CharityVillage® Research: Making the decision to outsource non-core services

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Making the decision to outsource non-core services
By Betty Ferreira
May 22, 2007

For many organizations, leasing an essential piece of equipment, such as a photocopier, can often make more sense than buying one. Why? Because unless you're Kinko's, making photocopies probably isn't the core reason your organization exists. It makes more sense to invest scarce funds into delivering your core service offering than it does to acquire a piece of machinery whose technology can quickly become obsolete, that depreciates in value, and that incurs large service and maintenance costs.
In the same way, it can make sense to outsource essential but 'non-core' business processes, such as human resources, bookkeeping and accounting, as well as entire staff functions such as Controller or CFO. By outsourcing these functions, organizations can take advantage of a deep base of specific knowledge and expertise on a regular and on an as-needed basis, without having to incur the cost of hiring a dedicated staff person to perform these duties. This can be particularly attractive to nonprofits, since they can take advantage of economies of scale to access highly skilled expertise that they may otherwise not be able to, and minimize costs!
Many organizations may already be familiar with outsourcing through their use of outsourced payroll with ADP or Ceridian. While an organization could run its own payroll, it makes a lot of sense to employ a specialist company to perform the role, given their superior systems, detailed knowledge of payroll legislation, and access to the direct deposit system.
For nonprofits, outsourcing non-core function offers many tangible benefits, allowing you to:

concentrate on what you do best: delivering on your mission statement,
access top-level financial and HR expertise and insight on a regular and/or on an as-needed basis,
be more confident in your business processes, analysis and reporting for executives and board members,
significantly reduce overhead costs, and
redistribute the financial savings to other areas of your organization.

Factors to consider when deciding whether or not to outsource
1. Type of Work
Certain jobs within a nonprofit organization demand in-house employees, including most positions that interact regularly with clients and other staff (e.g. managers/supervisors, administrative assistants, etc.) or with the organization's key stakeholders (e.g. outreach and program staff, etc.). Generally, any function that is core to the organization's delivery of its mission should be kept in-house.
Many other types of jobs, however, can be outsourced, depending on the organization's structure and needs (website design/maintenance, bookkeeping, accounting, human resources, etc.).
The size of a nonprofit and demand for expertise play an important role in the decision. A new organization with several employees probably should not hire a full-time Controller. But when a certain level of growth has been attained and the organization begins attracting large scale funding from foundations and government, then hiring an in-house person may be warranted.
2. Cost difference between an employee and outsourcing that function
HR industry studies estimate that total all-in costs for full-time paid employees can reach as high as double the annual salary of the employee. The employee's base salary is obviously a large component of the total figure, but other elements can add up quickly:

medical and dental benefits ($250 to $500 per month),
employer employment insurance and/or pension contributions (9% to 14% of base salary),
time lost to sick leave (6 - 12 days per year, on average),
vacation time, etc. (2 - 4 weeks a year).

Then there are the hidden, often forgotten, expenses:

new employee orientation and supervision costs,
training and development costs (this may be higher for employees involved with financial matters than for 'regular' employees since they tend to go on a greater number of more expensive courses),
staffing recruitment and search costs, pre-employment screening and background checks, etc.
potential severance costs, etc.
potential downtime if employee is terminated (i.e. until a new employee is hired).

Finally, there are the non-quantifiable items:

Is the new hire a good cultural fit?
Would she/he 'play well' with the rest of the staff?

Outsourcing non-core functions may provide your organization with a cost-effective way to:

concentrate on what you do best - delivering on your mission statement,
access top-level HR and financial expertise and insight on a regular and on an as-needed basis,
be more confident in your financial and human resource processes, analysis and reporting for executives and board members,
significantly reduce overhead costs, and
redistribute the financial savings to other areas of your organization.

Outsourcing can be an attractive solution to many nonprofits' need for financial and HR expertise. But it may not be for everyone.
Make sure you speak with any potential vendor and carefully walk through the pros and cons of outsourcing together, and make sure they provide you with a quote to outsource these services and let you decide for yourself what the benefits may be for your organization.
Betty Ferreira is a Principal with ReStructure Non-Profit Consulting. ReStructure provides consulting and outsourcing services specifically tailored for the non-profit sector. She can be reached at betty [at] restructure.ca, 416-597-9555, www.restructure.ca.