A Management Service Organization Solution for Non-profits
Help your colleagues, customers, or friends be well-informed.
Originally Published In:
ROCHESTER BUSINESS JOURNAL
Author: Gerald J. Archibald, CPA
“When it comes to business, you have to lead, follow, or get out of the way.” - Lee Iacocca
In the past five years, I have coined the metaphor of “Wal-Marting the nonprofit sector”. In my view, there are a number of factors that jeopardize the ability of many nonprofits, particularly smaller providers, to maintain their autonomy. Mergers, acquisitions, and, inevitably, the failure of certain nonprofit organizations will be the result of the Wal-Marting process.
Three major industries in the United States have yet to fully experience significant restructuring and reform. Healthcare, education, and government service organizations have not yet seen the rapid changes which occurred in the past decade in most industry sectors including transportation, banking, retail, manufacturing, technology, and communications. While some may argue that healthcare, education, and government are in the midst of significant reform, I believe rapid change in the next five years will prove otherwise. Keep in mind that healthcare, education, and government account for more than 40 percent of our gross domestic product.
So what does reform and restructuring of healthcare, education, and government have to do with nonprofit organizations? One word: “money”. The vast majority of nonprofits either provide services in these industry sectors, or receive 70 percent or more of their revenue from these segments.
Restructuring and reform of these industries is like a freight train. Everyone knows it’s coming, but not everyone will hear or see the train until it is too late.
Competition drives most major restructuring in industry. Healthcare, education, and government historically have not had to deal with significant competition. New York, in particular, has had legislative impediments for for-profit entrants into healthcare and educational services. In the education service area, Governor Pataki’s endorsement of “charter schools” a number of years ago was just one of many examples of an increasing trend towards competition in these industry sectors.
One of the strategies that nonprofit organizations have embraced to respond to this change is the concept of collaboration with other nonprofits to create what is known as a management services organization. MSOs are not a new concept; similar structures have been in place for decades.
And an MSO can mean many things to many people. Group purchasing cooperatives, shared computer services, technology support, and managed-care contracting are examples of the many types of services that can be arranged for and provided by such an organization.
A broad definition of an MSO is any organization that provides goods or services to its members and other customers with the objective of improving productivity and efficiency, and reducing costs. Obviously, this broad definition can apply to a variety of organizations. Regional, State, or National provider associations are examples of quasi-MSOs. MSOs can be nonprofit or for-profit depending upon the mission and objectives of the organizations forming the entity.
However, as MSOs have become more popular in the health and human services sectors, their failure rate has also increased. Their popularity is being driven by changes resulting from:
1) Technology and communications
2) Competition among providers
3) Improved productivity and efficiency
4) Government payer demands for reduction in overhead costs
5) Prohibitive costs of capital equipment acquisition
Based on experience in the design, development, and formation of MSOs, the following 10 factors are critical elements for success in providing such services. As you read this list, keep in mind that, in the final analysis, the MSO’s ability to provide value to its members/customers will determine whether it will be successful. The 10 critical factors are:
1. The organization and its members must share a common vision with a defined purpose, goals, and objectives. Too often, MSOs attempt to provide services in areas where they have no experience or core competency.
2. The MSO must have dedicated, capable leadership. Since MSOs provide services, the leaders must have recognized expertise in providing these services – or else no one will want to buy.
3. The organization must have sufficient capital resources to deliver what is promised in terms of services and bottom-line value to its customers.
4. It must have a customer focus and an ability to measure satisfaction of its customers.
5. The MSO should be a free-standing, entrepreneurial organization. A decision-making process and flexibility are important to an MSO’s success. The ability to react quickly to member needs and market changes will help the MSO achieve success.
6. The MSO must have the ability to grow by adding new members who will use the organization’s leadership talent and generate additional revenues for the MSO.
7. Ongoing education and training for MSO staff is essential. The value to be derived by MSO members is dependent upon the talent pool available either in the MSO or through contractual affiliations with other service providers.
8. There must be an opportunity to provide consulting services to customers to follow up on implementation of issues that may result from MSO consulting services.
9. The MSO must have an ability to provide benchmarking data to its customers. Both internal and external benchmarking data is necessary to provide a competitive advantage to MSO members.
10. The services provided by the MSO must be targeted to meet the needs of what members/customers want. The cost of these services must be priced appropriately.
Participation or collaboration with an MSO is only one strategy that nonprofit organizations should be evaluating to strategically position themselves for success in the ongoing restructuring of the industry.