Administrative Consolidations and Management Service Organizations

Sharing Administrative Services, Part I: Administrative Consolidations and Management Service Organizations
In January 2009, San Francisco Mayor Gavin Newsom created the San Francisco Community-Based Organizations Task Force, co-chaired by Dr. Sandra Hernandez, chief executive officer of the San Francisco Foundation, and City Attorney Dennis Herrera, to devise a strategy between the City and nonprofits in light of San Francisco’s projected $438 million budget deficit. In the Task Force’s April 2009 Report, “Partnering with Nonprofits in Tough Times,” one of its six recommendations was for San Francisco to “identify and incentivize opportunities for nonprofits to use management services organizations (MSOs) and consolidate back office functions.” The Task Force hopes this recommendation will lessen costs such as the estimated $58 million spent by San Francisco on nonprofit indirect costs in the fiscal year 2007-08. The Task Force believes MSOs offer an opportunity to capture economies of scale and when combined with administrative consolidations, nonprofits can further benefit from “the potential to standardize and improve the quality of administrative services” as well as provide San Francisco with “increased notification and oversight of performance issues.”
Especially with the current economy, there has been increasing interest in and attention on partnerships for strategic restructuring across the nonprofit sector. While MSOs and administrative consolidations are both forms of sharing administrative services, the two should not be confused as one and the same. Bill Coy and Vance Yoshida, Senior Associates at La Piana Associatesset the framework for these discussions in their article, “Administrative Collaborations, Consolidations, and MSOs,” by first defining nonprofit administration as human resources (e.g., recruiting, personnel policies, and compensation), finance (e.g., accounts payable/receivable, cash management, and forecasting), information technology (e.g., software, database administration, and website management), and other areas (e.g., marketing, office space, and grant-writing). From a macro viewpoint, organizations focus on these functions at three levels: transactional, managerial, and strategic. Coy and Yoshida state organizations seeking to share administrative services have four options available: an administrative collaboration, administrative consolidation, MSO, or external service provider.
Administrative Consolidation
Coy and Yoshida describe an administrative consolidation as a more formal agreement than a collaboration that “involves the sharing of specific functions to increase administrative efficiency.” It is a “commitment to continue, for the foreseeable future, shared decision-making power” but does not, however, change the corporate structure of the organizations. Examples may include standardized human resources practices and training, shared accounting systems, shared IT professional and other key staff, or shared marketing/development staff such as a grant writer.
They suggest a consolidation is best used when:

  • Nonprofits operate in similar programs in the same or adjacent communities
  • Good relations exist among the parties
  • Expansion is not necessary

A benefit of this form is that the consolidation of simple functions can be inexpensive with quick results. Drawbacks include a potential distraction from the organization’s mission because of the time and resources needed for administration of the consolidation, costs, and conflicts due to shared-decision making.
Management Service Organizations
MSOs in particular are receiving increasing attention lately by the nonprofit sector due to calls for restructuring in light of the economy, but this concept has been around for quite some time (although often a harder concept to grasp, in part, because they are historically less common than, for example, administrative consolidations).
The definition of an MSO seems to vary slightly across the sector but all center on the idea that an MSO is an organization that primarily exists to provide administrative services. For example, the Task Force defines MSOs as “independent organizations that provide management and administrative services (e.g., financial and legal services, human resources and payroll/benefits management, grants and contract management, bulk purchasing, risk management, real estate consulting, insurance) to multiple organizations, while allowing those organizations to maintain separate identities, governance structures, and programmatic independence.” Coy and Yoshida define an MSO as “a new organization created to integrate administrative functions, and thereby to increase the participating organizations’ efficiency.”
Coy and Yoshida suggest that MSOs are best used when:

  • This will be the entity’s sole business
  • Existing systems need minimal migration
  • Systems are easily scalable
  • Funders will support start-up

Benefits include an opportunity to create systems that meet the organizations’ service needs, expansion possibilities, and an integrate service model. Drawbacks include the high costs to create a new system, initial large investment of time, and potential inability to customize services.
Examples of MSOs currently operating in California help to illustrate the MSO concept:

  • CompassPoint is a San Francisco based MSO that works with over 300 nonprofits a year, offering consulting, research, training, and conferences in order to provide the management tools, strategies, and resources “to lead change in their communities.”
  • The Center for Excellence in San Jose is an MSO that provides consulting, programs, in-depth leadership development, and resources to the nonprofit community of Santa Clara and San Mateo counties.
  • The Valley Nonprofits Resources (VNR) is “designed to serve executive directors, staff and board members of nonprofits, plus leaders of volunteer groups and of smaller foundations” in the San Fernando Valley. VNR calls itself a “virtual MSO” because most services are provided on-line, over the phone, or in the facilities of partner organizations, thereby making it “a management support organization that takes advantage of modern technology and multiple partners.”
  • The Long Beach Nonprofit Partnership (LBNP) is an MSO currently serving over 1,000 community-based organizations in the greater Long Beach area. LBNP offers services such as information and referral, capacity development consulting, networking opportunities, a prized Philanthropy and Research Library, and year-round educational seminars and workshops.

Generally speaking, Coy and Yoshida advise four steps to a nonprofit considering an administrative partnership:

  • Step 1 – Document your existing administrative structure in order to determine where efficiencies can be created.
  • Step 2 – Define the improvements that would bring the organization’s administration to its desired state.
  • Step 3 – Identify potential partners.
  • Step 4 – Begin to explore potential partnerships.

“Partnering with Nonprofits in Tough Times” by the San Francisco Community-Based Organizations Task Force is available here.
“Administrative Collaborations, Consolidations, and MSOs” by Bill Coy and Vance Yoshida, Senior Associates at La Piana Associates, Inc. (2006) is available here.
– Emily Chan