“Ultimately, a nonprofit sector that knows well how to collaborate will be far more effective in the pursuit of its public-spirited mission” (McLaughlin 1998a, xxiii).
Abstract
In June of 2008 two organizations that had served Philadelphia’s children for over 125 years each, merged to form a new nonprofit entity, Turning Points for Children. The two organizations, Philadelphia Society for Services to Children (PSSC) and Children’s Aid Society of Pennsylvania (CASPA), had been in discussion for two years before the merger was finalized. Four years after the merger, the new organization is stronger programmatically and financially, than the two independent organizations had been by themselves. More importantly, Turning Points for Children is now better positioned for continued growth with an ability to compete in the changing landscape created by Philadelphia’s Department of Human Services and its attempt to streamline case management and promote accountability among service providers.
A Culture of Merging
“What’s the problem? Why don’t we get everybody in the room and talk about opportunities and ways to collaborate?” Questions like these led to an event sponsored by Philadelphia’s Department of Human Services to promote collaboration. A lunch meeting was convened, organizations held discussions and then everyone went home and the subject was never brought up again. “That was my first lesson that this was a different world.”
Mike Vogel, CEO of Turning Points for Children, came to the nonprofit world after a 20-year career at Johnson and Johnson. He joined PSSC in 2000 as the Director of Operations and Programs. In 2004, he was appointed Executive Director and guided the PSSC through the merger process along with his counterpart, Gail Ober, Executive Director of the CASPA. While Mr. Vogel had no specific experience with mergers in the for-profit arena, he brought his corporate management experience to bear in navigating the nonprofit world and set about to look for a partner with whom to collaborate.
PSSC had previously attempted to merge with another nonprofit organization through a United Way grant. “I thought it was a great potential merger … This other organization didn’t have an endowment, and so had to be really good at raising their full budget every year, and I thought to myself, ‘that would be a great skill for us to add to what we were doing already,’ because we weren’t that good at it. I don’t think we even had a development person at the time.”
Negotiations eventually fell through, but by exploring the possibility of a merger, when the next opportunity came around, this time it was a successful. While PSSC and CASPA had no history of collaboration, Mr. Vogel’s predecessor, Helen Dennis, mentioned that she used to talk with Ms. Ober over lunch about merging, but that nothing more ever came of it. When Ms. Dennis retired and Mr. Vogel became CEO, he stated, “I don’t remember if it was her (Ms. Ober) calling me or me calling her,” but the discussions resumed and eventually turned into a serious effort focused on merging the two organizations.
In fact one of the main reasons that the Turning Points merger was successful was because both CEOs were involved in championing the merger. Early on they worked out how the management structure might look and what role each of them would play, according to their respective strengths. This alleviated two of the common road blocks to merging. According to Tom McLaughlin, Vice President for consulting services at the Nonprofit Finance Fund and nonprofit merger expert, ego and economics (the two big Es) can be strong factors in individual staff and board member motivations, and can lead to active or passive efforts to sabotage negotiations (McLaughlin 1998b). Because of the problem of conflicting motivations, organizations should use the absence of a CEO, for whatever reason, as an opportunity to explore merging (McLaughlin 2004).
According to Mr. Vogel, “On paper we looked like a merger that could happen in a week. We had similar missions; both our agencies were old; we both had money . . . There was a lot of synergy.” McLaughlin says that the entities involved tend to forget that mergers take time, and argues that mergers and affiliations need to be built into the culture of organizations because, “The integration process does take a long time. Therefore, you will be doing serial integrations if you are a large enough, complicated enough system. Ultimately, you will build it into your structure, into your staffing, and into your culture and you will get good at this,” (McLaughlin 2012).
While Turning Points for Children is not yet a large enough organization to process serial mergers on the scale suggested by Mr. McLaughlin, it does have a long history of mergers and affiliations dating back to 1898. At least seven different organizations have become part of Turning Points’ pedigree (Figure 1). While neither PSSC nor CASPA has gone through a merger in the past 30 years, they are a part of the history of both organizations, along with their links to the nineteenth century. This shared identity helps the leaders of the two merging organizations recognize the other as kindred entities with which they can co-exist.
Philadelphia Society for Services to Children (PSSC) was formed in 1980 as a merger of the Inter-Church Child Care Society (founded 1835) and the Pennsylvania Society to Protect Children from Cruelty (PSPCC). PSPCC was chartered in 1877 and was the eighth such group in the United States at that time. The building at 415 South 15th Street, current home of Turning Points for Children, had acted as PSPCC’s headquarters from 1906 to 1980, when it became the headquarters for PSSC. The Inter-Church Child Care Society, formerly the Home Missionary Society, was founded in 1835 by members of the Methodist Episcopal Church as an evangelical group, which around 1854, “assumed the added task of placing poor dependent children in ‘good Christian homes’ in the country” (Clement 1979, 137).
CASPA was organized in 1882 and provided services for Philadelphia’s homeless and endangered children. During its long history CASPA had absorbed two other organizations: the Union Temporary Home for Children (merged 1898) and the Children’s Bureau (merged 1944). The Philadelphia Home for Infants (founded 1873) had previously merged with the Children’s Bureau in 1942.
The Children’s Bureau is an excellent example of the long history of collaboration among Philadelphia’s nonprofits. Established in 1907 through a joint effort of PSPCC, CASPA and The Adam and Maria Sarah Seybert Institution for Poor Boys and Girls of Philadelphia, the Children’s Bureau acted as a joint shelter for the founding agencies, as well as an information and education center for the more than sixty agencies in Philadelphia that received destitute children at that time (Gumbrecht 2003, 4). In 1908 a training program was developed to educate child-care social workers. This training program was the seed for what was to become the University of Pennsylvania’s School of Social Policy & Practice (Lloyd 2008, 4).
Figure 1: Organization Merger History
Institution Profile
Institution Profile
In 2011, Turning Points for Children (TPFC) provided services to over 2,700 families and 5,300 children. TPFC provides a variety of preventive programming and services for children and their families, working closely with Philadelphia’s Department of Human Services to help children in need. Programs include:
In-Home Protective Services - Providing parenting skills and protective capabilities for families in which children are at imminent risk of abuse or neglect.
Families and Schools Together (FAST) - A licensed, evidence-based program that works with schools and communities to provide parenting education and family support services.
Time out for Teens and Tots (TTT) - A parenting and support program for pregnant teens and teen mothers and their children.
Family Finding - Reconnects youth in out-of-home care to family members with whom they have lost contact, to provide another network of support.
Family Empowerment Services - In-home services that enhance parents’ abilities to meet the basic and well-being needs of their children and prevent the onset of abuse and neglect.
Kids N’ Kin - Supports families of children being raised by a non-biological parent (e.g., extended family member or family friend).
Figure 2. 2009 Income by Category.
Nonprofits Coming Together
Nonprofits Coming Together
In 1998, Tom McLaughlin predicted that:
The bulk of innovation today will take place not in programs and services, but in management. And the thrust of that innovation will be toward greater collaboration between nonprofit organizations and all others carrying out similar missions. What we call mergers and alliances are really just part of the innovation that the nonprofit sector must deliver over the next two or three decades” (1998a, xxii).
While the merging of nonprofit organizations has been on the rise since the 1990s, there are several different forms of partnerships that nonprofits can create. Nonprofit partnerships are typically divided into three categories: collaborations, alliances, and integrations (Kohm et al. 2000; Kohm and La Piana 2003, 5). Collaborations occur when organizations share information or coordinate their efforts, but each continues to act independently. Alliances take place when two or more organizations share programs or administration, while also requiring shared decision-making. Integrations involve a change in the corporate structure of the organizations, including mergers.
Motivations for partnerships include:
-perceived financial savings
-pressure from funders
-strengthening programming
-expanding mission
-taking advantage of partner’s area of expertise
-taking advantage of partner’s reputation
A successful nonprofit merger will cite several of these factors as motivation to merge (Kohm et al. 2000). If the sole reason of a merger is to save an organization, it is too late (Gammal 2007; McLaughlin 1998a). For a merger to be effective, it needs to be considered before there are signs of trouble. By merging with a troubled organization, all existing problems are also absorbed, which could threaten the stable organization. Gammal (2007, 48) cites the example of a $2 million health service provider who was pressured by funders to absorb another failing organization. The funders failed to follow through on promised financial support and caused unexpected financial burden of renovation dollars, extra staff time, and lost revenue during renovations which nearly bankrupted the formerly stable organization.
The best reasons to merge are for mission and programmatic reasons. A 1999 survey of San Francisco Bay area nonprofits found that, “Respondents entered into a strategic restructuring more often to improve the quality or range of what they do and the efficiency with which they do it than because of any immediate threats of closure or pressure from funders” (Kohm et al. 2000, 2).
There are two widespread assumptions that compel nonprofits to merge. The first misconception is that there are too many nonprofits across the board. The second is that most of the ventures are too small and inefficient (La Piana 2010, 28).
Philadelphia County (co-terminus with the City of Philadelphia) and its surrounding four counties (Bucks, Chester, Delaware and Montgomery) contain a total of 15,000 nonprofit organizations: 3,600 of which are Public Charities that serve individuals and households; 1,691 are categorized as Human Services organizations, with 658 residing in Philadelphia, including Turning Points for Children (The Philadelphia Foundation 2010).
15,000 certainly sounds like a large number of organizations, but what does this mean? Too many for what? McLaughlin simply states that in many parts of the country there are too many nonprofits, and that “having an excessive number of nonprofit organizations actually weakens the collective power of the entire field… spending a disproportionate amount of resources worrying about how they are going to fund it, manage it, and perpetuate it” (McLaughlin 1998a, xxii).
Public Charities are defined as 501(c)(3) organizations, not including public foundations. In 2007, over one-third of the Public Charities in southeastern Pennsylvania were in the red; nine percent had liabilities that exceeded their total net assets (The Philadelphia Foundation 2010, 4). It could be argued that either there is just not enough available funding, or that the organizations in the red are not managed properly. Either way, are these organizations collectively meeting their constituencies’ needs? In most cases where multiple organizations are providing the same services, it is not the redundancy of services that is the problem. In fact this is usually an indicator that there is a greater need for services. It is not the duplication of services that is the problem, but rather the redundancy of infrastructure that is wasteful(La Piana 2010, 30).
The second assumption, that most nonprofits are small and inefficient, is easier to demonstrate. The 1,691 Human Services organizations accounted for $1.8 billion in revenue in 2007 (The Philadelphia Foundation 2010, Philadelphia County Figure 2). Of these organizations, 39.6% were operating with deficits in 2007 (Philadelphia County Data Figure 2). Generalizing across the larger category of Nonprofits Serving Individuals and Households (NPISH) in the five-county area, the largest 10% of nonprofits accounted for more than 80% of the spending (The Philadelphia Foundation 2010, 17).
In Philadelphia’s Department of Human Services’ (DHS) Quarterly Contract Report for January 1 to March 31, 2012, 227 Child Welfare and Juvenile Justice-related Services contracts are listed (three of which are with Turning Points) for a total of 169 organizations. While these contracts are not all for the same services, many do overlap, and Turning Points is, in essence, competing with 168 other organizations for DHS funding (Philadelphia 2012a).
Of the nearly one million Public Charities in the country in 2008, 3.9% of the organizations earned $10 million or more, accounting for 84.8% of total expenditures in the sector (Figure 3). Public Charities that spent between $5 and $10 million (including Turning Points) accounted for 2.6% of the organizations, who spent 4.8% of the total expenditures. The vast majority of Public Charities, 73.9%, accounted for less than 3% of the total expenditures (Wing et al. 2010).
In an environment where multiple organizations provide the same services with competing infrastructures, it seems logical to bring these organizations together to eliminate redundancies and take advantage of efficiencies and economies of scale. However, in an attempt to save money during a merger, the new organization can find itself spending more.
Despite conventional wisdom, mergers themselves do not generate revenue or reduce expenses. In the short term, they actually require new money for onetime transactional and integration costs. Even in the long term, the act of merging itself did not lead to substantial cost savings for the vast majority of the mergers my firm has facilitated. Merged nonprofits can roll together annual audits, combine insurance programs, and consolidate staffs and boards. But they are also bigger and more complex and require more and better management—a cost that often exceeds the savings from combined operations (La Piana 2010, 30-31).
A survey conducted by The Stanford Project on the Evolution of Nonprofits in the San Francisco Bay region reported that none of the merged organizations in its sample reduced the need for funding, because each merger was used to grow the organizations’ activities, actually increasing the overall revenue requirements, despite reducing the number of organizations (Gammal 2007, 51).
Economies of scale do not just apply to finances, however. A larger organization is not only able to negotiate better deals with suppliers, but is able to wield more clout by increasing its market share when dealing with foundations and government agencies. The more services an organization can provide in a community, the more indispensable it becomes. This allows for a stronger negotiating position to provide ever more services, and ultimately permit it to grow. Funders have been known to scale back funding to newly merged organizations however (Gammal 2007), so it is still up to individual managers to engage foundations and government officials effectively.
When nonprofits do merge, the most common benefits reported include increased services, increased administrative capacity and quality, and increased market share (Kohm et al. 2000, 2). Mike Vogel notes that while Turning Points has not seen obvious cost savings, they have increased their services and hired more employees. During DHS’s recent restructuring, contractors for preventive services were cut from 40 to approximately 12. “And we were lucky enough to be one of that dozen. We grew in this time that others were shrinking, and this caused us to hire a lot of new people.” Because providing human services is a labor intensive field, Mr. Vogel estimates that 70-75% of Turning Points’ costs are salary and benefits. “So we’re buying more stationary, we’re buying more cell phones, we’re buying more computers. Is there cost savings? I think we’re getting better deals now. We can negotiate better terms … but the overall expenses are more.” Ultimately however, as the organization has grown, so has their budget.
Figure 3. Number and Expenses of Reporting Public Charities, 2008 (Wing et al. 2010).
Cooperation vs. Competition
Cooperation vs. Competition
In the 2005 survey of the San Francisco Bay area nonprofits, 9% had gone through some type of merger or acquisition in their history. In a survey of over 200 organizations, 76% claimed that they collaborate with other nonprofits, 46% collaborate with government organizations and 32% collaborate with for-profit companies (Gammal et al. 2005, 37-38).
Competition in the for-profit world is viewed as not only healthy, but an integral and necessary part of capitalism. Competition weeds out companies that fail to provide quality goods and services at a competitive price. However, in the nonprofit arena, especially preventive human services, it is very difficult to assign impact to a particular program or service because of the multitude of variables involved. Therefore ineffective programs can continue to persist despite their ineffectiveness because of contract failure, which occurs when those that receive goods or services are not the ones that are paying for them (Kohm and La Piana 2003, 12-13).
Yet nonprofits do compete for funding dollars from both public and private sources. Despite a reticence in the nonprofit culture to admit to competition, it remains very real. Because of this fact, and in the face of the demonstrated advantages of organizations working together, nonprofit organizations must learn to be adept at both, simultaneously (McLaughlin 1998, 80-81). Mergers and affiliations are one way that organizations are attempting to temper competition (Kohm et al. 2000, 2).
Funders direct monies to organizations that demonstrate efficiency or effectiveness. Sadly, often just providing the appearance of efficiency is enough. By merging, in addition to the other benefits, organizations can provide the appearance that they are serious about efficiency, making the case for even more donor dollars (Kohm and La Piana 2003, 14-15).
Navigating a Changing Landscape
14-year-old Danieal Kelly fell through the cracks in the DHS system. In 2006, Danieal was found dead of abuse and neglect, despite the family reportedly having received services for years. A Grand Jury indictment of nine individuals revealed a systematic failure of the DHS system to protect the young girl who suffered from cerebral palsy. In response to Danieal’s death and to others that the DHS system failed to protect, a Community Oversight Board (COB) was created to investigate the events that led to the tragedy and provide recommendations to overhaul the system (McElroy 2012).
The system overhaul became known as Improving Outcomes for Children (IOC), which is aimed at streamlining the child welfare system by decentralizing direct case management services through a network of Community Umbrella Agencies (CUAs). The program seeks to establish, “the foundation for a single case management system delivered by Providers through the development of strong, geographically based, community-level partnerships” (DHS RFP Philadelphia 2012, b6). By clarifying the roles of DHS, providers and subcontractors, IOC will eliminate redundancies while strengthening performance management and accountability structures. Ten CUAs have been proposed, with geographic boundaries overlapping existing Philadelphia Police Districts.
This approach is based on the premise that positive outcomes are achieved through the use of child protection and child welfare services that are family-centered, community-based, culturally competent, integrated, timely, and accountable for results.
In order to achieve these positive results, particularly safety, permanency, and well-being for our children and youth, the system must promote new practices, service innovations, and true collaborative partnerships between public and private agencies and stakeholders in the communities served (DHS RFP Philadelphia 2012b, 4).
In July of 2012, the first two of the proposed ten annually renewable contracts for CUAs were announced: NorthEast Treatment Center (NET) and Asociacion De Puertorriquenos En Marcha (APM). In 2009, APM’s total revenue was over $10 million, but NET’s total revenue was just over $5 million. By comparison, Turning Points for Children’s 2009 revenues were slightly above $4.5 million (see Figure 4 for CUA profiles).
Figure 4. Community Umbrella Agency (CUA) Profiles.
While PSSC and CASPA could not have predicted what the outcome of the COB would be, it was within this environment of change that they were negotiating to merge. Kohm and La Piana (2003, 24) state that most of the organizations surveyed chose to consolidate, “not because of what funders were doing at the time, but because of what they thought funders would do in the future.” The CEOs and board members of PSSC and CASPA could not know what DHS would do in the future, but only that the status quo was changing, and that by merging, a new organization would be in a better position to compete.
Another benefit of the merger was that it enabled the new organization to weather the recent world wide economic crises. A month after the merger was finalized, Turning Points for Children was in financial crisis mode, “This is where you could say we looked like geniuses,” Mr. Vogel says. Either organization may have survived on its own, but even if they had, their endowments most likely would have been drained.