On May 16, 2017, the City of San Francisco and La Piana Consulting held a half-day learning session on strategic restructuring. Bob Harrington of La Piana Consulting discussed different tools and forms of strategic restructuring, and reviewed some of the pitfalls that can prevent nonprofits from moving forward toward success. Notably, he emphasized that the process takes time and that strategic restructuring can have intermediate and long-range costs and benefits that should not be overlooked. He also noted the value of approaching issues with a healthy skepticism.
Collaboration enhances the capacity of participating organizations for mutual benefit and to achieve a common purpose.
Harrington introduced the attendees to The Collaborative Map presenting the range of ways that independent organizations can come together in pursuit of a shared goal. On the outside ring of the Map (collaboration mode): coordinated action, joint advocacy, collaborative learning, and network. On the inside ring (alliance mode): administrative consolidation, fiscal sponsorship, joint programming, joint earned income venture, affinity group, coalition-consortium-association. Finally, in the core (strategic restructuring mode): joint venture corporation (including management service organizations or MSOs), parent-subsidiary structure, merger or acquisition.
Here are some other highlights from Harrington’s presentation:
- Ready, Set, Parent! – Joint Programming and Administrative Consolidation
- MACC Common Wealth – MSO
- The Chattanooga Museums – Administrative Consolidation
- Domestic Violence Programs and Federally Qualified Health Centers – Joint Programming
Success Factors to Strategic Restructuring
Not surprisingly, having a mission focus was on the top of the list of success factors but tempered by flexibility in pursuing the mission. Other success factors identified were parties not in midst of an immediate crisis (e.g., one party otherwise shutting down in 30 days), a lack of divisiveness, clarity regarding desired outcomes, and positive relations with potential partners.
The roadblocks to restructuring were the parties’ autonomy concerns, lack of trust, self-interest, and organizational culture. It’s also our experience that a hardfast focus on preserving traditional certain modes of operation in the name of protecting culture can impede a successful restructuring. Defining what really creates each party’s culture for testing compatibility will be key.
Strategic Restructuring Process
The steps to strategic restructuring are:
- legal resolution / integration
Negotiations may involve a negotiations committee composed of board members from each party that works through the issues and the due diligence process. Unlike with for-profit restructuring, much of the due diligence for nonprofits takes place later in the process because of the costs involved and the ability of the leadership to first determine mission, program, and administrative compatibility. While it may seem self-serving, it’s our experience that bringing a competent lawyer experienced with nonprofit restructuring into the process at its earliest stages will help everyone understand the rules and the options before the parties go far down a path that may not prove legally viable.
Each party to a strategic restructuring must assess its own motivations, desired outcomes, and financial condition/outlook as well as identify critical issues and red flags. Understanding these factors are critical in determining the appropriate form of restructuring and selecting and assessing an appropriate collaboration party.
Once a collaboration party has been identified, a nonprofit must also assess the level of trust, based in part on past experiences, it has with such prospective partner. It should also assess what the other party brings to the table in useful skills and assets, cautions and challenges, and financial condition. And of course, the other party’s mission and programs must be scrutinized carefully for compatibility.
Areas to be Integrated
Integration is often the most complicated but often overlooked part of the process. Integration is generally required in the following areas:
- Marketing & communications
Mergers can fail because people tend to hold onto their individual cultures and identity rather than create a new organization.
Following Harrington’s presentation,two local nonprofit leaders, Brett Andrews (Positive Resource Center, AIDS Emergency Fund, Baker Places) and Sharon Miller (Renaissance Entrepreneurship Center), shared their experiences with strategic restructuring. Among the many gems of information they shared:
- One reason a party may be looking at merging is because of a leadership transition, including the retirement of a longstanding executive.
- Merger partners are often looking to achieve administrative efficiencies and economies of scale, but this will make employees nervous if they suspect they may become redundant to the merged entity.
- Parties need to figure out an appropriate balance of confidentiality and transparency.
- Re-licensing can be a long and onerous process.
- Having strong legal counsel and professionals experienced with nonprofit restructuring will be of great benefit to the process, creating more confidence and better communications.