Agencies Aim For Back Office Savings

November 1, 2008       Tom Pope      

Stephen Cole saw a way for eight Chicago-based nonprofits to save $6 million in the first full year after a few changes. “It’s just intuitive,” he said. “I did it before as CEO of the Cash Station Inc.”

Cole now serves as president and CEO of the YMCA of Metropolitan Chicago. “The genesis of helping the eight agencies came from what I did for banks,” he said. Instead of each bank putting out 6,000 ATMs, Cole linked them all together so everyone could use them. “I’ve saved the industry a lot of money,” he said.

“We have $300 million in purchasing power,” he said. The YMCA alone maintains an $80 million operating budget with around 3,000 employees that help an estimated 120,000 people a year. “The big challenge was convincing every other agency that hadn’t done this (sharing services) before that there was a business issue,” he said.

The eight organizations putting this concept in play include the YMCA of Metropolitan Chicago, the YWCA of Metropolitan Chicago, Metropolitan Family Services, Casa Central, ChildServe, Chicago Commons, Kids Hope United, and Youth Guidance.

Back office functions are usually described as the business processes of finance with accounting, procurement, human resources, payroll, legal work, benefits management, information technology, and even marketing. To engage the eight, another entity had to be created to coordinate the functions. The entity, called the Back Office Cooperative (BOC), has been working since March with vendors. After office supplies, the goal is to tackle food service, telecom and energy by 2009.

“The needs of all eight nonprofits should make the demand-equation work to help to deal with vendors,” said Kevin Carty, president and CEO of BOC.

The BOC is an initiative of the Chicago Alliance for Collaborative Effort (CACE), an umbrella federation of more than 20 service organizations in Chicago, which came up with the concept along with Cole and then formed a board to hire Carty. BOC is an Illinois nonprofit agency and a cooperative from a federal tax perspective.

“We’re not a 501(c)(3) because we service these agencies,” Carty said. “Directly we don’t have a charitable purpose so we can’t look like a 501(c)(3).”

In the structure, BOC is not legally tied to CACE, the founding organization. The eight agencies are members of the BOC and also owners.

Office supplies will begin the process. “We haven’t worked through the dynamics of the timing of each agency contract,” he said. “When we begin our buying cycle, every member will have to purchase from a designated vendor.”

If one agency presently has a long-term contract with a fixed price from one vendor, BOC will try to honor that arrangement. Once that situation ends, the agency will buy from the common vendor. “The real pot of gold is to get us to a common technical platform,” Cole said. “We all have accounts payable and receivable and we have to manage membership.”

Cole envisions a technology so when a person entering a Y swipes a card, a staff member will discover that it could be the member’s birthday or that the visitor hadn’t come in for a month. “We will be able to interact better,” he said. “We don’t have the capital and technology to manage this.”

Estimates place a $1.5 million price tag for startup costs to set up the joint body. The eight agencies are funding the venture by contributing 0.13 percent of each operating budget. The BOC also obtained a grant of $400,000 from the Chicago Community Trust while the United Way has made $200,000 available. Cole hopes the remainder will arrive from national foundations.

“We think we can obtain $3 million in expense reduction,” Cole said. One estimate has the agencies saving $20 million over five years.

Step two is developing technology. This leverage could convince governmental entities to automate payment systems. “Many of us have city and state contracts and the requirements are identical,” he said.

Such development and expense reduction doesn’t mean eliminating overall jobs. “We could use the funds to hire more program-oriented people.”

The concept doesn’t impact relationships with national headquarters. “Each organization of the YMCA has independent governance. We’re blessed with the national because they don’t interfere,” he said. “If the concept works, we could offer it to the 1,000 Y’s in the country.”

Creating an entity to represent eight agencies needs the support of an umbrella group, according to Laura Thrall, CEO of the YWCA Metropolitan Chicago and chair of CACE. The YWCA operates on a $13 million budget and serves 130,000 people annually through 11 centers.

“The concept is an initiative of CACE,” she said. “All agencies are members of CACE.” The Chicago Community Trust and United Way support CACE efforts. “The leaders wanted to help each other and we knew each other,” she said. “Reducing expenses is one way to survive in hard times and if we’re not doing that, we’re not doing our job.”

Thrall expects to see success starting in June 2009. “We hope to see the first benefits Ñ we didn’t build any savings into this year’s plans because we have a demonstration project,” she said. “We’d like the rest of the country to see that nonprofits can make a savings and become a model.”

Richard Jones, CEO of Metropolitan Family Services (MFS), said he would like to see a 5 to 10 percent reduction in cost as a sign of success. “We simply won’t renew an old contract with a vendor that isn’t selected,” he said.

Some agencies might find a larger reduction than others depending on the rates they were previously paying. That situation doesn’t become an obstacle. “We simply would accept that because we’d know that we’re working together,” he said.

He looks beyond the initial strategic sourcing to the time when BOC eventually consolidates accounting, IS, and human resource functions. Perhaps a toll-free number could give access to workers to handle human resource issues.

Done right, the concept could be, “very good,” according to Peter Goldberg, president and CEO of the Alliance for Children and Families in Milwaukee. “This depends on the execution.”

His comments address the fact that MFS is a member agency of the Alliance and Richard Jones is the board chair for Goldberg. “Doing right means that the execution doesn’t have an impact on the services delivery of the organization,” Goldberg said. “Also, they have to make sure the expenses bring in the quality for the items.”

Ideally, without an impact on the delivery of services, the public wouldn’t be able to tell whether the back offices have merged. “We’re all searching for ways to operate in a more business-like fashion,” he said. NPT

Tom Pope, a New York City-based journalist, writes about management issues.