For Internal Use Only

1
For Internal Use Only

• January 21, 2005

Exploring a Shared Back Office Service Initiative
2
Three options for implementing a shared back
office services initiative


SHARED BACK OFFICE SERVICES ONLY
INCUBATOR
CO-LOCATION
Description
Provide shared space and services for mature
organizations with a similar programmatic focus
and/or those with large back office needs
Assist early stage, high potential organizations
with financial and programmatic support
Provide shared non-core back office services
remotely for organizations that could realize
improvements in efficiency and effectiveness
Services

• Office space
• Program support
• Finance accounting, fiscal sponsorship
• Technology, share some equipment
• Human resources, reception
• Purchasing
• Facilities management
• Legal?
• Possibly fundraising

• Office space
• Finance accounting
• Technology, share some equipment
• Human resources, reception
• Purchasing
• Facilities management
• Legal?
• Possibly fundraising

• Financial accounting
• Technology
• Human resources
• Purchasing
• Facilities management
• Legal?

Target
Early stage/venture organizations
Any stage/size organization best with smaller
start-ups and/or growth-oriented organizations
Any stage/size organization best with
organizations that would not need to serve
clients at the site
3
What an outsourced back office service could look
like
Non profit A
Administration
Program
Development
Finance Accounting
Human Resources
Technology
Purchasing
Facilities
Outsourced Subfunctions

• Sourcing office, janitorial, travel, mail
• Negotiations
• Purchase order processing
• Supplier database management

• Infrastructure procurement and management
• Applications development and administration
• Help desk/PC support
• System back up/compatibility
• Training insurance

• Payroll processing
• Benefits and compensation planning, procurement
  and administration
• Employee data management

• Contract management (e.g., janitorial services)
• Repairs and maintenance
• Lease management
• Utilities management

• Accounts payable
• Accounts receivable
• General ledger
• Budgeting
• Cash management
• Risk management
• Financial analysis, strategy and reporting

4
Criteria for considering which services should be
outsourced vs. maintained internally
Level of support function outsourcing
None
Complete
Key elements to define outsourcing opportunities
Criteria

• Activity enables core competencies of
  organization but does not serve a core strategic
  role

Strategic

• Outstanding execution of the support activity is
  a core competency and source of sustainable
  competitive advantage for the organization

• Function is not critical to the strategic focus
  of the organization

• In-house capabilities are under developed
  relative to outside vendors
• Activities do not expand the skill set of top
  talent

• Specialist firms recruit superior talent in
  activity
• Activity expertise is primarily administrative or
  executional and does not support leadership
  development

• Activity expertise is well served by in-house
  resources
• Organization leaders develop from activity

Talent
Efficiency

• Outsourcing activity results in lower costs/same
  service or same cost/improved service

• Outside vendor is able to capture economies of
  scale or skill that organization is not
• Quality is not diminished by distance from
  organization

• Maintaining support functions in-house is optimal
  for productivity and cost effectiveness

Source McKinsey Company
5
Non profits could expect efficiency and
effectiveness benefits from outsourced back
office services
Comments
Reallocate time from admin to program

• Believe the amount of senior management time
  spent on administrative issues would be
  significantly reduced with outsourced services
• May see benefits across the organization

Higher quality services and products access to
greater expertise

• For example, few organizations need a full time
  CFO but if they could have ten percent of a
  CFO-level persons time they could greatly
  benefit from their strategic thinking and planning

More timely information

• Access to improved technology and financial
  management systems can help non profits make
  better decisions in a more timely manner
  ultimately leading to improved service quality in
  their programs

Increase operational flexibility

• With a more adaptive administrative structure non
  profits can respond to changes and demands in
  their fields scaling up or down more readily

• Many non profits have significant institutional
  knowledge stored with employees and employee
  turnover can be high. Maintaining critical
  information (e.g., financial) more formally with
  outsourced vendors can minimize the disruption to
  an organization when an employee leaves
• Also, an organization can reduce employee
  turnover if it has access to better employee
  benefits through outsourced vendors

Minimize risk associated with staff turnover
Improve costs

• Reduced costs of goods and services not likely
  biggest lever because many non profits are under
  funded in these areas

6
Several requirements would need to be in place to
be successful
Requirements
Explanation
Gain trust from non profits

• Likely concerned with confidentiality and service
  levels
• Will need to ensure high quality and consistent
  services. Service quality gaps will drive
  participants out communication is key

• The challenges are not insignificant and the
  pilot will be key in determining the potential
  impact for organizations
• Need to consider which model would minimize risks
  and costs without jeopardizing the quality of
  services
• Ultimately we may be creating a new market in the
  non profit sector a market that is well
  established in the for profit sector

Quality services could be provided by existing
or newly created vendors

• Need to identify either a turnkey organization or
  individual high quality vendors
• Less attractive option is to build capability
  internally (Tides model)

A pilot could prove that non profits would
realize significant benefits

• Pilot would define the economic value proposition
  to potential participants
• Believe significant benefits will create demand

Develop a low cost model that works

• Require critical mass of users make the economics
  attractive
• Need to create separation in funder-grantee
  relationship ultimately want outsourcing to be
  self-sufficient

Identify well suited organizations for
participation

• Early stage or growth stage organizations
• Affinities structure or issue
• Sophistication of management

7
Discussion points and next steps

• Developing an incubator gain experience with
  outsourced back office services while meeting a
  geographic need for social support
• Role of a funder in creating the market for
  outsourced back office services
• Next Steps
• Gauge interest with select grantees
• Develop service model, including potential
  vendors
• Develop economic model

8
Appendix
9
The administrative burdens cause some
organizations to run inefficiently and sometimes
ineffectively
Inefficiencies
Ineffectiveness

• Dont have specific skills to maintain and
  enhance technology technology not maximized to
  improve operations and customer service

• Program officer with knowledge of technology
  maintains systems and fights fires, all taking
  away from important program work

Technology

• Lack HR knowledge improper handling of
  unemployment claims, no HR controls or budget, no
  performance management system

• Senior manager handles all human resources from
  administering benefits to maintaining
  sick/vacation time database, all taking away from
  program work

Human Resources

• Mid-level finance person handles complete range
  of finance tasks petty cash to strategic
  financial decisions

Finance Accounting

• Dont know how to manage costs vis-à-vis services
  (cost per services basis) dont know how to
  structure for flexibility, such as changes in
  funding

• Each group makes own purchasing decisions and
  uses own vendors executive director must
  authorize all purchase orders (POs) irrespective
  of size

• No bulk purchasing to reduce costs run to
  corner to get supplies
• Government contracts dictate different purchasing
  requirements

Purchasing

• Everyone pitches in to clean taking time from
  executing mission
• Facilities issues are handled when something
  breaks or goes wrong little attention paid to
  maintenance and facilities planning

Facilities

• Facilities emergencies are expensive and often no
  budget take key staff completely away from
  program work
• No monitoring of leases or other important
  contracts leaving organization at risk

10
But these organizations struggle to improve the
situation
Need to revise with survey data
Top Five Reasons
Description
Cost

• Little budget available for back-office
• Perceived to be not core or strategic if cut
  somewhere it is usually in back office supports

Access to Quality Services

• Dont know how to evaluate the quality level of
  services dont know where to access quality
  services
• Not as many quality back office service providers
  in non-profit sector as for-profit sector

• Robin Hood works to improve inefficiencies and
  ineffectiveness through capacity building efforts
• May want to consider outsourcing as another option

Trying to Drive Down Admin Costs

• Perceived value of low administrative costs
  (especially with funders)
• Often do not allocate budget to back office
  functions unless broken not part of strategic
  operational planning

Training to Know Best Practices

• Management doesnt have experience to know how to
  leverage back office to improve effectiveness
• Staff in key back office functions lack expertise
  to know industry best practices (case of the
  accidental facilities manager)

Time to Devote to Non-Core Improvements

• Status quo if it isnt broken, dont fix it
• Organizations are stretch as it is, dont want to
  allocate precious staff time to evaluating
  efficiency/effectiveness improvements in back
  office supports

11
Outsourced and shared services could be either
those that are transactional or those that
require expertise

• Create outsourced Centers of Scale (highly
  transactional services) and/or Centers of
  Excellence (expertise-based services)

Transactional Expertise
Examples Purchase order processing Accounts receivable Payroll processing Accounts payable General ledger consolidation Compensation and benefits design Law Tax Applications development Financial analysis and strategic planning Market research
Operating Model Provides efficient, low-cost services Mostly high transactional in nature (achieve economies of scale) Staffed with process experts Rewarded for efficiency and productivity Shares scarce expertise across business units Staffed with content experts More specialized in nature Rewarded for business impact and value creation
Source EY SGV Review Are Shared Services Right
for Your Company? by Francis L. Huang, March 2003
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What is happening with outsourcing and shared
services in the for profit sector

• When evaluating a shared services initiative, we
  are asking organizations to first outsource
  certain back office functions and then we are
  looking to provide those functions under a shared
  service structure. We can and should consider
  helping organizations outsource exclusively
  (without shared service center). Three models
  for outsourcing and shared service are generally
  found in for profit organizations
• Shared services within a company/organization
  large companies centralize non-core back office
  functions such as technology, human resources and
  finance in a shared services center (SSC). The
  center resides within the company and there are
  several different organizational models that
  work.
• Shared services spin-off (sell services
  externally) some companies have built
  best-in-class SSC and have spun them off to also
  serve external clients.
• Outsource service to Business Process Outsourcer
  (BPO) a company could also choose centralize a
  function and outsource the service to a BPO or
  just outsource the service without centralization
  (although the former generally makes the most
  sense). CIO.com estimates the BPO market to be
  301 billion in 2004.
• Business process outsourcing (BPO) is the
  contracting of one company by another to execute
  a business process end-to-end. By definition, it
  goes a significant step beyond traditional
  outsourcing contracts, in which a company
  delegates only components of a business process
  to an outside vendor. Take, for example, the
  granddaddy of payroll outsourcing, Roseland,
  N.J.-based Automatic Data Processing (ADP).
  Fifty years ago, long before the concept of
  outsourcing became mainstream, ADP was contracted
  to process client payrolls faster and cheaper.
  And, says Bill Zint, senior vice president of
  marketing for ADP national accounts, they were
  again ahead of the curve when more than a decade
  ago, they had the first insight to offer BPO
  services. ADP now offers BPO for human resources,
  including benefits, payroll and task
  administration.1
• Many successful BPOs are not in the US but in
  areas with lower labor costs, such as India, and
  serve the technology and call center BPO market.

Source 1 CIO.com
13
Wed also apply a number of filters to identify
organizations well suited for outsourcing and
sharing back office services
Not founding EDs
Willing to take risk
Organizations well-suited to maximize benefits of
shared services
Can manage transition
Understand benefits
Understand own management limits
Desire for improvement
Low resistance to change
Few services provided pro bono
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Any shared service option has several risks which
requires a measured and deliberate approach
Key Risks
Description and Action Steps
Key Risks
Switching Costs

• High switching costs once a organization commits
  to outsourcing service it is difficult to bring
  back in-house quickly if not satisfied. Also
  difficult to switch technology platforms, once
  everyone is using a specific system it is
  difficult and costly to change
• Develop standardized services and platforms with
  contracts for usage for a specified period

Quality Services

• If the quality of service suffers you lose the
  customer and others may follow suit
• Shared services offered must be best in class and
  proven, not experimental focus on developing
  detailed service level agreements (SLAs) with
  specific performance measures for all vendors

• Ensuring customers know what to expect and when
  is critical must have requests and questions
  handled in a timely manner
• Need communication tools and systems in place to
  manage customers well seamless offering that
  gives them the responsiveness, choice and
  flexibility they would expect from a top
  provider may need customer account managers if
  employ multiple vendors

Customer Care
Lack of support/ participation

• Need to ensure buy-in at all levels in
  organization or risk low participation levels
• Take time to educate all levels of organization
  about services establish advisory teams which
  include staff at all levels in organization

Infrastructure support

• More vendors without centralized
  communications/processing system add confusion
  and frustration services will be slow,
  cumbersome, bureaucratic and inefficient
• Need central technology platform (and ERP?) to
  provide seamless and coordinated services across
  functions to all organizations

15
EY1 identified the Dos and Donts of shared
services

• Donts
• View shared services as a cost-cutting exercise
• View the SSC as a short-term solution
• Give the business units an option to use the SSC
  upon launching the service
• Alienate managers by not involving them in the
  process of developing the SSC
• Allow shadow units to develop after
  implementing the SSC
• Underestimate the need for change management
  efforts

• Dos
• Articulate a clear vision of what the shared
  service centers (SSC) objectives are
• Prepare a business case on why you will embark on
  an SSC and gather baseline data to support it
• Build up the necessary standardized technology
  that will enable the SSC to function efficiently
• Carefully select functions to share and reward
  appropriately
• Staff the SSC with the proper people
• Effectively communicate to managers why the SSC
  is important
• Use simple service level agreements (SLAs) to
  enforce and measure delivery of quality services

1 Ernst Young Source EY SGV Review Are
Shared Services Right for Your Company? by
Francis L. Huang, March 2003
16
EY also identified several key enablers and
risks in a shared service initiative
Key Enablers and Risk to Manage in Implementing a
Shared Services Center1
Easy quick-wins to build momentum
IT problems
Frequent communication on progress to all
employees
Severe business disruption during implementation
Clear communication of goals to all employees
from the start
High implementation cost
Finding the right people to lead work in SSC
Poor service quality
Senior management commitment
Low support by employees
1 Data based on global survey of 120 companies
by EY Source EY SGV Review Are Shared
Services Right for Your Company? by Francis L.
Huang, March 2003
17
The Blue Ridge Foundation

• Description

• Key Facts

• Started 10 years ago
• Provide program grants and operations grant
  (write a grant to cover the incubators cost)
• Can opt in or out of support services
• House and support some affiliates - orgs can have
  space in exchange for services (such as
  technology)
• 2 million per year operating budget
• 100K - 150K average grant size
• BRFNY doesnt provide all services right away -
  ED likes orgs to struggle a bit first

• BRFNY seeds and supports start-up non-profits,
  focus on Brooklyn community often fiscal
  sponsors
• Started by investor John Griffin
• Currently house and support 5 organizations at
  Brooklyn, NY site
• Provide seed money, IT (R. Fleishman NPower),
  some financial management (FMA), strategic
  planning (Wellspring) and some grantwriting
  services
• Develop a database of templates and tools for
  internal and external users
• Philosophy is to provide support but also a
  community to share knowledge
• Contact Matt Klein (Executive Director)

• Key Take-Aways

• Successes

• Challenges

• Space design
• Developing a performance management system for
  organizations to track success
• Helping organizations learn how to give feedback
  and develop their staff
• Providing other back office supports such as

• Built significant trust with partner
  organizations likely from EDs highly
  collaborative and informal approach to management
• Several organizations have left the incubator and
  are self-sustaining
• Built a close community amongst all participating
  organizations share information on grant
  applications, best practices, etc.

18
Al Sigl Center

• Description

• Key Facts

• Started 40 years ago with a breakeven after 3
  years 700K initial investment
• Fees structured as cost-plus (margin is about 10
  to cover overhead)
• Provide services as ala cart menu (can pick and
  choose which services want)
• 37 staff work on shared services (namely IT and
  HR)
• Contract with broker for risk management services
  and all benefits procurement
• Governance 33 EDs, 33 Board designated
  representatives, 33 from community 27 total pp
  (structure will change to 9 Board reps, 9 from
  community and 1 ED rep (chair of agencies
  subcommittee)

• Programmatic focus is developmental disabilities
  (for all participating agencies)
• 5 campuses in Rochester, NY 750,000 sq feet of
  space
• 9 partner agencies (8 agencies plus Al Sigl
  Center) serve clients at campuses
• Combined operating budget of agencies 100
  million 2,000 employees
• Provide IT, marketing/branding, human resources,
  risk management, facilities and fundraising
  services
• Do not provide financial management, legal, or
  board/governance services
• Contact Steve Russell, (VP Business Services)

• Key Take-Aways

• Successes

• Challenges

• Dont have full participation of agencies in all
  service areas
• If services are already well established in
  agency, low likelihood of participation
  requires time and patience
• Financial management difficult to sell EDs
  dont want to give up control
• Havent focused on group purchasing due to low
  savings and government contracts complicate
  purchasing
• Tried an MSO approach but not enough agencies
  able to buy equity

• 2.5 million estimated cost savings (inception to
  date)
• IT and risk management are easiest to sell
  (100 participate) HR next easiest (66
  participate)
• Biggest savings is risk management
• Easiest to build trust and sign a group onto
  services when change in management
• Now that they have proven benefits easier to get
  others to sign on
• Agencies required to sign contract if Al Sigl is
  price and quality competitive and delivers on
  time agency must use their services

19
Tides Center

• Description

• Key Facts

• Started 8 years ago as separate entity been
  providing some level of back office support for
  22 years
• 56 million in managed revenue 4.9 million
  operating budget
• 50 staff 635 staff in participating
  organizations
• Provide services as ala cart menu (can pick and
  choose which services want) and all services are
  internal
• For some services they connect with consultants
  (front office)
• Fees at 9 of operating budget if lt1 million and
  6 of operating budget if gt 1 million
• Self-sufficient operation paid solely by
  revenues from participating organizations
• Believe that most leaders cant do it all need
  help with back office support

• Nations largest fiscal sponsor for charitable
  initiatives
• Serves more than 220 early stage non-profit
  groups in 40 states
• Provides management, administrative and financial
  infrastructure support fiscal sponsorship,
  payroll services, financial services employee
  benefits, human resources policies, training and
  intervention and administrative support
• Dont get involved in technology or program
  management but heavy on grant compliance
• Hearing from funders that they question the
  impact of capacity building shared service
  center may be better approach
• Contact Willa Seldon (Executive Director of
  Tides Center) China Brotsky (VP Special Projects
  for Tides) Danica Remy (Managing Director for
  Tides, Inc.)

• Key Take-Aways

• Successes

• Challenges

• Measures success through longevity of
  organizations after they leave Tides Center and
  ability to fundraise
• Looking to expand model geographically and into
  independent 501C(3)s expanded regionally into
  Pittsburg but still run 50 of services out of
  SF
• Just received 4M grant from Kellogg Foundation
  to build ERP system
• Shared services is a big win for better
  information in a more timely manner with less
  administrative burden but not necessarily a cost
  savings benefit

• Pricing and managing the relationship will be the
  biggest challenges in working with independent
  501C(3)s
• Difficult for orgs to give up business
  application piece of IT (vs. the infrastructure)
  Tides, Inc.
• Shared Service Center requires a tremendous
  amount of work to build been doing it for 30
  years and still learning
• Okay to offer a couple different financial
  systems but same policies, procedures and
  processes for financial accounting (Tides, Inc)

20
La Piana Associates - Strategic Restructuring
Consultants

• Description

• Key Take-Aways

• Management consulting group with focus of
  strategic restructuring (mergers, acquisitions,
  joint ventures, administrative consolidations
• Wrote book Strategic Consulting for Nonprofit
  Organizations by Amelia Kohm and David La Piana
• Contact Bob Harrington, consultant
• Note may want to contact Vance Yoshida, who
  works in NY for La Piana

• Successes/Of Note

• Easier to provide shared services to similar
  functioning organizations with similar needs
• Size and sophistication dictate when organization
  is ready to move out a rule of thumb is greater
  than 3 5 million in operating budget they
  should consider providing services internally
• Need to price services independently (allow to
  choose from menu of options)
• IT is easiest to sell, most willing to outsource
  this service
• Services typically provided IT, HR, finance,
  purchasing, some development and fundraising
  (less common and difficult to do)
• Key is providing services on time and consistently

• Key Take-Aways

• Challenges

• Cost set up is expensive and may not ultimately
  save money for orgs but generally services are of
  higher quality
• Need to understand the breakeven - of orgs need
  for economics to work
• Need to survey orgs to understand needs and which
  services to start with (low hanging fruit)
• Need to first develop track record with small
  group help with broader sell
• Confidentiality is key concern for orgs, even if
  irrational

• How to structure entity recommends for RH to
  start as entity within foundation then spin-off
  once mature
• Whether to provide services in-house or outsource
  recommends building in-house b/c difficult to
  sustain if outsourced
• The level of resistance to giving up control
  depends on the organization founder-led and
  highly volunteer-dependent organizations tend to
  be more resistant entrepreneurial organizations,
  those with a sophisticated ED and those in a
  growth mode tend to be less resistant
• If orgs receive services pro bono, generally
  reluctant to outsource irrespective of quality

21
Potential Providers/Vendors Human Resources
Sector Provider Subfunctions Provided Size of Company NYC Presence Applicability/ Strengths Issues/ Weaknesses
For Profit ADP Total Source Benefits health, dental, prescription, life, flex spend, retirement, disability, workers comp, COBRA, EPL insurance EAP, HR policies procedures payroll tax admin recruitment selection training Regulatory compliance 600 million revenues/12B float per night/5,000 clients Yes ADP name Become an employee of organization Triggers gt 50 employee regulations, such as FMLA
Ambrose Employer Group LLC Benefits health, dental, prescription, life, flex spend, retirement, disability, workers comp, COBRA payroll admin background checks some training, some policies procedures some regulatory compliance Yes
Administaff Benefits health, dental, prescription, life, flex spend, retirement, disability, workers comp, COBRA, EPL insurance EAP, HR policies procedures payroll tax admin recruitment selection training Regulatory compliance Yes
Gevity HR (formerly EPIC) Yes




22
Potential Providers/Vendors Human Resources
cont.

• Human resources benefits can be thought of in
  three ways
• Expense control employment administration,
  benefits administration, retirement services
• Income generation recruitment and selection,
  performance management, training and development
• Protecting net income government compliance and
  employer liability management
• Companies that manage outsourced human resources
  for small businesses are called Professional
  Employer Organizations (PEOs)
• PEOs handle all HR functions for a small business
  health benefits, insurance, portions of the
  hiring process, retirements savings, flexible
  spending accounts, credit unions, risk
  management, and EAPs
• PEOs are co-employers of small business
  employees they maintain some fiduciary
  responsibility and work proactively to manage
  risk for a company (and themselves)
• Because of their exposure, they only bring on low
  risk companies (dont take every business)
• ADP Total Source is the second largest PEO
  (Gevity HR is the largest) with 16,000 work site
  employees (700 clients) in northeast region and
  10,000 work site employees nationwide (4,500 -
  5,000 clients)
• One estimate is that over 3 million people are
  paid through a PEO
• Cost to company ranges from 1,000 to 1,200 per
  employee per year (may get a break for
  non-profits) they make money on the float, so
  they adjust the fees to meet gross profit goals
  and average wages
• Benefit to companies more attractive benefits
  package for employees (improved retention), save
  time, and can save on costs
• Issues level of volunteer and temp employee
  basis (they dont get same fees but increased
  liability)