Last week, BoardSource, together with our colleagues at GuideStar, BBB Wise Giving Alliance, and the Association of Fundraising Professionals released a new recommended framework for measuring fundraising effectiveness.
For funders concerned about effective philanthropy and strong nonprofits, this framework is about much more than the measures it outlines. It is a response to an ongoing debate about fundraising practices within the social sector; one in which nuance and balance is often missing, and commentary typically falls neatly into one of the two following categories:
- Unilaterally defending nonprofit fundraising practices without acknowledging that sometimes nonprofits are indeed acting irresponsibly.
- Attacking nonprofits for fundraising approaches that have a high cost of fundraising without understanding if it’s part of a larger fundraising strategy that could in fact be responsible and strategic.
In this debate, there’s been little guidance for those funders, donors, and board members who earnestly seek to understand whether an organization is making smart decisions about its fundraising strategies and acting in ways that uphold the public’s trust. Nor have there been external guidelines or measures for nonprofits that acknowledge the complexity and diversity of nonprofit fundraising strategies.
That’s what this framework seeks to change. It is a straightforward way of looking at an organization’s fundraising effectiveness, encouraging nonprofits to consider three primary measures:
Total Fundraising Net: The Bottom Line Results
The total fundraising net is the amount of money available to spend on an organization’s mission as a result of its fundraising efforts. It is the bottom line measure of fundraising results, as it typically determines whether or not an organization has enough money to fund its work.
Cost of Fundraising: An Important (but Overemphasized) Measure of Efficiency
The cost of fundraising measures how much it costs to raise money within an organization. It is an important — but often overemphasized — measure of fundraising effectiveness that focuses on the return on investment of each dollar invested in fundraising efforts.
Dependency Quotient: A New Measure of Risk
The “dependency quotient” measures what percentage of an organization’s expenses are funded by its top five donors. It quantifies the extent to which an organization is dependent on a few donors or foundations to fund its operations.
It is our hope that this new framework will provide a common language so we can have more informed and thoughtful conversations about fundraising effectiveness — in boardrooms, between nonprofit staff and their foundation program officers, and more broadly.
Here are three things that foundation leaders can do to support this shift:
Reflect on the role that fundraising plays within your grantee organizations.
Similar to the phenomenon outlined as a part of “The Overhead Myth” campaign, we need to stop thinking of fundraising expenses as something that takes away from programs, and instead start acknowledging the critical role that fundraising plays in supporting the work of our sector. According to the National Center for Charitable Statistics, charitable donations underwrite nearly a quarter (23 percent) of all nonprofit expenses. That percentage increases to 51 percent when you include only those organizations with budgets of $10 million or less.
There’s no question that the nonprofit sector relies on fundraising for charitable giving to support its work. But what about your grantees? What would happen if they stopped their fundraising efforts? How many of their donors or funders would continue giving to them without being asked (or even thanked)? What mechanism would they have for replacing the funds that they lose? How long would it take for their programs to come to a screeching halt due to lack of support?
Consider the potential downsides of efficiency.
One of the important nuances introduced in this new framework is the fact that the dependency quotient and the cost of fundraising often have an inverse relationship. A low cost of fundraising typically exists alongside a higher dependency quotient, and vice versa. This is because broad-based fundraising strategies like direct mail, telemarketing, and special events can cost a lot of money to implement, but often serve as important ways to bring large numbers of new donors into an organization. Conversely, fundraising strategies that are focused on identifying and securing large-scale gifts tend to be lower cost, but can result in high dependency on a few large donors.
When we focus only on the efficiency of fundraising efforts — the cost of fundraising — we ignore the risks associated with dependence on a small group of donors. Consider what would happen if your grantees lost their top five donors or funders. What percentage of their budgets would be unfunded? How dependent are they on your foundation’s support? What are you doing to help them make informed decisions about the likelihood of your future support? Are there things that you are doing that might be unintentionally discouraging them from cultivating other sources of support?
In conversations with your grantees, encourage them to take a holistic view of their fundraising strategy and to evaluate, overall, how well their fundraising efforts are supporting their work and organizational resilience. Familiarize yourself with this free toolkit for boards and leadership teams and invite your grantees to use it to guide their conversations and reflection. It will send them a clear signal that you are committed to their success, and it will position you to have more honest and informed conversations about what that means in terms of their fundraising strategy.
An Important First Step
When we shared an initial draft of this framework with a group of nonprofit leaders attending the Independent Sector conference last November, they were universally enthusiastic about its value. They admitted frustration with the hyper-focus on cost of fundraising and the dysfunction that it can create within an organization. And they expressed relief as they contemplated a new reality in which both those within and outside the sector had a stronger understanding of what it really takes to build a successful and resilient fundraising program.
But they were also skeptical. They were not convinced that funders and the broader public would ever move away from cost of fundraising as the primary measure of fundraising effectiveness. They were nervous that their adoption of this framework would position their organization as an outlier. And they were willing to continue to do backbends to make their cost of fundraising appear as low as possible if it meant that funders would think they were more worthy of their support.
That’s where you as a foundation leader have yet another role to play. If you find yourself convinced that nonprofits need to measure fundraising effectiveness in a way that pays attention to results and risk — rather than just efficiency — I invite you to join in the conversation. By doing so, you can help dispel the misconception that less is always more when it comes to fundraising expenses. You can make it safer for organizations to be transparent and forthcoming about the strengths and vulnerabilities of their fundraising strategy. And you can encourage other foundation leaders to follow your example.
Anne Wallestad is president & CEO of BoardSource. Follow her on Twitter at @AnneWallestad.