December 2, 2013

Getting our act together

The need for consolidation in the non-profit sector isn’t as critical as popular opinion would have us believe. However, greater collaboration and integration can be beneficial writes Duncan Peppercorn. So what are the obstacles and how can we nurture tighter collaboration?

Duncan Peppercorn, Executive Director, SVA Consulting

It’s an ‘article of faith’ in the Australian charitable sector that there is a proliferation of non-profits, many of whom have similar causes and programs. If some of these organisations ‘merged’ then back office costs could be saved, and there would be less confusion in the market.

However, mergers and very tight structural integration between organisations is difficult and not always the best solution. An alternative is to encourage more and deeper collaboration.

This article investigates the dynamic of collaboration between organisations and proposes some concrete steps to encourage it. [i]

The article considers:

  • Whether proliferation in the sector is problematic, and whether mergers are called for
  • The reasons to collaborate tightly
  • What is difficult about collaborations, integration and mergers, and how these difficulties can be overcome
  • What non-profits, service organisations and funders can do to drive greater collaboration and integration.

Proliferation: problem or potential?

Funders, observers and even executives in the sector often say that there are ‘too many’ non-profits in Australia; that this is a problem; and that more ‘mergers’ are required. In 2010, the Productivity Commission report: Contribution of the Not-For-Profit Sector observed that the sector “…should be more open to the possibilities of restructuring and forging new ways of collaboration”.[ii] In 2007, the SEEEN report: Contrary and Congruent Views of Leadership and Management in the Australian Social Economy found that respondents were critical of the sector having a large number of smaller organisations.[iii]

However, two arguments cast doubt on whether there really is a compelling case for restructuring.

In the first place, there is value in proliferation. If we are to embrace innovative approaches to old problems, then the sector needs to encourage small initiatives to set up and grow. Small, new organisations potentially bring new supporters and new funding into the sector. There is also an argument that small, ‘niche’ challenges will only be addressed by dedicated organisations, and would get lost in larger non-profits – for example the Brown Nurses based in Glebe, NSW, who are specifically committed to ‘…offering holistic care to the sick poor in their own homes’.

These smaller organisations can also be more nimble and flexible and therefore better able to respond to changes in their operating environments than larger organisations.

Secondly, it is unclear what the benchmark is for proliferation. Compelling, comparable data for the US and the UK to demonstrate that Australia has more, or fewer non-profits per capita (or per unit of GDP) is hard to find. Colleagues in Europe and the US bemoan proliferation there, so maybe it is simply that any duplication causes confusion and discomfort, even though it may in fact be a good thing.

Furthermore, the argument that the for-purpose sector needs more mergers – ‘like the for-profit sector’ – is possibly flawed. Mergers are, in fact, rare everywhere: when businesses ‘merge’ the actual mechanism is more likely to be ‘takeover’. This involves one entity buying the shares of the other, and the ‘takeover’ will be agreed based on whether shareholders believe that they are getting a good deal. This mechanism simply doesn’t exist in the non-profit space: there is no dividend flow to buy. As a result, the mechanism driving consolidation is, largely, absent. Whether or not there is proliferation, the main mechanism to manage it through ‘mergers’ is absent.

While mergers might not happen often in our sector, there appear to be increasing numbers of collaborations – many of them deep and tight.[iv] Given the problems of merging (explored in more detail later), an alternative approach is to encourage more and deeper collaboration, and to make it more evident, in particular to those concerned about inefficiency in the sector.

The reasons to collaborate tightly

Closer collaboration or indeed merger in the non-profit sector is all about performance improvement. This is a narrower driver set than in the for-profit sector where ‘mergers’ can be motivated by a different valuation perspective or by financial considerations such as access to cheaper capital.

Performance improvement can be any or all of:

  • Increasing impact
  • Improving funding
  • Reducing capital requirements or operating costs.

Increasing impact

There are four main ways that collaborating on programs or integrating organisations might increase the impact of a program (see The extended Smith Family) or, indeed, allow the organisation to survive to continue to deliver impact:

  • Improving one or both of the existing separate programs, or increasing their sustainability
  • Providing a better combination of programs to clients
  • Entering new communities/geographies
  • Managing onerous legal or compliance responsibilities.

If two organisations have similar programs, or different programs that address the same issue, it is likely that one program will be more efficient or effective, and it is certain that one program will be better in some dimensions than the other. By effectively integrating learnings from both, a better result will be achieved for the beneficiaries of the programs.

Collaboration can also allow strong programs to be replicated and thereby increase their impact.

For example, the merger of the Victorian Multiple Sclerosis (MS) Society and MS Society of NSW allowed the best of both to be brought to all those with MS in the two states, and also for a more complete and complementary set of services to be provided (as discussed below).

In one proposed collaboration, a major argument for combining two disability services was that one had better systems and more standardised programs, while the other had better people on the ground. Combining the two was seen to potentially provide better outcomes for the disabled clients of both.

The dimensions on which two programs might be considered for combination include:

  • Replacing a ‘weaker’ program with a better one
  • Leveraging better (more capable, better trained, more experienced) people from one program to support and improve the other
  • Using better systems: facilities, infrastructure and technology from one program or organisation in the other
  • Adopting processes from one program or organisation: practices, standards, guidelines (including measurement and evaluation frameworks).

Sharing learnings might go beyond improvement: it might allow a program that is doing good work, but which is under threat because its parent organisation cannot fund or resource it to be adopted by a stronger organisation and sustained.

The MS integration also enabled a better service to people living with MS by enabling a more complete set of services. While any organisation on its own could, in theory, develop and grow new complementary services, CEOs can see the value of alliances with existing providers. In the US Big Brothers Big Sisters of America (BBBSA) formed an alliance with Boys and Girls Clubs of America (BGCA) to align the mentoring programs of the former with the development programs of the latter to the benefit of the clients of both.[v]

…the merger was an ideological decision to serve the best interests of the client.

The President and CEO of the Arizona’s Children Association noted in respect of its acquisition of an organisation providing preventative and early childhood services: “We might have been able to enter new services areas by ourselves, but I think it would have been a much slower process”.[vi]

Collaboration can also allow strong programs to be replicated and thereby increase their impact. For example, one organisation might not have the geographic reach of another. Again, it would be possible to grow into a new geography, setting up an office, recruiting staff, understanding local regulations and other requirements and building relationships with key stakeholders; but it is considerably more efficient to work with someone who already has the assets in place.

Finally, organisations may simply lack the skills that enable them to survive, particularly in the current environment of greater scrutiny and increased focus on good governance. This may drive amalgamation of smaller entities into a competent larger organisation, as seen with smaller, local community service organisations who are unable to afford the level and quality of reporting that is demanded.

In most situations, however, the quality of client service is the ultimate driver of a decision to proceed.

Paul Murnane, the former Chair of MS Society of NSW, commented that although increased funding had been an important outcome of the merger of the Victorian MS Society and MS Society of NSW “…we wouldn’t have gone ahead with the merger if it didn’t benefit the client”.

Gerard Menses, who guided Vision Australia as CEO following the merger of three separate providers of services to the vision impaired in NSW and Victoria, observed that “the merger was an ideological decision to serve the best interests of the client”.

Improving funding

In the commercial world, collaboration between existing competitors is often disallowed, because it increases the returns to shareholders at the expense of customers. In contrast, the second reason to collaborate in the non-profit sector is to increase market power and extract more net funding from either government or the private sector.

This can happen in one of two ways:

  • Improving the effectiveness of the funding functions
  • Improving the effectiveness of advocacy and influence.

In the first case, consolidation of the fund-raising effort between organisations can increase the efficiency of how funds are raised, allowing the combined function to deliver more for the same amount of effort. A medical research institute (considering integration with another institute) was dedicating 30% of its corporate resources to sourcing and securing grants: these resources were, arguably, specialised and underutilised, and combining with another research facility would have allowed significant economies of scale. Furthermore, skilled fundraisers are rare, and effective implementation of structured fundraising is uncommon, particularly in smaller organisations. Combining resources – in particular where one organisation has an excellent staff member – can increase the total flow of funds for the same effort, since there are more (and better) products to cross-sell.

We could see that a larger more robust organisation would have greater sway and influence with state and federal governments, other funding bodies and in general fundraising.

Of course, where donors or supporters have the capacity to give more, creating a more compelling offer from the programs of more than one organisation might increase total giving.

Secondly, advocacy can be more effective (see The extended Smith Family). In the social sector advocacy is largely about influencing the flow of money or achieving legislative change. Tight collaboration between organisations with a common advocacy agenda increases impact, and reduces the opportunities for unwilling targets to ‘divide and conquer’. As Murnane commented: “…we could see that a larger more robust organisation would have greater sway and influence with state and federal governments, other funding bodies and in general fundraising”.

Reducing capital requirements or operating costs

‘Reducing costs’ is often cited as the key argument for more ‘merger’ activity in the non-profit sector. There are three ways to save money:

  • Rationalising shared services / back-office functions
  • Increasing asset utilisation
  • Improving program efficiency to reduce delivery costs (as opposed to increasing scale with the same resources).

The ‘shared services’ argument surfaces frequently, often in the context of a provider seeking to create a shared services business to serve the sector. The argument ‘for’ is straightforward: there are fixed costs associated with all back-office functions (IT, finance, payroll, travel, asset management, HR, etc.), so integrating these for multiple organisations will save costs, allowing more resources to be focused on program delivery.

…there is little evidence – to date – of real traction from back-office integration in Australia.

Frustratingly, there are also arguments ‘against’: the majority of the cost is actually variable (and already very lean), so the savings will be relatively small for any but the largest players and will be outweighed by the costs and risks of making the change. Furthermore, the challenges of managing an outsourced service might make it an unattractive proposition for smaller or start-up businesses (who may well be accessing these resources pro-bono through board members, or using volunteers anyway).

Whatever the reason, there is little evidence – to date – of real traction from back-office integration in Australia (except where organisations have been forced to merge in order to meet a compliance burden, as noted earlier). However, as Murnane noted with the MS integration: “We figured that if we could take out more than 15% of our combined NSW and Victorian costs and expand services at the same time, some sort of integration between NSW and Victorian was worth doing”.

Secondly, assets can be used more effectively. Obviously, the potential to work assets harder is restricted to those with assets, be they buildings, vehicles or technology/equipment. Most of these opportunities can be captured using collaborative mechanisms that are straightforward, transparent and well understood: leasing, operating agreements and such like. For example: SVA, Career Trackers and AIME all share an office in Melbourne, defraying costs and using heating, lighting and fixed office equipment costs more efficiently.

Finally, more efficient use of assets, as well as staff and their expertise can occur at the program level. Minibuses, vans, meeting spaces and offices can be shared, particularly in more remote communities. Similarly, where human resources cover a very wide geographic area there are significant efficiencies to be gained if, when they drive to a remote community, they can deliver or oversee multiple programs. Even within a Victorian organisation delivering multiple energy efficiency and financial awareness programs in rural communities, there were savings to be made from using staff across programs, so that the ratio of client-facing to travel time was increased.

What is difficult about collaborations, integration or mergers?

Given the variety of ways in which organisations can potentially achieve greater impact through collaboration; what are the major challenges? What is preventing closer collaboration, and even productive sector rationalisation that would be in the interests of clients and society?

The challenges are threefold:

  • A lack of clarity about the benefits: ‘why would we?’
  • Uncertainty about how to go about it: ‘how could we?’
  • Discomfort with the whole idea of the changes required to meld two programs or organisations into one: ‘Must we?’

Clarifying the benefits: ‘Why would we?’

This first challenge is down to a recurring strategic issue in our sector: lack of clear metrics, and uncertainty about needs, funding and behaviours.

…savings may not be huge… frequently not as large as optimistic outsiders or even board members might have hoped.

As noted earlier, savings may not be huge in an integration or merger; frequently not as large as optimistic outsiders or even board members might have hoped. However, the other side of the equation, 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?

As well as the uncertainty about the upside, the costs associated with making the change may be hard to estimate. Indeed, harder than they are in the commercial sector. The reasons for this include the lack of analytical capacity in what are generally very leanly resourced organisations. High quality skills could be accessed pro-bono; but it can also be more difficult to predict how the business will respond, given that there is often significant reliance on the goodwill of staff (to work above and beyond the call of duty), or on volunteers.

Finally, existing working patterns, processes and activities may not be standardised, formalised or even documented. It is therefore hard to predict how integration of different programs might impact on service provision, and whether predicted benefits will eventuate; or even whether things might go backwards.

Overall, a reasonably risk-averse board may struggle to feel confident even that two programs should be combined, let alone that two organisations should be merged.

Planning for change: ‘How could we?’

Managing the integration of any activities is a significant project; integrating two organisations involves an intricate web of planning and detailed tracking, even when those organisations are relatively small.

…the resources available to manage them [challenges], and the expertise on tap to assist, is generally significantly less.

Some of the specific problems, highlighted in a review of a failed integration of two large providers of support to children with serious illness, included:

  • Decision making: no clear framework was used to determine how decisions were to be made and by whom
  • Project management: process was poorly managed and controlled
  • Communication: communication was inconsistent or reactive
  • Delegation of work: senior leadership took too much responsibility for too many aspects of the process
  • Facilitation: facilitation of key meetings was often seen as weak
  • Engagement: not all members and staff were engaged along the process.

The challenges are no less than they are in the for-profit sector, but the resources available to manage them, and the expertise on tap to assist, is generally significantly less.

Furthermore, the challenge already noted that the motivations in the non-profit sector are different to those in the for-profit sector can make change harder. As Murnane observed: “The non-profit sector is not comfortable with change and certainly doesn’t have a lot of experience with mergers”.

Perhaps the greatest issue for non-profits in merging two organisations into one is the integration of the governance models. Many mergers and integrations fail because the governance model and who would remain on the board, could not be agreed. One client, referring to the failure of a proposed merger, observed: “The board could not decide on the form, structure and responsibilities of the new governance model, including the board itself… People weren’t brave enough to make the tough decisions. At the start everyone was being too nice to each other.”

Finally, there is no ‘market’ for mergers: no deal-makers and brokers looking for opportunities to bring organisations together – for the obvious reason that there are, in the non-profit sector, no deal fees to make it worth their while.

Discomfort: ‘Must we?’

It would, of course, be nice to believe that we all act selflessly, generously and objectively. But it is clear that, even with the best intentions, our personal perspectives influence or even cloud our judgement. In the for-purpose sector, boards and management – the decision makers in effecting collaboration or even merger – are frequently deeply emotionally engaged with their role; through personal experience and history, honest commitment, community position or status. There is an understandable fear that merger or integration of activities might result in consolidation of roles (at the board and management level), leading to loss of position, status or even raison d’ être.

Ego and ‘founder’s syndrome’… are some of the challenges faced when driving collaboration.

This fear manifests in increased tension and conflict, reducing the possibility of structural integration even being contemplated and compromising successful outcomes if it is. One board member noted: “Leadership was held by passionate individuals, who were not ready to share responsibilities”.

Michael Traill, CEO of SVA and a veteran of working with social entrepreneurs and looking for ways to grow impact, has said, “Ego and ‘founder’s syndrome’, together with the vested interest of leaders and managers are some of the challenges faced when driving collaboration”.

Furthermore, there is often a genuine belief that an organisation’s or program’s approach is unique; that it has some ‘special sauce’ that will be lost or compromised if it is forced together with another ‘similar’ program. From the outside this can appear defensive and unhelpful. Sometimes detailed program mapping and understanding of the program logic can either demonstrate the differences (and highlight which approach is more compelling) or even evaporate the ‘special sauce’.

What can non-profits, supporters and funders do?

While there might be more collaboration occurring than is immediately visible, there would be benefits from more collaboration, targeted integration and potentially even merger. The following proposals, developed with the sector, suggest specific things that non-profit organisations, their supporters (including service organisations like SVA Consulting), and funders could do to facilitate more collaborative activity.

Non-profit organisations can…

Some of the organisational characteristics that give the sector strength (commitment, passion, dedication, single-mindedness, and entrepreneurialism) can militate against effective collaboration.

Boards must therefore take it upon themselves to consider collaboration, integration of programs and merger as valid strategic alternatives, and explicitly consider them at every strategic review as a matter of course. Board members are clearly obliged to always be looking outside the organisation for opportunities to pursue the mission of their organisation, through expansion, imitation, integration or consolidation: an agreed process to develop strategies based on this contextual review is valuable. There is a strong case that external, disinterested facilitation will help in this.

If a merger, in particular, is contemplated then a clear and transparent process must be followed. Decisions should be documented and not revisited unless significant new information comes to light. The responsibility of board members to adhere to and support the decisions of the board (even though they might not personally endorse them) is vital so long as they remain board members. If dissenters wish to dissent publicly, they should resign their board seat.

…the rationale for the integration or collaboration must be clear and agreed by both parties… and documented!

Deal breakers (e.g. program focus or board composition) should be identified at the earliest possible opportunity and shared with the potential partner. We have found that ‘difficult’ questions do not melt away; in fact they get more difficult the further down the track discussions progress.

Specifically, the rationale for the integration or collaboration must be clear and agreed by both parties… and documented! Is it cost saving? Or to improve both programs? Or is it that programs are synergistic, and if offered in tandem will improve outcomes?

As in so many other things, clarity about the planned outcomes of programs, and tracking of success (or otherwise) is critical. If two similar programs can compare factual details about how effective and efficient they are, then that fact-base can be used to challenge assumptions and prejudices.

Service organisations could…

A more transparent market would enable greater visibility of the opportunities for greater collaboration and integration. Service providers could take a role in achieving this. For example, it is clear that more information is needed, particularly case studies of successful collaborations, especially those that have been driven by a desire to improve outcomes rather than by the distress of one party. Other resources to support the sector could include examples of how collaboration can lead to integration and then merger, as well as ‘How-to’ guides and ‘maps’ of the sector showing who is doing what, where and with whom.

Funders can…

Funders – be they private sector or government – are the key stakeholders with a carrot and stick, and have a critical role to play.

Funders have visibility of the performance of individual organisations and programs (if they are appropriately tracking results), but also often have visibility across organisations and programs, and have leverage to change behaviours.

Funders can take more of a role in ‘match-making’: encouraging organisations to integrate programs or even to merge.

Funders can assist in containing proliferation, and facilitating collaboration.

By advising start-ups where they are at risk of duplicating or competing with existing activities and organisations, funders can encourage budding entrepreneurs to either subsume their idea into another organisation or program from the start, or at least to incubate the idea within another entity. Having said that, everyone recognises and encourages innovation and wants to continue to support exciting new approaches and determined entrepreneurs.

Funders can take more of a role in ‘match-making’: encouraging organisations to integrate programs or even to merge. Funders might make funds available specifically to joint applications, thereby encouraging collaboration and discussion between organisations (in fact, the Macquarie Group Foundation has done just this, see Macquarie: catalyst for cancer charities).

Funders can also make funds available to support integration and merger activity, where this is demonstrated to be in the best interests of beneficiaries. This type of ‘capacity building’ support is unusual in Australia but is obviously vital if the complexities of an integration project are to be managed well.

Finally, one of the main hurdles in achieving more dialogue about integration and merger is that organisations are loathe to exit programs: it means a loss of face and/or funding, and frequently a loss of some utility to beneficiaries. Funders need to play an increasingly active role in demanding evidence of effectiveness and efficiency, and in defunding programs that are ‘failing’. This would drive organisations to consider integration or collaboration; at first reactively but ultimately proactively.

Working towards the best proliferation

In this, as in many things, the popular rhetoric is probably overblown. We likely don’t have massive duplication between programs; we probably have more collaboration already happening than is immediately obvious to those on the outside.

However, we need to get better at looking for opportunities to improve outcomes through tighter collaboration: through integration and even merger. Non-profit organisations, service delivery and support organisations and – critically – funders all have important roles to play in this.

At the same time, the sector needs to continue to support new approaches and budding entrepreneurs to adopt and grow innovative approaches. This can only be done if we are clear that we are determined to ensure that existing programs are being run as efficiently as possible, to ensure that the maximum resources are available to support innovation.

SVA Consulting is committed to share learning and insight in this area. We welcome feedback on this article or other comments about this topic. You can comment below or email: svacquarterly@socialventures.com.au


Endnotes

[i] This article is based on SVA Consulting’s work with organisations who were merging, considering merging, or had tried and failed to merge; research reviewing other case studies from around the world; and two roundtable discussions with non-profit CEOs, chairs and funders in 2011 and 2012 hosted by Macquarie Bank Foundation.

[ii] Productivity Commission, Feb 2010, Contribution of the Not-For-Profit Sector, pg.229

[iii] Social Economy Executive Education Network (SEEEN), Nov 2007, Contrary and Congruent Views of Leadership and Management in the Australian Social Economy, pg.70

[iv] Based on SVA Consulting’s work with organisations who were merging, considering merging, or had tried and failed to merge; research reviewing other case studies from around the world; and two roundtable discussions with non-profit CEOs, chairs and funders in 2011 and 2012 hosted by Macquarie Bank Foundation.

[v] Big Brothers Big Sisters’ website, Two National Youth Charities Strike Partnerships to Share Resources

[vi] The Bridgespan Group, Feb 2009, Nonprofit Mergers & Acquisitions: More Than a Tool for Tough Times, pg.6