Tham, Jared

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Institutional Knowledge at Singapore Management University

Singapore Management UniversityInstitutional Knowledge at Singapore Management UniversitySocial Space Lien Centre for Social Innovation1-2009Mergers and Acquisitions in the Non-profit SpaceJared ThamFollow this and additional works at:http://ink.library.smu.edu.sg/lien_researchPart of theBusiness Administration, Management, and Operations Commons, and theNonprofitAdministration and Management CommonsThis Journal Article is brought to you for free and open access by the Lien Centre for Social Innovation at Institutional Knowledge at SingaporeManagement University. It has been accepted for inclusion in Social Space by an authorized administrator of Institutional Knowledge at SingaporeManagement University. For more information, please emaillibIR@smu.edu.sg.CitationTham, Jared. (2009). Mergers and Acquisitions in the Non-profit Space.Social Space. . Social Space.Available at:http://ink.library.smu.edu.sg/lien_research/31.SOCIAL SPACE • 2009NEW SOCIALMODELS40M&A are a given in the for-profit sector, but at least in the local non-profit sector they are rare. Jared Tham believes this should not be the case.Mergers and acquisitions (M&A) serve several purposes,  inter  alia  to  reduce  market competition,  cut  costs,  reduce  taxes,  or even to ‘empire-build’.This  business-like  approach  may  be  seen  as  too calculative when applied to the non-profit sector – a world known for its emphasis on putting people first and ensuring the good of their beneficiaries. But as several  non-profit  experiences  show,  M&As  do  not only help the organisations to cut costs, it also paves the way for more strategic impact.M&A for the Beneficiaries’ GoodM&As can be undertaken in a positive spirit, whether it is a merger of two non-profit organisations (NPO) of  comparable  size,  or  an  acquisition  with  a  larger NPO taking a smaller NPO under its wing. Instead of increasing profits as a motivation for M&As, the key motivation  is  altogether  different  for  NPOs,  which have their clients’ needs uppermost in their minds. Taken  in  this  light,  M&As  can  provide  significant economies  of  scale.  Take  for  example  the  Arizona’s Children Association. Back in 1994, it was a US$4.5 million  organisation,  focused  primarily  on  offering residential services in Tuscon, USA. But  through  a  series  of  six  acquisitions,  they  grew into  a  US$40  million  state-wide  NPO  with  a  broad continuum of care for children and their families. Not only did each merger double or triple the number of clients served, but their per client cost was also cut by 11 to 40 % each.1The concept of mergers has already been established in  parts  of  the  US  non-profit  scene.  Researchers William Foster, Alex Cortez and Katie Smith Milway in a Bridgespan Group research project2, examined more than 3,300 non-profit mergers over an 11-year period in four American states, and found a cumulative merger rate of 1.5% among NPOs, a figure that is comparable to the 1.7% among their for-profit counterparts. In the Singapore non-profit space, news of M&A is rare. But those who have taken this path show promise. Take the case of the merger between Halogen Foundation Singapore (HFS, formerly Young Leaders Foundation Singapore) and Promiseworks in 2008. The common infrastructure now shared by the two bodies allows HFS to focus on developing a framework for building young leaders while Promiseworks continues to do its groundwork in mentoring youths. According  to  Halogen’s  Executive  Director,  Martin Tan, focus on the beneficiaries and alignment in vision had helped the respective organisations to see sense in merging. There are cost savings for PromiseWorks in  operational  areas  like  accounts,  rental  and administration  while  for  HFS,  a  wider  portfolio  of MERGERS AND ACQUISITIONS in the Non-profit SpaceLien Centre for Social Innovation41NEW SOCIALMODELS41programmes  now  exists  and  includes  mentoring programmes in schools that would otherwise not be possible to provide. Shared Services - An Intermediate SolutionTo  be  sure,  intermediate  solutions  do  exist  in  the provision  of  shared  services  –  a  collective  of  NPOs sharing  back-office  functions  while  maintaining their  separate  identities,  governing  structures and  programmes  –  whose  main  purpose  is  to  gain operating  efficiencies  and  increase  the  quality  of back-office functions by merging several non-profit operations.In Singapore, similar economies of scale have been achieved. The most widely recognised is the Shared Services scheme administered by the National Council of  Social  Services  (NCSS),  in  which  functions  such as  Human  Resource  Management,  Administration Services,  Medical  &  Healthcare  Services,  Design  & Printing Services, Audit Services, IT Services and IT Bulk Purchases are collectively outsourced to third-party providers.There  are  also  multi-service  centres  that  provide the  co-location  option.  Here,  voluntary  welfare organisations (VWOs) providing services for different groups of clients are aggregated in one location, thus providing a one-stop social service centre.M&A as the Next StepM&A  go  beyond  consolidating  NPO  back-end operations.  It  places  relevant  NPO  players  in  a better position to view the beneficiaries’ needs and environment in their entirety. There is market opportunity for mergers. The school social work sector in Singapore, which includes youth workers as well as school counsellors, is an example. Within this sector, there are about 40 NPOs3 providing a potential pool of 324 primary and secondary schools4 with preventive, development and remedial services for  students.  While  the  ratio  may  seem  enviable  (1 NPO to every eight schools), the reality is that only a handful of schools seek such services each year. There are about five large NPOs which have already achieved economies of scale, and are able to serve eight to 10 schools each. Where does this leave the rest of the small players that have at most two programme staff?This fragmented state leads to a highly competitive situation in which the livelihoods of entire NPOs (and their youth workers) hinge on their ability to attract the patronage of particular schools. This is especially difficult if the NPO has a short track record, yet needs to prove its capability in order to receive funding. Should  two  or  three  of  the  smaller  youth  agencies decide to merge, they would be in a better position to  achieve  economies  of  scale  and  stretch  donor money to cater to more schools. And if an NPO that does mainstream youth work decides to merge with an agency that specialises in school social work, both agencies are better placed to provide a continuum of services for any youth they meet. The Real QuestionsThe biggest concern of management and staff of NPOs regarding M&A is that they are going to lose their sense of identity, along with the organisation’s mission. This is especially so when people have invested a significant part  of  their  lives  to  build  their  organisations.  At times,  founders  who  successfully  start  NPOs  may not have the necessary qualities to enable it to scale up  its  operations.  They  may  therefore  spend  more time defending their “turf”, rather than exploring all possible means to ensure the welfare of their clients. The fear of job losses for staff may also be a key factor that hinders M&As. Furthermore,  due  diligence  is  needed  to  address governance issues and financial liabilities. And while there are cost savings in the long run, the period of transition may incur more costs.  Yet, the last thing we want is to have NPOs coast along, content with performing below maximum efficiency. But sometimes, it requires getting out of their comfort zone in order to see that drastic changes are necessary in  order  to  create  drastic  improvements  for  the beneficiaries they serve. Jared Tham manages research and programmes at the Lien Centre for Social Innovation. His experience spans various sectors, such as youth, international volunteerism and social services and he has an interest in fostering greater collaboration among non-profit organisations. 1 Alexander Cortex, William Foster and Katie Smith Milway, “Nonproﬁt M&A: More Than a Tool for Tough Times,” The Bridgespan Group (February 2009) <http://www.bridgespan.org/Nonproﬁt-M-and-A.aspx> 2 Ibid. 3 Personal estimate based on having worked with several NPOs providing school social work services.4 2007 ﬁgures from Ministry of Education, Singapore. Available at <http://www.moe.gov.sg/education/education-statistics-digest/online-interactive/tables/table-18-2007.pdf>Unlike the for-profit companies, financial incentives for the NPO management to initiate M&As are non-existent. 

Mergers and Acquisitions in the Non-profit Space

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