The Risk of Underinvesting in Fundraising

In this webinar, Anne Wallestad of BoardSource & H. Art Taylor of the BBB Wise Giving Alliance will share a new framework for measuring fundraising effectiveness designed to help boards and staffs have informed conversations about the importance of a well-balanced fundraising strategy.

Full Transcript:

Steven: All right, Art and Anne. My watch just struck 1:00. Is it okay if I go ahead and get this party started?
Anne: Absolutely.
Art:Sure.
Steven: All right. Cool. Well, good afternoon, everyone, if you are on the East Coast, and good morning, I should say, if you’re on the West Coast or somewhere in-between. Thanks so much for being here for today’s Bloomerang webinar, “The Risk of Underinvesting in Fundraising: The Conversation Boards are Not Having About Fundraising Effectiveness.”
And my name is Steven Shattuck. And I am the Chief Engagement Officer over here at Bloomerang, and I’ll be moderating today’s discussion as always. And just a couple of housekeeping items before we get going here, just want to let you all know that we are recording this session. We sent out the slides. So if you didn’t get those, or if you’re going to need the recording later on, have no fear. I’m going to get both of those things in your hands this afternoon.
So if you have to leave early, or maybe you want to share this session with a board member perhaps or someone else at your organization, we’ll get you that recording this afternoon, I promise. Most importantly, as you’re listening along today, please feel free to use that chat box right there on your webinar screen. We are going to save as much time as we can for questions at the end. So do not be shy. Don’t sit on those hands. Chat in your questions. We’ll try to get to them. You can also do that on Twitter. I’ll be keeping an eye on the Twitter feed as well.
And one last bit of a technical note, if you have any trouble with the audio through your computer speakers, we find that the audio by phone is usually a little bit better. So before you totally give up on us or throw your computer out the window, try dialing in by phone if you can, if that’s comfortable for you, if that won’t disturb a co-worker, of course. There is a phone number in the email for ReadyTalk that you can dial in to. That email went out about an hour ago. So check that out if you have any trouble.
If this is your first Bloomerang webinar, I just want to say an extra-special welcome to all you folks joining us. If you don’t know Bloomerang, we are a provider of donor management software. And if you’re interested in that or just kind of want to know what we have to offer, check out our website after the session ends. Don’t do that right now, because you all are in for a treat from the session. But we would love to get to know you afterwards if you have any interest in software maybe in the coming year.
But for now, I am so, so excited to welcome two very, very prestigious guests. We actually had the all-hands company meeting yesterday at Bloomerang, and I always talk about upcoming webinars, and I told everyone that this is a session that they need to watch. So I think we have quite a few Bloomerang employees listening in as well as hundreds of people across the country, because, today, we have Art Taylor and Anne Wallestad joining us. How’s it going, Art and Anne. Thanks so much for being here. You doing okay?
Anne: Absolutely.
Art: Yup, great.
Anne: Thanks so much for having us.
Steven: It’s my pleasure. This is a treat for me. It’s a big deal to have these two on. If you don’t know Art and Anne, you’ve got to know them. I’m going to brag on both of them here really quickly. I’ll start with Anne. If you don’t know Anne, she is the President and CEO over at BoardSource. And BoardSource is such an awesome resource. Check out their website after the session. She has over 20 years of leadership experience in the nonprofit sector.
And since she has taken over at BoardSource, they have been recognized as a finalist for the Drucker Prize for Innovation, which is a really big deal if you know anything about the Drucker Prize. And they were also named the Best Nonprofit to Work for in 2016 and 2017. Maybe they are running for 2018. I bet they are. She herself, Anne, has been honored as one of the NonProfit Times’s Power & Influence Top 50. So in the top 50 of the nonprofit sector.
So to have Anne alone would be a big deal, but we also have Art Taylor here. He is the President and Chief Executive Officer over at the Better Business Bureau’s Wise Giving Alliance, which, if you’re not familiar with the BBB Wise Giving Alliance, they were formed at kind of a merger between the National Charities Information Bureau and the Council of Better Business Bureaus foundation. So really awesome organization.
And they do a lot of really cool reporting. Actually, they put out over 1,400 reports . . . or a reports of over 1,400 the nation’s most talked about charity. So kind of the leading names in the sector. So they are here to talk all about fundraising effectiveness, kind of a different way of looking at it, a way that, I’ll kind of spoil it, but we at Bloomerang really definitely support. So it’s great to have them.
So I have already taken up way too much time, Anne and Art, from you. So I’m going to hand things over to you. So take it away, my friend.
Art: Well, great. So I think we agreed that I was going to talk about a few of the slides, and Anne was going to really get into the nuts and bolts of this new tool that we collaborated to develop. And we think it will be very interesting and helpful to you as you talk to your boards about fundraising. So let’s go to the first slide and just see what’s there.
So, you know, we talk a lot about what is the board’s role. And, you know, we can easily see that boards should be raising money. I think we all hope that our boards will be very active when they go out to raise money. And, of course, that requires that they really understand what they’re raising it for. But when we think about fundraising, we want to make sure boards are certainly doing it in an ethical way, that they are taking charge of the practices that the organizations are using when they go out to develop funds, and that they’re thinking about how their organization should grow.
But more importantly, are they really thinking about how the organization or how much money the organization has to support its organization? And, you know, you really want boards to think about that when they are out raising money. So, you know, they should be thinking about the practices as well as the goals when they are out raising money. And that does require a certain degree of measurement when they’re going to do that. We want to talk about measurement as we get into this. So next slide.
Now when we start talking about measurement, what is one of the questions that generally comes up, right, on the cost of raising money. How much you’ll be spending to actually raise the money that we do. And I will tell you that, as a monitor of charities, this is something that we pay some attention to because we want organizations to be efficient in how they raise money. But it’s also important that organizations pay attention to the fact that it costs money to raise money. We want to make sure that there is room for organizations to actually do that. So let’s go to the next slide.
Now a lot of the metrics that we’ve been using so far so to tell us, you know, about the cost of raising money. You know, we say, “Oh, it shouldn’t,” in our case, “it shouldn’t take more than 35 cents to raise a dollar.” And if an organization is living within that boundary, then we kind of feel that those are reasonable expenditures. However, if you talk to some boards and even some donors, they will tell you that the organization is some in some ways failing if it’s spending more than 10 cents to raise a dollar, or even more in some cases.
And we also see that charities can be their worst enemy when it comes to this as well. They will, in their appeals, tell donors that they’re great because they’re only spending, you know, such a small amount to raise money. This usually works, unfortunately, because when people see that number, they think it really means something. And they seem to be more inclined to support organizations that have those lower amounts. But we know also that those numbers don’t tell us the whole story. So let’s go on to the next one, Anne.
Sometimes you’ll see the media even pick up on this. And you probably have all seen the America’s Worst Charities edition, “Pennies for Charities,” where does your money go? And all of these sort of create a lot of misinformation about how charity really operates. And it also pushes charities to be in a situation where they’re not thinking about spending money for growth, and they’re not thinking about whether they’re actually raising the kind of money that they need to fulfill their mission. They’re more thinking about doing it as efficiently as possible, and that could actually leave a lot of money on the table.
And some people have said to me, you know, “If you want to be the only donor to an organization, then insist that, you know, they keep their cost of fundraising very low. If you want to be the only donor, then insist that the charity keep its funding expenses really, really low.” But this is not what charities really need to be doing. Charities really need to be investing in their fundraising. So how do we measure the right amount of investment? Let’s go to the next slide.
So we got together, under Anne’s leadership, I should say, to begin thinking about this. And due to Anne’s I think tremendous leadership on this, we started thinking differently about how boards should begin the conversation about fundraising costs and about measuring those costs in a more sensible and reasonable way. I will also congratulate our colleagues at AFP and GuideStar as well who were very active in helping Anne and BoardSource shape what has turned out to be I think a really helpful and compelling story for boards to begin telling about their fundraising expenses. Next slide.
So as we talked about this, we began thinking about three, maybe four really important points that, ultimately, it’s about what an organization accomplishes. And that’s really what boards and all of us should really be focused on. Is the organization helping to move a mission? Is it really impacting society as a whole? And we want to make sure that all of our work is really focused on that primarily. We also want to make sure that funders and donors understand that it’s their support that’s really helping to make that impact possible.
And lastly, it’s reasonable for nonprofits to care about how efficient they are in their fundraising. But that’s not the only thing that they should be concerned about. In fact, as I mentioned earlier, we have standard that requires organizations to spend no more than 35 cents to raise a dollar. And I will tell you that very few organizations fail to meet that standard among the groups we evaluate.
However, we find that far more will miss one or more of our other standards. And so if you’re only focused on the metric around fundraising costs, you’re going to miss quite a bit when it comes to how ethical an organization is. So this really isn’t even a reliable metric to determine how ethical an organization is. So I wanted to point that out just so that you could understand what was driving us as we began thinking about these new ways of looking at Measuring Fundraising Effectiveness. Next slide.
Anne: Great. So I think you’ve teed me up perfectly, Art. Thank you so much. As Art shared, you know, when we think about, well, if cost of fundraising isn’t the best or the only or even the most important way to measure fundraising effectiveness, what would be. And that was really the question that we asked ourselves as a collaborative, is what’s a better way? Because it’s not okay to simply say, “Well, the cost of fundraising measure isn’t the only thing that matters. So let’s just, you know, kind of end there.” We wanted to offer an alternative.
And particularly, as we thought about how can we help boards really wrap their heads around what’s most important, we knew that it was important to have an external framework and that it would be valuable for organizations like BBB Wise Giving, GuideStar, AFP, and BoardSource to come together and work on a common framework that boards, donors, and others can really use and leverage as a way to reflect on fundraising effectiveness.
So you see in front of you a slide that outlines what we consider to be the three components of Measuring Fundraising Effectiveness in a more holistic, responsible, and I loved your word, Art, sensible way. So first and foremost, it’s about total fundraising net. Do you have enough money to fund programs? Do you have enough money to do your organization’s critically important work?
If you can’t say yes to that, if the numbers don’t support saying yes to that, then nothing else really matters. And so we think that’s really the starting point in terms of understanding fundraising effectiveness and board-level conversation about fundraising effectiveness.
Second is about a responsible balance of risk and reward. And there are two components to that. First is cost of fundraising. So, again, we don’t think that cost of fundraising is irrelevant. We just think it’s an incomplete picture. And that by focusing just on it, we’re missing that more holistic and sensible approach.
And third is the unique contribution of this Measuring Fundraising Effectiveness framework. It’s something that we created and talked about as the dependency quotient. And the dependency quotient is a measurement that seeks to answer the question, what percentage of our budget would be unfunded if we lost our top five donors?
And when I present this framework to live audiences, there’s usually an audible gasp after I ask that question, you know, as folks think about, “Oh my gosh, what would our organization look like, what would our annual budget look like, what would our reality be if we lost our top five donors?” And, you know, those of you who are fundraising professionals on the line, that is a reality that, you know, you probably think about as a part of your daily work and your annual fundraising planning.
Unfortunately, there are a lot of boards who aren’t asking themselves that question and who aren’t thinking about that. So as we thought about how do we articulate the risk of under investing in a thoughtful robust fundraising program, it was really that dependency quotient that we thought captured that risk. And that together, if you have enough money to fund programs and a responsible balance of risk and reward, that’s really the definition of a healthy fundraising program and healthy fundraising metrics.
So just building on that a little bit, one of the tensions that we know is very, very real is that, in general, I don’t want to say always, but in general, there is an inverse relationship between the cost of fundraising and the dependency quotient. So what you see here is a list of some of the most common fundraising tactics and generally where they tend to be on a spectrum of high versus low cost of fundraising and high versus low dependency quotient.
So just using one example, direct marketing as a strategy tends to be very broad-based. It is a kind of cornerstone of a program that is working to acquire and cultivate smaller dollar donors to an organization. That is really expensive typically to deliver. So high cost of fundraising. But in terms of the risk of being dependent on a few donors, very, very low. So you see that on one end of the spectrum.
On the opposite end of the spectrum, you see major gifts and planned giving. So it tends have much lower cost of fundraising when you’re talking about major gifts no matter how your organization defines that, whether that’s $1,000, $5,000, $100,000, much lower cost to raise those dollars but much, much higher risk in terms of the potential dependency on the donors.
So as we think about how can we help boards have the right conversation about fundraising metrics and fundraising effectiveness, we think this concept of this inverse relationship or this relationship between cost of fundraising and dependency quotient is really, really important.
So the aha for board members when we introduce this framework is that low cost of fundraising may come at a cost, which is really different from the way that, you know, the media or donors or, you know, so many of us typically talk about cost of fundraising. It’s put forward as though, you know, that’s the goal, that’s the kind of main thing that a fundraising program is trying to achieve.
And going back to that concept of a responsible balance of risk and reward, we want to kind of call that into question and say, “No. In fact, there can be a downside to having a very low cost of fundraising. And that downside is that your organization might be in a situation where you are overdependent on a small group of donors in a way that is putting your organization at risk.”
Now I want to be careful here. And I am not trying to say that if you have a fundraising model or a business model where you are reliant on a few donors or a few grants that that is always or definitely a challenge or a risk, you know. There are organizations where, just by nature of the work that they’re doing and the relationships that they have with their core funders or donors, where that might not be a risk.
But the point, at least at the board level, is that the board needs to be positioned to have that conversation and to reflect on those questions. You know, how confident are we about the long-term investment of this particular donor? How well have we mitigated against the risk if one or several or all of our top donors made a different funding decision next year? Those are the conversations that we want to encourage boards to have as they talk about fundraising effectiveness and really stay away from just looking at cost of fundraising.
So to support those conversations as a part of the Measuring Fundraising Effectiveness initiative, we’ve created a set of resources for board. And I would say boards in partnership with staff, and in particular, development and fundraising staff, to guide those conversations. So you can find at BoardSource.org, and I should say this is all free and open source, you can find a description of this framework. And we’re going to talk some more about it, but I just want to put out there that, you know, full description and additional information of this framework and the thinking behind it is available.
There’s an Excel template that helps organizations actually put in their numbers for their fundraising program to help create those measures and guide conversations. There’s a discussion guide that talks about some basic fundraising concepts in support of building board fundraising literacy.
And there are actually PowerPoint decks to help support that conversation, whether in the boardroom or in the development committee or resource development committees conversation, and to really support fundraising professionals or EDs and CEOs as you’re having this conversation so that, you know, not only you have tools and templates to do that but also that you’re able to rely on and point to the expertise and kind of neutral third-party nature of BoardSource’s expertise along with BBB Wise Giving and GuideStar and AFP, respected organizations that hopefully enable you to have a really different and thoughtful conversation in the boardroom as a fundraising professional, as a CEO, or ED.
So I want to talk a little bit about some of the things that that discussion guide tees up for board conversation. And the first is that fundraising strategy is unique to an organization. It is not one size fits all. And I’m not going to talk a lot about each of these concepts. There is more information on the website.
But just generally, one of the things that we see in our work at BoardSource is that a lot of board members are really unfamiliar with fundraising, whether because they work in for profits or they’ve never served on a board before, you know. And they benefit from understanding that what works at one organization does not necessarily work at another organization. And there’s not necessarily, you know, an exact science or a formula for what a good fundraising program is or how it should work.
One of the questions we get asked a lot is, you know, what should the ROI on any particular fundraising tactic or even, you know, fundraising staff members, what should the ROI be, or how should we be thinking about it, or what can we expect? That’s, as you all probably know, a really impossible question to answer without understanding what type of organization, where in their fundraising lifecycle they are, what their history and legacy is in terms of where they’ve been successful and where they’ve faced challenges.
So there’s a lot of nuance that goes into fundraising strategy. And I know I’m preaching to the choir here, but board members don’t necessarily understand that. So we think that’s a really important place to start.
I see that there’s a question about the URL. All of the downloads are available at BoardSource.org. So you have our organization name. You’ll have these slides in the recording. But it’s BoardSource.org.
The other concept or next concepts that I want to introduce that we talked about is that different fundraising tactics can play different roles within an organization. You know, so all fundraising tactics, going back to that slide that we were looking at in terms of, you know, direct marketing, major gifts, annual giving, special events, sponsorship, grants, they might play different roles in an overall fundraising strategy. And so it’s important for board members to understand that they’re not all doing the same thing or set up to do the same thing.
And just kind of drilling down on that a little bit, Art knows this, but I wrote an op-ed a couple of weeks ago in “The Chronicle of Philanthropy” that was reflecting on the report and database that Art mentioned, “Pennies for Charity.” And one of the challenges with that database in particular is that it’s not acknowledging this reality of different fundraising tactics playing different roles.
So this is a lot of information on a slide. But what you’re seeing here is a comparison between two organizations, and this is hypothesized, who look really similar if you look at, or look exactly the same, if you look at the first two rows. But they look really different when you start to see what else is happening within their fundraising program.
So Organization 1 has a lot going on that they’ve built into their fundraising strategy and is really building on what has been done by paid professional fundraisers. Organization 2, very different scenario. The challenge was something like “Pennies for Charity” is that it looks only at individual tactics, and it’s only looking at what’s being done by paid professional fundraisers. Which means that Organization 2, which is spending 98% of what it’s raising to pay for fundraising looks exactly the same as Organization 1 that’s in a completely different scenario.
And I think this really helps underscore why boards need to understand that different fundraising tactics play different roles and that the point is about how the strategy comes together and how, overall, an organization is set up to ensure that it has the dollars that it needs to fund programs and that it has that responsible balance of risk and reward.
The third concept that we talked to boards about is that some tactics have immediate payoff, and some take time to build. So it’s not just, you know, that direct marketing is about bringing new people into an organization and that major gifts is about cultivating deep relationships with individual donors who have a high capability to give larger gift amounts. It’s also that different programs take time to build.
So a major gifts program is unlikely to be the thing that you can do immediately on Day 1 when you haven’t built a donor program. And so your major gifts program may be something that’s built once you have a well-established, you know, direct marketing or annual giving program. These are concepts that it’s really important for boards to understand and for board members to think about as they’re thinking about an organization’s fundraising strategy.
And I should say here, the point of this initiative and the point of sharing these concepts is not that we expect for members to be fundraising strategists themselves or to know more about fundraising strategy or anywhere near as much about fundraising strategy as fundraising professionals.
But we do think it’s really important for board members to have a high-level understanding of key concepts in fundraising strategy so that they can play that important strategic and fiduciary oversight role as board members. So the point is not to replace the expertise or compete with the expertise of fundraising professionals but to partner in a way that is more helpful, more useful, and better informed.
So the final concepts that’s really important for board members to understand is that some tactics depend on each other. So going back to that example that I was sharing about the hypothesized two organizations and the “Pennies for Charity” report, one of the things that that I talked about in my op-ed is that, you know, it’s important for boards, for donors, for all of us to understand that, you know, work being done by paid professional fundraisers often feeds the overall health and growth of a larger fundraising strategy.
And if you try and excise pieces of a fundraising strategy because they have a high cost of fundraising without understanding how those tactics are feeding the broader strategy, boards can push for or make really poor, short-sighted decisions about fundraising strategy. So as fundraising professionals, it’s really important that we’re helping boards understand those dynamics and that we’re talking with them about those interdependencies so that they’re not thinking about things as self-contained, separate tactics.
You know, so thinking about how is our major gift program sort of building on or supported by our events program. How is our corporate sponsorship program reliant on what we’re doing in terms of events or programs that might create those sponsorship vehicles. Board members don’t necessarily see those connections on their own. And it’s really important as fundraising professionals and executives that we help them see those connections rather than look at things in a vacuum.
So one of the coolest things as a part of the Measuring Fundraising Effectiveness initiative is that PowerPoint deck that I mentioned. And what’s really great, in my opinion, about that is it makes it very easy for boards to ask themselves in partnership with executives and fundraising professionals the right questions based on their Measuring Fundraising Effectiveness measures. So based on their particular combination of cost of fundraising and dependency quotient, their organizational balance between risk and reward.
And so just to share four possible questions and how they’re different, depending on that, an organization, a board that is sitting, having a conversation about well what does it mean that we have a low cost of fundraising and a high dependency quotient. As I was sharing before, that board, that organization, that partnership between fundraising professionals, executive, and boards should really be focused on how solid is our pipeline of big donors both in terms of current donors, how much can we count on and rely on this support, what conversations have we had with them about the likelihood of continued support, what commitments have they made, or, you know, where are we nervous. So that’s really the conversation or types of questions that an organization in that scenario might want to ask itself.
Similarly, but from a different side, if they were an organization that had a high dependency quotient and a high cost of fundraising, they should be asking themselves, well, what’s not working here in terms of what are we investing in that might not be paying off. What do we need to understand about where we are in the lifecycle of these investments? You know, if we’re in Year 1 of a major new strategy and it’s expensive to invest here and it’s not yet paying off, that might be perfectly appropriate to have both a high dependency quotient and a high cost of fundraising. But there also might be a scenario where it isn’t.
So these are the kinds of questions that that deck and the Measuring Fundraising Effectiveness initiative is teeing up for boards, and hopefully, is a helpful and powerful resource to staff, both executives and fundraising professionals, to guide that conversation and to focus it in a way that really looks at that question of do we have the right balance.
So a few other points before we move into your questions. And I would encourage you to start thinking about where you want to go deeper or where things aren’t quite making sense to you. A few other points that we would mention in terms of ways to build board fundraising literacy.
So first and foremost, talk about fundraising as an essential investment in your organization’s mission and work. Way too often we, and you said, Art, sometimes we’re our own worst enemies. We reinforce this idea that cost of fundraising is the end-all be-all and that expenses or investments made in fundraising are sort of a necessary evil.
Let’s not talk about it that way. That reinforces this idea that it’s bad to invest in fundraising, and that’s just not the case. It’s essential to invest in fundraising. So how do we help boards understand that better? And part of it is about the way that we talk about fundraising and talk about fundraising as a way to drive our organization’s mission and work.
One thing that can be really helpful with the board is to encourage them to think about a fundraising strategy as an investment portfolio. So different tactics playing different roles, different tactics having different balances of risk and reward. Often board members are very familiar with financial frameworks, and we’ve found at BoardSource that that can be a really helpful comparison or analogy to make and that board members really understand. Okay, so we’ve got some things that are about long-term payoff, and we’ve got some things that are our, you know, kind of solid performers, and understanding that it’s about having the right mix in the right moment for the organization.
Another thing that’s important to remind board members is that it’s not just about what they can see as a board member. And what I mean by that is, you know, sometimes board members, or typically, board members are more involved in some types of fundraising and much less involved in other types of fundraising.
So board members tend to be quite involved with things like major gifts and special events. They might be somewhat involved in annual giving. They tend to be much less involved in direct marketing, whether that’s telemarketing or mail or email. They tend to be less involved in, I already mentioned annual giving, but planned giving, they may not be as involved. It’s different in different organizations.
But helping to remind them that there are pieces of the fundraising strategy that they may be less familiar with, but that doesn’t necessarily mean that those things are less important in terms of the organization’s overall success and its overall fundraising strategy. And I would say, in particular, that’s important when you’re talking about the interdependencies between different fundraising tactics.
Fourth, it’s really important that we report on fundraising results holistically instead of tactic by tactic. And I would say that’s important both with the board but also with donors and the public so that we’re not encouraging organizations or donors, board members to think about, well, what did this special event raise and what did it cost to have this special event, or what did this particular fundraising mailing raise and what did it cost to do that, but that we are reinforcing the idea of an integrated and cohesive fundraising strategy by talking about those things and that performance in aggregate.
And then finally, and, Art, you made this point really clearly, try to avoid using your percentage to programs as a talking point. It reinforces the idea that cost of fundraising or percentage to programs is a proxy for organizational impact when it is presented that way, and particularly, when it’s presented on its own. So try to avoid reinforcing that by not having that be your headline in terms of how you’re talking about your organizational success.
So with that, I’m going to go ahead and pause in terms of the presentation and turn it over to Steven to invite your questions, feedback, places that you want to go a little bit further or deeper.
Steven: Yeah, that was awesome. So first, we should thank you, Anne and Art, for taking time out of your day and sharing this information philosophy with us. This was really awesome to have you both here. And yeah, like Anne said, we’ve got some time for Q&A. I’d say 12, 15 minutes or so. So if you’ve been sitting on your hands, don’t be shy. Send us your questions because we got two experts here obviously that are willing to hang around and answer them.
Maybe I get things kicked off with my own question if that’s okay with you two. I’m kind of curious, where do you think this came from, this idea that the cost of fundraising is the metric? Because, you know, before people started kind of speaking out about it, it really was, you know, kind of the metric. And, Anne, I think you mentioned that a lot of board members come from the for-profit sector where that sort of measurement, you know, might make sense in a lot of context. Do you think that maybe board members from the corporate sector kind of drilled this? Or what’s your experience? I mean, you’ve been in the sector a long time. Where do you think the idea kind of came from?
Anne: Well, I have some thoughts, but I actually think, Art, that you might be even better positioned to answer that.
Art: Yeah. Sure. We did some research on this. To our best understanding, a lot of this came after the early days of direct mail and direct response fundraising when there were some bad actors out there that sort of, you know, took advantage of people. They were raising money using those tools, direct mail and telephone solicitations. And what we discovered was that when people really felt they were being abused, they would go to the state regulators and see if there was some redress for what they were experiencing.
And what state regulators would do is certainly go after those organizations. And many of them began instituting laws in their state to keep charities from spending too much raising money. Some of them actually had prescribed percentages. And if an organization spent more than that percentage on fundraising, then they wouldn’t be allowed to solicit in that particular state.
Some years later, three Supreme Court cases struck down those state laws. And so organizations were free once again to spend whatever they wanted to on fundraising. But of course, the cat was out of the bag, you know. People were now expecting charities to spend small sums on fundraising. And the charities themselves realized that they’d be better off with their donors if they spent less.
And of course, no charity executive wakes up early in the morning thinking, I want to spend as much money as possible on fundraising. But you do need to spend some. And I think the important thing here is that even when the state charity regulators had these laws, the laws were to try to combat fraud, you know. They were trying to stop really bad actors from defrauding people. They weren’t intended to determine whether an organization was effective.
But over time, these metrics began to not only measure fundraising but they began to, in people’s mind, determine that an organization as a whole was more effective if somehow they had low fundraising or low administrative costs. So you can see that these percentages are being, you know, really abused and misused particularly as it relates to administrative costs, and to some extent, fundraising as well.
Steven: Yeah, that makes a lot of sense. Any further thoughts, Anne? I know you’re involved with this too.
Anne: Well, I completely agree and appreciate with what you should use shared, Art. So thank you. I knew you’d be better positioned to provide that context. The only thing that I would add is just a couple of thoughts. One is I think that financial metrics, you know, are important and that people understand them. And so, you know, while they are important, it’s easy to try and focus on, you know, kind of real numbers more than, perhaps we should all of the time. And that’s very honestly part of why we felt it was important to develop a framework so that there was something that could be a real metric that would be more helpful.
I also think that that’s related to the fact that that sometimes in the nonprofit sector, there’s either a lack of or significant nuance around impact metrics. So we say that the most important thing is whether an organization is having an impact. But for a lot of organizations, that can be tough to articulate. And certainly, it’s not easy from the donor perspective or from even maybe the board’s perspective to use impact measures as a way to compare two organizations.
And that really speaks to, I think, a final thought that I would add, which is I just think, generally, as a sector, we are so donor-oriented in the way that we think about things. And, you know, Art, you’re absolutely right in terms of regulators. And of course, that is regulator’s role in some ways at least is to think about protecting donors as consumers. But that is not the reason that the nonprofit sector and individual nonprofit organizations exist. We don’t exist to serve donors. We exist to do our work and fulfill our missions.
And so when we get that kind of upside down or lopsided and focus so much on donors, that’s when you start to get into a place where it’s about following a donor’s dollar through an organization in terms of thinking . . . instead of thinking about is this organization having an impact, and are they operating in a way that is smart, strategic, and responsible.
Steven: Yeah, I was going to ask you about that, Anne, because it seems like, you know, donor-centricity is kind of a becoming a really big topic, maybe starting last year, maybe even a year before, and now today. And it seems like maybe some . . . There’s been a lot of people who say maybe we’re taking that a little too far and focusing too much on that.
So, you know, I know you said what you just said, but I’m wondering if you could comment on that, you know, particularly. Because it seems like, you know, curating donors is good, but if it comes to the expense of the people we serve, that seems problematic. I think that’s kind of what I heard you just say.
Anne: Yeah, I mean, I think there’s some nuance there. And I should mention that, you know, my background is as a fundraiser. So I know quite a bit about fundraising strategy because of that first-person experience in a number of different organizations running fundraising programs.
So being donor-centric as a fundraising professional, as a fundraising team, means one thing. You know, that’s about good stewardship and good cultivation and good relationship-building and being respectful and being interested and curious and, you know, thoughtful and strategic about the ways that donors are brought into the organization and that that relationship is cultivated over time. So in that way, I think donor centrism is not just good but essential.
I think what’s challenging is when organizational strategy is donor-centric and when an organization is prioritizing the donor first in terms of the way that it’s thinking about what’s important for it to do. And from a kind of macro perspective, when as a public or a society or donors is looking at organizations and kind of why they exist or what purpose they serve, who their stakeholders are when we are focusing so much on the relationship between the donor and the organization that we are forgetting about the relationship between the organization and its mission and the people and communities it serves.
Steven: Yeah, that makes perfect sense. I love it. Since we’ve got this slide up about the dependency quotient, we had a question from Janet specifically about grants. And I think you could probably lump sponsorship into this question as well. And I know you touched on this a little bit, Anne, but should we treat money from individual donors different from those that are maybe corporate or grant-making organizations when we talk about the dependency quotient, or should it just be all . . . it’s all revenue and kind of the source of it doesn’t really make that big of a difference? Should we treat grants differently perhaps?
Anne: So we talk about the dependency quotient as really trying to look at the number of decisions. So if five decisions were made differently, you know, our top five sources of revenue at a decision level, what would that look like? So there is some nuance there. I would say you wouldn’t want to treat an event like one decision, but you would want to treat a grant as one decision. So, yes, we would say you should be inclusive in terms of the sources of funding but that the unit level is the number of decisions.
Steven: That make sense. Here’s one from Diandra.
Anne: How many people or institutions, you know, changing their mind.
Steven: Yeah. Speaking of number of people, Janet is curious if the number of fundraising staff should be part of the equation. Is there any correlation between staff, you know, quantity of staff and the fundraising goals in terms of effectiveness? Should we look at how many people are on staff in any way, or is that sort of sort of irrelevant?
Anne: So it’s not irrelevant, but it’s really difficult to benchmark. So this is a little bit what I was talking. This is my opinion. You know, what I was talking about before. So if I were working with an organization or talking with a board about their fundraising strategy, and this question about, you know, kind of personnel and what expectations there should or shouldn’t be, you know, I’d want to understand, well, what types of fundraising tactics are you using. Because the personnel or staffing plan for a fundraising strategy depends on which tactics you have. You know, a major gift officer is not the same as a special events person is not the same as a person that runs your direct mail program.
And I say this with the personal experience, and probably lots on the line share it, of, you know, there are lots of single person development shops. And I was one of them early in my career. So I understand that in some organizations, you do have to do everything. But when you’re in a place where you have multiple staff persons understanding which tactics are planned or existing for an organization is a part of what that staffing plan should be.
It also matters where in the kind of growth or development of the fundraising strategy and individual tactics an organization is. You know, so you might, if you’re just building a major gifts program, you might have one person that is a major gift officer. If you have a well-developed major gifts program, and it’s not just about acquiring new major donors or finding new major donors, it’s also about stewardship of existing donors, well, you’ll need more.
So it’s really tough to answer, but there are good, smart questions for boards and executives and fundraisers to be asking about staffing plans. So it’s not that it’s irrelevant. It’s just really tough to answer without context.
Art: I would just add to what Anne said that organizations need to first think about feasibility. And while we would love for every organization to be able to execute on every possible tactic, the reality is that some tactics do not work well for certain types of organizations and certain types of missions. And so I think it’s really important for boards to engage at the level of feasibility.
And, you know, if it’s determined by the board and the staff that a particular tactic is highly feasible in terms of the results that it could produce for that organization, then you may want to invest more in that. But if it’s lower on a feasibility scale, then you probably want to invest less. And that may also spill over into how you’re deploying staff. Just something to think about.
Steven: That makes sense. Art, while I’ve got you, would you mind telling folks about the Overhead Myth letter and what that was all about. That’s kind of where I had my first introduction to you. And since it’s been, I think maybe five years since that first went out, I’m wondering if you wouldn’t mind just kind of talking about the story behind it for folks that might have missed it.
Art: Well, sure. The Overhead Myth was a collaboration between Wise Giving Alliance, GuideStar, and Charity Navigator. The three organizations came together because we are concerned that organizations, and more importantly, individuals were spending too much time worried about, you know, how much money an organization spends on overhead.
And, you know, by overhead, you could probably, you know, mean a lot of different costs. But we were primarily focused on non-mission-related costs, which would also include fundraising now. In my mind, everything is mission-related. But, you know, in a world of 990s and tax returns and audit reports, these costs get broken out.
So the purpose of the Overhead Myth was for three organizations that were in the business of sort of helping donors make good decisions. We felt that if we came together and told people that they are wasting time if they believe they can assess the performance of an organization based on these ratios and that there needs to be a much more in-depth look into a charity’s operation such as what we provide at Wise Giving and the information that GuideStar puts out and the work that Charity Navigator was actually trying to do to expand on its ratings, so that people would better understand the limitations of these ratios.
So we sent a letter out to the donors of America, just asking them to reconsider their focus on these expenses. What’s been really interesting is we published a second letter later on to the Charities of America asking them to stop leading with, you know, we’re only spending 5 cents on overhead and to begin having real conversations about, you know, the true cost of running an organization.
And so with these two letters, lots of auxiliary activity began. We now see that foundations are taking a look at how they fund their grants. They’re making more money available through direct support grants and not restricted grants. We’re seeing more unrestricted grants. We’re seeing more unrestricted grants. We’re government begin to rethink their overhead rates so that organizations are getting more out of that. We’re seeing charitable organizations being a lot more active in explaining, you know, their positions and why they’re focused on, you know, really providing true results more so than an over focus on these ratios.
But I will tell you that there’s still a lot of work to do with the individual donor, many of whom still believe that you can tell everything you need to know just by looking at a financial ratio.
Steven: Yup, I love it. Thanks for talking that backstory. I’ve always kind of considered that lighter to be sort of a watershed moment in the sector. And that was the first year, a full year in business for Bloomerang, so it always just stuck out in my mind.
Cool. I got time for maybe . . .
Art: Oh, thanks for that.
Steven: . . . one or two other questions. Yeah. My buddy Mary Ann here. Hi, Mary. She’s got a great question. Curious about tracking expenses and the results by channel. Mary is wondering what if you write to say that it’s the fundraisers’ responsibility to translate that into the big picture. In other words, they spent so many dollars and hours on a mailing, but it brought in new donors, and it renewed a lot of longtime donors. So how do you think folks should approach expenses when maybe they’re the person who chose to spend that money on a particular channel or strategy or project or something like that?
Anne: Yeah, I’ll jump in there. I do think it makes sense to look at things by tactic. And I’m not even opposed to the idea of looking at things by tactic as a part of a discussion with the board. I think it actually helps the board understand those interdependencies and kind of cultivate their own fundraising literacy to see how it works, kind of look underneath the hood in that way.
I think the thing I would caution is to not talk about the that in isolation. So meaning not talking about one tactic and its expenses and not talking about the big picture, because I think that’s where the sort of dangers lie. But I think it’s absolutely important as a fundraising staff and, you know, at a higher level, the executive, and at a, you know, higher level summary than that, the board, to understand how things fit together and whether or not things are paying off, particularly over time, and what those trend lines are.
Art: And I would add that it’s also important for organizations to talk about the future. The way we go about raising money today, the tactics that are currently being employed will change. And, you know, five years ago, we didn’t have crowdfunding. Well, organizations are needing now to dabble into crowdfunding. And guess what, you’re probably not going to raise a whole lot of money initially in crowdfunding, but you have to make some investments in it.
Organizations didn’t use to reach out to people via social media for donations. Now you have to do some of that. Probably not going to raise a whole lot of money, but who knows, 10, 15 years down the road, it may be a very viable way of raising money. So organizations have to think about how they invest in tactics that aren’t yielding much today but could be very powerful later on. So that’s also something to think about.
And I know it’s kind of odd to hear a watchdog organization leader say that, but the truth is we have to be focused not only on what’s going on today, but if we want our organization to be viable in the future, we have to begin making investments and experimenting in tactics that may lead to success later on.
Steven: Cool. Wow, this has been great. I feel like probably three of us could talk about this all day. And I would if the clock wasn’t running to 2:00. I just want to be respectful of everyone’s time. But, boy, this was a real treat and an honor to have you both here to share your knowledge and wisdom and both be on this show. So Anne and Art, thanks so much for being here for an hour of your day. We really appreciate it.
Art:It’s been our pleasure.
Anne: Well, thank you so much for having us. It’s a pleasure.
Steven: Maybe could you give the last word. It looks like you’ve got a cool white paper here downloadable on the BoardSource website. Anne, do you want to say a few words about that real quick?
Anne: Yeah, sure. And I also sent a note to the group in response to the request for a direct link. So you can always find us at BoardSource.org, but the direct link to the Measuring Fundraising Effectiveness initiative is what you see on your screen right now. That’s where you can find the discussion guide, a summary of what we’re doing and why, as well as those tools to support conversations. So the Excel spreadsheet, the PowerPoint deck, etc.
So we hope that it’s helpful as you think about having a different conversation at the board level about Measuring Fundraising Effectiveness. And we’d love to hear from you about how you’ve used this framework, how it’s changed the conversation, whether that’s positive feedback or things that, you know, kind of the board got hung up on that you would suggest we consider reframing or changing.
Steven: I love it. This is great. And I know we didn’t get to all the questions. I’m so sorry for that. But do take advantage of these resources. Reach out to Anne and Art. Because obviously they’re a wealth of knowledge, and I’m sure they’d be happy to keep the conversation going. I mean, you’ve heard the invitation just now. So please do that.
Art:Absolutely.
Steven:Yeah, this is great. We got some great resources on the Bloomerang website as well, but I don’t want to cannibalize that document. Everyone should go get that now. Don’t do anything else. Maybe if you do something else, register for our next webinar. We’re going to keep this going.
This is going to be our last webinar of the year next week at 1:00 next Thursday. We’re going to talk about donor offers. So crafting those donor offers. It’d be good going into 2019 to get some tidbits there. We’ve got the guys from Veritus Group joining us, Jeff and Richard. If you don’t know Veritus Group, super, super smart, great blog, great newsletter. Check them out. It’s going to be a good session. If you like this one, come see us again next Thursday.
And we’ve got our full scheduled webinars for 2019 means out there on our webinar page. So we’d love to see you again some other Thursday, if not next week. But we’ll call it a day there. I’ll get the webinar recording out to you all this afternoon, I promise, and hopefully we’ll talk to you again soon. So have a good rest of your Thursday. Have a safe weekend. Stay warm out there. And we’ll talk to you again soon.