Like it or not, far too many folks judge a charity by its cost of fundraising and ‘overhead’.

From regulators to the media, from charity watchdogs to far too many nonprofit boards — and even some fundraisers themselves — the false metric of ‘cost of fundraising’ has created a big mess of misunderstanding.

Fortunately, the industry is waking up and finally seems motivated to deal with the issue. Nowhere was the awakening clearer than at last week’s New York conference of the Direct Marketing Association’s Nonprofit Federation (DMNAF).

First, a heavily-attended plenary session — moderated by Tom Harrison of the Russ Reid Company with panelists Attorney Seth Pearlman, Art Taylor, CEO of the BBB Wise Giving Alliance, and yours truly — tackled the pros and cons of watchdog behavior, the pluses and minuses of the need for more regulation, and the calling out of questionable practices and what the industry could do about it.

Key points from that first session:

• Pearlman — No need for additional regulation. What is needed is resources to more vigorously enforce current laws and regulations. As Seth noted, “You know there certainly must be enough regulations on the books if a lawyer isn’t recommending more.”

• Taylor — Watchdogs, specifically the BBB Wise Giving Alliance, are taking the focus off ‘cost of fundraising’ and focusing on a range of multiple guidelines, from ‘transparency’ to ‘conflict of interest’. Art Taylor was adamant that BBB at least be viewed not as a ‘rating’ agency, but as a source of information for donors, the media and others.

• Craver — The nonprofit sector and its trade associations should not rely only on regulation. Each of us has tools at our disposal to help drain the swamp — for example, withholding use of mailing lists from questionable nonprofits … naming names … not doing business with vendors who engage in questionable practices.

Kudos also to the DMANF and the Association of Direct Response Counsel. DMANF announced a new set of ethical guidelines and urged all members to adopt them. ADRFCO announced ethics investigations into two member companies that could lead to disciplinary actions.

With worries about the state of ethics clearly on everyone’s mind, the conference then turned to the question: What are we actually going to do about it? It’s one thing to agree that the self-anointed watchdogs are wrong and are in fact misleading the public, but what are we really going to do to change things?

In a first-rate session labeled “Talking About Fundraising Costs” — moderated by Shira Mitchell of Special Olympics, with panelists Erika Kloehn of the USO and Tom Harrison of the Russ Reid Company — these key points surfaced when it comes to talking about costs and overhead:

• Why Bother? Who really cares about all this? Media, boards,  and donors do, and so should fundraisers. Confidence in charities has not risen significantly since it hit bottom in 2003. As of 2008, 70% of Americans thought charities waste a ‘great deal’ or a ‘fair amount of money’. (Brookings Institution)

• Importance of Mission Statement. Effectiveness and efficiency of a charity is far broader than one metric like ‘cost of fundraising’. Be prepared to clearly and quickly articulate mission — who you are, why donors should support you.

• Terms. Understand the terms you use. ‘Cost ratios’ are the percentage an organization spends of its annual revenue on things like program or fundraising or management. ‘Overhead’ is the combination of fundraising costs and management costs — everything not considered ‘Program’.

• Time. Anything less than an annual metric is usually inaccurate because it normally counts all costs, but not all revenue. Better to use a longer time frame. For example, best to measure acquisition cost ratios over the lifetime of the donor.

• Take The Long View. Management and fundraising costs are normal and healthy part of doing business. Investing in good management and program expertise and good fundraising programs pays off big time in later years. In short, don’t use short-term campaign metrics; use long-term Lifetime Value and net revenue metrics.

• Diversification. Most nonprofits enjoy diversified sources of funding, each with its own ratios and LTV. Report aggregated results, particularly total money that goes to program. If costs exceed program expenses, be prepared to offer a rational, transparent explanation.

• “Wishin’ Don’t Make It So.” Most watchdogs, media and even nonprofit boards either don’t understand the realities of fundraising or wish they were different. Unfortunately, we all have to deal with the realities and avoid denial.

• Questions for Which You Should Prepare Answers. Whether the ‘cost’ and ‘overhead’ questions are incisive or idiotic, and whether they come from within or outside your nonprofit, you should have answers to:
  • ”Why Not just raise money online?”
  • “What happened to your fourth star on Charity Navigator?”
  • “I think your overhead costs are too high.”
  • “A disgruntled former employee claims your telemarketing partner got most of the money from a telefundraising campaign. You spent $50,000 on it, but it only brought in $40,000.”
  • “How much of my money is really going to program?”

  If you can’t answer questions like these honestly and effectively, you’re in danger.

• Be Prepared. Every fundraiser should think about questions like these and be prepared to answer enthusiastically and honestly. Refer to the DMANF, or AFP ethical guidelines you operate under … get proper media training … don’t hide from the press, watchdogs or donors … understand key long-term metrics like Lifetime Value so you can answer the cost question in its proper context. For example: “Each dollar we spend on bringing in a new donor produces an additional $3 for program. Far better than investing in the stock market or a far better return than we get from our endowment.”

What answers do you or would you give to the questions above? What additional questions and answers would you add to the list?

Beyond my and Tom’s frequent rants, would it be helpful if The Agitator continues this conversation in some other way or forum? Suggestions, please.

The fundraiser’s life has so many questions, so few answers.

Roger

P.S. Agitator raises for Erika Kloehn and Tom Harrison, with hopes that these raises don’t trigger a press or watchdog inquiry into excessive compensation.