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NONPROFIT MANAGEMENT: COVID Puts More Pressure on Already Stressed Nonprofits

By Gerald J. Archibald

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“In every crisis, doubt or confusion, take the higher path – the path of compassion, courage, understanding, and love.” — Amit Ray

The COVID-19 pandemic has changed our world in many ways. The frustration of what constitutes the post-pandemic “new normal” represents a tremendous uncertainty for all organizations, particularly not-for-profits. For example, less than one year ago, it was highly unlikely that most of our meetings and communications — both internal and external — would take place because of virtual technology. 

As a result of the pandemic, we find the word “impossible” fading rapidly from our lexicon. Further technology revolution is the order of the day and the foreseeable future. For example, in the health and human-service delivery sector, the use of telehealth and telemedicine technologies has accelerated the acceptance that services do not have to be provided face to face. In fact, many experts believe that the pandemic has accelerated the acceptance of telehealth and telemedicine by a decade. We all need to embrace the techno-revolution and automobiles without human drivers.

One of my recent columns discussed the concept for nonprofit organizations to consider outsourcing non-core competencies to achieve more cost-effective service delivery and outcomes. The pressure on nonprofit service providers to obtain and/or develop cost-effective approaches to service delivery has been building for decades. Most of this pressure has been accelerated by advancements in technology. One of my colleagues recently said that my current smartphone has far more technology than what was used for purposes of building a successful Lunar Module in 1969. I found that knowledge terrifying.

However, in addition to technology advancements, there are many additional pressures on nonprofit organizations that result from increased government regulations and consumer demands for cost-effective service delivery. For example, New York Gov. Andrew Cuomo issued Executive Order 38 back in 2013, which required a transition for nonprofit health and human-service organizations to reduce their administrative costs below 15 percent. Since the issuance of that executive order, insurance companies and managed-care organizations, as well as federal grant funding, have reduced their expectation for administrative costs to 10 percent or less. This extraordinary pressure is, in large measure, driving continued affiliations and mergers of tax-exempt organizations across all charitable-service sectors.

Many tax-exempt organizations continue to apply a strategy that involves collaboration with other nonprofits to create a management-services organization (MSO). Group-purchasing cooperatives and information-technology outsourced-service providers are two of the most common services that lead to the formation of an MSO or the utilization of an outsourcing-service vendor.

 MSOs are not a new concept. Similar structures have been in place for decades. Yet the term “management service organization” can mean many things to many people.

A broad definition of an MSO is any organization that provides goods or services to its members and other customers with the objective of improving productivity, efficiency, and reducing costs. Obviously, this definition can apply to a variety of organizations. MSOs can be either nonprofit or for-profit, depending upon the mission and objectives of the individuals forming the entity.

In the nonprofit sector, MSOs’ popularity is being driven by the techno-revolution and changing expectations of consumers and government funders. Nonprofit organizations continue to face the challenge of government funders and philanthropic donors to produce quality service at a cost-effective price.

Other than group purchasing, the most common functions that can benefit from a shared-service MSO approach are as follows:

• Information technology

• Financial reporting and billing

• Human resources

• Regulatory compliance 

• Managed-care provider contracting

• Facilities, occupancy, maintenance

• Access to grants and capital financing/credit facilities

• Transportation

• Administrative functions supporting regional provider networks

• Fundraising and development

• Marketing, public relations, & communications

• Strategic planning and multi-provider collaborations

As MSOs have become more popular in the health and human-services sectors, their failure rate has increased dramatically. Recent studies have shown that, particularly in the nonprofit sector, a large percentage of MSOs failed to achieve their goals and fulfill their mission.

Based upon my 40 years’ experience in the design, development, and formation of MSOs, I believe the 10 factors in the following list are critical elements for success in providing such services. As you read this list, keep in mind that, in the final analysis, an MSO’s ability to provide value to its members/customers represents the key component to long-term success.

The 10 critical factors are:

1) The organization and its members must share a common vision with a defined purpose, goals, and objectives. Too often, MSOs attempt to provide services in areas where they have no experience or core competency.

2) The MSO must have dedicated, capable leadership. Since MSOs provide services, the leaders must have recognized expertise in providing these services — or else no one will want to buy.

3) The organization must have sufficient capital resources to be able to deliver what is promised in terms of services and bottom-line value to its customers.

4) It also must have a customer focus and an ability to measure the satisfaction of its customers.

5) The MSO should be a free-standing, entrepreneurial organization. A timely decision-making process and management flexibility are important to an MSO’s success. The ability to react quickly to member needs and market changes will help it achieve success.

6) The MSO must have the ability to grow by adding new members who will utilize the organization’s leadership talent and generate additional revenues.

7) Ongoing education and training for MSO staff is essential. The value to be derived by MSO members is dependent upon the talent pool available either in the MSO or through contractual affiliations with other service providers.

8) There must be an opportunity to provide consulting services to customers, to follow up on implementation of issues that may result from MSO consulting services.

9) The MSO must have an ability to provide benchmarking data to its customers. Both internal and external benchmarking data are necessary to provide a competitive advantage to MSO members.

10) The services provided by the MSO must be targeted to meet the needs of what members/customers want. The cost of these services must be priced appropriately and demonstrate true value to the customer in the form of both cost reduction and/or improved efficiency and quality of services.

Participation or collaboration with an MSO is only one strategy that nonprofit organizations should evaluate to strategically position themselves for success in the restructuring and reform of the tax-exempt service sector. My previous column discussed the potential advantages of direct outsourcing of non-core competencies to the many vendors that typically specialize in one or possibly two of the functions listed above. As an example, very few individuals supported a vision of Tom Golisano in 1975 with the strategy of providing payroll processing services to small companies. As we know, his vision is now reality, with Paychex being a hugely successful company, with a market capitalization of more than $30 billion. Upstate New York and more recently, Southwest Florida, have realized extraordinary benefits from the philanthropist Tom Golisano continually exhibiting compassion, courage, understanding, and love for the less fortunate in those communities. Each of us owes a debt of gratitude to him.                

Gerald J. Archibald, CPA, is a partner in charge of the management advisory services at The Bonadio Group. Contact him at (585) 381-1000, or via email at garchibald@bonadio.com