”

To read more about the Chattanooga Museum Collaboration, please view the “About us” article written by Heather DeGaetano, developement director at the Tennessee Aquarium, on the Hunter Museum website.

– Emily Chan

Mergers and Due Diligence

While the idea of a merger can seem like a promising avenue for increased efficiency, increased fundraising, and the like, merging is a multi-step process with important legal implications. As Jerald A. Jacobs explains in his article, "All About Mergers of Nonprofit Organizations," every organization should consider the mechanics and the consequences thereof before formally committing to a merger. It is risky business to assume one knows all the answers given that "mergers are sophisticated business transactions, likely the most sophisticated that a nonprofit will ever undertake."

One of the most important stages for merging organizations is the exercise of due diligence during the planning stage. Jacobs describes due diligence as a type of "legal audit," a process of "systematically reviewing the legal and financial situation of one’s potential merger." Due diligence is not a matter of approving only "perfect mergers." As Jacobs explains, boards can approve and recommend a "less-than-perfect merger partner" such as an organization facing litigation challenges. The goal of due diligence is to assure that the board has engaged in sufficient inquiry and acquired enough information to make an informed decision. Similarly, La Piana Associates, Inc., a management consulting firm helping nonprofits and foundations with strategic issues, explains in their "Tips and Answers to Due Diligence," that "[t]he essence of the due diligence process is an effort to make everyone… on each board, as aware as a prudent board member can be of any liabilities the other party may bring to the transaction" in order to create a "’no surprises’ situation so that… no one can claim that [a] matter was hidden."

Collectively, Jacobs and La Piana provide an extensive list of the types of information to be investigated: IRS records, incorporation, contracts, licenses, claims or litigation, personnel policies and structure, agreements and affiliations, real estate, marketing materials, programs activities, current and potential liabilities, and so forth. Financial due diligence may not reach the level of a full financial audit but should still acquire what is necessary to determine the merging corporation’s "true financial position."

Due diligence reviews are costly and intensive efforts but they are necessary. The surviving organization must realize that it will absorb both the assets and liabilities of the dissolving organization. Additionally, given that courts have held boards of directors of a corporation personally and individually responsible for adverse results due to unfounded recommendations to merge, the reports from due diligence reviews will serve not only as an objective premise for the board’s approval and recommendation of the merger but also as a type of "insurance policy" against personal liability of directors of both governing boards involved.

Organizations can satisfy their duty of due diligence while lowering the risk of unnecessary costs by heeding Jacobs’ advice to undertake this legal endeavor once it seems more likely the merger will occur (e.g. the governing boards of the merging organizations are interested in a formal merger proposal). However, organizations should not unduly delay this time consuming process, as La Piana explains, "[t]he document exchange should happen early in the process so that there is adequate time for the parties to digest the packages (often several inches thick) formulate their questions, and seek answers."

As a final note, organizations should remember that due diligence is only one, albeit crucial step in the merger process. As John Emmeus Davis emphasizes in the Neighborhood Works Founder’s publication, " Bridging the Organizational Divide: The Making of a Nonprofit Merger," the seeds for success (or failure) of any potential merger will probably be sown in the early stages: "What happens during the process of exploring, negotiating and joining together the merger organizations will determine to a large degree how well they will work together, how long they will stay together, and how effectively and efficiently they will use the resources made available to them during their time together."

To learn more about the various types of mergers, please view another Jerald A. Jacobs’ publication, "Association Mergers and Consolidations: Strategic Considerations."

Dan H. McCormick’s book, "Nonprofit Mergers: The Power of Successful Partnerships" is also available for preview through the Google Book Search here.

Additional information can be found in the Local Initiatives Support Corporation’s presentation, “To Merge or Not to Merge.”

– Emily Chan