Friday, August 17, 2012

Mergers and Collaborations for Charity Navigator?



Note: A shorter version of this article was first published on the Stanford Social Innovation Review blog on August 10, 2012.

By Ken Berger, Dr. Robert Penna & Dr. Jeremy Kohomban

(Ken Berger is the President & CEO of Charity Navigator, Dr. Robert Penna and Dr. Jeremy Kohomban are both advisors to Charity Navigator. In addition, Dr. Penna is the award winning author of the Nonprofit Outcomes Toolbox, and Dr. Kohomban is the President & CEO of Children’s Village in New York City.)


Me 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 on the nonprofit landscape created a list of every “information intermediary” (including Charity Navigator, Guidestar, BBB, etc.) and calculated there were over 100 of us. Since then, the explosive growth of such sites that have as their goal to be a web portal of information on charities has only continued apace, much like the growth in the number of nonprofits the intermediaries attempt to evaluate. Therefore, the “noise level” on the internet has risen dramatically over the past few years when social investors are looking for information and help in selecting a charity. Whatever barriers to entry there were in starting such groups have largely dissolved, given the access to free tools that anyone can use to quickly build their own web site, pull data from other sources, as well as engage in all manner of social media. In view of all this, the logical question that comes to mind for many is, why don’t you all consider merging? If not, why don’t you all at least collaborate more?

Those are fair questions, but not simple ones to answer.

The suggestions –merger or collaboration- represent two very different ends of a spectrum of possible arrangements by which two (or more) entities can join forces or come together; and they thus entail significantly different considerations.

At one end, is a “merger” more often than not an acquisition wherein one entity ceases to exist, and its functions and its identity are absorbed by another.(see endnote 1)  In the second case, “collaboration,” both entities retain not only their independent existence and identity, but also virtually all of their freedoms to act, and take positions as they see fit…even if those actions or positions do not necessarily sit well with their collaborative partners.  Between these poles lies a broad range of “degrees of integration” by virtue of which the participating entities retain or surrender autonomy; and finding just the right balance is no easy task and rarely comes about simply because “it’s a good idea.” 


Acquisition, understood in the business world as one organization literally taking over another organization –often in the face of opposition by the organizations being “acquired," is a dicey proposition for a number of reasons.  While Bridgespan has reported2 that there is far more potential for acquisitions (and mergers) to create value in the nonprofit sector than most people realize, the lack of a direct financial incentive for “acquiring” another organization stands as a significant impediment.  So too do the lack financial “matchmakers” (as there are in the corporate world) to help leaders identify, explore and then finance potential merger options. Additionally, there is scarce guidance on how to evaluate potential deals and structure them so that they’ll work.3 At a most basic level, however, the financial reserves an organization would need 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?”

As for actual acquisitions or mergers, they typically are a very costly and delicate process. Beyond questions of staffing, potentially different pay scales, and issues of significantly differing internal cultures, if the two organizations do not have strong similarities of mission and culture, and if at least one organization does not have strong leadership with capacity to manage the process, the chances for success are quite unlikely. A critical question is whether one combined entity would be stronger and better able to achieve its mission than the original two entities would have been.  With mergers, the central questions is always Why?, and if the answer is that one of the participants is too weak to survive on its own (for whatever reason), then it is often the case that the merger could result in a larger but weaker organization than the stronger original partner might have been on its own. 

We also believe the “innovators dilemma” can explain the disastrous consequences that have occurred as a result of some mergers and acquisitions within both the for-profit and the nonprofit sector.4 In the seminal book on this topic, Dr. Clayton Christensen provides compelling research showing that innovative organizations are often destroyed in the process of being acquired by larger entities. The unique services the innovators are developing require a very different culture and business model than what an established agency typically utilizes. Once the larger and more bureaucratic agency takes over, they tend to squeeze the very life out of the products and services they have acquired.

Another significant stumbling block to any “joining” of two different entities is the differences that often exist in the organizational cultures, considerations that include why they exist, the way they’re run, their historical mandate and their business models.  The problems arising from trying to “merge” organizations with significant differences between them in these and other important regards can often be avoided through a collaborative effort, what is called in the field “functional consolidation.”  Through this type of arrangement, one organization either takes on some of the activities of the other, provides to the other the products of one or more of its activities, or they jointly carry out a specific function while retaining all of their own identity and autonomy.

Given the undercapitalization of the nonprofit sector, the question of who the heck is going to pay for the work of a merger or collaboration is often the most difficult question. There is a sizable cost of labor and analysis required to get to the first step of agreeing to a merger, and most of us operating within the “rating space” (especially these smaller organizations) do not have access to the resources to make it happen. Given the scarcity of resources and the day-to-day workloads of the staff, it is no surprise that many mergers or collaborations barely get off the ground and those that succeed are few and far between.

Nonetheless, one of the major conclusions made by the authors of the book Forces for Good, was that high impact organizations are collaborative rather than competitive in their approach.5 Regardless of the obstacles noted earlier, we agree and believe that Charity Navigator’s recent collaboration with GreatNonprofits, whereby Charity Navigator added GreatNonprofits Write a Review feature to its web site, is an example of a successful collaborative effort. However, obstacles do exist even where organizations seek merely to collaborate rather than combine identities. 

A specific down side to the effort to collaborate among the information intermediaries in the nonprofit arena is that once you get beyond the “big three” (Charity Navigator, Guidestar, and BBB), the number of charities evaluated by most other intermediaries is small. Therefore the value of collaborating is, by definition, limited. We recognize that there are on-going efforts to increase and deepen the analysis of the performance of charities (Root Cause being a good example). While we believe Charity Navigator would welcome the opportunity to collaborate with the organizations involved in this important effort, many request a fee to use their data: While we understand the need for payment, this is not an arrangement that we think Charity Navigator should enter into at this time. Charity Navigator’s commitment has always been to provide rating and analysis at no cost to the public and not ever charge the charities it rates a fee for achieving its four star seal. Therefore, to collaborate with a fee-based organization would increase Charity Navigator’s costs, change its business model and require users to pay for a “premium service”.  That said, we believe that if two partners are committed to collaboration, they can overcome the obstacles. We further believe that Charity Navigator is open to collaborating with as many of those 100 or so information intermediaries as it can.

As for what the future holds, we agree that a number of information intermediaries are potential collaborators with Charity Navigator and we hope it can expand its work with them. Even a merger is possible. After all, Charity Navigator shares 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. However, to accomplish this, we will all need to get past the view that our organization’s approach is best. In Charity Navigator’s case, we do not believe that it is the only good way to rate charities. That said, we do believe Charity Navigator’s rating system is pretty special in its role as a scalable, transparent, free, independent and multi-dimensional rating service. We further believe that Charity Navigator’s plans for the coming years will only increase those qualities.

Nevertheless, we also know that ego often plays a critical role in the discussions with such groups on the pros and cons of merging (see Ken’s earlier thoughts on the challenge of such egos here).6 Of course, although we try to check our egos at the door, none of us can claim to be completely exempt from this weakness.

Beyond this, we also believe Charity Navigator has a few critically important and unique qualities which should be protected in any collaborative or merger effort.  For example, Charity Navigator was built on the premise that most donors/social investors do not have the time or inclination to wade through 990 forms or other detailed and technical data sources. Instead, in the majority of cases they are looking for an expert to provide an easy to understand judgment (such as a rating!) on the information. We think they also desire a fully independent source of information that is not funded by the organizations being evaluated. In fact, they do not want to be charged a fee for the information either! Charity Navigator has built its web site and straightforward rating system on these assumptions. What is the result? The Charity Navigator web site is breaking records each year for the total number of visits (roughly 5 million in 2011) and influences billions in donations/social investments annually.

In addition to these considerations, our work and advising of Charity Navigator has also given us a deep appreciation for the unique voice it has as an outsider (in the best sense of the term) to the nonprofit sector. In other words, Charity Navigator is not just a rating service; it is also as a watchdog. Charity Navigator is outspoken on a number of critical matters that the nonprofit sector struggles with. For example, Charity Navigator is one of the lone voices that speak out on the reality that there are more than a few scoundrels and thieves within the sector. Many leaders of other information intermediary organizations are given less latitude in expressing their views. Their boards often reflect this limitation in that many of them are also insiders to the sector.

At the same time, we believe that information intermediaries that are insiders have a vitally important role to play in establishing internal standards for the nonprofit sector. Although such an insider role does not lend itself to being an outspoken independent voice for donors. Therefore, the likelihood that Charity Navigator can entertain a merger or more than a limited collaboration with most of the larger groups is minimal.

Meanwhile, we know that Charity Navigator is working to make its rating system as robust and universal as possible. The staff are currently intensely focused on using the organization’s limited resources to double the number of charities they rate over the next few years, as well as to deepen the analysis to include results reporting (CN 3.0) for charities in every category and cause area evaluated. Once Charity Navigator accomplishes this baseline of information and standards, it can focus even more attention on adding aggregated data from fellow information intermediaries who have the willingness to collaborate in a meaningful way: we would love to see the day that the Charity Navigator rating system integrates the value added of these potential collaborators and vice versa!

We also hope that at some point collaborations, mergers and acquisitions among the nonprofit information intermediaries and the sector as a whole become more commonplace.  The nonprofit sector is estimated to garner roughly 2 trillion dollars a year in annual revenues. At the same time, the “big three” information intermediaries have combined annual revenues less than $15 million. That means we are spending roughly .00075% of the sector’s revenues on this oversight and monitoring effort!

We are confident that Charity Navigator will continue to explore opportunities where it can join with colleagues in collaborative undertakings. In that regard, we are big fans of the Nonprofit Panel (and the Independent Sector which backed the initiative) that successfully created the Principles of Good Governance and Ethical Practices.7 We also applaud the effort of the Independent Sector, BBB, and Guidestar in creating Charting Impact.8 In fact, just as Charity Navigator uses some of the standards of the Principles of Good Governance and Ethical Practices in CN 2.0, we are hopeful that it will soon be able utilize information posted in Charting Impact in CN 3.0. At minimum, we hope that Charity Navigator can at least post the Charting Impact information on its web site soon for those organizations that have completed it and as a result, help in the effort to urge other nonprofits to do so. Although Charting Impact is, in our view, a “baby step”, at least it is a step in the right direction. Further, we think that if managed correctly, it can be a catalyst that can lead to even greater leaps forward down the road (we want to get that baby running!).

Charity Navigator is also a proud member of the Alliance for Effective Social Investing and we support all of the Alliance’s efforts to drive more money to high performing nonprofits.9 As noted in a blog post on CN 2.010, the collective wisdom of that group has also provided tremendous help to Charity Navigator and may well be a forum for even more collaboration in the future. Markets for Good, which is being coordinated by the Hewlett Foundation, the Gates Foundation and Liquidnet, is another worthwhile effort to foster even greater collaboration.11 Finally, the collaborative effort (kudos to the Urban Institute, Child Trends and Social Solutions) to create PerformWell, as a portal of evidence based outcome indicators by cause area, is yet another outstanding undertaking that we hope Charity Navigator will be able to utilize in its work.12

In conclusion, let’s all keep our eyes open for every opportunity to work together in our common interest to help the nonprofit sector be the best it can be. But let’s also remember what it is all about: making our combined efforts as effective as they can be, so that we ultimately help as many people and communities as we can.

1 The use of the term acquisition within the context of the nonprofit sector is technically incorrect since no profit or shareholder value is involved in such transactions. However, in actual practice, when one entity disappears in the merger, it is in our view an acquisition nonetheless.
2 The Bridgespan Group. “Nonprofit Mergers and Acquisitions” more than a tool for tough times.”  February 25, 2009. http://www.bridgespan.org/Nonprofit-M-and-A.aspx .
3 Ibid.
4 Christensen, Clayton, The Innovator’s Dilemma (New York: Harper Collins Publishers, 2005).
5 Crutchfield, Leslie and McLeod-Grant, Heather, Forces for Good (San Francisco: Jossey-Bass, 2008).
6 Berger, Ken “Gentle Giants and Emotional Intelligence in Charity Land”  August 2, 2010, http://www.kenscommentary.org/2010/08/gentle-giants-and-emotional.html
http://www.nami.org/Content/NavigationMenu/NAMI_Center_for_Excellence/Tools_for_Excellence/PrinciplesforGoodGovernanceandEthicalPractice.pdf
8 http://www.chartingimpact.org/
10 Berger, Ken “CN 2.0 in Context”, October 25,2011, http://www.tacticalphilanthropy.com/2011/10/charity-navigator-2-0-in-context

2 comments:

Karl Metzner said...

A great article, though it dances around what seems like the main reason why M&A in the nonprofit field is problematic, and which is somehow lost in above: money! Not in the sense of the money needed to handle the transaction. That's a secondary issue--money and expertise could probably be obtained in the fact of a compelling argument for the transaction. (In addition, not all M&A processes are that expensive, and some pro bono services might be available.) The root issue is that nonprofits have to ask themselves if they will do a better job after the transaction, and the yardstick for that is more complicated than the one used in the corporate world: money! The writers' formulation of this criterion is "whether one combined entity would be stronger and better able to achieve its mission than the original two entities would have been." The problem is that the people at the entity being acquired will, unless already life-support, inevitably say, "No thanks. We'd rather putter along ineffectually than let you loosen our tiny fists from our melting popsickle." Well, they might not quite put it that way, but you get the idea. In a traditional M&A transaction, the principals in the acquired entity are usually "taken care of," through compensation or a retained position. What are you going to offer the acquired nonprofit? A promise that giving up their power and privilege will be rewarded by serving the greater good of delivering better results?

Ken Berger said...

Karl,

I agree with every point in your comment!!

Hence, the likelihood of a viable and worthwhile merger in the NP world is slim at best.

Thanks for the insights.

Ken