If not, you might want to have a quick look at Part 1, where I talk about the need to nuance our discussions around mergers. I also introduced our thinking on how mergers apply to the different stages of a charity’s development, or ‘lifecycle’.
Here I’m going to talk in a bit more depth about these different stages.
The embryonic stage
New charities: duplication or innovation?
Creating a new organisation in isolation and ignorance of the work of others in the sector can result in duplication. Duplication can confuse users and cannibalise funding sources, reducing impact. Some would argue that some of the 5,525 new charities registered in 2015/2016 should have channelled this money and enthusiasm into charities that were already set up.
But this is only part of the picture. New charities can respond to unmet needs or challenge the status quo in ways that more mainstream providers might not be able to do.
There are many examples of new players entering a sector alongside those more established to create more impact. Shift.ms’s income is approximately 3% of the most well-established charity serving this condition. Yet young people with Multiple Sclerosis created the charity because they found no other way to connect with others in the community.
Potential for mergers at the embryonic stage
For charities at such an early stage, mergers will not be a focus. Embryonic charities lack the headspace required to think about this and consolidation could stifle innovation if the idea is not yet fully developed. Cost savings will also not be a priority, having a small user base and often relying on the goodwill of volunteers.
But less formal consolidation models—such as sharing costs through back-office mergers or incubation inside a larger organisation—could help maximise impact at this stage. Reducing the burden on HR or IT services would give space to focus on strategy, service-delivery and fundraising.
For fundraising groups, redirecting funds to larger organisations to use their processes and expertise can be an effective way to work—Brain Tumour Charity’s supporter groups are one example of this kind of ‘white labelling’.
Challenges of scaling
At this stage, a charity has started developing its approach—increasing its user base and the income sources required to do this.
But growing is costly and there can be high competition for the limited funds. Small to medium sized charities may find growing most difficult—unable to benefit from a certain type of access to volunteers like the smallest, or the economies of scale like the largest.
Potential for mergers at the growth stage
For those organisations looking to grow, mergers could speed up this process of scaling and bring their services to more people. Mergers can also bring financial sustainability or exploit a strategic opportunity—allowing new ideas to be taken up by the mainstream.
ChildLine was created in 1986 because no other child counselling helpline was available. It is unlikely that any of the large charities would have developed an equivalent service; it took the gamble of a plucky small charity to demonstrate that it was needed. In 2006, ChildLine’s trustees decided it was time to find it a larger home in NSPCC, using the charity’s scale and resources to reach more children. It continues today as a distinct service for 50,000 young callers.
Time for a shake up?
Charities at this stage, whether micro or super-sized, have stabilised and are no longer growing as fast. Current funds may be more secure, but new sources to expand further are likely to be limited.
For many, remaining at this size will be enough. For example, a local charity might wish to maintain its grassroots approach or its ability to raise donations out of reach from larger charities.
For others, mergers can help avoid stagnation, returning them to the growth stage, or enabling them to shake things up to find new ways to create impact.
Potential for mergers at the maturity stage
Mergers—especially for a mature charity taking over a smaller organisation—can also be a cost-effective way to increase reach or add a new service without duplication of effort achieving this from scratch.
A takeover in 2002 by Macmillan helped continue Cancerbackup’s information services, which were facing decline. This way Macmillan acquired new services more cheaply than it could have developed itself, which it could then scale and enhance.
A charity at this point of its lifecycle is at its most stable. That means it is best positioned to undertake a merger or simply plan for the triggers that make a merger fit for mission. Though mergers with the wrong partners can increase risks that may threaten this stability.
Struggling charities: An opportunity or a liability?
All good things must end—or do they? In 2015/2016, 4,465 charities de-registered from the Charity Commission. Some would argue that a merger could have helped many of these maintain levels of impact and prevent closure.
But many charities consider a merger far too late. Over 60% of charities being taken over by another are in deficit, suggesting financial decline. Funding may be insufficient for it to operate, or its user-pool may have shrunk. It is at this stage that charities are forced to make difficult decisions in order to keep services running and to pass on their remaining funds and expertise.
Yet the likely impact of mergers reduces as a charity declines. A charity with limited time and money is no longer seen as a good partner but a liability. Even for financial reasons, mergers should be planned in advance and initiated from a position of strength.
Potential for merger at the decline stage
Mergers at this point mean a declining charity can be fully integrated into a stronger charity, or it can simply pass its services and assets on to others. When 4Children closed its doors in late 2016, for example, Action4Children were able to help prevent its services from closing. In such cases, ‘the rescued’ charity becomes sustainable, or sees its legacy survive, while ‘the rescuing’ charity has access to market intelligence and its assets.
We think this framework can help charities think through their limitations and opportunities at different stages of their development, and what this means for the question of mergers.
Whole sub-sectors can also benefit from using this lifecycle thinking to. It can help identify what stage a sub-sector is at and whether there is a useful role for mergers.