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Cost-sharing is an attractive option for nonprofits that need to support their operations. Here are six steps that will help make this model work.
Whether an organization is for-profit or nonprofit, it must somehow find ways to support its payroll and operations while creating more value in its business. If you run a nonprofit organization, the challenge is how to do this while still maintaining your nonprofit status.
One of the ways that nonprofit organizations can support their operations is by finding ways to underwrite operations through sharing. Sharing the costs of IT is one option.
How does the model work?
Let's say that you are a large nonprofit in a sector where many smaller nonprofits are doing the same thing, even though they're not really in the same market. A large nonprofit credit union in combination with many much smaller credit unions is a good example. The large credit union has a full IT staff and an online banking system, so it can propose to run IT for the smaller credit unions for a monthly subscription fee. This enables the smaller credit unions to use the latest technology at a price they can afford—and it helps the large credit union underwrite its IT operating costs with the fees.
All of this seems simple. But for it to work, leaders in the larger nonprofits must take several steps.
1: Organizing the new service company
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Often, nonprofits opt to spin off separate IT-for-sale functions into S corporations or LLCs, which are not subject to double taxation (for profits and for dividends) as regular corporations are. In effect, these new organizations are almost wholly owned subsidiaries of the large nonprofit, provided that the large nonprofit maintains a 90% ownership stake in the new organization.
2: Setting up the board of directors
The next step is to define the board of director positions. This should reflect the relative proportions of ownership of all the founding parties. For instance, if the large company controls 90% of the new company and initially has four smaller companies join the organization as customers and as minority shareholders, the four small companies might each obtain a 2.5% interest in the new organization. Board representation should reflect this.
3: Ensuring that you have the bandwidth to operate an IT business
Your own IT staff must have the internal knowledge of systems and services you plan to offer to others. They should also have strong customer care and communications skills. If your staff isn't equipped with this knowledge and skillset, you should wait until you obtain the personnel who do.
4: Verifying software and hardware licensing
If you're licensing a system from a commercial vendor and you hope to offer that system to others, you need to meet with your vendor first to make sure it's willing to let you run the smaller organizations on your license—without demanding separate licenses for each participant, which could become cost-prohibitive. Some vendors are willing to do this. But some aren't.
5: Having a say in the product
Smaller companies that sign on often fear that they will have no input into how the offering will be enhanced—and no assurance that it will continue to meet their needs. A strategy should be developed that enables all participants to have input into product enhancements so that no one is excluded.
6: Adding non-owning organizations
If the new company gets rooted and is successful, it is likely that other organizations will want to participate as non-owner subscribers. Before this happens, the new organization's board should determine how it is going to price and offer its products in a more general market.
Sharing the cost
The opportunities to cost-share are limitless for nonprofit organizations that must continue to find ways to keep themselves funded in a fiercely competitive nonprofit environment. Sharing IT expenses is a good way to do this. The key is developing an attractive product offering and strong product support, while also ensuring that you have the right organizational structure in place for the spinoff to facilitate growth.