Nonprofits Unify and Lower Costs : Group Buying Power Helps Agencies Get a Better Deal
When the Santa Cruz Community Counseling Center Inc. switched health insurance carriers last year, it not only vastly improved medical benefits for its employees, it also cut its premiums by $40,000 annually.
The agency--which helps people with alcohol, drug abuse and other problems--used the savings to give each of its 110 modestly paid employees a $360 annual raise, Executive Director Terry Moriarty said.
Moriarty’s agency got a better deal on its health insurance because it joined the California Assn. of Nonprofits, which was formed in Santa Cruz partly to help small and medium-size charities get better deals from businesses through group purchasing of insurance, office supplies and other needs. The association recently teamed with the Southern California Center for Nonprofit Management in Los Angeles to expand its marketing.
From Massachusetts to California, thousands of charities are discovering that they can save money on everything from insurance to fuel oil when they form a group to negotiate with vendors. Group buying programs in Boston, Philadelphia, Los Angeles and other cities are part of a broader trend among nonprofit agencies to cope with government spending cuts by reducing operating costs.
Discounts on $3 Million
“There is power in group buying,” said James Kalish, executive director of the Washington Council of Agencies, which represents 300 nonprofits in and around the nation’s capital. The council’s members will purchase about $3 million worth of insurance and other necessities this year at discounts negotiated by the council, according to Kalish, a pioneer in the field.
“Group purchasing is part of a general theme of how nonprofits are responding to being increasingly strapped,” said Norton Kiritz, president of the Grantsmanship Center in Los Angeles, a for-profit business that runs training programs for charities nationwide. Kiritz recently began marketing a group dental plan for employees, directors and clients of charities. He plans to expand into health insurance and financial management services.
“There are as many as 340,000 public-benefit corporations in this country with annual revenues of more than $25,000, excluding churches,” Kiritz said, “but, except for the largest, which are solicited by salespersons of every kind, they are not solicited to buy products and services. . . . The entire nonprofit sector generally is not viewed as a marketplace by business.”
“Many businesses treat nonprofits as second-class citizens,” said Robert Kardon, who founded the nonprofit California Assn. of Nonprofits, which is marketing insurance and has negotiated discounts on office supplies and other goods for its members.
“Here we are doing public service, usually at lower wages than people get in government or busi ness, and yet many businesses try to discourage nonprofits from becoming customers,” Kardon said.
Kardon said that while some suppliers routinely give nonprofits a discount solely because of their charitable status, often charities are denied the price breaks and other inducements that small merchants get for doing the same amount of purchasing.
Kardon got to thinking about how charities sometimes get a raw deal from corporations when he was executive director of the counseling center in Santa Cruz.
“I had this lawyer on my board who told me ‘we’re getting taken by our bank. Here we are, in effect, a medium-size business that puts a couple million dollars a year through the bank and yet we are not getting any of the free services they provide to small businesses of the same size,’ ” Kardon said.
Benefits for Profit Makers
So Kardon went to his bank, one of the nation’s largest. Kardon said the branch manager told him that such free services as payroll preparation were available only to profit-making enterprises.
Kiritz said he had a similar experience six years ago, when the Grantsmanship Center was a financially flourishing nonprofit agency with 20 employees and a $1-million annual budget, mostly from fees for training programs.
“We had substantial savings, corporate credit cards, our employees all did their business with that bank, which had seen us grow from not a penny in 1972,” he said. Then the center wanted a $100,000 mortgage on a building that it was spending $150,000 more in cash to buy and remodel. A lending officer rejected the mortgage, Kiritz said, citing only one ground: the center’s nonprofit status.
The Grantsmanship Center then changed banks and got the loan, Kiritz said.
The Washington Council on Agencies’ Kalish said that for his council and some others, group buying is a means to an end and not the reason the councils exist.
“The purpose of our organization is not to do group buying, but to bring nonprofits to work together on a variety of things from advocacy to networking and information,” he said. “Group buying provides a politically neutral way to do that; it is also a carrot to get them to join.”
Political Activism
Cooperative purchasing may also help finance the growing political activism of some charities.
Kalish’s council and similar organizations typically contract with vendors to market their service or product to nonprofits. The council also handles administrative chores, such as collecting premiums from each participating nonprofit agency and sending one check to the insurance carrier. In turn, the vendor pays the council for doing this work.
If the council operates efficiently, the fees it earns can exceed actual costs, leaving a surplus. The surplus can be used to benefit the council’s member charities through such actions as lobbying for favorable legislation and regulations. (Federal law limits charities to spending between 15% and 20% of their budgets, depending on size, on nonpartisan lobbying activities.)
By pooling their bank deposits, Kalish said, charities may also be able to exert influence on institutions such as banks to change their policies.
“Our agencies have revenues of $150-plus million,” said Kalish, a pioneer in group buying for nonprofits. “If we could capture that and go to one or three banks and bring to them $25 million of that amount, imagine what you would do for this city. Years ago that kind of money could have been used to combat (home mortgage) red lining. Now it would be low-income housing development or other issues.
“To me that is a powerful way of producing social good without any expenditure,” Kalish said.
Most Buy Insurance
Most group purchasing involves insurance. Kardon and others said health insurance for employees alone often consumes 7% of a nonprofit agency’s budget.
Moriarty, who runs the Santa Cruz Community Counseling Center, noted that his agency’s $40,000 savings from switching insurance is nearly double its annual allocation from the local United Way. And, by switching insurance carriers, the counseling center was able to get coverage for unmarried partners of employees and get non-traditional health care such as acupuncture and herbalists.
The Massachusetts Council of Human Service Providers negotiated for a group insurance package that cut premiums covering 4,000 employees of Bay State charities by well over $1 million annually, council associate director John McLaughlin said.
“We look for brokers who are sympathetic to nonprofits, who want our business,” said Suzie Pollack, administrative director of the Marin (County) Council of Agencies in San Rafael, Calif. Her council first negotiated for discounts from consultants, then got a major office supplier to give members the same prices it gives the Marin County government.
Not One Bid
The Marin council tried in 1983 to buy a group health plan for its 140 member agencies. “We went to 15 insurance carriers and did not get one bid,” she said.
Now council member agencies can buy health insurance through groups, plan arranged by United Way of the Bay Area. For the last 10 years that United Way has quietly allowed nonprofits the opportunity to buy group health insurance for their employees, but recently it began encouraging charities statewide to join regardless of whether they are United Way agencies.
“Nonprofits have been hit with an economic double whammy,” said Skip Robinson, manager of United Way of the Bay Area’s group insurance trust. “On one side medical costs have gone berserk and on the other side funding has tightened, creating the worst possible time for medical costs to be berserk. What we did was find the the best humane cost-containment stuff proving out in research studies and arrange to offer it.”
United Way in Los Angeles also offers group insurance, but only to member agencies. About one-third of United Way’s 300 members and partners in Los Angeles County participate, according to Lee Stoffer, the local United Way personnel director.
In Philadelphia, the Delaware Valley Council of Agencies does group buying, using proceeds to help finance advocacy. It has also created a network for nonprofits to barter services and equipment, John Selsky, the council resource coordinator, said.
“We publish a directory of resources, with listings such as a community center offering a table-top copier in good operating condition that needs microphones and puppets for use in child-abuse education,” Selsky said. “The directory costs $10 a year and is sort of a loss leader to get agencies to join.”
Kalish said he believes that there may be 50 or more councils of nonprofit agencies operating within a few years as the benefits become known.
For information about group buying opportunities for California organizations that are tax exempt under Section 501 (c) (3) of the Internal Revenue Code contact:
California Assn . of Nonprofits, 397A Coral St., Santa Cruz, Calif. 95060. (800) 345-4226.
United Way of the Bay Area, Group Insurance Trust, 410 Bush St., San Francisco, Calif. 94108. (415) 772-4300.
The Grantsmanship Center, 1031 S. Grand Ave., Los Angeles, Calif. 90015. (213) 749-4721.
