To merge or not to merge?

Thursday, 01 May 2014

Duncan Peppercorn photo
Duncan Peppercorn

    Duncan Peppercorn examines the pros and cons of mergers in the not-for-profit space.

    It’s an article of faith in the Australian charitable sector that there is a proliferation of not-for-profits (NFPs), many of which have similar causes and programs. If some of these organisations “merged”, back office costs could be saved. Even better, funders and clients would be less confused.

    The reality is that mergers and very tight structural integration between organisations are difficult and not always the best solution. One alternative that might achieve many of the benefits without the pitfalls could be greater collaboration.

    The challenges of merger or integration are threefold:

    • A lack of clarity about the benefits: “Should we?”
    • Uncertainty about how to go about it: “Could we?”
    • Discomfort with the whole idea of the changes required to meld organisations into one: “Must we?”

    First, should we? What is the logic and value proposition behind a move towards rationalisation?

    Mergers (or any form of collaboration) in the NFP sector should be all about performance improvement. This is a narrower set of drivers than in the commercial sector where mergers can be motivated by a different valuation perspective or by financial considerations, such as access to cheaper capital. Performance improvement might be increasing impact, improving funding, reducing capital requirements and boosting efficiency, or all of the above.

    From what we’ve seen in previous NFP mergers, savings in the back office have been quite small and do not necessarily add enough value to justify the effort and costs. NFPs are typically very lean already and the biggest cost of operating – people – cannot easily be rationalised without compromising service quality.

    In addition, the potential to realise significant benefits in the quality or reach of services, or in influence and advocacy, is very hard to project and quantify. How much better could our programs be if we were able to combine the best of both? How much risk or integration cost are we prepared to bear to achieve this?

    A recurring strategic issue for NFPs is a lack of clear metrics for social purpose outcomes, and uncertainty about needs, funding and behaviours.

    “Could we” – and even if it’s worth merging – how would you go about it? While the challenges for NFPs are no less than they are in the for-profits, there are generally fewer resources available to manage them and less expertise on tap to assist. There is no “market” for mergers in the NFP sector and no deal-makers and brokers looking for opportunities to bring organisations together.

    Further, while there are a multitude of case studies to learn from in private enterprise, examples of successful NFP mergers are few and far between.

    This isn’t to say it can’t be done, but it should be acknowledged and understood that specific resources need to be allocated to the effort and that, in the NFP climate, these resources aren’t readily available.

    “Must we?” is the emotional element. In the NFP sector, boards and management (the decision makers in effecting mergers), as well as staff and volunteers, are frequently deeply emotionally engaged with their roles through personal experience and history, honest commitment, community position or status. There is an understandable fear that a merger or integration of activities might result in consolidation of roles (particularly at the board and management level), leading to loss of position, status or even raison d’ être.

    We ignore this passion at our peril.

    In many ways, the sector relies on the goodwill of staff and volunteers to work above and beyond the call of duty. They are also underpaid or unpaid for their time. The culture, mission and values of an organisation are its lifeblood, so any changes from a merger must be given critical consideration.

    With around 40,000 NFPs with deductable gift recipient status in Australia (all of which may well be doing great work), I often wonder whether we do really have the number of people, and the talent, to be running all of these organisations well? For example, are there enough skilled and experienced people to fill all of these boards?

    If a merger or collaboration opportunity exists you will have to ask yourself honestly: Is this a way to improve possibilities for my organisation to have impact? Will consolidation actually benefit this organisation I care about and the people that we seek to help?

    Finally, even though mergers do not happen often in the sector, there appear to be increasing numbers of succesful collaborations.

    Collaborations can also be a very effective first step on the path to integration – “trying before buying” in effect.

    An appealing alternative to ill-informed rhetoric about rationalisation is to encourage more of this and there are concrete steps that can be taken by key stakeholders – funders, boards and the service providers – to do so.

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