Findings From Cost-Revenue Analysis

Findings From Cost-Revenue Analysis Community Foundations Prepared for: December, 2007 www.CFInsights.org

Purpose of This Document • This set of slides is intended to provide community foundations with a template for presenting the findings of their cost-revenue analyses • Foundations can use any or all of these slides as appropriate • To use these slides, foundations must: • Enter the results of their cost-revenue analysis in relevant slides (the foundation studied is sometimes called “Sample Foundation”) • Update the peer foundation data on appropriate slides based on current benchmarking data available on the Community Foundation Insight’s database (www.cfinsights.org) • The comparative data currently provided in these slides is from FSG’s analysis in 2003/4

Agenda • Background • The Path Toward Improved Sustainability • Conclusions

A Key Initial Premise for This Work Was that the Current Fee and Revenue Structure for Community Foundations is Outdated Fee structures inherited from bank trust departments don’t cover the services required today • The traditional fee structure – an annual fee based on a percentage of assets – was never intended to support today’s expanded range of services • Administering donor advised funds • Advising and educating donors to become more knowledgeable about giving • Managing committees who advise grantmaking • Providing advice and continuing education to professional advisors • Helping local nonprofits raise funds or develop their own endowments • Convening funders to organize solutions to community problems • Compiling studies of the local philanthropic and nonprofit sector Increased resource costs have often been covered on a case-by-case basis through self-administered grants or the rapid growth of investment portfolios • Neither is a sustainable or fiscally responsible strategy Competitors have lower costs and alternative sources of revenue—community foundations cannot continue to compete by offering more service at the same price

Providing sufficient resources to: • Grow community philanthropic endowment • Create social change CF Operating Models are Increasingly Stressed, As Staff and Boards Find Themselves Caught in A Push-Pull Raising sufficient revenue to support foundation activities Community Foundations A new approach is needed to effectively manage this push-pull

A New Discipline Is Required to Make Strategic Choices and Prioritize Use of Available Resources • Build internal transparency into costs and revenues associated with foundation products • Understand the operating context for each product • Make intentional strategic choices that further your mission

Agenda • Background • The Path Toward Improved Sustainability • Build Internal Transparency into Costs and Revenues • Understand the Operating Context for Each Product • Make Intentional Strategic Choices • Conclusions

Community Foundations Can Build Transparency Into the Costs and Revenues Associated with their Products by Asking New Questions A New Set of Questions • How much cost is associated with each Foundation product? • Which products make money and which do we subsidize? • Are our subsidies consistent with our mission and strategic priorities? • What determines cost for each of our products?

Expense 3 Expense 4 Expense 2 Expense 1 Activity 1 Activity 2 Activity 3 Activity Based Costing Can Enable Community Foundations to Better Understand the True Cost of Products and Services • Activity Based Costing (ABC) allows organizations to determine the actual cost associated with each product or service • First activities are identified and defined, then cost data is gathered and traced to activities, finally costs are allocated to products or services based on their utilization of activities Product #1 Product #2

100% of the Foundation’s Staff Time, Cost and Other Expenses Are Assigned to a Matrix of Activities and Products 10 Products 106 Activities Staff costs were assigned to activities and products based on reported time, weighted by individual salaries and including taxes and benefits

Foundation Staff Identified Ten Distinct Products for Cost Analysis These products are provided as an example – fill in the ones that your foundation chose to analyze

Competitive, Designated and Donor Advised Funds Account for 86.9% of the Market Value of Assets Foundation Statistics $309M $133M 18,217 This data is provided as an example – fill in data from your analysis Women’s Funds and Designated Funds (including Pass Through Fundraising gifts) account for the largest numbers of gifts received Source: Foundation data and analysis.

Donor Advised Funds and Competitive Grantmaking Account for 55% of the Foundation’s Total Operating Costs $1,428 Distribution of Total Cost by Product and Type of Cost ($000) Other Staff Activities Providing Non-Grant Services to the Community Making Grants Main-taining Funds This data is provided as an example – fill in data from your analysis $732 $429 Acquiring a New Fund/Gift $340 $311 $207 $182 $149 $81 $63 (MV 12/31/02) Note; Other Staff Activities includes IT, Human Resources, management and supervision, staff meetings, professional development, Board meetings, planning, Brand management, reception, office management, reporting, etc. Source: Foundation analysis of staff surveys and operating expenses.

Competitive Grantmaking (FOI and Unrestricted) and Designated Funds Generate a Subsidy of $1.3M that Supports a Range of Other Products Cost and Revenue by Product ($000s) This data is provided as an example – fill in data from your analysis $1,724 $1,289 Subsidy Generated/Required $761 $528 ($868) ($150) ($59) ($18) ($159) ($149) ($177) ($144) Source: Foundation analysis of staff surveys and operating expenses.

The Subsidy Generated Should Be Directed Toward Funding the Highest Strategic Priorities for the Foundation Subsidy Generated or Required by Product ($000s) This data is provided as an example – fill in data from your analysis Continue Generating Subsidy Consider Adjusting Pricing to Decrease Subsidy Required Consider Funding through Grants Explore Options as Appropriate The foundation should also consider how pricing, activity, or policy changes for the fastest growing products can improve the Foundation’s sustainability Source: Foundation analysis of staff surveys and operating expenses.

Pricing Adjustments, Cost Reductions, Or Increased Fund Sizes Would Be Required for Subsidized Products to Become Self-Sustaining This data is provided as an example – fill in data from your analysis Source: Foundation analysis of staff surveys and operating expenses.

Comparative Analysis Includes a Range of Foundations, Each With a Different Product Mix Foundation Assets by Product Type This comparative data should be updated – for current data on peer foundations, see the Community Foundation Insights database Note: Designated is noted separately from Org/Agency Endowments only when foundations viewed these two as distinct products. Otherwise, Designated funds are included with Org/ Agency Endowment funds in the same category. Source: FSG Analysis

Comparing the Foundation’s Breakeven Points to Benchmarks Provides A Starting Point for Understanding Sustainability Breakeven Points (Product Operating Costs as a % of Product Assets) and up This comparative data should be updated – for current data on peer foundations, see the Community Foundation Insights database Traditional Fee Ceiling at 1.0% Source: FSG Analysis

A Number of Interrelated Factors Influence the Sustainability of the Products Provided by Community Foundations • Number of products, and asset concentration in each product • Products that represent a relatively large percentage of a Foundation’s assets tend to have lower costs and be managed more efficiently • Degree of customization allowed or encouraged by the Foundation • Unique processes in response to one-time donor requests add significant cost to all funds and divert staff attention from activities that serve a broader base of donors • Average fund size in each product category • Exceptionally large funds tend to subsidize many small funds – All foundations have products that cover their total costs only when the average fund size is at least $100K in assets • Level of transactions associated with funds in each product area • Higher levels of gift and grant activity can lead to additional cost, unless processes are streamlined and standardized • Degree of enhanced services provided by the foundation, e.g., managing committee processes, creating special RFPs for individual donors or offering unique investment management options • Enhanced services, while expensive, are an opportunity to recover additional revenue for service, though few foundations generate revenue from these services in a systematic way • Pricing, and discounts from published pricing • Higher effective fees, particularly for large funds, at or above 1% of assets are often necessary to recoup enough revenue to cover costs • Foundations’ total costs range from 0.7% to 1.6% of assets, excepting those foundations with assets over $1B • Breakeven points for individual products often exceed 2.0% of assets, some up to 5.0% of assets

Products with a Larger Concentration of a Foundation’s Assets Generally Have a Lower Breakeven Point – Though Breakeven Points are Not Explained by Scale Alone % of Assets versus Breakeven Point and up This comparative data should be updated – for current data on peer foundations, see the Community Foundation Insights database Breakeven Point (Product Operating Costs as % of Product Assets) Sample CF Sample CF Sample CF Sample CF Sample CF Product Assets as % of Foundations’ Total Assets Source: FSG Analysis

For All Foundations, Large Funds Subsidize Some Portion of Smaller Funds Distribution of DAF by Fund Size This comparative data should be updated – for current data on peer foundations, see the Community Foundation Insights database Source: FSG Analysis

Higher Levels of Grant Transactions Lead to Higher Costs Unless Processes are Streamlined and Efficient Number of Grants per Fund And Up This comparative data should be updated – for current data on peer foundations, see the Community Foundation Insights database Source: FSG Analysis

Foundation Strategy Should Guide Prioritization and Adjustment of Products These products are provided for example only. Fill in the products your foundation used in its analysis

To Achieve Sustainability, Foundations Must Understand Each Product’s Operating Context Community Foundation Products Fee Based Products Community Leadership Products • Examples include: • Donor Advised Funds, Designated Funds, Supporting Organizations, Unrestricted/FOI Funds, Scholarship Funds, and Agency Endowments • Examples include: • Convening, community organizing, conducting community needs assessments, special initiatives • Operating Context: • Foundation Mission and Values • Cost To Serve • Customers • Competition • Operating Context: • Foundation Mission and Values • Cost To Serve • Community Need • Alternatives in the Community Each product type requires a different set of questions

Four Perspectives Are Required In Order to Evaluate Changes to the Foundation’s Prices, Processes and Policies for Fee-Based Products • What are our donors’ alternatives? • How are our competitors positioned in the market? Values • What are our mission-driven priorities? • What does market research tell us about our donors’ priorities and interest in different product offerings? Competition Customer Value Fee-Based Product (Price, Processes, Policies) Cost to Serve • Are our fees aligned with the cost structures of our fee based products?

Values Competition Customer Value Fee-Based Product (Price, Processes, Policies) Cost to Serve • These Four Perspectives Should Be Considered for • Each of the Foundation’s Fee Based Products • Donor Advised Funds • Committee Advised Funds • Scholarships • Designated Funds • Unrestricted/ Field of Interest Funds • Supporting Foundations • Funds Engaged in Fundraising While the questions are the same, the answers are different for each product

Donor Advised Funds – Case Study The Economics of Donor Advised Funds Vary By Foundation Sample Foundation Donor Advised Funds Average $259K in Assets Per Fund Effective Fees @ 0.86% of Assets Average DAF Contribution (Subsidy) $89 $3,413 Subsidy Per Fund ($1751) ($3,413) $257K in Assets per Fund Effective Fees @ 0.80% of Assets $197K in Assets per Fund Effective Fees @ 0.98% of Assets Source: FSG Analysis

Donor Advised Funds – Case Study Donors Are Faced with an Increasing Array of Donor Advised Fund Options • Enhanced service funds offer donor advised funds paired with targeted grantmaking opportunities, flexible program services and an active community of engaged donors Philanthropic Advisors Traditional Giving Programs • Organizations that have traditionally promoted philanthropy through giving campaigns have expanded to offer donor advised funds CommunityFoundations Donor Advised Fund Options • Community Foundations nationally are experiencing rapid growth in donor advised funds, despite increasing competition Large Nonprofit Organizations • Nonprofits with strong donor relationships are extending their own giving options to offer donor-advised fund products Commercial Gift Funds • Financial institutions see donor advised funds as commercial opportunities • In only 10 years, Fidelity’s Charitable Gift Fund has grown to be the nation’s second largest public charity and the largest public grantmaker Source: Giving USA 1999, United Way of America, Fidelity Charitable Gift Fund

Donor Advised Funds – Case Study • Commercial Gift Funds With Standardized Service Have Standard Breakeven Rates, While Community Foundations and High Service Funds Such As Tides Have Not Achieved the Same Efficiencies Donor Advised FundsEffective Fee Required to BreakevenOperating Costs as a % of Assets The comparative data should be updated – for current data on peer foundations, see the Community Foundation Insights database Commercial Gift Funds Perceived Fee Ceiling at 1.0% Source: FSG Analysis, Fidelity Charitable Gift Fund Annual Report 2006, Vanguard Charitable Endowment Program Annual Report June 2007

Donor Advised Funds – Case Study Community Foundations’ DAF Effective Fees Vary Widely, With All but One Lower than the Sample Set Breakeven Fee of 1.31% Peer Foundations DAF PricingEffective Fee Rate Average CF in Sample Set Breakeven Fee at 1.31% This comparative data should be updated – for current data on peer foundations, see the Community Foundation Insights database $M

Donor Advised Funds – Case Study The Pricing and Positioning of Commercial Gift Funds and Other Competitors Have an Impact on Foundations’ Choices Competitive Alternatives’ DAF PricingEffective Fee Rate Perceived Fee Ceiling at 1.0% $M Many community foundations perceive a fee ceiling at 1.0% and have lower DAF fees for larger funds – approximating the fees charged by competitors Source: Organization web sites

Donor Advised Funds – Case Study The Tides Foundation Meets the Needs of Its DAF Customers with Differentiated Levels of Service – and Differentiated Pricing to Cover Higher Costs of Higher Service Annual Funds • Donors establish fund and recommend grants to nonprofit organizations over a short period of time, generally within one year • Administrative fee: 1% • No Minimum Contribution Long-Term Funds • Donors establish a long-term philanthropic investment by creating an ongoing stream of income for charitable activities that fit their values and interests • May also include a Declining Fund with a balance to spend down over a period of years • Annual management fee: • 1.00% Under $500,000 • 0.75% Next $500,000 • 0.50% Next $4,000,000 • 0.25% Over $5,000,000 • Minimum Contribution: $100,000 Donor Advised Funds

Donor Advised Funds – Case Study Many Community Foundations Match Higher Cost Options with Lower Pricing Low Cost High Cost No Efficiencies with Scale Commercial Gift Funds Philanthropic Advisors Community Foundations Single Product Many Products Commercial Gift Funds Community Foundations Philanthropic Advisors Standardized Transactional Service Customized or Enhanced Services Efficiencies with Scale Commercial Gift Funds Philanthropic Advisors Community Foundations Large Average Fund Sizes or Automated Processing Small Average Fund Sizes with Manual Processing Pricing Decisions Commercial Gift Funds Community Foundations Philanthropic Advisors Lowest Fees Highest Fees

Donor Advised Funds – Case Study The Resources and Values of Each Community Foundation Suggest Different Alternatives for Donor Advised Funds

Values Competition Customer Value Fee-Based Product (Price, Processes, Policies) Cost to Serve • A Look At Operating Context for Each of the Foundation’s Products Illustrates the Value of this Approach • Donor Advised Funds • Committee Advised Funds • Scholarships • Designated Funds • Unrestricted/ Field of Interest Funds • Supporting Foundations • Funds Engaged in Fundraising The questions for each product are the same, but the answers are different

Community Leadership Products have a Different Operating Context than Fee Based Products Community Foundation Products Fee Based Products Community Leadership Products • Examples include: • Donor Advised Funds, Designated Funds, Supporting Organizations, Unrestricted/FOI Funds, Scholarship Funds, and Agency Endowments • Examples include: • Convening, community organizing, conducting community needs assessments, special initiatives • Operating Context: • Mission and Values • Cost To Serve • Customers • Competition • Operating Context: • Mission and Values • Cost To Serve • Community Need • Alternatives in the Community Cost to serve should be evaluated relative to potential for unique social impact

Four Perspectives Are Required In Order to Evaluate Options for the Foundation’s Community Leadership Products • Is the CF best suited to meet this community need? • Are there others in the community who could play a role (non-profits, government, foundations, etc)? Values • What are our mission-driven priorities? • What are the needs in the community? • What are the opportunities for impact? Alternatives in the Community Community Need • Community Leadership Product • (Revenue Sources, Processes, Policies) Cost to Serve • What are the costs associated with the development and ongoing management of these activities? • Is the investment reasonable given the impact?

Investments in Community Leadership Products Can Serve to Differentiate the CF and Enhance Community Impact Distribution of Total Cost by Type of Cost - 2003 Other Staff Activities Other Staff Activities Other Staff Activities Providing Non-Grant Services to the Community Providing Non-Grant Services to the Community Providing Non-Grant Services to the Community Making Grants Making Grants Making Grants Maintaining Funds Maintaining Funds Maintaining Funds Acquiring New Fund/Gift Acquiring New Fund/Gift Acquiring New Fund/Gift Community Leadership Activities: • Initiatives such as Women's Impact Fund, Impact Fund, CBI, Voices and Choices, POST, Donors Forum Fund • Meetings with civic leaders, community foundation boards • Better Together Kalamazoo initiative to connect citizens with City’s resources • Leadership Initiatives, which include service on national and local committees and boards • Special Projects, which include the Nonprofit Management Fund, youth initiative, poverty, Casey, environment, gay/lesbian and diversity issues. Instead of viewing community leadership products as merely an extension of program activities, CFs can seek revenue to sustain these investments

Informed by a New Set of Facts, the Foundation Can Engage in Productive Board/Staff Dialogue and Make Intentional Strategic Choices Questions • Are our operations aligned with our mission and strategy? • To improve sustainability going forward, what changes should we make in our: • Processes? • Policies? • Pricing? • Revenue sources? • How do we prioritize investment of resources? • Which fee based products will we subsidize, if any? • How should we trade off subsidizing certain fee-based products versus community leadership activities? • How do we develop and evaluate new product/service introductions?

What is our core mission/ values? • What mix of products serves our mission and values best? • Within fee based products • Fee based vs. community leadership products? How do we position priority products for growth? • What operational changes do we make by product: • Price • Policy • Processes A New Framework Can Be Used by Community Foundations To Improve Sustainability

Which Mission-Driven Goals Are the Highest Priorities? Leverages CF Expertise to Direct Funds Builds Community Endowment Addresses Local Needs Promotes Philanthropy by Expanding Donor Base Generates Revenue to Cover Costs High Priority Moderate Low Minimal Articulating the Foundation’s Values Is the First Step to Creating a Path to Sustainability Our CF Values By articulating its values, a community foundation gives itself a framework for prioritizing among its product areas

A Key Question for the Foundation Is How To Best Differentiate Itself Through Investments in Fee Based or Community Leadership Products How can we differentiate ourselves and create an impact in the community? Fee Based Products Community Leadership Products • Should we build new relationships with donors by underwriting the costs of fee based products? • How important are specific fee-based products to accomplishing the CF’s mission and differentiating it from others? • Should we invest in community leadership products to attract new donors by increasing our profile and vitality in the community? • How important are specific community leadership products to accomplishing the CF’s mission and differentiating it from others? Is the best way for the foundation to build relationships with donors underwriting fund costs, or undertaking high-profile community initiatives?

To Achieve Their Potential, Community Foundations Must Improve Their Sustainability • To reach their potential, community foundations must act now: • Improve the differentiation of their operating model • Make deliberate, fact-based, strategic choices on the donors and products to prioritize and grow • Identify new revenue sources to support high priority activities • Two critical ingredients are required for community foundations to improve their sustainability • Achievement of a higher level of understanding of product costs and market/community dynamics • Willingness and ability by staff and board to engage with the new fact set and adapt historical values and priorities to new realities

Findings From Cost-Revenue Analysis