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Further Thoughts on Mergers and Strategic Alliances

A recent issue of our newsletter, Sounding Board, focused on the topic of mergers and strategic alliances in the cultural nonprofit sector, and generated more than the usual amount of feedback from clients and industry leaders. While some readers thanked us for tackling a controversial and pressing issue head on, others took us to task on a variety of issues. We welcome these diverse viewpoints and devote this edition of On Our Minds to sharing them with you, along with our responses, in hopes of continuing the dialogue.

1.) One consultant colleague pointed out that Darwin’s principle of
natural selection is not about sifting the strong from the weak,
clarifying that what separates the “survivors” from those that
do not survive, is not their strength, but rather their adaptability.

We stand corrected that “adaptability” rather than “strength” more accurately captures Darwinian theory and agree that it is as relevant in institutional settings (and a factor in their survival) as it is for a species. We believe that organizations need to be able to adapt to a changing world – perhaps today more than ever – and that institutional collaboration provides a key strategic opportunity to do so.

2.) Another reader suggested we should have explained the distinctions
between mergers and strategic alliances better, in particular by
delineating the collaboration options that exist that do not require
organizations to merge (which is likely to occur less frequently in
the arts than alliances).

We certainly did not mean to say that mergers are the only collaboration solution. On the contrary, there are many structural options to consider, such as:
• Holding companies with semi-autonomous subsidiaries
• Strategic alliances
• Shared services corporations
• Joint-ventures
• Programming partnerships (e.g., co-productions, co-presentations)
• Outsourcing
• Incubators, and
• “Un-incubators” (umbrella nonprofits that minimize unnecessary
infrastructure by offering services to unincorporated groups and individual
artists).
Organizational collaborations should occur, however, only in those areas – whether it is the mission, programs, governance, management, operations, and/or administration – where there is a commonality of interest. As in architectural design, where form follows function, the structure of the organizational collaboration should be appropriate to the scope and depth of the areas of alignment. Initial key questions to ask include:

• What are the institutions’ goals and objectives for the collaboration?
• Where along the organizational spectrum of functions are the organizations
willing to share decision-making control and corresponding financial
responsibility?
• Where do the organizations want to remain independent?

 

3.) A foundation executive asserted that internal consensus to
collaborate is often difficult to achieve in the face of
resistance from so many naysayers. Although staff leaders are
understandably apprehensive, it is often the very trustees who
have to approve such changes who are the least willing to agree
to them. He asked whether the desire for internal consensus
prevents the realization of many mergers and strategic alliances
that are clearly in the best interests of those organizations and
the communities they serve.

There is no question that it is difficult to obtain internal consensus about organizational collaboration, and that the barriers to doing so often derail consummation of the agreements. This is sometimes because the decision makers – whether consciously or not – substitute their individual interests for those of the organizations (and/or the communities) they represent. A facilitated process, in which a small collaboration subcommittee of respected trustees is empowered by each Board to develop a set of recommendations regarding the form and terms of a possible merger or strategic alliance, can mitigate internal resistance. The subcommittee should separate recommendations into “first order” policy issues that have to be resolved before a decision to proceed can be made, and “second order” issues that can, and should, be saved for later in the process. The “second order” issues (e.g., board and professional leadership issues) are often the ones that derail the process. While it is human nature to want these resolved early, it is better to decide first whether, and in what form, the collaboration makes sense before addressing some of the more sensitive issues. It is still the purview of the full complement of trustees to give final approval, but the smaller group can create a confidential forum in which to explore possible solutions, keep the process focused on institutional rather than individual interests, and determine when and how to advocate for a positive decision from other trustees.
4.) An arts executive commented that we might have acknowledged in
greater depth the risk – and resulting fear – that a collaboration
looks good on paper, but in practice will lead to one organization
becoming subordinate to another, thereby losing its power and
influence over key decisions.

There is always a risk that organizational leaders who promise to share decision making authority or give priority to the needs of a collaboration partner, will not live up to their commitments. While there are no guarantees that executives will “walk the walk,” this is not a reason to eschew exploring an organizational collaboration. There are many ways to incorporate checks and balances into collaboration agreements, including dispute resolution provisions and remedies for breaches of the letter or intent of the agreements. In the absence of pressure from market forces that force organizational efficiencies in the commercial world, it is clear that funders often play a key role. The nonprofit sector generally needs internal or external funding sources to provide a financial incentive (either in the form of a “carrot” or a “stick” or both) to consider organizational collaborations they would otherwise resist. Funders can also discourage organizations from believing that all that is needed is a recapitalization strategy; that just one more capital campaign will solve the financial crisis. To succeed in these times and to maximize allocation of resources to mission-related activities, nonprofit leaders must learn how to share organizational control and collaborate. If not, the Darwinian process of natural selection will unnecessarily dissipate valuable programmatic resources.
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