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The Financial and Operational Benefits of Outsourcing for Nonprofits
As contributions and other revenue sources have become scarce in recent years, many nonprofits face short- and long-term financial challenges. Many are under pressure to “do more with less,” leading administrators and finance committees to explore multiple options to reduce costs and improve efficiency.
Due to economic constraints, nonprofits must conduct business in the most efficient manner possible. As they evaluate how to do this without jeopardizing their mission, there has been a growing trend toward outsourcing functions that are not considered core to their mission.
Many organizations effectively outsource back office functions such as accounting, payroll, human resources, and information technology. This helps them preserve limited resources so they can focus on their mission. It may also allow them to accept and use donations that don’t include overhead costs, and preserve critical relationships with these financial supporters.
Funders generally give money for a specific activity or purpose, and may also stipulate certain conditions for receiving the money. For instance, funding may not include overhead or personnel costs. This puts the nonprofit in a difficult position, and can actually be financially detrimental to accept funds that make no contribution back to overhead; the resource commitment is just too high. But when an organization seeks to recover some overhead costs from its funders, it is sometimes looked at with mistrust.
Therefore, organizations are turning to outsourcing to significantly reduce personnel and overhead costs. It is not uncommon for a nonprofit to save more than 20 percent of total personnel costs when switching to an outsourced solution for accounting and technology.
For example, we worked with a nonprofit organization with 20 employees and $7 million in operating costs. We provided an outsourced controller along with payroll services and helped them implement a new accounting system. As a result, the organization was able to save more than $50,000 per year, plus significantly improve the effectiveness of the accounting office.
There are many reasons other than cost that demonstrate why outsourcing may be a good option for nonprofits, including:
- Access to the latest technology that an organization may not be able to afford on its own
- Skilled personnel to provide high-quality services in an efficient manner
- Streamlined services due to advancements in technology
Nonprofits may have a lot to gain from outsourcing some services. In addition to cost savings, outsourcing can result in more timely financial information provided to management, which ultimately leads to better decisions and a more efficient organization.