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To hire in-house, or to outsource? That is the question that most nonprofits face at one point or another along their journey. It’s a big decision and one that should not be taken lightly. In this blog post, we’ll endeavour to tackle the ins and outs of outsourcing non-core functions including the pros and cons, functions that lend themselves to outsourcing, best practices, and important things to consider.
What is a non-core function?
When a function is referred to as “non-core,” it means that it is not directly related to the primary mission or core activities of an organization. Non-core functions are typically supportive or ancillary tasks necessary for the efficient operation of the organization but are not the primary focus of its work. There are several non-core functions that support the overall operations and sustainability of a nonprofit, including:
- Administrative Tasks
- Financial Management
- Human Resources
- Fundraising and Development
- Marketing and Communications
- IT and Technology Support
- Facilities and Property Management
- Legal and Compliance
- Volunteer Management
- Board Governance
While these functions may be considered non-core, they are still important for the efficient operations of nonprofit organizations.
Outsourcing: The pros and cons
Outsourcing is when you delegate specific tasks, functions, or processes of an organization to external service providers or third-party companies. Instead of managing those tasks internally, the organization contracts with an outside vendor or partner to perform certain functions.
When outsourcing, the organization transfers the responsibility and accountability for specific tasks to the external provider. The service provider, in turn, assumes responsibility for managing the resources, personnel, technology, and processes required to fulfill those functions effectively.
The pros of outsourcing:
Outsourcing offers several potential advantages for nonprofits. Here are some key pros to outsourcing:
Efficiency and Cost Optimization: By outsourcing non-core functions, organizations can avoid the expenses associated with hiring and training in-house staff, investing in infrastructure and technology, and maintaining ongoing operations. External service providers are able to offer services with a higher degree of accuracy and less administrative cost associated with the activity. When managing internal resources, there are management overhead costs to consider, training costs, vacation, and all other fixed costs that arise with employing personnel.
Expertise and Specialized Skills: Outsourcing allows organizations to access specialized expertise and skills that may not be available internally. Service providers are usually dedicated professionals with extensive knowledge and experience in certain areas. By outsourcing, organizations can tap into this expertise and benefit from the latest industry best practices, knowledge of changing laws and regulations, innovative approaches, and improved efficiency.
Focus: Outsourcing non-core functions enables organizations to focus on their mission and strategic priorities. By delegating ancillary tasks to external service providers, organizations can allocate more time, resources, and energy to activities directly related to their core mission. This can lead to improved productivity, efficiency, and effectiveness.
Flexibility and Scalability: Outsourcing offers flexibility in scaling operations up or down as needed. Organizations can adjust the level of outsourced services based on changing business requirements, market conditions, or project demands. This flexibility allows organizations to quickly respond to fluctuations in demand, enter new markets, or adapt to evolving market dynamics (think Covid) without significant internal disruptions.
Risk Mitigation: Outsourcing certain functions can help mitigate risks for organizations. Service providers often have expertise in managing risks and ensuring compliance with applicable regulations that impact the work that they deliver. They may also have established processes and controls to handle security, privacy, and legal concerns. By partnering with external vendors who specialize in risk management, organizations can reduce their exposure to potential risks that might otherwise arrive if managing the activity directly.
Efficiency and Quality: Outsourcing can lead to improved operational efficiency and quality. Service providers typically have streamlined processes, best-in-class technologies, and experienced teams dedicated to specific functions. This specialization often results in faster turnaround times, higher quality outputs, and better service levels. Outsourcing can also introduce fresh perspectives, innovative approaches, and best practices to improve overall performance.
Consistency: In a Not-for-Profit environment, people often wear many hats. With a passionate team, small organizations can make a lot happen. That said, with a plethora of possible activities, human nature is such that we focus on the activities that give us the greatest enjoyment. As a result, certain tasks may get repeatedly ignored, despite the critical importance that they might have to the organization.
Results: When engaging a third-party firm, you will usually have an engagement letter that will include a clear scope of services and a service-level agreement. Inherently, this means that you have an accountability framework in place making it easier to evaluate whether or not results have been achieved. This also makes the return on investment more apparent and can allow you to make more rational decisions about the activity and its benefits to the organization.
The cons of outsourcing:
While outsourcing can offer many advantages, there are also potential disadvantages and challenges that organizations should consider. Here are some common cons of outsourcing:
Communication and Coordination Issues: Outsourcing introduces a new layer of communication and coordination between the organization and the service provider. Miscommunication, language barriers, time zone differences, or cultural differences can hinder effective collaboration and understanding. Poor communication can lead to delays, errors, and misunderstandings that could potentially impact the quality and timeliness of deliverables. Communication processes and service-level agreements should be well understood before engaging a third party.
Dependency on External Providers: Organizations often become reliant on external vendors for the outsourced functions. If the service provider experiences financial instability, operational issues, or changes in their own business, it can directly impact the organization relying on them. A lack of redundancy or alternative options can leave the organization vulnerable to disruptions and potential negative consequences. It is important to understand the credibility of the service provider that you are engaging with.
Data Security and Confidentiality Risks: When outsourcing functions that involve sensitive or confidential data, organizations need to carefully consider the data security measures implemented by the service provider. The infrastructure of your service provider can expose you to a risk of data breaches, information leaks, or unauthorized access to sensitive information. Organizations should assess the security protocols and compliance standards of the service provider to mitigate these risks.
Cultural and Ethical Considerations: Organizations may encounter cultural or ethical differences when outsourcing functions to providers located in different regions or countries. Divergent work practices, values, or ethical standards can lead to conflicts or challenges in aligning expectations. Organizations should be aware of potential cultural differences and ensure that the outsourced work aligns with their own values and ethical guidelines.
Hidden Costs and Contractual Issues: While outsourcing can lead to cost savings, there can be hidden costs associated with managing the outsourced relationship. This can include additional expenses for contract negotiation, monitoring and controlling the service provider, or addressing unforeseen issues. Contractual disputes, changes in pricing, or lack of clarity in service-level agreements can also create challenges and additional costs for organizations. Transparency in pricing models and fees is key and should be evaluated in the negotiation process.
The most common functions outsourced by nonprofits
While nonprofits can outsource a number of non-core functions, here are the most common roles and activities:
1. Accounting and Financial Services: Nonprofits often outsource tasks like bookkeeping, financial statement preparation, tax filing, audit preparation, and payroll administration to professional accounting firms or financial service providers. It is extremely rare to find a single person who is trained in all areas, and hiring people, even on a part-time basis, to manage each discipline can be a heavy burden. Most third-party firms have a multi-disciplined team that can handle all of your back-office needs.
2. IT Services: Outsourcing IT functions can include network management, hardware and software support, data backup and recovery, cybersecurity, website development and maintenance, and help desk support. Again, it is rare to find one person who can do it all, so partnering with a firm that has multiple layers of expertise can be a win-win.
3. Marketing and Communications: Nonprofits often outsource marketing and communications activities like graphic design, social media management, content creation, public relations, media buying, and digital marketing campaigns.
4. Human Resources: It’s not uncommon for nonprofits to outsource various HR functions including recruitment, benefits administration, employee onboarding, training and development, and compliance with labour laws and regulations.
5. Legal Services: In a perfect world, nonprofits don’t have a big need for legal services, but occasionally, it is a critical requirement. If you’re not lucky enough to have a good lawyer on your Board, you may require legal assistance for things like compliance with nonprofit regulations, contract review, intellectual property issues, and legal representation in specific cases.
Other, less common areas that nonprofits could benefit from outsourcing include:
6. Administrative Support: Data entry, document management, appointment scheduling, reception services, and general office support.
7. Fundraising and Grant Writing: Donor prospecting, grant writing, event planning, and donor management systems.
8. Volunteer Management: Volunteer recruitment, training, scheduling, and recognition.
9. Donor Database Management: Data entry, maintenance, donor segmentation, and reporting.
10. Event Planning: Fundraising events, conferences, galas, or community outreach activities.
Best practices when outsourcing non-core functions
When outsourcing non-core functions, it’s important to follow a handful of best practices to ensure a successful outsourcing relationship. Here are some key best practices to consider:
Define Clear Objectives and Requirements: Clearly articulate your organization’s objectives, expectations, and specific requirements for the outsourced functions. This includes defining desired outcomes, performance metrics, quality standards, timelines, and any other important factors. This helps both your organization and the service provider align their efforts and understand what needs to be achieved.
Conduct Thorough Vendor Evaluation: Before selecting an outsourcing partner, conduct a thorough evaluation process. Assess the vendor’s expertise, track record, financial stability, references, and client testimonials. Consider their industry knowledge, technical capabilities, scalability, and ability to meet your organization’s specific needs. It’s also important to evaluate their data security measures, compliance with regulations, and ethical standards. This is where there is often an inverse relationship with price. Frequently, the more well-equipped service vendors will charge higher fees as they take into account a more thorough cost of service delivery.
Establish Clear Communication Channels: Effective communication is single-handedly the most critical aspects of successful outsourcing. Establish clear communication channels, including regular meetings, reporting, and escalation procedures. Clearly define the roles and responsibilities of both parties and ensure that there is a designated point of contact for dealing with issues or concerns.
Develop a Detailed Service Level Agreement (SLA): Odds are your service provider will bring this to the table, but you want to make sure you have a comprehensive SLA that outlines the scope of work, deliverables, timelines, quality expectations, and performance metrics. The SLA should include provisions for dispute resolution, termination clauses, confidentiality, and data protection. It ensures both parties have a clear understanding of their responsibilities and can help manage expectations throughout the outsourcing engagement.
Implement Robust Contract Management: You want to make sure you have a well-drafted and legally binding contract that covers all essential aspects of the outsourcing agreement. The contract should address issues like intellectual property rights, liability, confidentiality, and termination conditions.
Provide Adequate Training and Knowledge Transfer: If there is a need to transfer knowledge or train the service provider on specific processes or systems, allocate sufficient time and resources for training and knowledge transfer. This ensures that the service provider understands your organization’s unique requirements, processes, and culture. Regularly assess and monitor the service provider’s progress and provide feedback as needed.
Maintain Performance Monitoring and Evaluation: Regularly monitor and evaluate the performance of the service provider against the defined metrics and expectations. Implement performance review meetings, reports, and dashboards to assess their adherence to timelines, quality standards, and overall performance. Address any issues or concerns promptly and proactively to maintain alignment and improve performance as needed.
Foster a Collaborative Relationship: Cultivate a collaborative and mutually beneficial relationship with the service provider. Treat them as a partner rather than a mere vendor. Encourage open dialogue, share relevant information, and seek their input on process improvements or innovative solutions. Regularly review and discuss performance, challenges, and potential areas for optimization.
Plan for Continuity and Risk Mitigation: Consider potential risks and develop contingency plans to address any disruptions or challenges that may arise during the outsourcing engagement. Maintain a level of redundancy and explore backup options to mitigate risks associated with relying solely on the service provider. This includes data backups, disaster recovery plans, and strategies for transitioning the outsourced functions back in-house if necessary.
Other things to consider when outsourcing
Do they “get” you? You want partners who get what you do and why you do it, and are not in any way at odds with that. There’s nothing better than finding a vendor who shares in your passion for your mission. Culture fit is a big deal and you don’t want to take it lightly.
Do they have a partner versus a vendor mindset? At the end of the day, you’re in this together. While third-party providers aren’t officially on your team, they are integral to your success. Ask them for examples of how they’ve gone above and beyond the call of duty to service their clients. Think of your worst-case scenarios and ask them how they would handle them. Look for someone who will be your partner through thick and thin.
One thing is for sure, outsourcing is here to stay and is a viable option for nonprofits to deliver on their mission. According to Rebecca Pauls, Executive Director at PLAN, “I think outsourcing is the way of the future for nonprofits. The philanthropic world is reluctant to fund costly operations and administration because it takes dollars away from the core mission.”
It’s important for nonprofits to carefully evaluate their needs, consider the costs and benefits, and choose reputable and reliable service providers when outsourcing non-core functions. And always consider the potential impact on organizational culture, internal capacity building, and the long-term sustainability of operations.
Enkel Backoffice Solutions is a Vancouver-based accounting firm that provides managed accounting and reporting services for Canadian businesses and not-for-profit organizations. Enkel strives to provide nonprofit executives and board members with better bookkeeping and accurate financial reporting, so they can make better decisions and focus on achieving their goals.
