02/24/2014 06:17 pm ET Updated Apr 26, 2014

If Nonprofit Mergers Seem Obvious, Why Aren't There More?

By Willa Seldon and Katie Smith Milway

While the Great Recession led corporations to pursue mergers and acquisitions in many for-profit service industries, the rate of mergers and acquisitions in the nonprofit sector didn't budge. Despite several years of reduced giving by private donors and continuing big cuts in government support, Bridgespan research recently published in the Stanford Social Innovation Review showed that nonprofit mergers remained flat as the number of nonprofits grew to 1.58 million by 2011. That's an average of nearly 40 nonprofits per U.S. zip code.

The reason that nonprofit mergers continue to lag sector growth isn't that they don't make sense. Quite the contrary. Nonprofit mergers and acquisitions are often an effective way to deliver more and better services at lower cost. The problem is a gauntlet of hard and soft barriers to getting to "yes" in a sector without enough matchmakers, nor financial packages to cushion the landings for redundant senior staff.

The Bridgespan Group study showed progress against the hard barriers, which include cultivating matchmakers (e.g., foundations are increasingly playing this role); increasing know-how (e.g., the Foundation Center now has a library of cases on mergers and collaborations), growing funding for due diligence and integration, and raising the profile of mergers and collaborations on the strategic agendas of nonprofit leaders. And the study illustrates the soft barriers that can crop up in due diligence and derail even strategically aligned mergers. These include the challenges of blending boards, brands and key staff.

Consider what is today The Crittenton Women's Union (CWU), a Boston nonprofit that helps low-income women achieve economic independence. In late 2005, the board chairs of two venerable Boston nonprofits, The Women's Union (founded in 1877) and Crittenton Inc. (1824) bumped into each other in an elevator. It turned out they both had approached the same candidate to fill their impending vacancies at the top, a nonprofit executive named Elisabeth Babcock. The trouble was, Babcock didn't find either role enticing. After the chance meeting however, the board chairs, who knew each other socially, met in earnest and began to set their sights on merging into a new entity with an evolved and ambitious mission: to move women and their families to economic independence. It was a vision that Babcock found irresistible. She signed on as CEO of both organizations in 2006, and in June of that year merged them into the CWU, which is today an $11 million agency.

But there were real challenges along the way, especially in two emotionally charged issues that can often surface after merger talks begin and derail the effort: creating alignment within the boards, defining and blending the brands. (A third common land mine (roles for senior staff) turned out to be less of an issue for CWU).

"The board merger was the hardest part," recalls Babcock. "We had two organizations with different board cultures and different perspectives on what was needed in the new organization." Working with an outside advisor, Babcock and her chairman then turned to the hard work of aligning the merged board to CWU's mission. Each board chose seven members for the combined CWU board, and the new entity could add up to seven new members. "We created a shared mission and vision," says Babcock. "We worked hard on how the board role should lead and support that vision, and transitioned off the board members who couldn't realistically be a part of the new vision and role of the board." By January 2014, six of the original 14 members were still on the board, along with 12 new members.

In the CWU merger, brand also turned out to be a challenge. In the case of corporate mergers, especially those that serve consumers, the advantage of preserving a strong brand identity is obvious: strong brands beget customer loyalty. For nonprofits, brand may count with funders, elicit trust from clients, and attract volunteers, board members, and talented staff. In this case, Crittenton, Inc. and The Women's Union used market research to decide to compound their names. "It's a mouthful," says CEO Babcock, "but they both had distinct and important followings, so we wanted to preserve them."

In the wake of the merger, CWU identified programs it wished to let go and transferred several of these to nonprofit partners, minimizing impact on the community. This freed up resources to develop new programs in line with the merged vision, including its award-winning Mobility Mentoring program, now shown to move poor women to independence -- defined as holding a job with a salary of at least $45,000, having $10,000 in savings, and an educational degree that supports one's chosen vocation. In making these shifts, CWU grew its budget steadily through the economic downturn, from $9.4 million in 2008 to $11 million in 2012. Babcock credits growth in revenue and program quality to the strategic restructuring: "That never would have happened had we not merged."

CWU overcame two emotional barriers that can sink strategic combinations: blending boards and blending brands. To do this, it created transparent processes, premised on fairness, and grounded feeling in objective, third-party expertise and data.

Has your management team looked at merging as a way to increase impact? What challenges and benefits have you experienced?

Willa Seldon is a partner with The Bridgespan Group's children, youth and families practice. Katie Smith Milway is a Bridgespan partner and author of "Why Nonprofit Mergers Continue to Lag," published February 2014 in the Stanford Social Innovation Review. She will host a SSIR webinar on Overcoming the Challenges of Nonprofit Mergers on March 11 and launch a nonprofit merger case collection next month on in partnership with La Piana, Lodestar, and the Catalyst Fund.