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Mergers and Collaborations for Charity Navigator?

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Co-written by Robert Penna and Dr. Jeremy Kohomban

A while ago, a researcher created a list of every “information intermediary” (including Charity Navigator, Guidestar, BBB, Root Cause, etc.) and found more than 100 of us. Since then, there has been an explosive growth of such sites. Whatever barriers to entry that existed have largely dissolved, given the access to free tools that anyone can use to quickly build their own website, pull data from other sources, and engage in all manner of social media. Concurrently, the “noise level” on the web has also risen dramatically as average donors and social investors look for information and guidance in selecting a charity. In view of all this, we face a logical question: Why don’t you all consider merging or at least collaborating more?

The suggestions -- merge or collaborate -- represent two extremes of a spectrum by which two (or more) entities can join forces. At one end is “merger,” often an acquisition wherein one entity ceases to exist -- its functions and identity are absorbed by another. (Typically, the term “acquisition” isn’t used in the nonprofit sector, but when one entity disappears in a merger, we view it as an acquisition.) At the other extreme is “collaboration,” where both entities retain their independence and identity, as well as their freedom to act and take positions as they see fit -- even if those actions or positions do not necessarily sit well with their partners. Between these extremes lie “degrees of integration,” and finding agreement or just the right balance is never an easy task.

A merger or acquisition is not always friendly. Acquisition literally means taking over another organization -- sometimes in the face of opposition by the organization being acquired -- and it comes with risk. Bridgespan reports that there is far more potential for acquisitions to create value in the nonprofit sector than most realize; however, the lack of a direct financial incentive for acquiring another organization remains a significant impediment. So is the paucity of “matchmakers” to help leaders identify, explore and then finance potential merger options. Additionally, there is scarce guidance on how to evaluate and structure potential deals. At the most basic level, however, the financial reserves needed 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?”

For a merger to succeed, organizations must answer a wide variety of questions. Beyond mission and vision compatibility, they must consider more subtle questions about staffing reductions or relocations, pay scales, organizational culture, and donor support. Most importantly, if at least one organization does not have strong leadership and the capacity to manage the process, the chances for success are unlikely. A critical question is: “Will a single entity be stronger and better able to achieve its mission than if the organizations remain independent?” If the answer is that one of the entities is too weak to survive on its own, then it is often the case that a merger could result in a larger but weaker organization than the stronger partner might have been on its own.

We also believe that the “innovators dilemma” (described in Clayton Christiensen’s namesake book) can explain the disastrous consequences of some mergers and acquisitions in both the for-profit and nonprofit sectors. Christensen provides compelling research showing that innovative organizations are often destroyed when larger entities acquire them. The unique services that the innovative new organizations develop require a very different culture and business model than most established organizations. When the larger and usually more bureaucratic agency takes over, it tends to squeeze the very life out of the products and services it has acquired.

Nonetheless, we believe that mergers and collaborations are essential, especially as the information intermediary space becomes more crowded. A major conclusion made by the authors of the book Forces for Good, is that high-impact organizations are collaborative rather than competitive in their approach. Our experience proves that this can be achieved. Recently, Charity Navigator collaborated with GreatNonprofits by adding its’ Write a Review" feature to our website. This experience helped us realize that a number of other information intermediaries are potential collaborators and that even mergers could be possible. We believe this despite our conviction that Charity Navigator is not just a rating service; it is also a watchdog and its rating system remains relatively unique in its role -- proven, scalable, transparent, free, independent and multi-dimensional. Nevertheless, we recognize that we share 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.

Let’s all keep our eyes open for every opportunity to work together to make the nonprofit sector the best it can be -- and to thereby help as many people and communities as we can.

Dr. Robert Penna is an adviser to Charity Navigator and award-winning author of Nonprofit Outcomes Toolbox.

Dr. Jeremy Kohomban is an adviser to Charity Navigator and the president and CEO of Children’s Village in New York City.