Sharing costs, upgrading productivity
March 2, 2015 Thomas McLaughlin
There are co-ops for everything from farmers to food merchants, many of which have existed for decades or longer. So, why not develop technology cooperatives for nonprofits?
The simple response to this question is — there already are technology co-ops, sort of. Large hospitals and universities have been quietly operating technology-oriented co-ops for decades. Not far from where this is being penned (near Boston) there is a substantial cooperative where the members are nonprofits such as hospitals, universities, colleges, a health insurer and a private high school.
What they have in common is that all or a large percentage of each of their operations are within the area served by the cooperative. This mutual proximity doubtlessly made it easier to initiate and cheaper to run the co-op, a lesson that should apply to similar ventures.
The institutions that belong to the co-op are mostly large, highly-sophisticated nonprofits. In effect, they succeeded because they were adequately capitalized and served a “closed” market. No one needed to carry out an expensive advertising campaign because the members decided to build a shared platform and created the cooperative as a way of accomplishing this goal.
What about the vast majority of nonprofits, the ones whose smallest bank accounts don’t have six zeroes behind the first digit? The story is very different for these groups, which are the majority of the nonprofits in this country. Yet, their need for technology is proportionately the same and perhaps even greater.
There are three aspects of this riddle that need to be solved to improve technology use and access for nonprofits that otherwise wouldn’t be able to afford a complete program on their own.
1. Fixed Costs
Fixed costs are one of the quietest of the budget devils. Most costs rise or fall in some kind of coordination with the demand for a nonprofit’s service. Direct staff, for example, usually increases if the need for the organization’s service grows. These are called variable costs, because if one were to chart the arc of growth in the need for an entity’s services, the volume of direct staff hired would almost certainly vary according to the arc of the demand.
By contrast, in an ideal world the growth in the need for administrative services should not be comparable to the growth in service demand because administrative costs tend to be a “step function.” This means that growth in administrative resources is likely to come in spurts. Frequently, over time, administrative staff can lower the overall administrative costs by creating efficiencies greater than the growth in demand.
At its economic simplest, technology is a fixed cost. That computer server has the same price tag if it is going to be used 24 hours a day or just a portion of each day. The upgrades to the wiring system to power the thing also had to be incurred even if it was just intended to be a backup system. That finicky server needs just the right blend of temperature and humidity, which drives up the utility bills.
And, the additional computer guy’s salary and benefits are inescapable. Members of co-ops can better manage the costs by collaborating at the infrastructure level (servers, storage, etc.), at the software level, or both.
Fixed costs abound in technology, which is one of the reasons it is so hard for most nonprofit managers to develop a robust technology platform. Large nonprofits such as universities and hospitals can absorb a substantial amount of these fixed costs before their budgets start to complain. Smaller nonprofits find it difficult if not impossible to take on such fixed costs.
Having the financial resources (or capital) is a second technology hurdle. Economists refer to technology as a capital-intensive operation, meaning that one has to buy a lot of assets such as computer equipment. Here, capital means something akin to reserves, or cash that’s not needed for day-to-day operations.
The problem for nonprofits is that, unlike for-profit businesses, nonprofits can’t invite outsiders to invest in the operation in return for a share of ownership. The only way a nonprofit can gain resources for capital acquisitions is through profitability or donations. Development specialists, which ask would you rather make — requesting that a potential donor buy a few computer servers or invest in kids?
The third need is to run a productive and economically feasible operation. This is more difficult than one might imagine because staff productivity is not necessarily an automatic must-have unless a nonprofit operates in certain areas of health or human services.
Large for-profit companies, by contrast, often demand a certain number of billable hours from each employee whether the company is a law firm, an Internet cable company, or a medical laboratory. No matter what the tax status, low productivity is a budget devil itself.
The Co-op Model
The obvious solution to this dilemma for most nonprofits is to buy as little as one can get away with, at as low a price as possible. But this can lead to disastrous trade-offs in which an organization makes too many compromises.
The formula is to minimize variable costs while managing fixed costs as tightly as possible. This is where the co-op model comes in. In effect, the co-op carries the fixed costs and the burden for falling short of revenue goals (as does any for-profit service provider). They also assume responsibility for hitting productivity targets.
The co-op model can be viable in this setting because it is not like a drugstore, with items sitting patiently on the shelf, waiting to be scooped into shopping baskets. Both parties must make a commitment to each other, and it almost certainly will take the form of a written contract. The composition of their client base gives the co-op not only funds for operations but — if the market co-operates — some level of capital accumulation as well.
There are already a number of cooperatives accepted by the Internal Revenue Service (IRS), such as those serving hospitals and educational organizations and even farmers (who helped originate the model two centuries ago). This might be good encouragement to begin a technology co-op in your area if there are no comparables in existence. Perhaps more likely, a nonprofit is free to go out of the sector to find companies that provide these kinds of services.
Whether your information technology supplier is an actual co-op or a for-profit company offering professional services should be largely immaterial: Good service is good service. What is more pressing as a new client is what you will get for your money. Note that if you and your peer organizations decide to form a co-op you should automatically have an advantage in the value-for-payment transaction.
The models sketched here are most likely to succeed in an urban or suburban setting because it’s easier to achieve the desired productivity levels when your customers are located relatively near each other.
Some 60 percent productivity for your field staff should be a good starting point, though it might be possible to push it higher. More intriguing is that finding the capital could be easier than you think.
After years of promoting collaboration in general, some major foundations are beginning to experiment with funding certain aspects of collaborative processes. Program Related Investments might be an option from savvy, well-established foundations. L3C corporations were designed for social enterprise ventures, and they can be an invaluable structure on which to build a robust new service for the
The B-Corp, or benefit corporation, offers traditional for-profit businesses an opportunity to convert to a different status as long as they can prove that they seek to create a public benefit in tandem with private.
With a little imagination, some energy, and some good financial strategic thinking, it should be possible to develop market-serving entities for information technology purposes and/or find existing suppliers that are effectively doing the same thing. Good IT might be a cost but it doesn’t need to be a burden. NPT
Thomas A. McLaughlin is the founder of the nonprofit-oriented consulting firm McLaughlin & Associates and a faculty member at the Heller School for Social Policy and Management at Brandeis University. He is the author of Streetsmart Financial Basics for Nonprofit Managers, published by Wiley. His email address is firstname.lastname@example.org