Outsourcing Back-Office Services in Small Nonprofits:
Pitfalls and Possibilities

The Eugene and Agnes E. Meyer Foundation funded the Management Assistance Group (MAG) to assess the back-office needs of Meyer grantees and to identify alternative back-office services that could strengthen operations, relieve pressures on executive directors, and lead to greater efficiencies, particularly in this difficult economy. The study's report, Outsourcing Back-Office Services in Small Nonprofits: Pitfalls and Possibilities by Mark Leach, found that the back-office needs of small nonprofits are urgent but largely unmet.

Small organizations (those with annual budgets under $3 million and fewer than 20 employees) play critical roles in the nonprofit sector -- whether they’re creating new ways of politically engaging constituencies or providing innovative services that meet a community’s particular needs.  Smaller nonprofits bring a diversity of constituencies, voices, and approaches that are essential to fostering cross-fertilization and innovations that can advance their fields. 

As vital as these small nonprofits are, their leaders must often divide their time and energy between developing the programmatic work and managing a wide array of back-office needs, including administration, finance, human resources, and information technology.  Unlike larger nonprofits which typically hire staff with expertise in these areas, smaller nonprofits’ leaders must often learn as they go and are often dissatisfied with their own performance, with pro bono services, and with outsourced providers whose business models are not tailored to the non-profits’ needs.  

Not surprisingly, small and mid-sized nonprofits cite limited management infrastructure and lack of administrative support as key contributors to executive director burn-out and turnover, according to Daring to Lead 2006 by CompassPoint and the Meyer Foundation.  

The impacts of not finding better solutions for back-office needs are many -- inefficiency and burnout, high staff turnover, cash flow crises, loss of funding, missed opportunities, diminished impact and threats to growth and sustainability. At best, these are enormous challenges for leaders of small nonprofits. At worst, the lack of adequate back‐office infrastructure is responsible for their ineffectiveness in achieving their mission and incalculable human and financial waste.  

The new  study focuses on outsourcing as a potential solution and reveals the structural constraints and possibilities in outsourcing to small nonprofits. 

Key Findings

  • Barriers that prevent nonprofits from outsourcing back-office services include: the inability to find specialized skills at a reasonable cost, lack of time to find and contract with providers, and negative past experience.
  • Current business models for outsourcing often are not well suited for serving small to mid-sized organizations, many of which are complex and have significant unmet needs.
  • Outsourcing may not offer short-term cost savings but can offer significant long-term benefits and cost savings.
  • There is great opportunity for business entrepreneurs with a deep knowledge of and sensitivity to the nonprofit sector to create innovative business models.
  • Areas most in need of better solutions include: human resource management related to recruiting and retaining good staff, marketing and communications and long term financial planning.

Ideas To Create More Effective and Appropriate Back-Office Services

  • Nonprofits can:
    • Become better consumers by getting educated about outsourcing.
    • Investigate outsourcing options thoroughly.
    • Be realistic about what it really takes to fund their missions and the cost of not addressing back-office needs with both themselves and with funders.
  • Grantmakers can:
    • Re-examine how much funding for overhead is necessary for an organization function effectively and provide adequate general operating support and core support in program grants.
    • Help nonprofits identify and access the most needed services.
    • Facilitate conversations among grantees and outsourcing service providers aimed at creating business models tailored to small nonprofits.
  • Providers can work with nonprofits and grantmakers to design and implement innovative business models  to increase the supply of quality outsourced services for small nonprofits.

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There is an urgent need for innovation in how small and mid-sized nonprofits handle their back office functions, and increased use of outsourcing can help address that need.
— Rick Moyer, the Meyer Foundation’s Director of Programs