Transcript Organizational Structure Planning

January 21, 2005
Exploring a Shared Back Office Service Initiative
For Internal Use Only
Three options for implementing a shared back office services
initiative
INCUBATOR
CO-LOCATION
SHARED BACK
OFFICE
SERVICES
ONLY
Description
Assist early stage, high potential
organizations with financial and
programmatic support
Provide shared space and services
for mature organizations with a
similar programmatic focus and/or
those with large back office needs
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 organizations that would not
need to serve clients at the site
Any stage/size organization; best with
smaller start-ups and/or growthoriented organizations
What an outsourced back office service could look like
Outsourced
functions
Non profit A
Administration
Program
Finance &
Accounting
Development
Human
Resources
Technology
Purchasing
Facilities
Outsourced Subfunctions







Accounts payable
Accounts receivable
General ledger
Budgeting
Cash management
Risk management
Financial analysis,
strategy and reporting





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




Sourcing – office,
janitorial, travel, mail
Negotiations
Purchase order
processing
Supplier database
management




Contract
management (e.g.,
janitorial services)
Repairs and
maintenance
Lease
management
Utilities
management
3
Criteria for considering which services should be outsourced vs.
maintained internally
Level of support function outsourcing
None
Criteria
Complete
Key elements to define
outsourcing opportunities

Function is not critical to
the strategic focus of the
organization
•
Outstanding execution of
the support activity is a
core competency and
source of sustainable
competitive advantage for
the organization
•
Activity enables core
competencies of
organization but does not
serve a core strategic role

In-house capabilities are
under developed relative to
outside vendors
Activities do not expand the
skill set of top talent
•
Activity expertise is well
served by in-house
resources
Organization leaders
develop from activity
•
Specialist firms recruit
superior talent in activity
Activity expertise is
primarily administrative or
executional and does not
support leadership
development
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
•
Strategic
Talent


Efficiency

Source: McKinsey & Company
•
•
Outsourcing activity results
in lower costs/same service
or same cost/improved
service
4
Non profits could expect efficiency and effectiveness benefits
from outsourced back office services
Comments
Reallocate time from
admin to program
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 person’s time they could greatly benefit from their strategic thinking and
planning
–
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
–
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
More timely information
Increase
operational flexibility
Minimize risk associated
with staff turnover
–
Improve costs
Believe the amount of senior management time spent on administrative issues would be
significantly reduced with outsourced services
May see benefits across the organization
–
Reduced costs of goods and services; not likely biggest lever because many non profits
are under funded in these areas
5
Several requirements would need to be in place to be successful
Requirements
Gain trust from
non profits
Quality services could
be provided by existing
or newly created vendors
A pilot could prove that
non profits would realize
significant benefits
Explanation
–
–
–
–
–
–
–
Develop a low cost
model that works
Identify well suited
organizations
for participation
–
–
–
–
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
Need to identify either a turnkey organization or
individual high quality vendors
Less attractive option is to build capability internally
(Tides model)
Pilot would define the economic value proposition to
potential participants
Believe significant benefits will create demand
Require critical mass of users make the economics
attractive
Need to create separation in funder-grantee
relationship; ultimately want outsourcing to be selfsufficient
Early stage or growth stage organizations
Affinities – structure or issue
Sophistication of management
6
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
7
Appendix
8
The administrative burdens cause some organizations to run
inefficiently and sometimes ineffectively
Inefficiencies

Program officer with knowledge of
technology maintains systems and fights
fires, all taking away from important
program work

Senior manager handles all human
resources – from administering benefits to
maintaining sick/vacation time database,
all taking away from program work

Mid-level finance person handles complete
range of finance tasks – petty cash to
strategic financial decisions

Each group makes own purchasing decisions
and uses own vendors; executive director
must authorize all purchase orders (POs)
irrespective of size
Technology
Human
Resources
Finance &
Accounting
Purchasing

Facilities

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
Ineffectiveness




Don’t have specific skills to maintain and
enhance technology; technology not
maximized to improve operations and
customer service
Lack HR knowledge; improper handling of
unemployment claims, no HR controls or
budget, no performance management
system
Don’t know how to manage costs vis-à-vis
services (cost per services basis); don’t know
how to structure for flexibility, such as changes
in funding
No bulk purchasing to reduce costs; “run to
corner” to get supplies

Government contracts dictate different
purchasing requirements

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

9
But these organizations struggle to improve the situation
Top Five Reasons
Description
–
Cost
–
–
Access to Quality
Services
Trying to Drive
Down
Admin Costs
–
–
–
–
Training to Know
Best Practices
Time to Devote to
Non-Core
Improvements
–
–
–
Need to revise
with
survey data
Little budget available for back-office
Perceived to be not core or strategic – if cut
somewhere it is usually in back office supports
Don’t know how to evaluate the quality level of
services; don’t know where to access quality services
Not as many quality back office service providers in
non-profit sector as for-profit sector
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
Management doesn’t 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)

Robin Hood works
to improve
inefficiencies and
ineffectiveness
through capacity
building efforts

May want to
consider
outsourcing as
another option
Status quo – “if it isn’t broken, don’t fix it”
Organizations are stretch as it is, don’t want to
allocate precious staff time to evaluating
efficiency/effectiveness improvements in back office
supports
10
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
Examples
Operating Model

Purchase order processing

Accounts receivable

Payroll processing

Accounts payable

General ledger
consolidation
Expertise

Compensation and benefits
design

Law

Tax

Applications development

Financial analysis and strategic
planning

Market research

Provides efficient, low-cost
services

Shares scarce expertise across
business units

Mostly high transactional in
nature (achieve economies
of scale)

Staffed with content experts

More specialized in nature

Rewarded for business impact
and value creation

Staffed with process
experts

Rewarded for efficiency and
productivity
Source: E&Y SGV Review; Are Shared Services Right for Your Company? by Francis L. Huang, March 2003
11
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;
12
We’d 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
Understand
benefits
Can manage
transition
Desire for
improvement
Few services
provided pro bono
Understand own
management limits
Organizations wellsuited to maximize
benefits of shared
services
Low resistance
to change
13
Any shared service option has several risks which requires a
measured and deliberate approach
Key Risks
Description and Action Steps
–
Switching Costs
–
Quality Services
Customer Care
Lack of support/
participation
Infrastructure
support
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
–
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
–
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
–
–
–
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
14
E&Y1 identified the “Dos” and “Don’ts” of shared services
Do’s
–
–
–
–
–
–
–
Articulate a clear vision of what the shared
service center’s (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
Don’ts
– 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
1 – Ernst & Young
Source: E&Y SGV Review; Are Shared Services Right for Your Company? by Francis L. Huang, March 2003
15
E&Y also identified several key enablers and risks in a
shared service initiative
Key Enablers and Risk to Manage in Implementing a Shared Services Center1
2…while low support by employees is the
top risk to management
1 Senior management commitment is
crucial...
Easy quick-wins to build
momentum
IT problems
23%
Frequent communication on
progress to all employees
Severe business disruption
during implementation
27%
Clear communication of goals
to all employees from the start
Senior management
commitment
87%
40%
52%
60%
56%
Poor service quality
45%
20%
41%
High implementation cost
40%
Finding the right people to lead
& work in SSC
0%
30%
80%
100%
60%
Low support by employees
0%
20%
40%
60%
80%
1 – Data based on global survey of 120 companies by E&Y
Source: E&Y SGV Review; Are Shared Services Right for Your Company? by Francis L. Huang, March 2003
16
The Blue Ridge Foundation
Description

–
–
–
–
–
–
–
Key Facts

–
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)
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 doesn’t provide all services right away - ED likes orgs
to struggle a bit first
–
–
–
Key Take-Aways


Successes
–
Built significant trust with partner organizations; likely from ED’s
highly collaborative and informal approach to management
Several organizations have left the incubator and are selfsustaining
Built a close community amongst all participating organizations –
share information on grant applications, best practices, etc.
–
–

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
17
Al Sigl Center
Description

–
–
–
–
–
–
–
Key Facts

–
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)
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)
–
–
–
–
–
Key Take-Aways


Successes
–
$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
–
–
–
–
–

Challenges
–
–
–
–
–
Don’t 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 don’t want to
give up control
Haven’t 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
18
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
–
Nation’s 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
Don’t 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.)
–
–
–
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 <$1 million and 6% of
operating budget if > $1 million
Self-sufficient operation – paid solely by revenues from
participating organizations
Believe that most leaders can’t do it all – need help with back
office support
–
–
–
–
Key Take-Aways


Successes
–
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
–
–
–

Challenges
–
–
–
–
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)
19
La Piana Associates - Strategic Restructuring Consultants
Description

–
–
–
–
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

Key Take-Aways

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
–
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
–
–
–
–
–
–
–
–
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
20
Potential Providers/Vendors – Human Resources
Sector
Provider
Subfunctions Provided
Size of
Company
NYC
Presence
Benefits – health, dental, prescription, life,
$600 million
flex spend, retirement, disability, worker’s
revenues/$12B
comp, COBRA, EPL insurance
float per
 EAP, HR policies & procedures
night/5,000
 payroll & tax admin
clients
 recruitment & selection
 training
 Regulatory compliance
Ambrose Employer  Benefits – health, dental, prescription, life,
flex spend, retirement, disability, worker’s
Group LLC
comp, COBRA
 payroll admin
 background checks
 some training, some policies & procedures
 some regulatory compliance
Benefits – health, dental, prescription, life, flex
Administaff
spend, retirement, disability, worker’s comp,
COBRA, EPL insurance
 EAP, HR policies & procedures
 payroll & tax admin
 recruitment & selection
 training
 Regulatory compliance
Yes
Gevity HR (formerly
EPIC)
Yes
For Profit ADP Total Source

Applicability/
Strengths

ADP name
Issues/
Weaknesses
Become an
“employee” of
organization

Triggers > 50
employee regulations,
such as FMLA

Yes
Yes
21
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 (don’t 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 don’t get same fees but increased liability)
22