Better Together: Why Charities Should Merge

The charity sector is a crowded market. As the pool of donations and grants shrinks, calls for mergers are growing, particularly for charities serving a similar cause, writes Fiona Smith.

Two years ago, Louise Walsh, chief executive of the Future Generation Global Investment Company, urged youth mental-health charities to team up if they wanted a slice of her philanthropic funding. Walsh made her preferences clear: “We are going to really encourage you and look kindly on you if you collaborate or partner.”

With $6.82 million in funding under Walsh’s control this financial year, growing to an expected $30 million a year in 10 years, there is a sizeable incentive for the charities to comply, but it hasn’t worked.

“Unfortunately, when the proposals came back, they all did their own thing,” Walsh says. “It is harder to collaborate. When you are on your own, you can do your own thing. You have total control.”

Walsh, former CEO of peak body Philanthropy Australia, says she may be more forceful in the future.

“We are going to wield the stick a bit more here,” she says. “Philanthropists and corporate funders are getting much more savvy in pushing and persuading not-for-profits to collaborate and partner where they can – it is just easier said than done.”

Collaborate or collapse

Calls are being made across the community for charities to concentrate on fulfilling their stated objectives, and to grow the outcome rather than the organisation. In doing so, they may find that the best way to fund their cause could be to merge with a like-minded operator to save on an array of administration costs, and cut the competition for donor dollars and government grants. Walsh says the administration cost savings alone are worth it – from human resources functions to accounting, payroll, IT and marketing.

Charities in the UK are asked if they are duplicating another charity’s work as part of the registration process by the UK Charity Commission. Introduced in the late 1990s, this change quickly whittled down the proportion of successful applicants from 90 per cent to 65 per cent, the commission told The Guardian in 2000.

In a 2015 survey, the Australian Institute of Company Directors (AICD) found that about one-third of Australian not-for-profits had discussed a possible merger at director level. Then-AICD chief executive John Brogden said at the time that directors of mostly larger charities had discussed the option of a merger because they operated on a higher cost base. Many were large enough to employ a CEO, a CFO and a full board, who often bring commercial experience with them and know that finding a more efficient way to operate is simply good for business.

“The only question that needs to be answered is: ‘Are we doing the best to support the cause we’re aligned with?’,” Brogden says. “If the answer is no, if the answer is someone else is doing it better, then it’s incumbent upon those directors and that organisation to look for opportunities to improve their efficiencies.”

World Vision Australia’s chief advocate, Tim Costello, has said donors find the increasingly fragmented charity sector confusing, and the administration burden kicks in for founders and their staff after a few years. Merging can share that load.

Eighteen months ago, Community Council for Australia chief executive David Crosbie made a public call for charities to either close or merge, in an environment of dwindling donations and government grants. Yet there has been little action, he says, because many struggling organisations are leaving it too late to be able to create a successful merger.

Mergers and collaborations are very resource-intensive, so the worst time to do it is when two organisations are financially struggling, he says.

“It is timing and motivation. Two drowning people clutching each other in the ocean is just going to make you both drown quicker,” he says.

Demands on donors

Donor fatigue is an increasing issue for charities, particularly following big callouts for help, such as after a natural disaster. If that special callout comes before Christmas, charities report a fall in donations to their Christmas drives because donors feel they have nothing left to give.

In September 2016, consumer group Choice released research that showed a quarter of Australians receive calls from charities at least once a week and 90 per cent of the recipients find them pretty annoying. Older Australians are a particular target. Overall, 89 per cent of Australians received at least one charity call in a given six-month period.

Australia has around 600,000 not-for-profits, says Crosbie, and 54,000 registered charities. The number of new charities is roughly matched by those that are wound up.

Does Australia have too many charities? It depends who you ask.

Figures from the Australian Charities and Not-for-profits Commission (ACNC) show Australia has fewer charities than other countries, with one charity for every 440 people, compared with Canada (417), England and Wales (340), and the US (268).

The charities regulator says that around two-thirds of Australia’s registered charities are small organisations, with an annual revenue of less than $250,000, and operate in just one state.

“Having a large number of such charities can lead to innovation, new ways of tackling complex issues, local solutions to local problems, and specialised expertise for niche issues. Also, small charities are often effective fundraisers through local networks and can engage local volunteers eager to help their community,” the ACNC says on its website.

It adds that while some commentators characterise competition for funding as a negative thing, competition increases the focus on outcomes, drives efficiency and improves transparency.

Merger success

In 2015, Australian children’s charity Good Beginnings merged with Save the Children. Save the Children Australia CEO Paul Ronalds says the move deepened the group’s programming expertise, increased its policy influence with government, made it more attractive to donors, and generated significant financial savings.

“The success we’ve seen encouraged us to pursue another merger [in 2017], with educational not-for-profit Hands on Learning Australia. Together, we plan to scale up work to prevent disengaged children from dropping out of school and re-engage them in our education system,” he says.

In 2016, three Western Australia-based not-for-profits (Care Options, Volunteer Task Force and Community First) decided to follow suit and merge. The new not-for-profit entity – Chorus – has more than $30 million in revenue, 1,000 staff and volunteers and supports 10,000 Western Australians in the community. That’s big business in anyone’s language, serving a significant proportion of the population.

Similarly, the Australian Red Cross merged its state bodies into a national body to improve efficiencies, and another charity group, SIDS and Kids, completed a four-year-long merger of seven regional bodies with the national organisation in 2016.

Crosbie says multi-organisation merger tie-ups are “incredibly difficult”.

“I know of at least three other groups trying to do that, who haven’t been able to do it – even with the best leadership in the world,” he says.

ACNC assistant commissioner Murray Baird says mergers are not always the answer. “You have got all the cultural implications of a merger and, sometimes, making something bigger does not necessarily make it cheaper or more efficient.”

One factor to consider is whether a merged charity would lose the support of its volunteers as it becomes “professionalised”, he says.

Michael Traill, chair of non-profit consulting firm Social Ventures Australia, has often been asked to help broker or merge organisations.

“The truth is, in a lot of those cases, unfortunately, ego or ownership or patch protection often gets in the road of what would be more efficient merger and alliance conversations,” he says.

A former merchant banker, Traill says some charities, such as those dealing with cancer, are “ripe for consolidation”. Many health-focused charities are established in the emotional aftermath of a loved one’s death.

“If you looked at it objectively, you could say it is quite duplicative in terms of the normal efficiencies of scale that you might expect in the commercial world.”

However, small not-for-profits and charities often have a role to play in engaging the community and it may not be appropriate to assess them with a narrow, corporate mindset, he adds.

Assessing effectiveness

Analysing the relative effectiveness of not-for-profits is difficult. “We don’t have a common set of accounting standards that apply to charities so we can compare apples with apples,” Baird says.

He believes a charity supporting an unpopular but important cause, and delivering services in a remote and difficult location, will have much higher costs than a charity for a popular cause, which raises funds from donors who give regularly, and delivers services in easier circumstances.

“How do we compare those two things? I think it is an arid exercise. Sometimes outcomes or impacts are unmeasurable and sometimes even unknowable,” he says. “Those things are nuanced and subtle, and even subjective.”

Ram Subramanian, CPA Australia policy adviser on reporting, agrees, saying not-for-profits often find it challenging to measure outcomes based on non-financial performance indicators.

“For example, when a not-for-profit is engaged in activities to improve the emotional wellbeing of the disadvantaged or disabled, how do you measure the improvement in someone’s emotional wellbeing?” he asks.

This is one of the challenges the Australian Accounting Standards Board (AASB) is tackling.

It is developing requirements for service performance reporting by not-for-profits and looking at other issues such as measuring outcomes.

Subramanian says the AASB’s steps are positive moves that recognise not-for-profits have sector-specific reporting needs that the existing accounting standards do not address, but he warns it will be a “slow rolling” process.

Costs of charity

Charity overheads can vary from zero (for those subsidised by a business) to 90 per cent of money collected, according to Choice.

“Choice research revealed that some charities receive as little as 10 per cent of the money raised at fundraising events after total costs are taken into account,” says Andy Kollmorgen, Choice’s editor, finance and services.

On the flip side, Kollmorgen says Choice has seen previous examples where close to 100 per cent of money donated to charities have reached the pockets of these organisations (often because the charity’s fundraising costs are being subsidised by another part of its operations or business).

Baird’s advice to would-be donors is to decide what issues they want to support, then find an organisation that can demonstrate an impact.

Charities could lift their game by providing more information about their activities, who is behind the charity, what it does and what outcomes it claims, says Traill. He argues that such disclosures should be a requirement for a charity’s tax-deductible status.

Some of the larger donors have started to apply “the strategic blowtorch” to get increased efficiency, he says.

“I am aware of one who was a significant funder – probably the largest funder in Western Australia – who had separate applications from two quite similar sport and recreation organisations servicing youth at risk,” he says.

The funder told them there was a cheque for $500,000 for each of them, but only if they combined resources.

“Otherwise [there was] nothing. That’s a pretty powerful call to arms,” Traill says. This time, the charities complied.

Stiffer regulation and tougher demands from donors may see more of them doing the same.

The philanthropic way

Philanthropists traditionally have deep pockets and corporate experience, and are savvy about where they put their money. The size of their donation demands thorough due diligence – what organisations are in that market, how is the group run, what is its governance like and does the balance sheet stand up to scrutiny?

Philanthropists are often in it for the long haul and expect results. It’s a process both sides of the charity sector could learn from – donors and the charities themselves.

Fortescue Metals’ Andrew “Twiggy” Forrest, who Forbes estimates has a net worth of more than $5 billion, says he and his wife put great thought into where they put their philanthropic gifts, to ensure they are enduring.

“I have been very fortunate, with my wife Nicola, to be able to accumulate capital and then as soon as we can, to commence giving it away,” he said in May 2017, when the pair made the largest philanthropic donation of any living Australian – $400 million.

“We had a slightly unsustainable business model previously, where we would actually borrow money to give it away. Fortunately, we don’t have to do that now, thanks to the strength of the iron ore sector.”

The $400 million will be used to fund cancer research, improve higher education and research, eliminate modern slavery, and improve Indigenous welfare and early childhood development.

Wilson Asset Management founder Geoff Wilson also had endurance of philanthropic gifts in mind when he established Australia’s first listed philanthropic wealth creation vehicles, the Future Generation Global Investment Company and the Future Generation Investment Company. The two firms manage about $700 million.

Fund managers waive their fees (about 16 per cent for performance and 1.3 per cent for management), and 1 per cent of net tangible assets goes to youth charities.

Investors pay no fees and get to vote on which charities to support. The amount paid by the fund managers is relatively small, by their standards, and it becomes their social contribution.

This article was originally published on intheblack.com

To hear more about mergers and amalgamations in the NFP sector or to listen to Phil Butler, Tim Costello and Ram Subramanian speak on sector issues attend the upcoming CPA Australia National Not-for-profit Conference 2018.