What To Build Into Outsourcing
pic from Johnalanbirch
The use of outsourcing companies or consultants does not mean the management team or the board are no longer responsible. However, make sure the contracts are clear that the outsourcing is found to be at fault and that they cover the costs of any penalty and must document the reason for the error. Nonprofits should think of the outsourcing operation as an element that must report to the designated management team member. This team member is then evaluated based on how they would manage any employee or project.
If administrative costs are above 12% a nonprofit should seriously consider outsourcing administrative functions. In 1994, the state of Massachusetts signed approximately $20 Billion worth of program services and contracts with nonprofits across the state. In 2001, the state signed approximately $29 Billion worth of the same contracts, meaning that overall, state spending increased a little more than 30% over those seven years. Over that same time period, the number of nonprofits contracted by the state increased from approximately 6,400 to 8,600, a 25% increase. It was during this time period when the government increased spending at a faster pace than industry growth that providers were not forced to be as efficient as possible. In the years between 2000 and 2001, the economy began to decline. There is a 7.5% increase in nonprofits, but only a 3% increase in government spending. The explanation is that social service and nonprofit advocates are pushing for greater, more focused quality care and/or outcomes, and thereby encouraging the opening of new, community focused non-profits. Meanwhile the state is seeing cuts in revenue. The end result is a squeeze on the industry forcing non-profits to operate as efficiently as possible. Nonprofits need to set a ceiling on their administrative expenses to compete better. Outsourcing provides the means to control administrative expenses easier.
