iNGO mergers: A solution but no silver bullet

Emergency Architects Australia is reviewing its operations and in danger of closing shop — unless it finds another organization willing to take them over. EAA relies largely on fund-raising and donations, but these dropped significantly in the past year, according to the group’s 2012 annual report. The group would be keen to apply for AusAID funds, but the agency is currently in “caretaker mode.” The small Sydney-based NGO, which helps rebuild shelters for disaster-affected communities in Asia-Pacific, is now negotiating a merger with several aid groups after admitting in February that it was “facing decreased financial and human resources in an economic climate where raising funds is increasingly difficult.” Aid groups, both big or small, are increasingly facing the same situation. The dynamics were exemplified in the latest development merger between Save the Children, which was seeking expansion, and Merlin, which was facing funding woes. In discussions with current and former employees of iNGOs that underwent similar transitions, Devex learned that mergers have become a norm among the aid community. Like any other business, aid groups are placing themselves as buyers or sellers in the global marketplace, where small and medium-sized iNGOs are increasingly looking to larger, more branded organizations for better access to a shrinking funding pie, and big organizations are shopping for smaller aid groups that could add in expertise or help establish a presence in a given country. But whatever the reason, organizations should keep in mind that these transitions are a result of long and oftentimes complex negotiations, and sometimes produce disappointing results. Not all mergers are perfect, and could lead to an NGO losing part of its identity, principles and — more often than not — staff. So what can aid groups do for their mergers to be successful? While this is not an exact science, we found out that many mistakes can be prevented if organizations know what to watch out for, what to avoid, and when to take action. What to watch out for CARE International UK took over Bangkok-based Raks Thai Foundation in 2003. Considered one of the largest aid groups in the world with an annual income of some 500 million pounds, CARE has been working in Thailand since 1979, initially to provide assistance to Cambodian refugees. CARE didn’t have a permanent presence in the country, and so was searching for potential local partners. When CARE approached Raks Thai foundation, it knew that its future partner was a well-established organization with local expertise. CEO Geoffrey Dennis explained this knowledge on the ground has been very useful, especially in late 2004, when Thailand was one of the countries worst hit by the Indian Ocean tsunami. The operational structures of both organizations were reportedly similar, but CARE still needed to make some changes in management, control mechanisms and staffing, always a concern after any merger as well as finding a partner that fits a particular aid group’s principles and values, he noted. During his time in the private sector, Dennis worked for a consultancy firm, where he was heavily involved with mergers and acquisitions. In a number of cases, he had to introduce substantial changes in staffing and management structure for operational efficiency. “In one of the organizations that my consultancy firm took over, we faced a very difficult period … We had to make a number of people redundant … It [was] a very difficult and sensitive period.” In previous years, Dennis recalled CARE considered a merger with two or three other iNGOs, but negotiations were unsuccessful due to some underlying financial issues. The London-based iNGO maintains its overhead costs below 10 percent, and some 90 percent of its staff are local, policies that Dennis said are important for CARE when considering mergers. What to avoid Merlin’s merger with Save the Children was triggered by the former’s financial woes — often a factor in these transactions, but not always. As reported by Devex, Merlin had been relying on a very small pool of donors whose contributions were mainly restricted, leaving the organization shouldering other operational costs such as payments to staff. Over time, some donors started pulling out, which further hurt the aid group’s financial health. This is similar to what happened in 2011 to the Swiss Foundation for Development and International Cooperation, which two years ago faced a funding dilemma after losing what its former CEO Felix von Sury described as a “somewhat privileged relationship” with the Swiss Agency for Development Cooperation. Intercooperation - as it was more popularly known - was established in 1982 to implement SDC’s mandates. The Swiss government decided to increase its official development assistance, but did not want to hire more personnel to accommodate the increased development work. But over the years, the way SDC tendered their projects changed, and other iNGOs were allowed to implement the agency’s overseas work, leaving Intercooperation with lots of competition. “The situation would have forced [us] sooner or later to either start fundraising in an already overcrowded market or turn … into a consulting-like company,” Von Sury told Devex back in 2012, in the middle of the organization’s transition phase after merging with Helvetas, a leading Swiss NGO. Fundraising was risky, expensive and unchartered territory for an aid group which was used to having access to a large pool of public grants. Stefan Stolle, head of communications of the now-merged nonprofit, said Intercooperation didn’t do any fund-raising prior to the merger. Changing its business model would also have been too big a shift from Intercooperation’s mission and would not have gone down well with the staff, explained Von Sury. Intercooperation thus chose to merge with Helvetas, a move both organizations felt would help them get positioned among the larger European NGOs, secure more projects and financial resources, and make them the “undisputed leading Swiss development NGO.” Stolle claimed they are now doing well, and implementing an increased volume of SDC projects abroad. It was clear with Merlin and Intercooperation that both organizations were approaching troubled waters. But their decision to merge early on was described by a veteran development professional as showing “a business maturity not often seen in NGOs … while there is still value to be gained for all stakeholders involved.” When to take action When Children’s Aid Direct folded in 2002, officially they entered a merger with Concern Worldwide. But many in the aid community knew better — the truth is that Children’s Aid Direct had no other choice. “CAD was broke … We were actually looking at a genuine merger in the beginning … but by the time we got to this discussion with Concern, we were just desperately trying to find a way of sustaining [ourselves]” according to former program support manager Timothy Bainbridge. London-based CAD was then a mid-size NGO, with operations in some ten countries. In the almost five years that Bainbridge spent with them, he realized the organization had a tight cash flow. In fact, even when he joined in 1997, he was assured of only that month’s salary and hopes that operations would continue for the next six months. CAD survived for a few more years, but most of its personnel was kept in the dark about the fact the organization was already on life support. By the time the merger was announced, the bank had already declared the NGO insolvent. And if the pain of closing shop was not enough, donors started tightening cash flows, and other aid groups would turn down merger offers. The organization was therefore forced to offer what it could: programs that fit other NGOs’ strategy and that were economically viable. For instance, CARE agreed to take in their fundraising team, and Concern Worldwide took over the bulk of overseas work, according to Bainbridge. But these were not easy deals, and Bainbridge admits aid groups exercised due diligence in examining the programs and each state of finances — an ethical decision, he said, given that donors are providing them money to deliver development programs, not bail out another aid group. CAD was torn apart. Many of its employees were laid off, and it unfortunately lost its brand. Bainbridge claims there was “very good synergy between values” with the organizations that agreed to take over CAD’s programs — but CAD had “absolutely no leverage” in the debate. “When you’re in that kind of financial position, there are some things which are outside your control,” he said. No silver bullet Mergers can indeed be beneficial for aid groups. In the case of Save the Children, we found out that some of its local partners see the potential of taking over Merlin as helping fill in support where the former organization is lacking. Dennis agreed and pointed how the Raks Thai Foundation helped CARE established its presence in Thailand, and the foundation was able to learn lessons from the work CARE is doing in other countries, as well as a more efficient structure through sharing staff and operational costs and resources. This, he noted, is the way to go for small and mid-size charities, often the ones that stumble in funding predicaments, unless they can offer a specific skill set that allows them to remain operating as a separate entity. Bainbridge shared the same view, but offered a caveat: Specialized groups can remain independent if they can stay ahead of the “innovation curve.” “If you’re not, the big members will [outrun] you … because what you will find is that the specialists will make the majority of the breakthroughs, and it is then the bigger NGOs that will adopt the innovation,” he explained. “And they will be able to out-compete you, either because they have a bigger budget, or they have the bigger brand, or they’re cheaper.” NGOs, he said, also need to do more evaluation and check their mission statements — and even more importantly, their finances — before asking: Can we achieve more by merging, and consolidating resources, driving cost effectiveness and creating synergies? Mergers are thus no panacea or a silver bullet to counter funding woes — so what else can cash-strapped iNGOs do to save themselves? Bainbridge suggested organizations try working in consortiums, which is where donors are increasingly putting their money nowadays, while Dennis recommended entering into “strong partnerships” to share skills. Read more development aid news online, and subscribe to The Development Newswire to receive top international development headlines from the world’s leading donors, news sources and opinion leaders — emailed to you FREE every business day.