Nonprofits not tapping staff for senior posts

Succession planning consistently is the top organizational concern of nonprofit boards and CEOs, yet nonprofit leaders are not promoting current staff to fill senior positions, a new study says.

In the past two years, only 30 percent of senior roles in the social sector were filled by internal promotion, or about half the rate in the for-profit world, says “The Nonprofit Leadership Development Deficit,” a paper from The Bridgespan Group published on ssir.org.

The study found “a broad gap in leadership development,” says Kirk Kramer, a Bridgespan partner and co-author of the paper.

“Promising leaders, frustrated at the lack of professional development and mentoring, are not staying around long  enough to move up in the ranks, he says. “CEOs want to exit, too, because their boards aren’t supporting them, a syndrome that is coming at a significant financial and productivity costs to organizations.”

Among 438 survey respondents, one in four said they plan to leave their roles within the next two years, with nonprofits providing the biggest source of people to fill those positions.

That creates a “turnover treadmill,” says Katie Smith Milway, a Bridgespan partner and co-author of the paper. “It exacerbates the succession planning problem at a time when the sector needs capable leaders more than ever.”

Fifty-seven percent of respondents cited low compensation as the cause of their departures from their organizations, compared to 50 percent who cited lack of career development opportunities.

Also cited were a lack of mentorship and support, particularly from their boards.

Only 17 percent indicated they wanted a different work environment.

Over half of respondents ranked their organizations lower than six on a scale of 10 for their ability to develop staff.

The report says funders can foster the development of existing staff for leadership roles.

Libbie Landes-Cobb, Bridgespan manager and a co-author of the paper, says effective development “calls for capacity investments in recruiting, training and performance measurement.

Yet in the past two years, she says, 58 percent of survey respondents received no funding earmarked for talent development.

Kramer says Bridgespan’s research and experience “indicate that the solution to this  problem, while addressable, requires the skill and will to build an ecosystem for leadership development within organizations, involving senior management, boards and funders.”

Todd Cohen

Nonprofit mergers flat, face hurdles

Despite financial pressures from cuts in government funding and private giving, the overall rate of mergers among nonprofits was mainly unchanged in the five years through 2012, a new study says.

Mergers did grow significantly among nonprofits in the field of child and family services, and the main type of merger involved big nonprofits absorbing smaller organizations, says the study by The Bridgespan Group.

Promising nonprofit mergers often trip over three volatile issues, including getting the organizations’ boards in sync, find roles for their senior staff, and combining their brands, says Why Nonprofit Mergers Continue to Lag, which was published in the Stanford Social Innovation Review.

Yet while “creating a successful merger remains difficult, even for organizations that have done it before,” the study says, the nonprofit sector is “taking mergers more seriously than before.”

Funder support

Funders are improving their support for mergers, it says, and more nonprofit executive teams considering mergers “as a regular  step in strategic planning.”

The study compared legal merger filings in Arizona, Florida, Massachusetts and North Carolina from 1996 to 2006 to those from 2007 to 2012.

It found little change in merger rates.

The number of merger filings grew in Arizona, Massachusetts and North Carolina.

But cumulative merger rates in those states — the number of filings divided by the number of nonprofits — remained unchanged from 2007 to 2012 compared to the previous five years because the rate at which new nonprofits were formed kept pace with the increase in merger activity.

Florida was the only state that saw a decline in the number of legal mergers, and a big decline — 30 percent –in the cumulative merger rate, mainly because 15,000 new nonprofits were established in the state.

An analysis of merger activity in Massachusetts found that legal mergers “continue to be most pervasive and increased significantly” among nonprofits in the child and family services field.

It also found the “emergence of a dominant type of merger — large nonprofits rolling up smaller nonprofits,” with the number of large and small nonprofits doubling from 2007 to 2012, and mergers between larger and medium-sized nonprofits growing 1.5 times.

The study included interviews with veterans of nonprofit mergers, as well as their funders and intermediaries.

Merger ‘traps’

It found three “traps” that can surface after merger talks begin and that can “sink discussions between otherwise mission-aligned partners.”

Despite “some progress in developing a favorable funder ecosystem, tools and proactive merger strategy,” it says, “nonprofits need to do a better job navigating the three softer traps if they are going to turn their increased skill to merger into a will to merge.”

In a report five years ago, Nonprofit M&A: More than a Tool for Tough Times, Bridgespan says, it found that mergers “hold far more potential to create value in the nonprofit sector than most people realize.”

But at least four “barriers were preventing that potential from being achieved,” it says.

Those included a lack of knowledge about “when and how to think” about mergers and acquisitions; a lack of  funding for due diligence and post-merger integration; a lack of “matchmakers to create an efficient ‘organizational marketplace’ through which nonprofits could explore potential merger options; and a “tendency to look at mergers reactively, as a route out of financial distress or leadership vacuums instead of proactively as an effective growth strategy.”

Merger funding

While still relatively small, the new study says, new sources of funding are flowing for merger due diligence and integration.

That funding includes philanthropic funds established in Boston, New York, Los Angeles, Charlotte and other cities that make grants to cover merger costs or provide technical assistance for potential mergers or other collaborations.

According to Foundation Center data, the study says, grants for mergers on average have grown about 18 percent a year in real terms to $5.3 million in 2011, up from $1.4 million in 2003.

“The total amount of money dedicated to supporting mergers remains small, but it is growing,” the study says. And foundations increasingly embrace matchmaking, organizing ‘meet and greets’ among grantees so they can get to know each other and explore synergies.”

Strategic mergers

The study says it also sees evidence that more nonprofits are “taking a strategic and forward-looking view toward mergers.”

From November 2008 to November 2010, Bridgespan conducted four surveys with a pool of 800 nonprofit executives, generating 100 or more responses in each survey.

Consistently, it says, 20 percent of all organizations reported considering mergers as part of their strategy and, by November 2010, seven percent had completed acquisitions.

Those acquisitions involved nonprofits with revenues under $5 million or over $25 million, numbers that Bridgespan says tracks somewhat with Massachusetts data from its study covering 2007 to 2012 that show the biggest increases over the previous five years involve nonprofits with revenue over $10 million or under $3 million.

Merger barriers

If the nonprofit sector is making progress to overcome the four barriers its study identified four years ago, Bridgespan says, a key reason the rate of mergers may not be increasing is that “deals that might have been strategically and financially advantageous turned sour during negotiations over the highly emotional issues of boards, senior staff, and brand.”

A successful merger can help expand a nonprofit’s programs, capabilities, reach and revenue, and can improve the organization’s costs structure, “benefiting the people and communities it serves,” the study says.

So it is “vital that funders continue to invest in supporting mergers and learn to navigate all the obstacles along the way — including the softer traps,” it says.

To help do that, it says, funders should be “capturing, codifying and sharing know-how on all forms of alliances, connecting donors that could become more than the sum of their parts, and providing financial support for the due diligence and integration costs that must accompany a merger.”

Funders also should be “serving as trusted advisers and thought partners” to confront hurdles to mergers, it says, and should be “careful to strengthen an ecosystem that enables collaboration that can lead to mergers, rather than forcing deals.”

Todd Cohen

Nonprofits urged to do better at growing leaders

By Todd Cohen

The nonprofit sector faces a crisis in leadership, and needs to be more systematic in developing a pipeline of new leaders, a new survey says.

Studies in recent years have forecast a mass exodus of executive directors as a result of retirement, burnout and lack of support from boards.

And The Bridgespan Group estimates nonprofits will need to hire an additional 640,000 senior executives by 2016.

A new Bridgespan survey says nonprofits recognize they face leadership gaps but are not sure how to address them.

Nonprofits should pay more attention to leadership development and succession planning, Bridgespan says.

The biggest obstacle to better leadership development “may be the behavior of leaders,” it says.

“Many nonprofit leaders (including nonprofit boards) confront the question of leadership development only when faced with a succession crisis,” it says. “And by then it may be too late.”

Among over 225 leaders responding to the new Bridgespan survey, nearly two-thirds disagreed with the statement that their organization is “highly effective in developing a strong internal and external pipeline of future leaders.”

Bridgespan also has produced a guide, known as “Plan A: How Successful Nonprofits Develop Their Future Leaders,” that is designed to treat leadership development as a “proactive and systematic investment in building a pipeline of leaders within an organization, so that when transitions are necessary, leaders at all levels are ready to answer the call.”

The guide offers a three-year “road map” that spells out an organization’s leadership needs, identifies future leaders, and suggests five interconnected strategies to build leadership.

Engaging senior leaders is a key strategy, with most respondents to the survey, for example, saying their organization’s CEO is “actively engaged in building a strong pipeline of leadership candidates,” but a majority also saying senior leaders “aren’t held accountable for their development efforts.”

To build leaders for the long-term, Bridgespan says, the CEO “must serve as the de-facto chief talent officer,” signalling the importance of leadership development, setting expectations for the team, and putting “the process in motion by first developing the people who report directly to her and then asking them to do the same for their teams.”

By holding herself and others accountable for results, Bridgespan says, “she communicates her commitment to the rest of the organization.”

A systematic development effort, it says, starts with “an understanding of the future leadership capabilities required to achieve the organization’s strategy.”

Yet only 39 percent of survey respondents say they understand the leadership capacity their organization will need to three to five years to achieve its strategic goals.

Leaders grow mainly through “well-designed on-the-job experiences,” Bridgespan says.

Yet while many nonprofits offer their staff members “stretch” opportunities, it says, the most successful groups are “systematic” about leadership development, “consciously building the right skills in the right people over time.”

While doing that effectively requires a “clear understanding of the development needs of each individual,” Bridgespan says, only 29 percent of leaders surveyed say potential leaders have development plans in place.

Internal promotions are not always enough develop future leaders, even at the best-prepared organizations, Bridgespan says.

And while its data show that organizations are relatively strong in external hiring, hiring new leaders represents just the first step.

And while it is critical to make sure the first few months on the job are planned carefully so new leaders can succeed, Bridgespan says, 40 percent of leaders surveyed disagreed that they bring “on-board and successfully integrate external leadership hires.”

Finally, it says, it is critical to monitor and improve the process of developing leaders.

Successful nonprofits gather data to ensure they are doing what they set out to do, making progress toward their leadership-development goals, and are continuously adjusting their process based on what they learn.

Yet the survey underscores a great need to improve that tracking and learning, Bridgespan says, with only 29 percent of leaders surveyed saying they regularly collect data to evaluate their progress and understand which leadership-development practices and supports are most  effective.

To be effective in developing leaders,  Bridgespan says, nonprofits should start “with the basics” and improve over time.