The past six months have seen corporate merger and acquisition activity reach its most feverish levels since 2007. Not so in the non-profit sector. Despite funding difficulties and the benefits of sharing knowledge and back-office expenses, the sector continues to grow, with US non-profits now outnumbering lawyers. So what’s holding back the marriages?
The arguments for consolidation are certainly compelling. First, there’s the opportunity to make cost savings, particularly in a sector where tight budgets remain a worry for many.
Some 56 per cent of organisations said they were unable to meet demand last year, according to the 2014 State of the Nonprofit Sector survey, the worst shortfall in the history of the survey, which is conducted by the New York-based Nonprofit Finance Fund.
The figure is even higher in some places. In a recent survey of more than 300 Southern California non-profits, 76 per cent said demand for their services continued to outpace their capacity. In the survey, conducted by the Center for Nonprofit Management almost half said limited funding made it difficult to attract the talent they needed to meet this demand.
Yet when two organisations come together, they can cut costs by sharing everything from IT, human resources and financial systems to donor records.
“It’s not that we have too many services in the non-profit sector but that there’s all this duplicated infrastructure,” says Peter Kramer, manager of national advisory services at the Nonprofit Finance Fund.
With fewer back office expenses, more philanthropic dollars could be spent on programmes helping communities and causes and advancing non-profit missions.
But cost savings are not the only reason for a non-profit merger or acquisition. Consolidation is a way of rapidly spreading know-how and experience. “This is really important,” says Katie Smith Milway, head of the knowledge unit at Bridgespan, a consulting group for non-profits.
She cites a hypothetical example – a large organisation with a 1,000-strong team of social workers helping at-risk youth. If it were to merge with or acquire a smaller non-profit working in early education, the smaller organisation could teach the social workers to identify early signs of trouble among the younger siblings of the teens.
“You can stop the next generation falling into the same pattern,” she says. “So the potential for knowledge transfer through a merger is tremendous.”
As well as increasing non-profit expertise, merging with or acquiring another organisation also helps groups expand geographically, add to their expertise and deepen their client base.
An acquisition strategy can also be an alternative to developing a new programme from scratch in-house. “There’s a lot of potential for some of these larger non-profits to buy versus make,” says Milway.
Yet, despite these benefits, there is no evidence of a rush to merge. In an analysis of legal mergers in several US states, Bridgespan found little rise in activity in recent years. And while in some places the number of mergers increased, it was offset by the rate at which new non-profits were being formed.
That’s because a number of barriers exist to consolidation in the sector. First, while ultimately costs may be saved, the price of consolidation is not trivial. “It’s a tremendous amount of change, needing additional dollars, time and expertise,” says Kramer.
Staff cuts may also be part of the equation, something that is more painful for non-profits than it is for corporations, which can usually afford to provide former employees with outplacement support.
And while two organisations may share a mission, their motives may be very different. “They each might have a different philosophical bent or sometimes religion is involved,” says Gene Tempel, founding dean of the School of Philanthropy at Indiana University. “So these things are not easy.”
Inevitably, joining forces with another organisation involves some loss of control over governance and decision-making. “That’s a difficult thing for any leader to think about, especially where there is emotion and passion tied into the mission,” says Kramer.
But although the internal hurdles are substantial, one of the biggest barriers is lack of support infrastructure. While the profit sector can turn to intermediaries such as banks to carry out due diligence and broker deals, non-profits lack the matchmakers that can help them identify potential partners.
This is starting to change. Donors are increasingly playing the middleman role between non-profits working on similar issues.
And a new fund – itself a joint venture between two organisations, the Lodestar Foundation and Sea Change Capital Partners – has emerged to support joint arrangements.
The Sea Change-Lodestar Fund for Nonprofit Collaboration offers exploratory grants allowing non-profits to evaluate potential collaborations as well as grants covering some of the costs needed to implement a collaborative venture.
As the fund’s name suggests, an acquisition or full merger of two non-profits is not the only option for organisations wanting to expand their reach and increase their efficiencies.
“You can have three or four organisations located in a single building,” says Tempel. “They might have a single accountant, copying centre or payroll processor and thereby operate more efficiently than if they were located separately.”
The challenge for non-profits is how to find the best match for the sharing of resources. Here, too, help is emerging. Nonprofit-share, a US, a start-up is using technology to help organisations connect, share resources, exchange knowledge and experience and form new relationships.
“Right now, we’re working on a new project focusing on matchmaking and building an algorithm that helps connect social entrepreneurs with the right people,” says Susmita De, co-founder and chief operating officer at nonprofit-share.
In fact, short of marriage, there are plenty of collaborative options for non-profits, from sharing spaces or procurement of services and supplies to joint ventures to work on specific programmes.
Milway sees great potential in these kinds of partnerships. “The merger rate should go up and I hope it will,” she says. “But I also think collaborations should go up even more.”
The good stuff
Here, I invite my interviewees to name a favourite charity and – in the spirit of Mixing It Up – a favourite cocktail.
Peter Kramer @nff_news
Cocktail: a Manhattan
Katie Smith Milway @KatieSMilway
Charity: One Hen Inc (co-founded by Smith Milway)
Cocktail: “If I’m on a beach, it’s a Margarita. If I’m by a fire, it’s a glass of Chardonnay.”
Gene Tempel @IUPhilanthropy
Cocktail: Scotch or a Gin Martini with an olive
Susmita De @susmitade
Cocktail: Gin and tonic