Nearly a quarter of charities in the UK are funded by the government, with 13% get over half their income from local authorities, and for some, this figure rises to more than 90%.
According to a report by New Philanthropy Capital, the coalition Government cuts are expected to be 25%-40% from current totals which will result in a drop in income of between £3bn-5bn for civil society over the next three years. Coupled with this are falling donations and investment income.
The merger and charity relationship
In response to these cuts, mergers and different forms of collaboration are increasingly discussed as a means to maintain – and even grow – services within civil society. While mergers are no panacea they can improve financial stability which is an imperative given that many organisations are faced by seeing the demand for their services increase at the same time as their income prospects decline.
This tension forces organisations to divert focus from the quality of their service to survival. This is hardly surprising. In light of this we take the view that organic growth alone will not be sufficient to sustain a healthy civil society in the medium and long term.
While the logic for mergers may be compelling, there is mixed evidence about whether more mergers are yet being completed. A scan of the Charity Commission Register of Mergers indicates that 166 were registered in 2010, which is a decline from 230 in the 2008 figures. So far this year, 57 have been recorded.
Having said this, our experience at Eastside over the past 24 months is that there has been a definite step change in the level of engagement in the topic at the trustees, boards and senior management levels. Recently we surveyed [120] charities with turnovers above £10m and [30] of these organisations registered an interest in mergers or takeovers.
There has been a corresponding interest from the media and over 70 articles on the subject have been published this year in The Guardian, Third Sector Magazine, Civil Society and Social Enterprise Magazine.
Is a merger for you?
The benefits that charities gain from merging tend to be realised in the medium to long term. These include better market positioning, higher public profile and a capacity to deliver a more comprehensive service. In the short term they can be expensive and a soak on management time.
The obstacles should not be underestimated. In the first place it can be difficult to align interests given that charities measure their success by the size of their social impact (notoriously difficult to articulate) rather than the size of their profits. Then, once the merger has been completed the challenge becomes one of organisational integration. Can both organisations harmonise cultural differences?
If this can be achieved it secures a strong foundation for longevity. Above all there must be a strong and clear reason to combine forces: 2 + 2 must equal 5. One high profile CEO recently commented that 2+2 should equal 14 to compensate for the risks and challenges.
While there are many types of mergers, the most common that we see is the ‘reactive merger’ when an organisation in distress seeks the safety of a large partner with deep pockets. In this scenario the struggling charity is an unattractive prospect for any potential partner and reaches out to organisations where there is already a good relationship. This marriage of convenience can frequently turn out to be anything but convenient. Such mergers are rarely based on sound strategic logic and are more likely to fail. It is for this reason that we have launched a new service called Partner-up.
The launch of Partner-up: the matching partnership service
Partner-up does for civil society what match.com does for the realm of human relations. It offers organisations a free confidential matching service to enable new partnerships to be formed, whether that be joint ventures, commercial partnerships or mergers. We launched it as a direct response to widespread research that there is a need for an independent marketplace where organisations can explore partnership options safely and receive support in making these new arrangements happen.
It is initiatives like this that are needed if the sector is to navigate the next years safely. Government, professionals and professional bodies have a role here too and we would welcome greater support for schemes which aid and allow effective collaboration within civil society.
If your charity is considering a merger, attend our upcoming evening seminar, Organising restructures in the charity sector, for further information.
By Richard Litchfield and Alex Scott-Tonge, Eastside
Charity and Voluntary Sector Group, June 2011
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Views expressed in this article are those of the author and may not represent ICAEW policy. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the publisher or authors.