For Internal Use Only

January 21, 2005 For Internal Use Only Exploring a Shared Back Office Service Initiative

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

Outsourced functions What an outsourced back office service could look like Non profit A • Accounts payable • Accounts receivable • General ledger • Budgeting • Cash management • Risk management • Financial analysis, strategy and reporting 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

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

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 person’s 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

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

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

Appendix

The administrative burdens cause some organizations to run inefficiently and sometimes ineffectively Inefficiencies Ineffectiveness • Don’t 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 • 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 • 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 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 • 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

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 • 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 • 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 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) Time to Devote to Non-Core Improvements • 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

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) Source: E&Y SGV Review; Are Shared Services Right for Your Company? by Francis L. Huang, March 2003

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;

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 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

Any shared service option has several risks which requires a measured and deliberate approach Key Risks Key Risks Description and Action Steps 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

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

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 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 E&Y Source: E&Y SGV Review; Are Shared Services Right for Your Company? by Francis L. Huang, March 2003

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 doesn’t 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 ED’s 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.

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 • 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 • $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

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 <$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 • 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.) • 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)

La Piana Associates - Strategic Restructuring Consultants • Description • Key Take-Aways • Successes/Of Note • 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 • 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

Potential Providers/Vendors – Human Resources

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)

For Internal Use Only