About High Fundraising Costs: It’s Complicated

The following editorial about high fundraising costs appeared in the Chronicle of Philanthropy.  Excellent topic.  On a related issue and another one of our pet peeves is the nonprofit executive that suggests 100% of a donors gift will go directly to programs. . . .

July 8, 2013

About High Fundraising Costs: It’s Complicated

By Jeff Schreifels

The image of nonprofit fundraising has gotten a black eye in the past few months as journalists have been examining direct-marketing tactics and other fundraising issues.

First Bloomberg Markets looked at telemarketing campaigns, then the Tampa Bay Times and several other news organizations came up with a list of what they called the 50 worst charities—many of which were picked because their fundraising costs were way too high.

In part, these articles show that journalists don’t understand the economics of direct marketing, but it’s also clear that neither do nonprofit officials, many of whom offered bumbling explanations to the reporters who asked tough questions.

It’s time to make sure everyone understands that direct marketing is about the long run, not the short term.

As an example of what I mean by that, let me take you back to 2001, when the direct-marketing firm I was working at landed a new client. It had a small pool of donors—just 40,000—and raised about $7-million, mostly in small gifts.

The nonprofit’s CEO said he wanted to double the organization’s growth to meet demand for the nonprofit’s services. We put together an aggressive plan to attract new donors and projected the returns over five years to make it easier for the board to see what it could expect.

It wasn’t easy. The board was proud of the nonprofit’s extremely low overhead costs. But the CEO, who was business savvy, explained in great detail that if the organization did not spend heavily now, its donations would essentially remain stagnant for years to come.

The nonprofit went ahead with the plan, spending $10-million to recruit supporters over four years. It recouped just $5-million of that money in donations. A prospective donor looking at that point would have probably questioned where the money was going. And you can get bet the group would have attracted horrified headlines if any news organization had pursued the matter.

But now, some 13 years later, this nonprofit is a household name that attracts $60-million a year donations and no longer has high fundraising costs in proportion to its services.

What’s more, it is now attracting big gifts, not just small ones, from the new donors attracted by the $10-million investment.

Nonprofit leaders need to understand how to talk about such long-term results in a way that is succinct, bold, and without apology. When a donor (or reporter) asks why overhead costs account for 35 percent of the budget and “only 65 percent is going to programs,” every executive needs to know what to say.

If a charity leader thinks that his or her group does not have a compelling plan to keep overhead costs reasonable, that’s a sign the charity needs to fix the way it finances its works.

But telling our story is not enough. We need to speak out against the bad actors who are tarnishing the reputation of all charities and preying on the good will of people who have a desire to change the world.

We need to speak out against mailing companies and telemarketing firms that start nonprofit organizations. And we need to protest the situation when the husband, wife, lover, and kids turn up on the payroll of a sham nonprofit.

Nonprofits can lead the charge by refusing to sign a contract with a vendor that pays a percentage of funds raised. No reputable firm does that, instead charging flat flees that are clear at the outset.

And direct marketers can all step up and make clear that their mission is to serve nonprofits so they can do good for society. Making a profit is great, but nobody should be making astronomical profits from a business involving the social good.

Such steps can do a great deal to assure the integrity of nonprofits, but we also need to do more to help donors and others understand the effectiveness of nonprofits.

When three of the major watchdog groups came together last month to urge donors not to base their decision making on overhead costs alone but to look at a nonprofit’s results, that was a major development and one we all need to push.

But we also need to make sure we do more than give lip service to efforts to show donors results.

Several years ago, I worked for a company that created software that made it easy for nonprofits to report to donors on their impact and results. When we went into sales meetings, chief executives, development directors, and program people absolutely loved it.

Then they realized: “Wow, this will mean we’ll have to have effective programs to report back to donors with.”

We couldn’t sell the product directly to nonprofits.

Then, we went to foundations and major donors. We suggested that along with their donations or grants, they would also give the nonprofit the software to report how the gift actually made a difference. Some donors showed an interest, but most of them were afraid they would be putting too much pressure on nonprofits to report on what they were doing.

Today, the software has been embraced by government agencies that are using it to evaluate the grants they award to nonprofits.

Perhaps all the bad press will help us get serious about telling donors about results. If it becomes standard practice for all nonprofits to show proof of their effectiveness, we will finally see the collapse of the faux nonprofits set up just to make money using direct marketing. And then maybe all of us who are in this business because we want to make a difference can win back the donors who lost faith because they gave to scams.

Jeff Schreifels is a senior partner at the Veritus Group in Elkins Park, Pa.