Few nonprofits merge or affiliate with other nonprofits. This is in stark contrast to the private sector, where often part of business growth and development is mergers and acquisitions. When nonprofit leaders are asked in annual surveys from The Nonprofit Finance Fund and others, in spite of their financial situations, only a fraction (2–3%) of leaders respond that they are in discussions with other organizations about mergers and affiliations. For every one successful nonprofit affiliation and merger, there are hundreds that did not happen but should have. Why is this? And more important, what will it take for nonprofits to begin to work together more strategically to consolidate operations and focus on their missions?
The purpose of this article is to shed light on one organization’s affiliation model and its lessons learned as a pioneer in the nascent nonprofit affiliation and merger marketplace. Since 1989, Public Health Management Corporation (PHMC) has strategically used its infrastructure and size to partner with mission-aligned nonprofit colleagues through its affiliation model. The focus on these affiliations has been to drive down costs and enable the affiliate organizations to better focus their operational costs to better compete.
PHMC is a nonprofit public health institute that creates and sustains healthier communities using best practices to improve community health through direct service, partnership, innovation, policy, research, technical assistance and a prepared workforce. PHMC has served the greater Philadelphia region since 1972 and has become one of the largest and most comprehensive health and human services organizations in the nation. PHMC fulfills its mission to improve the health of the community by providing outreach, health promotion, education, research, planning, technical assistance and direct services.
PHMC currently has ten affiliates, of which three are support affiliates, with a consolidated annual operating budget of over $175 million, in addition to a foundation with close to $40 million in assets. Through its 250+ direct services programs and ten affiliate partner organizations, its work in emergency preparedness across the region and its various partnerships with government, foundations, businesses and community-based organizations, the work of PHMC impacts every household in the Philadelphia region. PHMC currently serves 125,000 clients. The combined annual impact of PHMC and its affiliates on the Philadelphia community’s economic vitality is estimated to be in the range of $500 million. Of every dollar received, on average 92¢, or a total of $161 million, go toward program services.
The PHMC Affiliation Model:
Affiliations are strategically different from mergers. In a merger, one of the organizations usually loses its identify and ceases to exist. Some or all staff and board leadership are absorbed into one of the organizations or the newly merged corporate entity. Affiliations are different. In this model, staff and board leadership usually remains intact following some economies of scale and back-office consolidation. In the nonprofit sector, an affiliation is similar to the relationship between a subsidiary corporation and its parent corporation. The parent corporation has some level of control; however, in general the corporations operate independently but rely on economies of scale, like common back-office services: finance, human resource, information technology and communications support.
PHMC strongly believes in the missions of the organizations with which it partners and wants them to keep their identities and leadership as they affiliate. PHMC’s management style is to stay in the background and support its affiliate organizations. The PHMC affiliation model works as follows:
- The partner agency retains its own 501(c)(3) status and federal tax ID number, files its own 990 and completes individual agency audit.
- The partner agency has its own board of directors and keeps its own assets and liabilities. There is a firewall between PHMC and the affiliate nonprofit organization.
- PHMC and the partner agency sign an affiliation agreement. The partner agency amends its articles of incorporation and by-laws to reflect the affiliation agreement and its new legal structure as a membership corporation, with PHMC as the sole member of the corporation. Within the affiliation agreement is the ability for the two organizations to part ways should the partnership not flourish. To date, PHMC has disaffiliated with two organizations, but remains connected to them in other ways like management contracts.
- Existing partner agency staff are retained; HR policies and benefits are changed to better mirror those of PHMC.
- Existing board members remain on the board of the partner agency. However, PHMC appoints two board members. PHMC has a seat for affiliate board representation on its own board.
- Following a due diligence process, which analyzes the partner organization’s need for back-office support, the partner agency enters into an annual management contract with PHMC for PHMC’s provision of information systems, fiscal, human resources, communications and marketing, program and strategy development support, quality assurance and related infrastructure services with an arms length negotiated contract for service.
Affiliation Impact:
Affiliation Impact:
To date, all PHMC affiliate organizations have increased their budgets and community impact up to tenfold or more within a short period. The whole is clearly greater than its sum of its parts.
Why Relationship Matters
Contrary to mergers and acquisitions in the private sector, nonprofit sector mergers and affiliations are a relationship business. The common theme behind the success of all of the affiliations is relationships, and relationships built on trust and over time. These include relationships between the leadership of PHMC and the affiliate organization leadership, as well as in the funding community, including the City of Philadelphia and other government agencies, which has a vested interest in ensuring that the organizations it supports are strong fiscally and in management.
PHMC’s story is no different. In the following summaries is a background story of relationships among leadership and staff of both organizations that have been built over time and built on a foundation of trust.
Interim House: Interim House was PHMC’s first venture into the affiliation model. Richard Cohen had a strong relationship with the organization and its leadership. Interim House services were known to be considered exceptional by the women served in the residential treatment facility in Mt. Airy. However, the organization was in financial distress and the program was in financial trouble. Funding agencies like the city’s Offices of Substance Abuse and Drugs and Alcohol were very supportive of PHMC’s helping the program, which started with PHMC entering into a management contract to turn the agency around. PHMC provided management services with the support from city government agencies, and the board ultimately turned into an affiliation in 1989 and eventually creating a program for women and their children at Interm House West in West Philadelphia. However, it was the relationships that the leadership of PHMC had with the organization and the funding community, including the city, that enabled the affiliation to happen.
The Bridge: In the early 1990s, the Bridge, a residential program for adolescents, was in serious financial trouble to the point where it was at risk of going out of business. The program was strong and well liked by funders like the city but it was losing significant amounts of money. PHMC was retained with support from the city’s drug and alcohol office to do a management intervention. At the point when PHMC intervened in 1993, the program was losing over $500,000. PHMC and its lawyers did something unheard of in the nonprofit sector at that time, yet common in the private sector: It put the Bridge through bankruptcy to be able to resolve all of its debt issues. PHMC negotiated with all of its creditors and came to a common agreement on payback terms for funding earned—within a six-month period, the debt was resolved. The Bridge became an affiliate of PHMC in 1994. Since then, the Bridge has been managed well within a fee-for-service environment and with strong leadership and is about to grow in the next years.
Health Promotion Council (HPC): The former executive director of the Health Promotion Council had been a long-time colleague and friend of Richard Cohen and other senior management of PHMC. However, the affiliation idea was initiated by Philadelphia region consultant Don Kligerman, who introduced the leadership of HPC to thinking about the possibility of growing with a larger mission-aligned organization that could help it grow and scale. HPC affiliated in 1999 and has seen tremendous growth and expansion in services through the affiliation, including the ability to successfully bid on state funding, which it would not have been able to secure without a strong infrastructure such as PHMC’s. Most recently, another PHMC affiliate, Resources for Children’s Health, consolidated its programs with HPC and is now operating as a program of HPC.
National Nursing Centers Consortium (NNCC): PHMC manages a network of nurse-managed federally qualified health centers and was a founding member of what became the National Nursing Centers Consortium. There was total mission alignment from the beginning. In 2001, what was the Board of the Regional Nursing Centers Consortium, and Tine Hansen-Turton, who ran it, decided to go national and focus on the key policy and programmatic issues of the nurse-managed health center movement. The focus on policy and programs led the group to easily decide that affiliating with an organization with strong infrastructure and back-office support would be key to its success and its need to focus on national and state policies impacting nurse–practitioner- and nurse-managed health clinics. As with most affiliations, the rubber hits the road when organizations begin to discuss control and ownership. In an affiliate model, the parent organization is the owner legally. However, NNCC and PHMC leadership came to an agreement that there should be an exit clause in the affiliation agreement should the partnership not work out. NNCC affiliated in 2002 and has seen tremendous growth for its organization as well as been able to help transform how primary care is delivered in the U.S. and raised more than 300 million on behalf of its members nationally. The affiliation model was key to its success in focusing on its true mission.
The Joseph J. Peters Institute (JJPI): Richard Cohen and the PHMC board chair, Judge Renee Hughes, were both on the board of JJPI. As Richard Cohen often says, patience pays off, and over a five-year period discussing the possibility of becoming an affiliate. Both the Office of Mental Health and the Office of Community Behavioral Health were supportive of the affiliation, which happened in 2004.
Metropolitan Career Services/Computer Technology Institute (MCC): MCC, one of the region’s most respected workforce and associate degree programs, affiliated with PHMC in 2011. The affiliation came about through a relationship between the former executive director and Richard Cohen. The executive director was very well aware that the organization would need to close its doors without the support of an organization like PHMC. At this time, PHMC is in the process of turning the organization around, adding degrees such as allied health as well as growing the workforce programs.