All indications are that merger, amalgamation and partnership activity is at unprecedented levels in aged care, as the not-for-profit sector faces profound challenges. But how does an organisation decide whether to join forces or go it alone? What determines success? And what are the pitfalls?
There is now little doubt that merger, amalgamation and partnership activity in the aged care sector has reached unprecedented levels.
At the Better Boards conference in July, a show of hands among the 500-odd senior executives and directors of not-for-profit organisations indicated that at least half were currently exploring or considering an amalgamation, merger or partnership with another organisation.
Similarly, a report late last year from the Australian Institute of Company Directors (AICD) found that 40 per cent of NFP aged care boards had discussed a merger in the past 12 months, and half of them believed it would happen.
Michael Goldsworthy, a veteran management consultant who has assisted with over 250 merger/amalgamations in the NFP space, says activity in the past five years has “increased dramatically.”
He says most of the activity is in amalgamations, which involves one organisation being taken over by another, often larger organisation. He estimates that just one in every 50 projects he is aware of has been “a true merger”, where two organisations come together to form a new organisation.
Goldsworthy says there is also increasing activity in partnerships in the sector, but that these have become much more formalised in recent years. Where once organisations might have informally partnered or assisted each other on initiatives of mutual interest or benefit, aged care providers are now choosing partners based on selection criteria and are aligning partnerships against strategic plans.
‘New world’ for NFPs
Ultimately, there are five “game changers” pushing this drive towards mergers, amalgamations and partnerships, according to Chris Hall, CEO of MercyCare in Western Australia, who in 2010 undertook a Churchill fellowship to explore this activity in the NFP sectors in the UK and US.
These drivers are all external, environmental factors that will ultimately, Hall argues, result in a dramatic restructure of the NFP sector, not just in aged care but across Australian civil society more generally. (See ‘Game changers’ below).
“The fact of the matter is that we’re in a new world for NFP organisations, which has been emerging over the past five to 10 years,” says Hall, who also has personal experience in the area, having been involved in the 2006 merger of eight agencies and parish missions to form UnitingCare West.
Hall says there will be a “very, very different NFP sector” in just five years’ time. He says:
“In the UK, for example, we’ve seen the dramatic reduction in the number of not-for-profit providers, the emergence of much larger service providers, the relegation of the NFP sector as subcontractors to the for-profit providers, with NFPs generally picking up the more complex, challenging and costly cases.”
In fact, Hall makes a stark prediction: within the next decade the current aged care sector ownership model will be inverted – not-for-profits will make up just a third of the sector, for-profit providers making up 60 per cent and government the remaining 10 per cent.
“NFPs have some real challenges that we need to face up to,” he says. “We need to look at how we are doing business and what we can do differently to respond to this new world.” Part of this must involve going beyond traditional partnerships, to exploring the capital and resources that the NFP sector has tied up in its infrastructure and how this can be re-deployed back into services, Hall says.
“If we looked across the whole of this industry, if looked at the funding going in, the people we have, the capital resources we have, I’m wondering if it was differently organised would we be able to respond to the need out there already. That’s a question the NFP sector is beginning to address for itself.”
To merge, amalgamate or partner?
Clearly then the question of whether to go it alone or find strength in numbers is one increasingly facing aged care boards and senior executives of NFPs, as they seek to respond to the changing landscape. But what determines whether they seek a merger, amalgamation or a partnership?
Ultimately this should be driven by rationale, says Goldsworthy. “What’s our strategic intent? What do we want out of this? Do we want to grow? Are we seeking to join another because the competition is too tough? Or we can’t see ourselves in the future as we are?”
Organisations should also be guided by a set of “non-negotiables”, the areas they don’t want to sacrifice or compromise in order to secure a merger or amalgamation – such as their name, or particular projects or services they wish to sustain.
Hall cautions that while many immediately think of mergers, there is in fact “a number of different ways of cutting the mustard” in terms of getting greater reach and better services on the ground by exploring different models.
For instance, he suggests NFPS can learn from the corporate world. “I often talk about Westfarmers model for example. There’s a lot to be learned there where organisations can retain their identity and their brand, but be part of a larger group and get some efficiencies around governance and back of house arrangements.”
Beware the pitfalls
“Cultural misalignments” are what Goldsworthy terms the most common cause of a merger or amalgamation not proceeding. “It’s the values, vision, mission and chemistry; the psychology of your organisation versus mind. That is single biggest reason as to why two organisations won’t fit.”
The other issue, which Goldsworthy says exists to some degree in almost all mergers or amalgamations, is the “power, politics and personalities.”
“The human factor can be huge. You can have a process going along, seemingly smoothly, but behind the scenes ago and personality kicks in, and it ultimately sabotages all the time and effort other people have put into bringing the organisations together. You can never underestimate the power, politics and personalities – and everything in that triangle,” he says.
Was it worth it?
In his 2010 Churchill report, Hall noted that evaluation was the one area that received the least attention, especially by organisations involved in merger and acquisition activities. Only two of the 24 organisations which had been involved in mergers and/or acquisitions reported having undertaken any formal evaluation, he found.
He suggests the question of evaluation comes back to Goldsworthy’s point about having a clear strategic intent, as organisations can end up with something quite different at the end of the process, as they got derailed during discussions and lost sight of what they were trying to achieve.
“When we set up Uniting Care West the boards of the eight organisations agreed to what they called an aspirational statement, and we used that as the guiding document. All the way through the merger and at the end of the merger we went back and looked at whether we achieved what set out to.
“I encourage organisations that once they have articulated what they’re trying to achieve they actually put it in writing, get it agreed to, and use that as a guide to all of their negotiations and discussions moving forward, becomes a bit of a litmus test,” he says.
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Game changers: five factors re-shaping NFPs
- Escalating community need and change in demographics, with increasing complexity in demand. Nearly all the social indicators – rates of imprisonment, number of homeless, increasing number of children going into care – are getting worse and now becoming constant factors.
- The move by government to the marketisation of social services, which is based on the belief that free markets can exist in human services and are advantageous to the community. Evident in the move from the supply to demand-driven model of service delivery, and in greater contestability and competition in service provision.
- What governments refer to as consolidation, but is essentially the rationalisation of the number of service providers. Driven by preference of government for greater scale in organisations. Concurrently seeing the downsizing of the public sector which will also see a need to deal with fewer number of contracted providers.
- Emerging frontier of “the jargon” around social impact investment, social enterprise activity, public sector mutuals and social entrepreneurialism.
- Increasing complexity of the system in which NFPs operate, within the context of declining government funding, workforce challenges, fragmented system with lack of integration of core services, and increase in governance requirements.
Source: Chris Hall
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An extended version of this article appears in the current issue of AAA magazine (Sept-Oct).
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