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It’s Easier for a Nonprofit to Save Money than It Is to Raise It!

March 19, 2015

This article originally appeared on GuideStar’s website. View original >>

By Irv Katz and Michelle Sims

Making ends meet financially is an everyday challenge for nonprofits. Sometimes the greater challenge is finding ways to effectively lower costs without harming the organization’s mission or programs.

What if we said that the nonprofit sector can adopt a systematic approach to reducing costs that has long been used by the health care industry, as well as the for-profit sector? Easier said than done, right?

For most nonprofits, budget cuts are most painful when they involve personnel, so let’s take that off the table. Facility space (whether leased or mortgaged), where staff is housed and services are delivered, is tough, too.

Benefits costs (particularly health care) are going up, with little that a single organization can do to stop them. If anything, many national nonprofits would like to improve benefits, both as a way to treat lower-wage employees fairly and as a tool to motivate and retain staff.

What’s left?

The cost of purchasing the services and supplies needed to keep the organization running in order to deliver on your mission and programs. Overnight delivery. Office supplies. Telecom. Car rental. Promotional items. Copying and printing. IT equipment and support. Food products and services. Unemployment and board liability insurance. And much more.

All of these smaller expenses add up to serious spending. The National Human Services Assembly estimates that large human service nonprofits in the United States spend, on average, 37 percent of their revenue every year on non-programmatic, non-personnel overhead. For many large national nonprofits, the purchasing component can be even higher because of their greater complexity and travel needs.

Increasingly, the solution for many nonprofits is access to a group purchasing organization (GPO) that uses the collective purchasing volume of its participating members to negotiate discounted pricing on the products and services they use in daily operations. While members still purchase directly from the contracted supplier, pricing and standard terms and conditions are pre-established and agreed to by the GPO and the supplier. As a result, GPOs and their group discounts can provide access to a level of pricing that typically is reserved for Fortune 100 companies.

Frankly, the health care industry is way ahead of the rest of the nonprofit sector on this. At least 96 percent of U.S. hospitals are customers of a GPO and use GPO-negotiated contracts for some portion of their purchasing, according to the Healthcare Supply Chain Association, a trade group for health care GPOs.

Yet very few non-healthcare nonprofits are using group purchasing today. Why?

First, for many nonprofits outside of the health care industry, group purchasing is still a novel concept, and what’s new and untried often remains untried. Second, most nonprofit managers are not necessarily focused on lowering overhead costs as a key element of overall expense management. Third, most nonprofits lack the internal resources and capacity to do purchasing in an efficient and cost-effective way.

Even so, this is an opportune time to consider participating in a GPO. Many nonprofits are finding that donors and other funding sources are increasingly reluctant to fund non-programmatic expenses. So, while nonprofit spending continues to increase, often at a higher rate than unrestricted funding mechanisms, many nonprofits are challenged to find ways to be conservative with overhead spending.

So it’s time for the rest of us to catch up with the health care sector. After all, while human service organizations often have high personnel expenses due to the significant amount of direct services provided, the discounts available through group purchasing programs can provide relief toward the remaining expenses.

And that’s why we believe nonprofit managers—and the board members who share their commitment to their organizations’ missions—will increasingly embrace group purchasing as a way to cut the costs of operating their nonprofits while preserving funds for their missions.

If all this sounds easy, it is! The reality is that once vendor accounts are set up to access the discounts, it is business as usual!

But, as with any area of best practices for nonprofits, it pays to be careful. First, look for programs where the fees are minimal and will not cut into the overall cost savings. Second, look for programs that have a proven track record, ideally over five years. Third, make sure that the vendors available through the program are reputable and meet your needs. Fourth, be mindful of whether or not the program allows you to be a part of another GPO, and take this into consideration when looking at total estimated savings and participating vendors. And, finally, look for a program that is focused on nonprofits as a core market, rather than as an add-on to group purchasing for the commercial sector.