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Tips and Answers
to Your Questions
Financial Issues
How does an MSO make money?
An MSO (management services organization) is a corporation created
and controlled by two or more parent organizations and intended to
provide administrative services for the parent organizations. Typically,
the parents wish to share financial management, human resources, and/or
technology functions, which they believe can be provided more efficiently,
and therefore more cheaply, if they are done jointly.
An MSO supports itself by charging the parents for its services. For
example, let’s assume three parent nonprofits create an MSO to
offer financial, human resources, and information technology services.
Prior to making this decision, an analysis shows that the three organizations
spend a combined $250,000 on performing these functions separately.
Further analysis shows that by combining the functions in an MSO the
parents would have three choices: spend a combined $200,000 (save $50,000)
to receive a somewhat lower level of services; spend the same amount
- $250,000 - to receive a little bit higher level of services; or spend
$300,000 ($50,000 more than currently) to receive superior services.
The choices these parents make determine how much the MSO can accomplish.
Foundation support can help with start up costs and ease the transition,
but ultimately, the MSO will need to survive on its own revenues.
Once the MSO is set up, it may find that there is a market for its
administrative services beyond the initial parents. With the parents’ permission,
it may market its services to other nonprofits. These would not have
any role in controlling the MSO, but would merely be paying customers.
It is likely that the infrastructure required to meet the parents’ needs
will initially have some excess capacity. Thus, for little or no additional
cost, the MSO may be able to sell its services to a few other nonprofits,
thus generating revenue that will offset the fees charged to parents.
In the ideal situation, the MSO could generate enough outside revenue
to eliminate the need for the parents to subsidize it.
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