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Nonprofit Management

Mergers and Collaborations for Charity Navigator?

Why don’t organizations consider merging or at least collaborating more?

Ken Berger with a Guidestar mug (left) and with a Root Cause mug (right). Root Cause and Guidestar are two of a number of potential collaboration or merger partners for Charity Navigator.

A while ago, a researcher created a list of every “information intermediary” (including Charity Navigator, Guidestar, BBB, Root Cause, etc.) and found more than 100 of us. Since then, there has been an explosive growth of such sites. Whatever barriers to entry that existed have largely dissolved, given the access to free tools that anyone can use to quickly build their own website, pull data from other sources, and engage in all manner of social media. Concurrently, the “noise level” on the web has also risen dramatically as average donors and social investors look for information and guidance in selecting a charity. In view of all this, we face a logical question: Why don’t you all consider merging or at least collaborating more?

The suggestions—merging or collaborating—represent two extremes of a spectrum by which two (or more) entities can join forces. At one end is “merger,” often an acquisition wherein one entity ceases to exist—its functions and identity are absorbed by another. (Typically, the term “acquisition” isn’t used in the nonprofit sector, but when one entity disappears in a merger, we view it as an acquisition.) At the other extreme is “collaboration,” where both entities retain their independence and identity, as well as their freedom to act and take positions as they see fit—even if those actions or positions do not necessarily sit well with their partners. Between these extremes lie “degrees of integration,” and finding agreement or just the right balance is never an easy task.

A merger or acquisition is not always friendly. Acquisition literally means taking over another organization—sometimes in the face of opposition by the organization being acquired—and it comes with risk. Bridgespan reports that there is far more potential for acquisitions to create value in the nonprofit sector than most realize, however, the lack of a direct financial incentive for acquiring another organization remains a significant impediment. So is the paucity of “matchmakers” to help leaders identify, explore, and then finance potential merger options. Additionally, there is scarce guidance on how to evaluate and structure potential deals. At the most basic level, however, the financial reserves needed to acquire anything but the most moribund partner is beyond the capacity of those occupying the information intermediary space. Simply put, it is a question of “What would we gain if we did this?” versus the unavoidable question of “What will it cost us?”

For a merger to succeed, organizations must answer a wide variety of questions. Beyond mission and vision compatibility, they must consider more subtle questions about staffing reductions or relocations, pay scales, organizational culture, and donor support. Most importantly, if at least one organization does not have strong leadership and the capacity to manage the process, the chances for success are unlikely. A critical question is: Will a single entity be stronger and better able to achieve its mission than if the organizations remain independent? If the answer is that one of the entities is too weak to survive on its own, then it is often the case that a merger could result in a larger but weaker organization than the stronger partner might have been on its own.

We also believe that the “innovators dilemma” (described in Clayton Christensen’s namesake book) can explain the disastrous consequences of some mergers and acquisitions in both the for-profit and nonprofit sectors. Christensen provides compelling research showing that innovative organizations are often destroyed when larger entities acquire them. The unique services that the innovative new organizations develop require a very different culture and business model than most established organizations. When the larger and usually more bureaucratic agency takes over, it tends to squeeze the very life out of the products and services it has acquired.

Nonetheless, we believe that mergers and collaborations are essential, especially as the information intermediary space becomes more crowded. A major conclusion made by the authors of the book Forces for Good is that high-impact organizations are collaborative rather than competitive in their approach. Our experience proves that this can be achieved. Recently, Charity Navigator collaborated with GreatNonprofits.org by adding its Write a Review feature to our website. This experience helped us realize that a number of other information intermediaries are potential collaborators and that even mergers could be possible. We believe this despite our conviction that Charity Navigator is not just a rating service; it is also a watchdog, and its rating system remains relatively unique in its role— proven, scalable, transparent, free, independent and multi-dimensional. Nevertheless, we recognize that we share similar goals with at least some other information intermediaries: to provide independent and objective information that helps donors/social investors make sound charitable giving/social investing decisions.

Let’s all keep our eyes open for every opportunity to work together to make the nonprofit sector the best it can be—and to thereby help as many people and communities as we can.

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COMMENTS

  • BY Michael L Wyland

    ON August 10, 2012 11:22 AM

    Some of the strongest capitalists I know turn into socialists when they discuss nonprofits.  They praise “one-stop shopping” and tout “efficiency” as desirable goals to plan for nonprofits while simultaneously recognizing and praising the benefits of the chaotic, competitive, indidualistic, and consumer-responsive nature of the free market.

    Two or more similar charities with similar missions may follow very different formulas, have different values and visions, and may stress different areas of service or clientele.  This is a good thing.

    Competition is also a good thing, as it often (not always) improves quality through each competitor realizing that the community, clientele, and employees have a choice in providers to support, utilize, and pursue their life’s work.

    Mergers don’t save money - they cost money, both in cash and forgone revenue and programmatic/product opportunities while the merger process moves along.  The question is, do the long-term benefits of the proposed merger outweigh these significant costs? 

    I’m all in favor of the various collaborative, cooperative options open to nonprofits.  There are times when merger is the appropriate strategy.  The tragedy of our binary age is binary thought - to merge or remain separate?  Yes or no?

  • BY Bryan Richards

    ON August 16, 2012 08:30 AM

    If a nonprofit organization has a well-run program but a tight budget, it may be a great candidate for acquisition by a larger entity. Here are questions for the smaller nonprofit’s executives (i.e., “we” or “the acquiree”) to address before deciding whether to seek an acquisition by a better-financed entity (i.e., the “acquirer”):

    1. What should we insist that our acquirer preserve from our program model?
    2. What facilities, location, finances, and expertise should our acquirer provide?
    3. What level of financial stability must our acquirer demonstrate? (There is little promise in the value of acquisition if the larger entity has financial problems, too.)
    4. What kind of organizational culture would provide the most seamless transition for both us and our acquirer after the acquisition?
    5. Does the acquirer share our views about which results to pursue and how to measure impact? For example, do both entities believe impact is best measured by numbers or by stories? Does the depth of the relationship or the number of people served matter most to us? What matters most to our acquirer?
    6. Who will supervise our programs after the acquisition? Will we be comfortable letting an acquirer’s staff member run a program we spent years developing?
    7. Where will our programs be housed, physically, after the acquisition? Will that location improve or reduce program’s the social impact?
    7. What leadership and staff roles will carry over from us to the larger nonprofit? Will our team be happy with the leadership role changes that will result from the acquisition?

    Similar questions come into play from the acquirer’s point of view and in the alternative case of a merger. Decide which answers would be favorable before deciding whether to proceed with acquisition or merger.

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