A Nonprofit Merger Case Study

Family Service of Greater Saint Paul and East Communities Family Center

by Carol Lukas and Ron Reed

Editor's note: Although this merger was completed in 1989, the lessons learned are still relevant today.

AT THE 1989 annual meeting celebrating the successful merger of Family Service of Greater Saint Paul and East Communities Family Center, President Ron Reed, in his remarks to the group, compared the merger to "A blending of two families and two distinct but compatible cultures. Blending two organizations that are set in their ways is no small task," he said. "It involves more than two individuals deciding to live together. A successful merger is carefully planned, soberly decided and requires close and continuous consultation with all who harbor reservations toward the union."

What led to the success of this merger? How was the "successful blending" accomplished, when the literature on mergers shows a recurring and distressing theme: poor management of human concerns. Productivity levels tend to drop, power struggles emerge, morale plummets, turnover rises, the rumor mill flourishes, and absenteeism and stress levels peak. "Liking each other" is not enough for a successful marriage; financial strategy and good intentions alone don't make a successful merger. First, let's examine reasons for considering a merger.

Nonprofit Mergers as an Opportunity for Survival and Growth
Nonprofits, already attempting to do more with less are hesitant to initiate a process which will likely cause more stress. The mere word "merger" conjurs up hostile takeovers and acquisitions and is enough to discourage most nonprofit leaders. They envision being swallowed up by a controlling giant, having their programs scrambled into the larger organization’s agenda, and losing the original spirit, values, and intent of their mission. They see client needs being ignored and staff and managers swelling unemployment lines. They fear exactly what mass media reports about many corporate mergers.

However, a well executed merger of two organizations with complementary missions, values, and strengths can achieve economies, efficiencies and synergies that few organizations can achieve alone.

Many small, specialized nonprofit agencies are emerging to meet increasingly complex social and cultural needs. Competition for scarce funds is escalating, with financing and fundraising taking a disproportionate share of nonprofits' time and energies. Funders demand greater levels of accountability, which requires expertise and sophisticated system capabilities beyond the resources of smaller agencies.

The demand for increasingly sophisticated management skills is on the rise while low management salary levels are still the norm. The current nonprofit leadership, many schooled in the idealism of the 1960s, is aging and no clear vanguard has emerged with the requisite blend of human service and management skills. The survival of many nonprofits is at risk; only the strongest and richest in resources are likely to survive in the long haul. Combining forces with other compatible organizations provides one positive scenario for addressing many of these issues.

Six Keys to Successful Nonprofit Mergers
Merger X is wildly successful, a cause for celebration; while merger Y, equally grounded in strategic sense, is a dismal failure. Why? A different process was used. The value of process has been clearly demonstrated in relation to planning and management. It is crucial with a change as significant as a merger.

Six keys to strengthening a merger process include:

1. Focus on mission—make sure there is a fit, and that the combined entity will have improved service scope, delivery or effectiveness.
2. Create a clear vision of the new organization early in the process, commit to it, and lead with it.
3. Strive for a win/win—work as partners in planning the future.
4. Deal with difficult issues early and directly—name them and address them.
5. Involve people who will be affected in the process—give them information and opportunity to participate.
6. Take time to do it well—allow for courtship, thorough analysis, thoughtful preparation, and gradual adjustment.

 

The Merger Case Study
Following is the story of the merger of Family Service of Greater Saint Paul and East Communities Family Center. The spring 1989 celebration at which Reed reflected on the blending of two families was preceded by eighteen months of planning and negotiations. Their experience is a unique illustration of the six process keys and provides alternatives to the typical for profit merger scenario.

Organizational Background
In July 1987, Kathleen Jefferson and Ron Reed were among those in attendance at a workshop on collaborative partnerships in the nonprofit sector hosted by Management Support Services, a division of the Amherst H. Wilder Foundation, in St. Paul, Minnesota. One of the many collaboration strategies discussed at this meeting was merger.

Jefferson was executive director of East Communities Family Center, a nonprofit mental health clinic which focused on serving youth. The clinic's $500,000 annual budget was partially funded by three communities, a school district, insurance reimbursements and foundation grants. Jefferson was finding that this foundation money was getting harder to come by, and staff time available for development and fundraising was limited. While the agency was financially stable for the time being, Jefferson anticipated foundation support diminishing within two years. She feared a slow, steady slide into financial crisis. Jefferson viewed merger as a possible way of bringing stability to the agency so it could continue to provide the best possible service to clients in the future.

She knew of Family Service of Greater Saint Paul, which had been providing service to residents of Ramsey, Washington, and Dakota counties since 1892. At its five locations, Family Service offered counseling, education, and advocacy programs for families and individuals. The agency served many low income households on an adjusted fee basis. Family Service's $1.5 million annual budget was funded through the United Way as well as foundation grants, government contracts, fee for service, annual fundraising and membership dues. It certainly had the stability her agency required, as well as an outstanding reputation in the community. She approached Reed, President of Family Service, about the possibility of a merger.

Reed was intrigued, and after further discussion, genuinely interested. He recognized, however, that a bigger agency was not necessarily a better agency, and that organizations, their clients, and the community at large would have to gain in order for the merger to succeed. But Family Service had been through a merger before with South Saint Paul Family Service more than a decade ago, and that had been a positive experience. East Communities and Family Service seemed a good fit, although differences did exist. Jefferson and Reed agreed to explore further the possibilities that a merger might offer.

Organizational Compatibilities
First and foremost, the missions were compatible: East Communities' mission of "providing services to youth and families to maximize their emotional well being and social and family responsibilities" fit nicely with Family Service's mission to "improve the quality of individual, family and community life." Furthermore, Family Service had long wanted a service outlet in the East Metro area where East Communities Family Center was located.

Family Service would get more visibility in the East Metro area, better client access to services, connection with a high quality organization, new services for youth, and access to Rule 29 insurance reimbursement. East Communities would gain economies of scale; access to staff resources in marketing, research and computerization; and new program offerings such as service to seniors and family economics that could benefit their communities. Each organization's strategic issues could be met through a merger.

Organizational Differences
Several challenges would have to be resolved to ensure a successful merger. One agency was small, the other larger; the larger agency is always perceived as "taking over". Funding structures were different and would have to be reconciled.

A major difference was in the size, structure, role, and operating norms of the two boards. East Communities had a board of seven individuals, some of whom were appointed by a local community or school district. Board members were appointed specifically to address the concerns of their communities, insuring that monies were spent according to the wishes of each community's constituencies. Family Service's board was larger, with 26 members. They were individuals from various walks of life who established policy, developed long range plans, and raised funds. They had demonstrated a long term commitment to the agency's mission and goals.

Family Service answered to the community at large, with very few programs having direct contracts or responsibility to a government agency or other organization. This gave Family Service's board more freedom to play a policy role and respond as it saw fit to changing needs within the community. East Communities had strong support from and accountability to specific government entities; they tended to be involved directly in program level decisions. Some East Communities board members were worried that their programs might be cut or their representation eliminated; that the merged agency might no longer be accountable to the sponsoring communities.

In order for the merger to be successful, these differences would have to be addressed.

The Merger Planning Process
Following is a chronology of key events in the planning and decision process with a description of some unique steps to which are attributed the success of the merger:

November 1987: After initially approaching each of their boards of directors on the subject, Reed and Jefferson call a joint meeting of key members of each board to discuss the idea of merging. They outline what each agency might gain through the proposed merger. Board members are positive and direct their executives to continue exploring the possibility.

January 1988: Reed and Jefferson make presentations about their organizations to the other agencies' full boards.

February 1988: The potential merger is announced to staff members of both organizations. The two management staffs meet for a get-acquainted retreat. A Joint Board Merger Committee is convened composed of three members from each board, co-chaired by the Chairs of each agency board. This joint committee will, along with Jefferson and Reed, oversee the process of exploring merger. Decision is made to retain a consultant to facilitate the merger process.

March–June 1988: Consultants assist Executives in creating a "Common Understandings" document to serve as a value framework for remaining merger discussions. The Joint Board Merger Committee accepts the Common Understandings (see example) in June 1988.

June–August 1988: Consultant conducts board interviews, staff focus groups, and meetings with primary funders. Material is compiled describing the similarities and differences in personnel policies, benefits, finances, physical assets, information systems and programs.

August 1988: Joint Board Merger Committee moves that the merger is probable and begins development of a merger proposal for board approval. Throughout this period, staff members of both agencies are kept informed of the pre-merger process, particularly the Common Understandings. An attorney is retained to hammer out the agreement of merger and revise the bylaws, articles of incorporation, personnel policies and benefits package. A financial consultant is retained to begin combining financial systems.

September–October 1988: Joint Board Merger Committee works through technical issues (legal structure, salary classification system, organization chart, board structure, program design), gradually building a picture of what the merged organization will look like. At the end of October, the Joint Board Merger Committee formally recommends to its respective boards in favor of the proposed merger.

October 1988: The Family Service Board of Directors approves the merger agreement.

November 1988: The East Communities Board of Directors approves the agreement.

December 1988: Family Service membership approves the merger plan.

January 1989: East Communities Family Center and Family Service of Greater Saint Paul become one merged agency, bringing to a successful close eighteen months of discussion and negotiations.

October 1989: Family Service of Greater Saint Paul reports that things are going well. Staff are melding through frequent all-staff meetings and cross-division work. The community and funders have been very supportive of the changes. And with diligent leadership, the board has successfully made a transition to an integrated policy board. Expanded services are now available to the community.

Discussion
The case of Family Service of Greater Saint Paul and East Communities Family Center illustrates a process that avoided many common pitfalls of mergers and provides some lessons for others embarking on this journey. A unique feature of this merger which may have contributed to the creation of a very sensitive process was the leadership by mental health professionals, people trained in process skills and human dynamics.

The six keys to a successful merger process are clearly illustrated in the Family Service story:

Focus on mission
Fit between the two agencies' missions was the first issue addressed, and drove the merger discussions. Concerns about impact on quality, scope, and availability of services were raised and addressed constantly throughout the process.

Peter Drucker states that, "Starting with the mission and its requirements may be the first lesson business can learn from successful nonprofits. It focuses the organization on action. It defines the specific strategies needed to attain the crucial goals." ¹

When Steve Jobs, co-founder of Apple Computer Inc. and founder of NeXT Inc. was asked how he planned the kind of growth they experienced, he responded, “You can’t. Somebody once told me, 'Manage the top line, and the bottom line will follow.' What’s the top line? It’s things like, why are we doing this in the first place? What’s our strategy? What are customers saying? How responsive are we? Do we have the best products and the best people? Those are the kind of questions you have to focus on.” ²

Family Service and East Communities had the wisdom to start with and be guided by their mission.

Lead with a vision
The Common Understandings document provided a vision for everyone involved in the merger. It quickly began to answer questions about who we're going to be, what we will look like, and how it will affect me. It created a positive image of what was possible, and freed people up to consider possibilities rather than fears. Family Services staff now report that once this singular commitment was made, once these issues were resolved, the merger was well on its way to success.

Involve people
Openly announcing the tentative merger exploration to staff early in the process helped make the possible merger seem less threatening and created an aura of trust and understanding that was essential to the ultimate success of the process. The staff were continually updated, leaving no questions or concerns to fuel the rumor mill.

People going through change of any kind, tend to need three things: they need information about what's happening; they need support and encouragement, reassurance that we can get through this, we will make it; it's hard now and it will get better. And they need a clear vision of where we're headed, a picture of what the future will be like. Permitting the staff to be a part of the merger process through open reporting of intentions and progress, and discussions about key decisions allowed them to deal directly with their anxieties about the change rather than allowing anxiety to affect productivity and morale.

Strive for win-win
The formation of a Joint Board Merger Committee modeled values regarding shared leadership, power, and governance that would guide the merged agency in the future.

The message was win-win. We will work together to see if this merger will pay off for the community, for clients, and for our two organizations. We will jointly explore the options and opportunities, while retaining each board's autonomy to make the best decision for their organization. A poor decision for either organization would be a loss for both of them.

Deal with difficult issues early and directly
The Common Understandings document addressed the most potentially volatile issues up front. Public and funders' questions about agency name, availability of services, and leadership were addressed. Staff concerns about job security, salaries, and benefits were eased. And board questions about control and influence were allayed with a promise to invite all East Communities board members to become members of the newly merged Family Service Board.

Uncertainty about the future, concerns about competence, anger and grief about anticipated losses, stress from added workload, and confusion regarding expectations weigh on people engaged in a merger. Sitting on these issues causes productivity loss and tremendous human pain. Addressing them directly gives two messages to people: first, that people are important and the organization will do everything possible to respond to people's needs, and second, that people's needs are important and we don't want them hidden. It's better to talk about them and deal with them than let them erode health, morale, and productivity.

Take time to do it well
The merger took eighteen months from idea to decision (see process summary). The implementation process will certainly take at least as long, as the organization struggles to integrate the new with the old.

Many mergers are hastily conceived and poorly planned, rushed through in less than a year. A change process as drastic as a merger, even with small organizations, will take two to four years before a level of stability is reached. And several phases will be experienced during that time, phases which need to be thoroughly completed before moving on to the next phase.

Conclusion
Careful attention to the six process keys was the foundation of this merger's success. The process dealt with the difficult issues quickly and directly; information was shared openly as it was available with all concerned. The process represented the values espoused by the separate agencies; it reflected the values that would be honored in the merged agency of the future.

Reed is confident that the merger of East Communities and Family Service will have great benefit to the community and will add value to the organization. However, he acknowledges there are bound to be problems, just like in any blended family. He emphasizes that the key to long-term success is to handle these difficulties with the same concern, sensitivity and thoroughness that they were handled prior to the merger. "It is people that are important - board, staff, and those individuals in the community who are served by the agency. People are the bottom line in the nonprofit merger."

 

Common Understandings Regarding the Prospective Merger of Family Services of Greater Saint Paul and East Communities Family Center

1. The merged organization will be called Family Service of Greater Saint Paul. The Maplewood office will be called East Communities Family Service. 2. The Maplewood office will remain open after the merger. Community funders of East Communities Family Service will fund only the Maplewood office. 3. Ron Reed will remain the President of the merged agency. Kathy Jefferson will be the Executive Director of East Communities Family Service. 4. No staff will be terminated for at least one year. 5. Current salaries will not decrease.

6. Both budgets will be balanced at the time of merger. 7. Every current board member of the two agencies will be asked to serve on the combined board. 8. No programs will be cut as a result of the merger. 9. Services currently available at Family Service will be available at the Maplewood site. 10. Rule 29 is not inconsistent with Family Service’s mission. The Maplewood office will remain a Rule 29 clinic and the merged agency will explore expanding Rule 29 coverage.

 

The Merger Process
Phase	Tasks
Pre-merger Exploration	Acknowledge strategic needs Identify options (expansion, merger, etc.) Decide to pursue merger Develop merger partner criteria
Planning	Identify and collect data re merger candidates Select preferred candidate(s) Conduct initial feasibility study Decide in principle Establish joint merger committee Develop comprehensive merger plan Test and revise plan Decide go/no go Announce pending merger
Implementation	Implement merger plan Manage employee and trustee involvement Manage public, funder, and client relations
Stabilization	Monitor progress Debug systems and procedures Evaluate effectiveness

 

 

¹ Peter Drucker. "What Business Can Learn from Nonprofits." Harvard Business Review (July 1989): 89.

² Steve Jobs, "The Entrepreneur of the Decade." INC. (April 1989): p. 124.

 

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