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[1,500 words - 5 minute read]
We are now reaching a maturity in the second age of the internet. Mobile interfaces and fast connections to the web have enabled a proliferation of apps and services, which enable ever greater efficiencies to be embedded into the operations of companies and organizations. Included in this is a new type of business service that assists in the employee management needs of companies. These services include streamlined payroll systems integrated into an online database and portal, management of health insurance and other benefits, and compliance (payroll tax filing etc) with local, state, and federal regulations.
Nonprofit employees fall into two broad categories. First are those that are driven by the particular mission of the organization. These employees have a strong desire to work in a particular field due to their own interest or a life changing experience. This might be a love of music driving them to work for an orchestra’s administration, or a close relative who has been stricken with a terminal disease that led them to work to eradicate it. These employees often gravitate to the program implementation side of the organization's work, and frequently end up in senior leadership roles as they exude passion, and can articulate a vision, for the field. In the performing arts arena, this also includes all of the artists themselves.
The second type of employee is someone who has developed a particular skill set that many different types of organizations and companies need. In this category fall accountants, bookkeepers, finance professionals, marketing gurus, and, relevant for this article, the human resource professionals. Very often these employees also have a desire to contribute to the cause of the nonprofit, but they are far more likely to move from one nonprofit to another during the course of their career. This group present a particular challenge as the job market often dictates that their salaries be more in line with the for-profit world where similar roles exist. In general, smaller nonprofits often seek external organizations to help in this area, hence the proliferation of boutique public relation firms, marketing services, and accounting support firms, often vying for nonprofit clients.
A recent entry into this market are companies that offer the aforementioned employee management services. An early pioneer in this field was Zenefits which started in 2013. Their business model was unique. They supplanted the traditional health insurance broker. Instead of using the referral fee from the health insurance company to pay brokers to scour the health insurance marketplace, they used it to fund the development of an online employee database available for free to their clients. This was an ideal solution for nonprofits. At no cost for the organization, they could continue with the same or similar health insurance coverage and management for their employees, while also gaining a useful online database to manage all of their employees.
While I was Executive Director at the Oakland Symphony, we decided to sign on to Zenefits. There were some key benefits to our small office staff:
The Oakland Symphony had a small staff of eight employees. They would typically be managed through a traditional “manual” payroll system using internally created spreadsheets to track vacation accrual and facilitate collection of hourly employee timesheets. However, the 72 musicians in the orchestra were paid on a “per service” model, meaning that they were only paid when they were asked to work. A musician who was able to accept all of the work offered to them would usually perform eight concerts a year (along with the rehearsals associated with each concert) and would earn in the region of $4,000 to $6,000 per year. To fill out their professional work load, these musicians often have employment contracts with half a dozen different orchestras or educational institutions in the Bay Area. This juggling of multiple contracts results in each concert consisting of 30% of the musicians being hired from the substitute list. Analysis on the musician pool revealed that the symphony usually hired approximately 150 different musicians annually, and needed to onboard about 20 musicians each fiscal year.
The problem with current benefit and compliance models
We ran into some early hurdles. Zenefits had already established partnerships with a number of different payroll systems to integrate directly to their portal. However, our payroll service, ADP, had not yet signed onto Zenefits’ system. (They had plans to develop their own proprietary system which is now available.) Our finance director had a long standing relationship with their ADP rep so was not willing to switch payroll system. This meant that payroll information, including PTO (Personal Time Off) was not being tracked in Zenefits.
After Zenefits went through a major shake up of their founding leadership team -- the result of a litany of legal actions taken against them by various state entities -- their business model changed to a fee service, with the client paying per employee. This new model presented a challenge for the symphony orchestra employment model. The volume of employees on the payroll far outstripped the typical business that Zenefits served. It was disheartening to learn that we would now be restricted to the diminishing number of “free” services that Zenefits provided for their health insurance broker clients.
The effect of this policy change meant that the annual cost of a part-time musician employee who was not receiving any health insurance support or other benefits that Zenefits offered, had the same cost as a full-time employee who would rely on Zenefits’ services far more frequently.
There are a number of solutions that Zenefits could explore to resolve this challenge.
To show the difference in cost, I have put together an example comparing a typical small orchestra versus a large orchestra. Of course, the small orchestra model still has the same number of performing musicians on stage, but they will perform far fewer concerts and have a smaller administrative staff. In this example, the small orchestra employs 164 people, but this is the full-time equivalent of 24 employees. A larger orchestra has far more of their employees working full-time.
Zenefits has two rates. The Standard package costs $5 per employee per month, and the Advanced package, which includes the more useful offerings such as Time-off Tracking and Compliance Assistance, costs $9 per month per employee. Using the employee numbers in the table above, the difference in cost soon becomes apparent. I have compared the cost of the current Zenefits packages to my proposal No.2 above.
In both packages, a small orchestra will be paying 82% of the cost a large orchestra would pay, but only has 14% of FTE’s on payroll.
Employee management services offer great potential to dramatically improve efficiencies in HR practices for nonprofits. These resource strapped organizations constantly seek ways to reduce costs to enable more and more of their precious dollars raised through fundraising campaigns, to go directly to the services they offer. The fact that the market place for employees with transferable skill sets are often higher than those providing direct services to the mission of the organization adds additional pressure on organizations to find ways to minimize these costs. Companies such as Zenefits are on the cusp of providing a service and product which could be transformational to the nonprofit industry.