Mergers and Acquisitions

Cleaning Up the Mess In the Service-Delivery Industry

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It is a sometimes expensive hobby, but I love betting on the stock market. Lotteries are not intellectually stimulating, the racetrack is too inconvenient, and so I bet on the future of American capitalism.

I am not terribly good at it. I buy late and sell early, and I am unable to adopt a consistent investment strategy. I tell myself that I am buying a stock for the long haul, but I get impatient and sell it just before it goes up. Or I sell the minute it goes up a little and then watch it continue to climb without me. Sometimes it seems right to follow advice, but other times it seems that by the time I have gotten the word it is too late to cash in on it. I have done pretty well lately but everyone has--it is hard to go wrong when everything is going up.

This is a harmless pastime. I do not invest money that I cannot afford to lose, and I never buy on margin or sell short. I may lose a little but not enough to matter, and along the way I have learned a little bit about business.

It is popular to believe that business has the corner on truth, that capitalism and freedom are the same thing, that the marketplace is an omnipotent and benevolent force, and that businessmen are especially smart. This theme is particularly prevalent when business is contrasted in glowing terms to the public sector. Most of that, I believe, is garbage. Lee Iaccoca and Ross Perot are no heroes to me.

But I think we should learn from the business practice in which companies merge, buy each other out, and sometimes break up as they try to find a size and a product line that will work--the process they call "mergers and acquisitions." While we may not like to say it, one of the real problems in the service-delivery world is that there are just too many organizations.

I recently worked in a community of 100,000 people that had 140 separately defined youth programs. There are 2 million not-for-profit organizations in America, one for every 125 people, and thousands of governmental agencies as well. The truth is that there are lots of organizations and programs around, but very little real service is available.

There are at least four downsides to the glut of agencies, each extremely serious. The first is inefficiency--it costs too much to keep so many agencies in operation. Every single organization and program has, you can be sure, a director, offices, letterhead, clerical staff, and a ton of overhead. Small agencies are nearly always funded by soft and shaky money, and a great deal of the organization's energy and resources are spent trying to survive--doing grant chasing, fund-raising, and organization.

While there is a charm to small and indigenous agencies, and while some are led by dynamic and creative leaders, the very smallest agencies, like family farms and mom-and-pop grocery stores, should not survive over the long term and are inherently inefficient. (The same can be said on the other end of the scale as well--agencies that are too big and that have become overly focused on their own internal bureaucracies should be broken up and their programs spun off.)

Secondly, the talent pool is finite. There are only so many individuals with high-level management and administrative skills, program-development skills, or community-leadership skills. When we endlessly create new agencies we stretch this talent pool beyond its realistic capacity. Good program deliverers become mediocre or poor managers as we create a flattened organizational structure in which specialization becomes impossible. In larger organizations a person can do fund-raising or staff training or program design as a discrete job. People can improve their skills and develop expertise over time. In the smallest organizations, the administrator is expected to do everything and to do it all well.

Third, community support is finite as well. Competing fund-raising strategies, too many boards for too few dedicated people to serve on, too many meetings can overtax even the most public-spirited community and its strongest citizen volunteers. People will only give so many nights and weekends, and will only write so many checks.

Finally, the mere presence of so many agencies requires the development of endless collaboration vehicles to assure that everyone cooperates and coordinates and that no one feels left out. An enormous amount of energy is spent on relationships between the various organizations. Counties, cities, states, school districts, the federal government, and all the not-for-profits interact endlessly, and all the reporting, meeting, and communicating that goes on among them reduces their capacity to pursue their mission.

It is a part of the not-for-profit and public-sector culture to value such collaboration and to see competition among agencies as distasteful. Consequently, a proposal to re-form the organizations and institutions in a community would be seen as noncollaborative "empire building," and decidedly unfriendly. Yet that very hardball approach is desperately needed.

When budget cuts are inevitable, organizations should consider the option of folding into larger and more viable organizations. They should not seek to maintain their corporate identity at all costs--to keep a separate board, name, and identity. They should not worry too much about the impact of organizational restructuring on their current administrator and staff but rather should worry about the ultimate service beneficiaries and the community at large. Much of the responsibility for taking this hard look will fall to the part-time volunteer boards of these organizations and unusual courage will be required.

Community planning organizations should bite the bullet as well and advocate for the idea of "structural consolidation" of the service-delivery industry in a blunt and aggressive way. Sometimes it will take an out-of-town voice to say what everyone in town knows: that the game is no longer about getting agencies to work together but is instead about the survival of a viable service-delivery system.

Ultimately the folks with the purse strings--the government agencies and private funders--will have to support structural consolidation even if it is hard work and not fun. To a large extent the promiscuous proliferation of agencies that got us here was caused by funders who wanted over and over again to see a new organization devoted solely to their favorite project. The same folks, having created too many agencies, then created the busywork of getting them all to figure out how not to trip over each other. Now they ought to support some of the cost of reconfiguring the mess that is left.

We do not have the processes or the history that business has to guide us in our reconfiguration. We will not see not-for-profit agencies buy up each other's stock or try to get control of each other's board. We do not have the tools of leveraged buyouts or hostile takeovers. But we had better figure out some ways, and soon, to suck it up and tackle the hard job of downsizing and restructuring, of deciding what goes and what stays, and of how the mergers and acquisitions need to come out.

Vol. 15, Issue 05, Page 32

Published in Print: October 25, 1995, as Mergers and Acquisitions
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